Chapter 8
Strategy and Competition in the Broadband Communications Market
It is evident from our previous discussions about ETV that many tele- phone companies have had an interwoven relationship with multichan- nel media firms because of the increasingly blurry market boundaries between different communications networks. No longer regarded as a medium that carries merely user-generated voice content, the telco-based broadband system is now considered one of the essential building blocks of future digital entertainment because its platform en- ables the delivery of digital videos with the personalization and on-de- mand nature of the Internet via telecommunications networks (Bratches & Rooney, 2001). In fact, as the two leading broadband service providers (BSPs), DSL from the telephone sector and cable modem from the MVPD market, continue to expand, we are witnessing a new phase of development for the television medium. Just as the introduction of MVPD television added the multichannel, narrowcasting capability to broadcast television, the arrival of the Internet and the broadband infra- structure brought more enhanced functions such as interactivity and personalization to MVPD television. Such an expansion of television functions and content varieties means more opportunities for product differentiation in the marketplace and thus more strategic options for the market participants, now including the telecommunications firms (e.g., telcos) with broadband products. Considering the significant role telcos play in today’s digital media environment, in this chapter, we tackle the broadband communications aspect of the telephone industry and compare the strategic differences between these firms and their MVPD counterparts in the emerging broadband multimedia industry.
160Chan-Olmsted, S. M. (2005). Competitive strategy for media firms : Strategic and brand management in changing media markets. Retrieved from http://ebookcentral.proquest.com Created from ashford-ebooks on 2019-03-22 13:04:04.
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THE DEVELOPMENT OF AND COMPETITION IN THE BROADBAND MARKET
Broadband communications are the convergence of television, tele- phone, and computer networks that enables the interactive communi- cation of voice, data, and video (Sawyer, Allen, & Lee, 2003). Because the increasing demand for higher-bandwidth networks is largely due to the growth in Internet traffic, broadband is typically discussed in the con- text of high-speed Internet connections. Accordingly, we begin this chapter by reviewing the market development of DSL and cable modem broadband access services. Note that the focus here is not on the growth of enhanced multimedia contents such as VOD, gaming, and interactive advertising, which have been covered in the previous chapter, but on the different strategic approaches and competition between providers of broadband networks.
The modern deployment of broadband communications can be traced back to the unsuccessful introduction of the integrated services digital network (ISDN) in the 1980s. Although various network compa- nies such as GTE and Time Warner attempted to launch high-speed, in- teractive connections to homes in the early 1990s, most have faltered. The well-publicized broadband service Excite@Home floundered re- gardless of the backing by leading MSOs. It was not until the widespread popularity of the Internet that the utility of broadband communica- tions was highlighted. In fact, most asymmetric digital subscriber line (ADSL) trials from telcos such as GTE and Pacific Bell (now SBC) were not introduced until 1996. SBC was one of the most active telcos in de- ploying ADSL, with an aggressive pricing strategy, serving up to 8 mil- lion residential customers by 1999 (“SBC Tries to Knock,” 1999). The rollout of broadband was even cited by SBC’s proposed buyout of Ameritech as a main reason of the merger, noting that the combination would enhance the efficient introduction of broadband technology to homes and neighborhoods (Rohde, 1999).
As the United States entered the 2000s, the deployment of cable mo- dem led the race among high-speed data services due, in large part, to the fact that cable operators rapidly upgraded their passive one-way networks to two-way hybrid fiber/coax (HFC) networks and the 1996 Telecommunications Act, which opened up the telephone market to competition. Comparatively, the telcos’ DSL service was distance sensi- tive and not available to many phone customers too far from the central office at that time. In addition, many telcos, although experienced in providing Internet access through their traditional dial-up services, were initially reluctant to push DSL in fear of cannibalizing their older, higher-priced services such as T-1 data lines. As a result, cable system operators have had a head start in attracting broadband consumers, signing up almost four times as many subscribers at the initial stage of broadband development (FCC, 2004).
