The past two years have been tough on Pay Cable TV. In 2010 alone, the industry saw over two million video subscribers drop their subscriptions. While certainly not great news, there was a silver lining. In the same seven quarters, Cable High Speed Internet (HSI) gains more than compensated for Pay TV losses.

Has Cable been in the wrong business all these years?

Following that same trend, Time Warner Cable today announced that it had lost another 66,000 Pay TV subscribers in the first quarter. The good news? It added 177,000 broadband subscribers.

We've heard (and indeed, have been saying) for so long that traditional Service Providers were threatened with "disintermediation" and risked being relegated to the role of a "dumb pipe." I, along with many analysts, have advised Service Providers to avoid this trap at all costs.

But in retrospect, is being a "dumb pipe" such a bad idea?

High Growth, High Margin

As Pay TV subscribers (and margins) continue to dwindle, Cable Broadband profitability is growing. Our analysis shows that HSI margins are anywhere from 70% to 110% higher than Pay TV (depending on whether or not advertising is included in the calculation). Broadband is likewise changing the face of the "traditional" Cable bundle. In 2008, Video contributed 59% to Cable's Revenues. In 2010, the number was 53%.

TWC's CEO Glen Britt told analysts on the company's Q1'11 earnings call that the company is rethinking the role of broadband in the company's portfolio. "High-speed data is quickly becoming the anchor product in the eyes of our customers," he said.

CABLE_GROSS_MARGINS

Don't reprint those business cards quite yet

While on the surface it may seem like a no-brainer, doubling down on broadband may not be the best long-term strategy for Cable.

As a highly commoditized consumer offering, it is extraordinarily challenging to differentiate, and is one easily duplicated by competitors. Furthermore, prospects for increased ARPUs in fixed broadband are decidedly limited, as few have been able to successfully monetize incremental bandwidth offerings.

To be sure, it's doubtful that any MSO would abandon its core TV offering. But as Cable ponders its next move on the OTT front, it should be of some comfort that broadband continues to take up the slack.

-Ben Piper

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