Last Updated Sep 24, 2010 11:10 AM EDT
But wait. Before you get too comfortable with reality, Verizon (VZ) CEO Ivan Seidenberg says that cord-cutting is real and a problem. He said that young people are smart and won't pay for something unnecessarily. True enough -- that's what parents are generally for. However, the assumption that cable companies will take it in the shorts? Not a chance.
The question of cord-cutting will get more attention from industry types as well as investors because it is key to future strategy in entertainment, telecommunications, and cable. If you can figure out how consumers will get video, you can place bets appropriately and make significant money. My BNET colleague Marion Maneker discusses Tom Barrack's hedge fund and its investments in distressed media properties.
The conventional theory is that people pay for distribution, not content. If you get consumers to go directly to the source, the entertainment producers make higher margins, even as prices drop.
There's just one critical flaw with this theory. If producers are going to deliver television, movies, books, music, and the like to consumers, they have to send it over somehow. No one gets to go direct to the source without a connection to the Internet.
The connections have to be fast for video. That means ... doing business with a cable or telecom carrier. You simply cannot cut them out of the loop, or there is no path to deliver what consumers are willing to buy. You could argue for wireless delivery of broadband. And yet, that's hardly cheap or fast to build out in most places. In my town, we went through this very issue a few years ago. It's a rural area that largely had only dial-up. A local company wanted to build out a WiMAX service. Just one problem: The company couldn't get permission to erect the periodic broadcast towers it needed.
It's just like cellular service. To expand reach, the carrier needs more cell towers. But getting permission to build can be difficult. You're talking about a project that would run years. Cable or telecom companies would also have an easy time blocking this. All they would need do is cannibalize their own businesses and start building out wireless broadband delivery themselves. Get enough towers, and they could rest easy that local governments wouldn't' want more building, so competitors would find themselves locked out.
I imagine that the cable companies and telcos are aware of their indispensable position. There might be one real competitor in any given area, but for the most part, their positions are protected. What we're really seeing isn't a question of whether they can make money from consumers. Instead, it's about stock price. Should a Comcast say, "Guess what? Our core business is disappearing," share price would take off after it. Verizon doesn't care so much because it's a video newcomer.
Revenue will certainly take a hit as people decide to pay directly for entertainment, and that's a significant management problem. But cut out of the picture? Might as well say that you could have a thriving use of automobiles after digging up all the roads. And when the day comes, you can expect that costs for Internet connections suddenly become a lot more expensive.
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