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Nevertheless, telcos began to forge ahead with their DSL services by improving operational efficiencies, marketing, pricing, and service area coverage, gradually surpassing the speed and service satisfaction of- fered by cable (Greenspan, 2002). The waves of mergers between RBOCs also enhanced the resources and access to potential customers for lead- ing telcos. For example, Verizon, after combing the assets of Bell Atlantic and GTE, and Qwest, after its acquisition of US West, were able to signif- icantly boost their broadband offerings with aggressive pricing strate- gies (Greene, 2000; “Qwest Communications Offers,” 2001; “Qwest Offers New Broadband,” 2000). By 2004, DSL acquired a collective mar- ket share of 39% whereas cable reached 61% of the market (wire-line only) (see Table 8.1). In fact, more than half of the at-home Internet con- nections were broadband by year 2004, largely fueled by the growth of DSL services (Greenspan, 2004; Horrigan, 2004a). Overall, 34% of all adult Americans had access to high-speed Internet connections either at home or at work by the spring of 2004, a 60% increase from the year be- fore (Horrigan, 2004a). With a 58% broadband penetration rate in the spring of 2005, it was estimated that broadband connection for home users would break 80% by the fall of 2006 (“May 2005 Bandwidth Re- port,” 2005). Most analysts believe that cable will continue to lead the U.S. residential broadband market with DSL remaining a formidable competitor (Greenspan, 2002; Leichtman Research Groups, 2004).
Table 8.1 depicts the state of competition between the top MSOs and telcos in terms of their perspective market shares in the broadband mar- ket in 2004. Whereas the top four cable firms commanded almost 45% of the market, their telephone counterpart had about 33% of the mar- ket. The top MSO, Comcast, and the top telco, SBC, were the most signif- icant broadband market leaders, together controlling one third of all broadband subscriptions. Time Warner and Verizon are the other two noteworthy broadband players with a combined share of almost 22%. Overall, the top broadband services listed in Table 8.1 reached 95% of all subscribers. The CR4 in 2004 for this market is 55.7 and CR8 is 77.5. Ac- cording to Shepherd (1987), a CR4 between 40 and 60 identifies an in- dustry with firm concentrations optimal for competitive behavior. Scherer and Ross (1990) also reported findings that the optimal CR8 for a competitive industry is 70 (which roughly corresponds to a CR4 of 50 in the U.S. economy). According to these rules of thumb, the broadband communications market is relatively competitive with leading firms from both the cable and telephone sectors.
We believe that the race between cable and DSL is likely to stay com- petitive and become even more strategic while the growth rate tapers off. As an emerging industry, the broadband market exhibits the charac- teristics of technological uncertainty; high initial costs; entry barriers such as access to distribution channels, and input, and materials; and cost advantages due to experience (Hitt, Ireland, & Hoskisson, 2001; Porter, 1980). Consequently, market activities such as strategic alliances are becoming more critical as the broadband firms attempt to minimize
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163
TABLE 8.1
Top Broadband Service Providers and Their Market Shares in 2004
Broadband Service Provider No. of Subscribers % of Market
Cable Firms
Comcasta 6,005,000 19.9
Time Warner 3,548,000 11.8
Coxa 2,246,109 7.5
Charter 1,711,400 5.7
Cablevision 1,179,040 3.9
Adelphiab 1,167,802 3.9
Bright House Networksc 675,000 2.2
Mediacom 327,000 1.1
Insight 273,900 0.9
RCNc 210,000 0.7
Cable One 152,300 0.5
Total Top Cable 17,495,551 58% (61% of top firms)
Telcos
SBC 4,277,000 14.2
Verizon 2,944,000 9.8
Bell South 1,738,000 5.8
Qwest 853,000 2.8
Covad 514,345 1.7
Sprint 383,000 1.3
ALLTEL 194,534 0.6
Cincinnati Bell 117,000 0.4
Century Tel 108,820 0.4
Total Top DSL 11,129,699 36.9% (38.9% of top firms)
Total Broadband for Top Firms
28,625,250
Note. Data adopted from The Companies and Leichtman Research Group, Inc. Top cable and DSL providers represent approximately 95% of all subscribers. The percentages are based on the total subscriber number, not just the top broadband firms, as reported in the spring of 2004. Company subscriber counts may not represent solely residential households. Based on FCC data, about 6% of DSL subscribers and 0.2% of cable subscribers are classified as nonresidential or small business. aComcast and Cox totals are adjusted from last quarter of 2003 reflecting the closing of some minor transactions. bAdelphia subscriber counts do not include properties owned by the Rigas family. cBright House Networks and RCN subscriber counts are estimates.
