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IP: F A New Model for AOL May Influence Cable's Future
From: Dave Farber <dave () farber net>
Date: Mon, 26 Aug 2002 09:58:39 -0400
------ Forwarded Message From: "John F. McMullen" <observer () westnet com> Date: Mon, 26 Aug 2002 01:43:54 -0400 (EDT) To: johnmacsgroup () yahoogroups com Cc: Dave Farber <farber () cis upenn edu>, Declan McCullagh <declan () well com> Subject: A New Model for AOL May Influence Cable's Future
From the New York Times --
http://www.nytimes.com/2002/08/26/technology/26NECO.html A New Model for AOL May Influence Cable's Future by Seth Schiesel The top executives at AOL Time Warner and Comcast probably did not feel like heavyweight boxers as they hammered out last week's deal for the looming AT&T Comcast cable television giant to distribute the America Online Internet service. And yet, the agreement may represent a technological transition point in the cable TV business as important as the "Thrilla' in Manila" heavyweight title fight in the Philippines 27 years ago. Internet technology could now create the same kind of era-defining shift in cable television that satellites did back then. And for the media industry, the big question is which sorts of companies can benefit most from this transition the companies that operate the cable systems, or the ones that provide the "content." When Muhammad Ali defeated Joe Frazier on Sept. 30, 1975, in Manila, the fledgling Home Box Office network beamed the fight to cable television operators in the United States. It was the first time a cable network used satellite technology to distribute live programming to affiliates around the nation. Viewers, who up to that point had considered cable mainly a means to better reception of local broadcast stations, soon realized that cable operators could provide original programming available nowhere else. Just as important, cable operators soon realized that their success hinged on their relationship with the providers of that programming. As networks like HBO, ESPN and CNN blossomed in the late 1970's and early 80's, they attracted millions of households to cable for the first time. The top executives at AOL Time Warner which owns HBO, among other cable channels now hope that its America Online unit can fit into a similar mold. After years of insisting that America Online had to "own" its customers and trying unsuccessfully to persuade cable operators to lease the use of their lines as "dumb pipe" for high-speed Internet access, AOL Time Warner's executives came to a realization this summer: The only way to persuade AT&T and Comcast to distribute the cyberspace service over their cable lines was to package America Online as if it were a premium movie channel. It is a wholesale shift in America Online's business model and presumably for its future prospects. The new approach means that viewers who use the America Online service over the cable lines of the combined AT&T Comcast will be billed by AT&T Comcast not by America Online the way the price of HBO is included in a customer's cable bill, rather than the customer receiving a separate invoice from HBO. In other words, the high-speed AOL customer will be as much the cable company's customer as they are America Online's. Customers who sign up for the America Online service will have their cable modem installed by AT&T Comcast. Customers who have a technical problem with the service will first call AT&T Comcast, just as consumers who have a problem with HBO call their cable or satellite provider. And when a customer buys something on America Online online transactions are expected to play a big role in AOL's future AT&T Comcast will receive a cut of that revenue. This arrangement is comparable to the way cable operators now generally receive two minutes of advertising time for their own use for every hour of a cable network's programming they carry. What all this means is that, a few years out, the question of whether last week's deal was a good one for AOL Time Warner will probably depend on whether the America Online unit can create the Internet equivalent of must-have offerings like "The Sopranos" and "Sex and the City." Last week, AT&T Comcast, which is to receive about $38 a month from America Online for every high-speed AOL customer served by its cable lines, seemed to have gotten the better part of the deal. And over the next year or so, other cable operators may very well follow the lead of AT&T and Comcast and strike similar arrangements with America Online. If other cable companies follow suit, though, the risk facing the entire cable industry over the next decade will be whether America Online succeeds with its new strategy. The cable operators could find themselves in a long-term position of weakness just as they have found themselves at the mercy of programming conglomerates like Viacom (with CBS and MTV), the Walt Disney Company (with ABC and ESPN) and yes, AOL Time Warner, with a stable that still includes HBO and CNN. "For a long time, we kept asking cable operators to let us import our traditional business model into the broadband arena," said Lisa Hook, who oversees America Online's high-speed, or broadband, business for AOL Time Warner. "We kept saying, `Sell us wholesale access to your network and we will have the direct relationship with the customer,' " Ms. Hook recalled in an interview last week. "It became clear that that was really unknown in the cable industry, and we've realized that moving more toward an HBO model for carriage makes a lot of sense." Brian L. Roberts, the president of Comcast, who will run the combined AT&T Comcast if Comcast, as expected, completes its acquisition of AT&T's cable unit later this year, also uses the HBO analogy. "We're approaching this relationship with AOL like a premium movie channel," he said. "The HBO model lit a fire under cable, and it really took off. Likewise, I think the model we've worked out with AOL can really light a fire for cable modem service. Just as we have more than one movie service, like HBO and Showtime, we will have more than one Internet provider, and we will help each other become more successful." AT&T Comcast and whatever other cable operators America Online strikes deals with will probably continue to deliver a "house brand" of cable modem service. Moreover, that house brand will almost always be less expensive than America Online cable modem service. Therefore, America Online will probably have to invest tens or hundreds of millions of dollars in the coming years to develop the Internet equivalent of ESPN's "SportsCenter" or MTV's "TRL" material that is available nowhere else. The payoff for America Online could be spectacular. Consider that the lament of cable system operators like Mr. Roberts these days is that programmers largely have them over a barrel. A cable system that did not include ESPN, MTV and CNN would have trouble retaining a lot of its customers. That is why ESPN can increase its fees by 10 percent to 20 percent annually and cable operators will still pay it. (Cable operators now pay ESPN close to $2 a month for each subscriber.) In addition, the power of "must have" networks like ESPN allows programmers to force cable operators to carry additional channels. Walt Disney, which owns ESPN, is able, in essence, to say to cable operators: "You know you need ESPN, but if you want ESPN you also have to carry ESPN2, ESPN Classic and ESPN News. Take it or leave it." The cable operators have little choice but to take it. And that is the leverage that America Online hopes to exert in a decade. Speaking on condition of anonymity, people close to AT&T and Comcast said last week they did not think that America Online could develop sufficient original, proprietary "must have" services to gain that sort of leverage. They say the Internet itself, available to all comers, will be the primary reason why people sign up for cyberspace service whether America Online's or the house brand. Of course, America Online is counting on just the opposite. Stay tuned. Or logged on. Copyright 2002 The New York Times Company *** FAIR USE NOTICE. This message contains copyrighted material whose use has not been specifically authorized by the copyright owner. The 'johnmacsgroup' Internet discussion group is is making it available without profit to group members who have expressed a prior interest in receiving the included information in their efforts to advance the understanding of literary, educational, political, and economic issues, for non-profit research and educational purposes only. I believe that this constitutes a 'fair use' of the copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml "When you come to the fork in the road, take it" - L.P. Berra "Always make new mistakes" -- Esther Dyson "Be precise in the use of words and expect precision from others" - Pierre Abelard John F. McMullen johnmac () acm org ICQ: 4368412 Fax: (603) 288-8440 johnmac () cyberspace org http://www.westnet.com/~observer ------ End of Forwarded Message For archives see: http://www.interesting-people.org/archives/interesting-people/
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