Can the cable industry finish what it started?

The cable industry has a lot of work ahead of it.

After putting in place grand plans for many new,

Meta Group says both cable and digital subscriber line, high-speed access must adapt to the new realities of today's business and financial climate. see commentary

advanced cable-based services--and striking megamergers to help make it all happen--cable operators and the technology and content providers that supply them face the difficult task of finishing the work they started.

In recent years, the cable industry garnered great fanfare on Wall Street for its ambitious plans to offer more channels of digital-quality television, high-speed Internet access, local phone service and interactive TV, all via national networks that already are capable of reaching nearly 97 percent of U.S. households, according to industry market researchers.

"For (the cable industry), they may have been overly optimistic about how quickly they could move into data and voice," said Mike Paxton, a cable industry analyst at Cahners In-Stat Group, a market research firm. "I think a lot of those plans are still valid. I think it's just taken longer to develop a lot of those capabilities."

Cable stocks soared in the late 1990s and new leaders emerged, such as AT&T chief executive C. Michael Armstrong and technology investor Paul Allen, owner of Charter Communications. They proselytized a future filled with demand-inducing and profit-generating new services.

But even as the cable industry congregates and celebrates in Los Angeles this week for the Western Cable 2000 show, a large annual conference by the California Cable Television Association, the days of visionary ideas and skyrocketing stock prices are gone, replaced instead with the reality of delivering on the promises.

"The cost and complexity of rolling out new services...has become a much bigger job than originally thought," Paxton said "I believe in the strategy long term, but it's taken (the cable operators) a little bit longer to implement than maybe they expected a year or two ago."

Upgrading cable networks to handle these new services is costly and time consuming. At the same time, massive mergers such as America Online's acquisition of No. 2 cable operator Time Warner and AT&T's purchase of MediaOne Group--a second-tier player that put Ma Bell over the government's cable ownership cap--have been stuck in regulatory limbo.

Although the cable industry's digital cable TV and broadband Net access efforts have been successful so far, the industry has lost just as many customers to direct broadcast satellite (DBS) services such as DirecTV and EchoStar Communications, and to digital subscriber line (DSL) Internet connections provided by the Baby Bell local phone giants.

AT&T and Armstrong have had their recent troubles for a variety of reasons, but most analysts believe the cable industry's plans are sound. After all, consumers are clamoring for low-cost bundles of voice, video and data services, and cable can deliver all of that. Now, executing on those ambitious blueprints is the task at hand.

AT&T, which made its plan to offer local phone service central to selling its costly acquisitions of Tele-Communications Inc. and MediaOne, has quickly launched the service this year but is rapidly approaching a year-end deadline to reach roughly 500,000 cable telephony subscribers. Ma Bell has said it will meet those goals. But the company, amid falling profits in its core long-distance business, a slumping stock price, and a self-imposed four-part breakup, has plenty on its plate.

Similarly, Excite@Home, the world's largest high-speed Net access company, based predominately on cable modems, is up against a year-end goal of 3 million broadband Internet customers. The company currently has 2.3 million customers.

In addition to the looming deadlines and goals, other challenges remain for the cable industry.

The open access fight
For one, the proposed combination of AOL and Time Warner, which would be the largest-ever corporate merger, faces intense scrutiny in Washington. The Federal Trade Commission is believed to be raising antitrust concerns and is carefully reviewing the combination.

Chief among the concerns is a recent nemesis for the industry that keeps rearing its head.

Many consumer groups and federal regulators would like the cable industry to open its networks to competing Internet service providers to provide competition within the broadband Net access market.

Last week, AOL and Time Warner agreed to a deal with EarthLink, a major ISP, to offer so-called "open access" to the company. The deal would allow EarthLink to use Time Warner's cable networks to deliver high-speed Net access and could serve as a model for other deals in the future. AT&T is conducting similar trials with ISPs in Colorado.

But critics contend that Time Warner struck the deal only to placate regulators on its merger with AOL.

"The FTC pointed a gun at AOL Time Warner's head, and begrudgingly they signed one deal," said Jeff Chester, executive vice president of the Center for Media Education and an open access supporter. "To the extent that the cable industry has made any progress, it's relatively superficial. They think they can do a few trials and they've managed the open access issue. They still don't get it. It's about open architecture."

Regardless, the issue of open access remains a critical one for the cable industry, and one that is sure to be addressed at the Western Cable 2000 show. In a recent victory, a federal judge ruled that open access requirements in a Florida county were unconstitutional, affecting operators' First Amendment rights.

As for AOL and Time Warner, the companies have taken a public stance in favor of industry self-regulation of the open access issues. Once vehemently in favor of government regulation, AOL withdrew its lobbying efforts shortly after it announced its planned merger with Time Warner. In February, the companies issued a joint memorandum of understanding that spelled out assurances to allow competitive ISPs carriage on Time Warner's cable network.

Regardless of intent, many legislators and regulators have voiced skepticism over whether the companies would follow through with the MOU. Now regulators continue to drill into AOL and Time Warner's open access policy, pinning their actions squarely as a condition to approving the merger.

The Federal Trade Commission, one of the federal bodies examining the merger, has pushed back its ruling date to the end of the year or early 2001.

Time Warner spokesman Ed Adler said the companies' open access stance remains outlined in the MOU. He added that "no other two companies have demonstrated their commitment to open access" as much as AOL and Time Warner have.

As for the broader cable industry, analysts say the issue is still evolving.

"It's negotiated on a deal-by-deal basis. For cable, it looks like it's going to be negotiated by an ISP-by-ISP basis and unlikely that the government is going to regulate," said Bruce Kasrel, an analyst at Forrester Research. "It's still an active discussion--not as active as it was in the courtroom like it was two years ago."

To be sure, the cable industry has had its share of success. High-speed Net access and digital TV services are looking like sure-fire revenue generators.

But the industry has some tough hurdles to leap in accomplishing its goals in the face of ongoing regulatory scrutiny--over high-profile mergers and whether the cable industry is willing to open its Internet networks to others.

News.com's Jim Hu contributed to this report.