Chan-Olmsted, S. M. (2005). Competitive strategy for media firms : Strategic and brand management in changing media markets. Retrieved from http://ebookcentral.proquest.com Created from ashford-ebooks on 2019-03-22 13:04:04.
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uncertainty, share resources, and obtain access. In this next section, we discuss how the broadband firms have formed strategic networks to gain competitive advantages.
STRATEGIC NETWORKS IN THE BROADBAND MARKET
Careful observations of the partnerships in the past few years involving BSPs reveal certain alliance tendencies. They include the formations of strategic networks with technology firms, retailers, content developers, and branded Internet firms.
Strategic Alliances With Technology Firms and Electronic Retailers
BSPs have sought alliances with software and hardware tech firms to enhance the value of their residential network services and reach poten- tial customers through Internet access hardware (i.e., PC). For example, Comcast and Intel partnered to develop home networking products for Comcast broadband services. Comcast and Charter also formed alli- ances with PC manufacturers such as HP, Compaq, and Gateway, offer- ing PC users easy signup for their broadband access services. In the telephone sector, SBC and Dell Computer partnered to equip Dell Dimen- sion desktop PCs with ADSL modems and services (“Dell Computer Strikes,” 1998). There was even a loose broadband consortium, the Uni- versal Asymmetric Digital Subscriber Line Working Group (UAWG), formed by tech companies like Compaq, Intel, and Microsoft with the then five RBOCs (i.e., Ameritech, Bell Atlantic, BellSouth, SBC, and US West), as well as GTE, Sprint, and MCI (“Consortium to Push ADSL, 1998b). Most recently, SBC signed a 10-year, $400 million agreement with Microsoft to provide next-generation television services using Microsoft’s TV Internet protocol television software platform. The high-profile move aims to counter cable’s television advantage by en- abling viewers to channel surf in a small window on their TV screens while watching another program. Subscribers also could get alerts for their upcoming favorite shows, caller ID, instant messaging, VOD, DVR, and program guides (Gonsalves, 2004).
BSPs have also attempted to form strategic networks with electronic re- tailers that have the most direct contact with potential broadband users to augment their marketing efforts. For example, Comcast partnered with Best Buy, RadioShack, and even Office Depot, working together to develop a point-of-sale presence at many of these retailers’ stores nationwide.
Strategic Alliances With Content Developers/Providers
There are also alliances to enrich the variety of contents for broadband delivery and to comarket broadband access with branded content pro-
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viders, thus increasing the attractiveness of the overall broadband ser- vice. For example, Comcast allied with RealNetworks, which offers its Rhapsody, an Internet jukebox service, via a cobranded Web site accessi- ble on Comcast’s broadband customer destination home page at Comcast.net. Working with Disney, Comcast launched Comcast Kids Channel, an interactive environment designed for the broadband family with content from Disney Online. Disney also formed a joint venture with the RBOCs BellSouth, SBC, and Ameritech to develop, market, and deliver video programming to consumers. Three other Bells (before the consolidation)—Bell Atlantic, Nynex, and Pacific Telesis—initiated a programming partnership aided by Hollywood agent Michael Ovitz, whereas the seventh Bell, US West, teamed up with Time Warner to ex- plore video-programming opportunities (Leslie, 1995). Time Warner and Intellicast.com continued to ally to offer Broadband Weather, an online service that delivers weather information especially suited for high-speed Internet access.
