And what a magnificent and daring vision it was! It was the stuff of heady wonder and profound business revolution, of vast profits beyond the dreams of avarice, coupled with Schumpeterian gales of creative destruction howling through business sectors as diverse as mainframe computing, traditional retailing, and passive one-way television. It was a dream of a world transformed by a novel doctrine of predictable geometric increases in information processing capacity that we have come to know by the last name of a Silicon Valley icon -- Moore's Law.
It is a vision that has grown with the years and acquired a multiplicity of labels: the Information Superhighway, the 500-channel viewer universe, the telecosm, cyberspace -- and of course that largely accidental phenomenon that has shaped the infosphere in ways unforeseen by its creators: the mighty Internet.
It is a vision that Microsoft co-founder Paul Allen captured evocatively with the pithy phrase "wired world":
Before Bill Gates and I started Microsoft, we had the vision of a Wired World in which everyone would have a PC at home and at work that would be interconnected in a global network, providing immediate availability to information and resources anywhere in the world.1
Now, it seems, the wired world vision is at last on the threshold of realization. With the rollout of cable television's digital tier of services and advanced set-top boxes and the prospect of increasing penetration of cable-based, high-speed modem services like @Home and Time Warner's Road Runner, we seem to have arrived at the dawn of ubiquitously deployed, interactive broadband communication services.
What will be the key sources of competitive advantage in this new era? How will traditional purveyors of entertainment services like television broadcast networks fare? Is the "killer app" likely to be entertainment-on-demand as originally envisioned by Hollywood moguls? Will the trend toward "category television" niche networks be enhanced by the expansion of channel space on the digital tier? Are informational and communications services (like e-mail and directory and portal services) likely to continue their dominance over commercial entertainment ventures on the Internet? Do new categories of services, such as big-ticket home shopping for items like cars and real estate, stand to benefit from the coming enlargement of cable carriage opportunities? What is the potential for home banking? How about home-based telehealth applications?
What follows is a rough hypothesis of the likely characteristics of competitive advantage on cable's digital tier. The data on which the hypothesis is based are, by their nature, sketchy and incomplete. However, enough data points are now available from enough diverse sources to make the drafting of a first crude map of this vast, emerging competitive landscape feasible.
These challenges describe key features of what some business theorists call an evolutionary fitness landscape -- an economic environment that will exert Darwinian selection pressures on competitors seeking to master its rigors and to gain competitive advantage over one another. What follows is a preliminary sketch of a few basic rules which may shape the terms of economic combat in this challenging new environment.
The ongoing shift of audience share from the broadcast networks to cable represents the triumph of category television providers -- a growing confederation of powerful niche cable channels that focus intensively on specialized content categories such as science, sports, history, sci-fi, cooking, etc.
This is clearly the wave of the future -- and it spells big trouble for the broadcast networks in the years ahead. It's one of the reasons that even a successful broadcast enterprise like top-rated NBC is beginning to explore possible alliances with cable networks. (The other reason is that broadcast networks are dependent on a single revenue source -- advertising -- while cable channels such as ESPN typically claim a share of cable subscriber fees.) As NBC Entertainment President Warren Littlefield told The Wall Street Journal recently, "The traditional network model is not exactly one that people are embracing. For the future, it's just not going to work."
To maximize its inherent advantage as the key provider of category television, the cable industry should continue to diversify its portfolio of niche channels. It should avoid the temptation to:
Either strategy is shortsighted in that it will tend to weaken the core strength of the digital tier as an aggregator of high-quality niche channels.
The new functionalities of digital cable will dramatically enhance the importance of cable's "push" function vis-à-vis the Internet. For instance, with the rollout of the digital tier and @Home-style services, viewers will be able to use tools like WebTV to transition effortlessly between a passive television environment and an interactive Web environment, without losing the sense of program continuity.
This seamless integration of digital cable and Web content should also permit sophisticated co-branding of combined Internet/television content. This will be critically important in the overcrowded, barrier-free Internet environment.
Finally, if cable companies are able to convince Wall Street of their utility as Internet "push" and branding engines, they may be able to lift their valuations to more closely approximate those of high-flying Internet portal companies.
Most investors seem to believe that the Internet will someday produce unusually rich returns because it is a cheaper way to reach customers, without onerous expenses such as paper recordkeeping, brick-and-mortar shops, and piled-up inventory. Yet, the very things that attract users to the Internet -- speed, convenience, and unlimited breadth -- make it treacherous for profit-hungry merchants. With just a few keystrokes, consumers can play business rivals against each other. That ability is turning the Net into a relentlessly efficient market in which vendors will be hard-pressed to win, and defend, any lasting competitive advantage.
