How the Net Is Threatening Cable's Cozy World

After decades on Easy Street, the year ahead is looking tough for the country's biggest cable operators. Tech juggernaut Apple (AAPL) may be on the verge of lining up media giants Disney (DIS) and CBS (CBS) to participate in a new service that streams TV over the Internet and could debut in 2010, according to The Wall Street Journal. Facing competition from Apple -- with its unmatched place in the consumer imagination -- is never easy. But Apple is just the latest in an expanding list of competitors taking aim at the future of televised media, and the combined assault could finally deliver a major blow to cable's immensely profitable business model.Competition has long been limited for cable operators. Only satellite operators like DirecTV (DTV) and Dish (DISH) -- which are unable to offer bundles of services including broadband and phone themselves for a combined lower price -- compete nationally with cable. And phone companies like Verizon (VZ) and AT&T (T) will have only limited overlap with cable operators even when they finish building out their own TV services. With Americans watching a staggering amount of TV at home -- 153 hours per month, according to Nielsen -- cable operators are able to steadily jack up rates every year, leading to a business model that is the envy of the media world.

Meanwhile, Internet video sharing services like YouTube that were supposed to pose a major threat to cable operators have failed to make a dent. Americans who watch video online clock in just three hours a month, about 2% as much as they spend watching big screens. Demand for Internet services has been limited by the lack of high-quality video available -- cable and satellite operators have threatened to cut off the billions they pay to programmers if premium content is made available for free online -- and the inconvenience of watching long videos on small computer screens.

Nightmare Scenario

But as Disney's interest shows, premium content providers may now have another option: selling services directly to consumers and bypassing cable operators entirely. Indeed, this nightmare scenario for cable operators has long been forecast by Jim Chanos, the legendary short-seller. Chanos, one of the first to bet against Enron before its fall, has lately been betting against Comcast's (CMCSA) stock as Americans' TV viewing habits change.

A host of other companies aside from Apple are betting that a major disruption could be in the cards as well. Netflix's (NFLX) popular Roku service streams video content directly to TVs, and it's working to expand its library of licenses. Start-ups like Boxee and ZillionTV -- backed by top venture-capital firms like Union Square Ventures and Sutter Hill Ventures -- are also scrambling to find new ways to get video content to TVs easily. Heavyweight TV manufacturers like Sony (SNE), meanwhile, are outfitting new TVs with direct connections to the Internet.

Companies like Comcast seem vividly aware of this risk, and the cable giant's recent move to take a controlling stake in NBC Universal was driven in part by its desire to hedge its bets as video-delivery technology evolves. Even if consumers pay programmers for content delivered directly over the Internet, with its share of NBC Universal, Comcast will remain part of the equation.

A Shrewd Adaptation?

Other cable operators like Time Warner Cable (TWC) -- the country's second-largest cable operator behind Comcast -- have been taking a different defensive tack. Time Warner Cable has been testing ways to meter broadband services and charge users by the amount of data downloaded. If data-heavy video services move to the Internet, the cable company could make up for some lost TV revenue by charging higher broadband-connection fees.

Both maneuvers may be shrewd ways to adapt to a stark new reality -- though Time Warner Cable's new billing scheme has already sparked plenty of anger, and both companies now face tight regulatory scrutiny. But the good old days of being able to charge customers hefty, ever-rising bills for big packages of channels that mostly go unwatched may be ending soon anyway.
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