Why Have Cable Companies Wrung More Value From "Up the Stack" Investments than Telcos?

Why have cable TV companies have been so much more successful with their diversification or "move up the stack" strategies and investments, compared to telcos? One rarely hears of cable companies making strategic or technology investments that later prove to be ineffective, or which are divested.

It is a truism that value is moving up the stack, and telcos and cable have invested in software, hardware and services that are intended to help with that value-creation process. Still, cable tends to reap more rewards from its investments, compared to telcos.

One might argue that is because U.S. cable operators are more careful with their cash, being a smaller segment of the industry with a smaller supplier base, smaller revenues and resources than telcos.

One might argue cable takes a practical approach, never investing in “moon shots.” But the structure of the two industries was quite different. Cable operators are able to focus on competing with telcos as the threat of competition from other cable operators is nil to non-existent.

Cable companies do not compete against each other in any single territory, as do mobile companies or satellite firms. That means there is less pricing pressure and less margin compression.

That also means it is easier for cable operators to collaborate on developing new technology or software, compared to telcos. Each cable operator realizes the odds of any new technology being deployed against it, by other cable operators, is virtually zero.

Every mobile operator knows other mobile operators will use any new capability against all the others, minimizing the comparative advantage.

Many telecom specialists do compete against telcos and cable in the fixed network business services segment (system integrators, interconnect firms, competitive local exchange carriers), and there is some--and growing--independent internet service provider competition as well.

Telcos mostly have been incumbents facing market share attacks in voice, messaging, internet access and business services. Cable has been an attacker. So telco investments are more risky: telcos have to invest in new lines of business they do not understand. Cable only has to take market share in businesses that are well understood.

Also, cable platforms, whatever the original limitations, have been “broadband” since their inception. Telco platforms have been “narrowband,” and the costs of upgrading both types of platforms were disparate: it cost cable far less to upgrade to reliable, gigabit internet access speeds, compared to telcos wanting to do the same.

Cable companies also have had lower operating costs than telcos, in large part the complex legacy of telcos having had cost structures shaped by monopoly conditions. The cable industry  began life “capital starved,” with important implications for business outlook and culture.

On the other hand, the separation of apps from access has meant the core telco apps, traditionally bundled with network access, can be delivered “over the top” by third parties. At the very least, that increases competition in the app realm. At worst, “access” becomes a dumb pipe function with less value.

Also, cable operators have had other advantages in terms of securing a role in the applications business. Consider that potential apps in the communications business are virtually infinite. Potential apps in the cable TV business are quite finite.

So it made sense for Comcast to buy NBCUniversal, and gain control of a differentiated revenue stream that also lies at the heart of its cost structure, in an adjacent part of its core and well-defined ecosystem.

Though AT&T is attempting something similar with its acquisition of Time Warner, many other telco acquisitions have not proven so successful. Telcos have bought computing companies, data centers, home security, mobile advertising, banking and other assets with mixed results. Many started their own app stores or OTT voice and messaging apps, with mixed results.

Compared to cable companies, telcos had to guess at what might work. What has worked is “horizontal acquisitions,” in both telco and cable segments of the business.

The point is that there are any number of reasons why vertical, up the stack efforts arguably have been more effective when attempted by cable companies, compared to telcos.
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