In many ways it would seem that the rise of gigabit networks would crush the business of providing pay TV, but in fact, if cable companies play it smart, they may find a way to walk the line as their industry transitions to all-IP content delivery over broadband networks. They may even find new sources of revenue by offering IP services such as home security and automation. To understand what cable firms are dealing with, I spoke with Phil McKinney, the president of CableLabs, the industry standards setting body that is responsible for pushing cable’s access technologies.

CableLabs is the organization behind the DOCSIS 3.0 standard, which has helped cable companies roll out 100 Mbps and faster speeds. Unfortunately, those speeds have a practical limit that won’t help cable providers like Comcast or Time Warner Cable compete with Google’s gigabit networks. And if AT&T or municipalities get aggressive about deploying such networks, cable providers might find themselves selling the equivalent of feature phones in a smartphone world.

Getting cable to a gig

Enter DOCSIS 3.1, the next generation of the cable access technologies. The new standard will allow cable firms deploying D3.1 equipment to deliver up to 10 gigabits per second down and 1 gigabit up. The technology uses OFDM technologies familiar to the wireless industry to cram more bits into a single megahertz of available spectrum used in the cable plants (it’s 11 bits per hertz if you care). Thus, cable providers can then deliver more bandwidth using their existing radio frequencies.

These RF channels are part of cable’s legacy of delivering analog television signals over coaxial cable. In today’s hybrid fiber and coax networks some of the overall transmission is digital, but the coaxial and RF frequency limits remain in some parts of the network.

Cable firms still haven’t gone all-IP, which means that most cable companies are dedicating some of their spectrum to their pay television business and some to delivering broadband. One technology uses IP and the other uses QAMs. But as people demand more bandwidth and higher definition TV channels, cable operators must decide where to allocate their limited spectrum, or lose market share they have gained in the broadband market.

McKinney is also touting new compression codecs like HEVC that help lower the number of bits in a stream but still deliver high-definition quality. It uses half the information that MPEG-4, the current standard, uses. That gives cable companies a little more room on their spectrum to allocate for more broadband channels or more TV channels. McKinney notes that CableLabs is moving faster than it has ever moved in order to get DOCSIS 3.1 out to constituents — achieving in two and half years what it took five to do for previous standards. Comcast says it expects to start deploying DOCSIS 3.1 in 2015.

But what about the business model?

And speed is important, because widespread access to high-speed broadband is threatening the cable industry’s core business — packaging a bunch of channels together and selling it to end consumers, as well as selling some advertising against those channels. On one side there are people cutting the cord — canceling their subscriptions and relying on content from Netflix, Hulu or even just over-the-air broadcasts. On the other side are content companies pushing for higher fees from cable operators, especially for things like live sports, which many analysts believe are the main reason people don’t dump their cable packages altogether.

But the cost of cable is rising, something consumers are fighting as they become more accustomed to picking and choosing their own content on demand. To satisfy those consumers cable companies are offering their own IP-delivered services that bring on-demand content to subscribers’ tablets and phones, even when they are outside their home.

That embrace of technology though, can require tradeoffs for cable providers. For example, Comcast now delivers all of its video on demand content via IP, which means it divides its available spectrum into three chunks. One is for the traditional cable TV that’s broadcast, one is for broadband and one is for delivering the bandwidth for its IP-based Xfinity VoD service. AT&T has done this with its U-Verse services on its copper lines, but Comcast got in trouble for it last year when people questioned if that practice violated network neutrality, since Comcast doesn’t count its Xfinity content as part of its bandwidth cap.

Recouping lost revenue in an all-IP world

With DOCSIS 3.1, Comcast may have more headroom to raise its caps if its network is truly congested at the cable plant, but the business challenge remains. It must also figure out how to keep customers from dumping a $200 monthly charge for both TV and broadband and choosing instead a $50 broadband package. Adding faster speeds and charging more for those speeds might be one way to keep revenue up. And despite cable industry fear-mongering about upgrade costs, McKinney estimates that the upgrade to DOCSIS 3.1 gear should cost cable companies less than the upgrade to DOCSIS 3.0, which analysts put at roughly $100 per home.

Chart courtesy of Stifel.

