Comcast out, AT&T's U-Verse in

Yesterday, after years of getting video and high-speed Internet service from Comcast in California and Illinois, I switched to AT&T's U-verse IPTV service. There were two big reasons for making the switch:

• Cost: Even with HD service to only a single television, no premium channels (HBO, Showtime, etc), moderate Internet speeds and domestic phone service, I was paying almost $200/month with my most recent price increase. This is the same service that I paid around $120/month for two years ago with "teaser" rates. The U-verse service is around $150/month, with more channels (including premium channels) and faster Internet speeds. I could have gotten an even better rate had I been willing to commit to 12 months of service.
• Quality: Some channels (for example, the local CBS station) were so compressed and filled with errors that audio would frequently drop out and video would freeze. I initially thought that the problem was with the television station itself, but watching the same station on U-Verse was a revelation: Not a single audio dropout or video freeze in hours.

AT&T gives the same three-hour "window" for installers to arrive as the cable operators, but it also advises customers to allow four hours for the installation. In my case, AT&T sent two installers, who called me 35 minutes before they arrived and showed up 5 minutes into the window. It took them just two hours to complete the installation (I needed a few hours more to get everything working on my network).

A few observations from very early use of U-verse:

• Even though I was supposed to be getting around 12mbps down from my Comcast service, I measured the speed before AT&T started its installation and only got around 8mbps down. The U-verse service measures a true 12mbps down.
• AT&T really, really wants you to use their 2Wire gateway for everything related to the Internet, but even though I got the very latest 2Wire model, it still only had 802.11 b/g wireless, not 802.11n.
• I received what appear to be Cisco's latest set-top boxes. Compared to the elderly behemoth Motorola box that Comcast used, they're much smaller and more modern, with a far more attractive user interface and electronic program guide.
• One thing I miss from the Comcast system is that the AT&T remotes lack a "Favorite" button to take me immediately to my list of favorite channels. Instead, I have to navigate the set-top box's menu tree to reach the favorite list.
• I don't at all miss the never-ending parade of commercials that Comcast runs on its own systems disparaging its competitors. If Comcast could sell that commercial inventory, they'd have enough money to buy NBC Universal twice over.

In hindsight, I should have dropped Comcast at least six months ago.

Follow the bouncing carriage deals

According to Multichannel News, AT&T has sent a postcard to its U-verse subscribers, telling them that they may lose access to a number of channels if the company can't negotiate acceptable business deals with them. Here are the dates on which a number of carriage agreements expire:

• October 31: Scripps Networks' HGTV, DIY, Food Network, Cooking Channel, Travel Channel and Great American Country, plus the Outdoor Channel
• November 30: FamilyNet
• December 1: Bloomberg Television and Eternal Word Television Network

Just so everyone knows that AT&T means business, the Hallmark Channel and Hallmark Movie Channel have been off U-Verse since August 30th, and there's no word of if or when they're going to be restored.

As service providers knock more and more cable channels off of their systems to save money, they lower the value of their services to current and potential subscribers. There are a handful of channels that subscribers would likely change service providers in order to keep--the problem is that they're different channels for every subscriber. I'm a Comcast subscriber, and if they lost ESPN, I wouldn't blink, but if they lost Discovery, I'd be on the phone to DirecTV or Dish to schedule a hookup, which leads to the other problem--every service provider is playing the same brinksmanship games. I could switch service providers and still end up losing Discovery.

The inevitable future for all but a handful of cable networks is monthly subscriptions through Apple TV, Google TV, Roku, Boxee and the like. That's the only way to insure that they can reliably reach a critical mass of households.

Are cable and IPTV operators going to "back into" a la carte?

NewTeeVee ran an article last week about AT&T's decision to drop Crown Media Holding's Hallmark Channel and Hallmark Movie Channel from its 2.5 million U-verse IPTV households in the U.S., effective September 1st. As of this writing (September 9th,) the channels haven't been reinstated. NewTeeVee said that a JPMorgan research report from last April found that there are only 50 cable networks in the U.S. for which 10% or more of cable subscribers would switch service providers in order to watch them. The Hallmark channels aren't within that group of 50 essential networks.

Cable, satellite and IPTV systems have the capacity to carry hundreds of channels, and system operators have been racing each other to offer the most networks. New and small cable networks can get carriage on cable systems by giving their programming to cable operators at no cost or paying to have their programming carried (called "reverse compensation".) However, most of those networks get little viewership, and the service providers are essentially wasting bandwidth by carrying them.

Cable operators have successfully fought the FCC for years to prevent the imposition of rules that would require them to allow viewers to choose, and pay for, only the channels they want to watch (often called "a la carte".) However, as they begin to drop lesser-watched channels in order to save on retransmission fees, the operators of those networks will put political pressure on the FCC to protect them.

Cable and IPTV operators could turn this situation to their advantage (satellite operators have less flexibility, due to their technology.) As cable operators move to switched digital video and IP transport, they will have the ability to send any channel (or set of channels) to any subscriber. (IPTV operators like AT&T and Verizon can do this today.) These operators could offer to make small networks available on an a la carte basis in return for revenue sharing (for example, 70% of the fee would go to the cable operator and 30% to the network.) There would be some upfront costs to the network for making their content available to subscribers.

The "top 50" essential networks wouldn't be subject to a la carte, so those network operators would be unlikely to fight the move with the FCC or U.S. Congress. Some customers might actually save money by buying a few channels a la carte.  The cable and IPTV operators could position the move as sensitivity to consumer demand. They would also have more latitude to remove unpopular channels, giving them more flexibility to offer HD and 3D channels, and more bandwidth for high-speed Internet services.

In Cable TV, one quarter does not a trend make

Today, SNL Kagan reported that in the second quarter of this year, net pay TV subscriptions in the U.S. dropped for the first time in history. Cable systems lost 711,000 subscribers, and six of the eight largest cable operators reported their worst subscriber losses ever. So that means that consumers are dropping pay TV and moving to over-the-top Internet video services, right?

Not necessarily. Satellite (DirecTV and Dish) and IPTV services (Verizon FiOS and AT&T U-Verse) gained a total of 495,000 subscribers in the same quarter (414,000 for IPTV, 81,000 for satellite), and the satellite services don't even offer high-speed Internet. Why the big gain? You've probably seen the aggressive introductory price deals offered by the satellite and IPTV companies on television or in the mail, so people are switching to these services to save money.

Really? According to Steve Hawley, an IPTV industry analyst I used to work with, the monthly ARPU (Average Revenue per User, or subscriber) for the IPTV services is higher than that of any of the major cable operators. Only Cablevision comes close to Verizon and AT&T. That means that on average, the IPTV operators are charging more per month than the cable operators.

But pay television still lost a net of 216,000 subscribers in the quarter, so that still means that those subscribers went to Internet video, right? Perhaps, but Verizon and AT&T lost 515,000 subscribers to their DSL high-speed Internet services in the quarter, and you need high-speed Internet for Internet video.

So what does it all mean? We simply don't know yet. Over the next year or so, we can start sorting out what's really going on and identify the underlying causes. Are we seeing a temporary drop due to economic pressures (people losing or in fear of losing their jobs) that will be reversed when the economy improves? Are people experimenting with Internet video or committing to it as a replacement for pay TV? Is there a long-term shift from cable to IPTV and satellite, or in a saturated market, are people simply switching back and forth to get the best deal, just like they used to do with long distance services?

The key thing to remember is that one quarter does not a trend make.