If various merchants can't separate themselves from the pack, they are likely to transform most online markets into low-margin commodity businesses. Price cuts will become the main weapon in a chaotic battle for market share.
Hoping to avoid this profit squeeze, online companies are spending heavily to try to create brand loyalty in cyberspace. They are pumping up ad budgets, developing online communities of what they hope will be loyal customers, and trying to make it hard for newcomers to go anywhere except their site. Optimists hope that Internet branding will give companies the cachet -- and pricing power -- of a Nike Inc. or a Gillette Co.2
The inherent advantage of cable's digital tier in the free-for-all e-commerce environment is that a cable network can serve as its own powerful branding engine. It can lead the viewer back and forth between television programs and selected Internet sites while using "other peoples' money" (i.e., revenues provided by television advertisers and home shopping retailers) to pay for the branding exercise.
It is important to note that, in the era of category television, it is typically the network, not the particular program or television personality, that is the viewer magnet. Most viewers watch The Weather Channel, CNN, or a regional news network because of the specialized content stream of the particular channel, not because of the attractiveness of the host or the cachet of a particular program. The overall character of the channel itself is what makes it a "dependable viewer destination" in the words of a TCI official, who added, "you cannot over-emphasize the importance of a dependable destination in a 500-channel universe." (This situation is reversed on a category-diverse broadcast network. There, it is the star or the particular program that is the viewer magnet.)
Accordingly, a niche cable network is able to piggyback its brand-building exercise on the expenditures of its advertisers and product retailers -- a crucial competitive advantage not available to an Internet-based competitor lacking a dedicated cable television presence.
The inherent branding advantages enjoyed by digital tier cable channels imply rich rewards for those that dominate content categories offering significant transactional potential.
What are those content categories? Here are a few examples.
As Wall Street guru Peter Lynch wrote in 1994 with reference to the competitive advantages of various combatants in the telecom regulatory battles:
The future of the Bells and the CAPs, and everybody else in the phone business for that matter, depends to a large degree on the whims of regulators, the politicians, the courts, and the deal makers on Wall Street.
Wall Street is betting that the Bells will be the losers in the legislation coming out of Congress, but they have a lot of moxie and a lot of clout in Washington. Clout doesn't show up anywhere on a balance sheet, but in a regulated industry, it's the most valuable asset of all.4
Failure to anticipate and adequately shape the regulatory environment proved fatal to the proposed TCI/Bell Atlantic merger. On the other hand, superior government relations capacity has been a profoundly important, though generally overlooked, source of competitive advantage for a number of highly successful companies and industries operating in challenging regulatory and political environments.
The new functionalities of cable's basic tier offer unique opportunities to appropriately and ethically build a powerful grassroots political base that can help sustain the industry through the regulatory tribulations that will inevitably materialize in the years ahead.
The new capabilities of the digital tier offer opportunities to apply the strategic principle of share-shift in a more profound and comprehensive manner. Why? Because virtually every significant business sector -- health care, tourism, real estate, energy, and transportation, among many others -- is in the process of transforming itself into an information-driven sector. The potential exists to "trade" highly specialized and mass-customized video/Internet content for traditionally delivered goods and services at favorable price-value ratios. However, the critical information pathways, which link particular vertical sectors to their key consumers, must be mapped with sufficient precision and then subsumed within current or future content categories of the digital tier. Here are a few examples of how such strategic share-shifting might work:
In order to optimize such inherent advantages, the digital cable industry must develop a new core competence: consummate skill at sectoral partnering. Whether the sector be financial services, retailing, or health care, the task of actually accomplishing a value migration from a traditional business venue (such as the neighborhood bank branch or a physician's clinic) to a digital tier/Internet environment will require a high level of finesse and sectoral sophistication. The cable industry is incapable of achieving the requisite level of sectoral expertise on its own; it must learn to work cooperatively with sectoral partners like BankAmerica and INTUIT on a win/win basis.
If it can accomplish this daunting task, then the cable industry's future will be bright indeed in the brave new world of the digital tier.
If it cannot, there are a couple of well-endowed fellows named Bill Gates and Paul Allen waiting anxiously to implement their old dream of a wired world.