But aside from charging more for better broadband, cable companies shouldn’t have to give up on pay TV. Already companies like Time Warner Cable are experimenting with cheaper programming bundles in additional to concessions like allowing customers to watch any show, anywhere, on any device. The pay TV providers already have relationships with the content companies, and while they may not be the only path to mass market anymore for the Disneys and HBOs of the world, they still are an important channel.

Cable companies have tools they can use to protect content, they still have relationships with more than 80 percent of the U.S. households and they are aggressive about offering content in a way that consumers want. So, if they can transition to more of an a la carte option, using IP to deliver those choices on demand, they could still provide a service that consumers are willing to pay for. And thanks to new standards described above, the bandwidth is there to do this.

So cable providers just need to walk the line between cannibalizing their traditional pay TV business with IP-delivered services, while upgrading their networks to ensure they can still deliver a quality experience while maintaining their revenue and profits. The big telcos walked this line a few years back when they had to transition people from wireline networks to cellular service without hurting their own profits and revenue.

The cable business is a little tougher because they have the content companies in there demanding more money and seeing new avenues for distribution, but as disruptive as this shift is, I think in a few years we might see an even bigger one once pay TV providers realize they can take all of their content and deliver it over the top. Maybe the internet won’t eat the cable company after all.

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Roberts used the 3 Gbps connection which he used to open an email and download a 4K video file. I’m sure the email didn’t tax the connection. However the 4K video download would certainly tax Comcast’s existing broadband cap of 300 GB per month (it is trialing other versions of the cap) given that a single 4K movie download weighs in at about 100 GB per movie. Yet, 4K is the next generation video delivery standard after HD and companies such as Netflix are already starting to deliver content in 4K.

On the broadband side, Comcast knows that to keep up with the demand for faster broadband networks, it will have to push the envelope on gigabit speeds. Google is building out gigabit networks in three cities, while AT&T has threatened to build on in Austin, Texas. Meanwhile private companies and municipalities are pushing their own gigabit projects.

So while Comcast currently delivers a top speed of 305 Mbps in some markets, showing off a multi-gigabit connection is important to show that cable technology can keep up with the fiber to the home build outs. The 3 Gbps connection was delivered over a DOCSIS hybrid fiber coax (HFC) network. But in the real world such speeds might be impossible without an upgrade to the next generation DOCSIS 3.1 technology.

As impressive as this demo is, the reality of deploying 3 gigabits per second may require a new technology (the coming DOCSIS 3.1 standard) as well as some hard thinking on how Comcast wants to use the spectrum available inside its cables.

The DOCSIS standard boosts broadband speeds by allocating more channels comprised of 6MHz of spectrum together to deliver broadband. So more channels, equal more speeds. But, those 6MHz chunks of spectrum also deliver between 2-4 television channels as well, so at a certain point Comcast has to decide if it wants to boost broadband at the expense of adding or delivering television channels.

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This  allows AT&T to recoup another 4 to 6 months of handset subsidies before providing the next one to a customer. The company says “it applies to any customer whose agreement expires in March 2014 or later,” so it retroactively applies to AT&T subscribers that signed a two-year contract during or after March 2012.

Ironically, my wife’s contract with AT&T is up this October. And under AT&T’s eligibility rules before the change, she can actually upgrade now at the fully subsidized cost, i.e.; an iPhone 5 for $199, for example. But when she does that, she’ll sign a new two-year agreement and will have to wait the full 24 months under the new rules.

AT&T says that early upgrades are possible after six months of a contract, but “you qualify for partial discount off the full retail price.” And you’ll have to sign a new two-year agreement at that point. For those that don’t like their handset or get bored with it in the first few months, that’s a reasonable out. Don’t expect the lowest price for your new phone at that point, however.

It does make logical sense for handset upgrades aligned with contract lengths. AT&T is doing anything nefarious in that regard. It’s simply taking something away that consumers could take advantage of.

Ideally though, the carrier would follow in the footsteps of its peer, T-Mobile, and simply abolish contracts while decoupling device costs from voice and data services. (Note: AT&T says you can bring your own phone and it will provide contract-free service, but there’s no mention of lower monthly costs.)

Then consumers could be in control of their own hardware costs and upgrades. Instead, in this generally saturated market, AT&T is looking to grow revenues from fees and slower upgrade cycles.

