An annual study of the battle for eyeballs between cable and telco rivals show cable companies are still winning the war, with no change expected soon. But the same research group-Convergence Consulting Group-is also predicting that Internet-based video will not displace the family TV set and that cable companies may soon trim their customers' use of fast-forwarding of digital recorders.

In two separate reports under “The Battle for the North American Couch Potato,” Convergence Consulting looked at bundling of services by cable and telco companies and at new challenges and opportunities in the content market.

Where bundling is concerned, the cable companies are doing very well, said Brahm Eiley, an analyst for Convergence.

“This year's report has the same theme as last year's,” he said. “Because cable has great overlap of residential [video] customers and Internet customers, they are able to add voice customers at a really quick pace.” The cable triple play also has reversed the loss of basic cable customers, the report states. Convergence is forecasting a slight increase in basic subs for 2007.

Convergence believes cable companies will have 13% of the residential phone market in the U.S. by the end of this year and almost a quarter-24%-of that market by the end of 2009. By contrast, telephone companies will have 1% of television subscribers by the end of 2007 and 6% by the end of 2009. Just as important, Eiley said, about half of all cable company customers buy their Internet service from their cable company, while only one-quarter buy DSL from a telephone company. Unlimited long-distance calling and free advanced voice features have made cable telephony very attractive, he said.

Convergence is impressed by Verizon's early penetration of customers with its FiOS service. “We think Verizon numbers are really good,” he said. “We think that every number they say they are going to hit, they will hit and hit early.”

The concern is that FiOS will take until the next decade to get the coverage it needs, he said.

By contrast, Convergence is convinced AT&T isn't investing enough in its network to compete, Eiley said.

“AT&T will grab customers, but without an increase in capital expenditure-they have to pair bond or push fiber closer-they can't compete,” he said. “They haven't articulated additional capex to do that to eighteen million homes. If they do pair bonding, it will get them another nineteen months. But we still think they will have to invest more.”

Eiley believes Verizon, with an all-fiber network, is better poised to make changes as needed to add bandwidth.

“Verizon's running fiber to the home, so they have capacity,” he said. “With their existing architecture, they have one hundred Megabit capacity, but there are a lot of ways to enhance that. They are moving to [Gigabit passive optical network] now, and if it isn't perfect, they can change. Verizon is driving a Porsche; they can change the tires. By contrast, AT&T is driving a Honda, so they've got to think about these things. In Canada, we have telcos that started with the kind of approach AT&T has, and they moved their fiber closer and closer, and now they are doing pair bonding.”

The second report, which looked at the content market, states that “at least until the end of this decade, there are a number of cold hard realities dictating little economic and technological rational for the broadcasters and the cable networks to move away from TV as the primary driver or for the studios to bet the farm on Internet downloading.”

At the heart of those cold, hard realities are the billions in advertising revenue that broadcasters and cable companies put at risk by going to direct distribution of content over the Internet or via retail downloads. There is little likelihood they could make up the ad revenue by charging consumers more, Eiley said.

“Apple had 200,000 sales per show on iTunes downloads,” he said. “That's the revenue equivalent of a thirty-second spot. For broadcasters bringing in $47 billion in ad revenue and cable bringing in $40 billion-to give up on that doesn't make sense.”

He believes, in fact, that the cable industry may try to protect its advertising revenue by pulling back on digital video recorder (DVR) capabilities, which allow consumers to fast-forward through commercials, and offering network-based DVRs that don't have a fast-forward button.

Web sites will continue to provide a home for new and different content that once might not have seen the light of day, Eiley said.

ESTIMATED U.S. BASIC CABLE TV SUBSCRIBERS

ESTIMATED U.S. TELCO TV SUBSCRIBERS

ESTIMATED U.S. CABLE RESIDENTIAL TELEPHONE SUBSCRIBERS

Source: Convergence Consulting

ESTIMATED U.S. DVR SUBSCRIBERS BY CABLE, SATELLITE, TELCO AND TIVO, AND BY PERCENTAGE OF TOTAL TV SUBS