Strategic Alliances With Branded Internet Firms
As the provider of connections to the Internet conduit, BSPs have also partnered with established Internet brands to take advantage of the ex- isting brand equity of leading online brands in comarketing efforts. For example, SBC and Yahoo! formed a so-called “landmark alliance” to pro- vide cobranded high-speed Internet DSL service to residential consumers in SBC’s networks nationwide (“Yahoo, SBC Sign, 2001b). Microsoft jointly sold and marketed high-speed Internet services with Verizon Communications (Buckman, 2002). Verizon also partnered with Ex- cite@Home to be the provider of directory services for all of Ex- cite@Home’s Web properties, whereas Charter and the MSN network allied to make MSN content and services available to customers of Char- ter high-speed Internet service.
TELEPHONE COMPANIES’ VIDEO STRATEGIES
The promise of broadband Internet goes beyond the high-speed surfing of the Internet and VoIP (Voice over Internet Protocol) services. The capabil- ity of delivering ETV features is another exciting new area of revenues en- ticing many telcos that are faced with a decline in traditional landline telephone services. Chapter 7 has already examined the ETV ventures from the MVPD perspective. We now scrutinize the video ventures initi- ated by the telcos to assess their strategic emphases in this area.
Acquisition of Resources to Facilitate Video Services
Lacking the video services and marketing experience, telcos were at a competitive disadvantage initially compared to cablecasters who have
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acquired years of video programming expertise. To move from acting as a common carrier to a programming supplier, many telcos not only be- gan to hire programming veterans like Sandy Grushow, former presi- dent of Fox Broadcast Group, and Howard Stringer, former president of CBS, from the broadcast and cable television industries (Sharkey, 1995), but also formed alliances with technology firms to facilitate their deliv- ery of video services over phone lines. For example, Microsoft joined Southwestern Bell to provide software for the telco’s interactive video service in the early 1990s (Cauley, 1994). To better their video offerings, telcos such as BellSouth and SBC also formed joint ventures with con- tent firms like Disney and CinemaNow.com (Leslie, 1995).
From Video Dial-Tone (VDT) to Video on Demand (VOD)
Beginning with VDT ventures in the early 1990s, many telcos had tack- led the complicated, expensive undertaking of delivering video services via telephone lines with mostly disappointing results (“FCC Approves BellSouth,” 1995; Kapadia, 1995). For example, Bell Atlantic, the most aggressive telco in testing various VDT trials, failed to sustain its ambi- tious so-called “Stargazer” service, which offered shopping via televi- sion and more than 700 educational and entertainment program choices (Kapadia, 1995). Another high-profiled VDT service, Tele-TV, put forth by a consortium of three RBOCs—Bell Atlantic, Pacific Telesis, and Nynex—was formed to deliver programming content and link in- teractive elements to the video systems of the Baby Bells (Sharkey, 1995). The venture eventually folded after the 1996 Telecommunica- tions Act, which distracted the RBOCs with the possibility of a more lu- crative revenue stream, long-distance service. Citing the regulatory uncertainty and difficult application process for VDT ventures, telcos like Ameritech also decided to abandon their VDT services and instead use the cable TV model to build digital video networks with cable TV franchises offering both analog and digital video channels (Kapadia, 1995; McCarthy, 1995). In essence, the original VDT ventures by the telcos failed to materialize because of regulatory complications, prob- lems of inefficiency in integrating a wide range of interactive options into a usable product not yet demanded by consumers, costly equip- ment, other business opportunities opened up by the 1996 Telecom Act, and the fact that interactive television was losing much of its luster as public interest began to shift to the Internet.
The new broadband VOD model seems to hold better prospects for the telcos. After waves of mergers, the remaining telcos are able to invest in broadband services with pooled resources and develop VOD as an appli- cation to enhance one of their core businesses, broadband services. To ensure a smooth transition to the VOD platform and the availability of attractive content products, telcos have formed alliances with technol- ogy and content firms. For example, SBC and Microsoft partnered to test
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