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AT&T doesn’t yet have a release date for the handset, which is BlackBerry’s second new handset this year: The Q10 follows behind the all touchscreen Z10 phone that arrived in the U.S. in April. Due to the keyboard, the Q10 has a smaller display, but it still has a high resolution screen: The 3.1-inch display is 720 x 720 resolution.

The phone, of course, runs on AT&T’s LTE network with HSPA+ service as a backup connection as needed. The Q10 has 16 GB of internal storage and can be expanded with an up to 32 GB microSD card. A dual-core processor and 2 GB of RAM power BlackBerry 10.1. Typical of BlackBerry devices — and those with smaller screens — the phone should have better than average battery life. AT&T says to expect 59 hours of MP3 listening, up to 9 hours of video playback and 15.29 days of standby time.

The showcase of course is the hardware keyboard that BlackBerry phones have always offered. The company’s SureType technology for the onscreen keyboard is quite good but for those that can’t give up the old BlackBerry hardware keys, the Q10 offers the best of both worlds: A newer platform with modern hardware and the legacy keyboard that BlackBerry has long been known for.

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Of course, they would say that — more video over LTE is good for the carriers. It lines their pockets and it puts strain on the networks, which means they buy more gear from Ericsson. Okay, with that caveat out there, let us look at some of the salient data points from Ericsson’s report:

• Total global smartphone subscriptions hit the 1.2 billion mark in 2012. We will see 4.5 billion smartphone subscriptions by the end of 2018.
• Smartphones accounted for around half of all mobile-phone sales in Q1 2013, compared with roughly 40 percent for the whole of 2012.
• So it is no surprise that mobile-broadband subscriptions are growing really fast — during the the first three months of 2013, they grew 45 percent faster than the same period in 2012 and now stand at around 1.7 billion.
• More smartphones means more demand for data, ergo, data traffic volumes doubled between Q1 2012 and Q1 2013. Data traffic growth between Q4 2012 and Q1 2013 was 19 percent. Ericsson forecasts that the data traffic on mobile networks will grow 12-fold by 2018.
• During 2013, overall mobile data traffic is expected to continue the trend of doubling each year.
• Of course, a lot of this growth will come as a result of faster networks. Ericsson expects 60 percent of the world’s population to be covered by LTE in 2018.
• Across the world 20 million new LTE subscriptions were added in Q1 2013.
• In North America, driven by the U.S., LTE will account for majority of subscriptions in the region in 2016, growing to around 70 percent in 2018.
• In comparison, by 2018, LTE will penetrate around 35 percent of the subscriptions base in Western Europe.
• LTE subscriptions are expected to exceed 1 billion in 2017.
• So what do we with all that speed? Spend more time on social networking: an average of up to 85 minutes per day in some networks. Looks like that Facebook addiction of ours is going to become super expensive!
• And we don’t really spend that much time talking on the phone. Voice traffic growth between Q1 2012 and Q1 2013 was 4 percent. Ouch!
• Ericsson says that web browsing and social networking will each constitute around 10 percent of the total data traffic volume in 2018.
• Of course, we watch video — a lot of it.  According to Ericsson, the video traffic on mobile networks grew by 60 percent annually.
• On some networks, video consumption is on average 2.6GB per subscription per month. That should make the network operators break into evil grins — more of our money into their pockets.
• Of course, worried about its carrier overlords, Ericsson makes no mention of over-the-air communication apps in this report.

Now for more details about the mobile world at large:

• Global mobile penetration was at 90 percent in first quarter of 2013 and mobile subscriptions now total around 6.4 billion. However, the actual number of subscribers is around 4.5 billion, since many people have multiple subscriptions.
• China alone accounted for around 25 percent of net additions, adding around 30 million subscriptions during first quarter of 2013.
• India added over 10 million, as did Indonesia. Brazil and Nigeria both added over 5 million subscriptions during the first quarter.

We will parse some of the data in separate posts later.

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According to their research, cable companies have about 47.5 million broadband subscribers, while the remainder are with the phone companies. Cable companies added about 800,000 new subscribers, about 72 percent of the total for the month. The top two phone companies — AT&T and Verizon — saw a decline of 696,000 DSL accounts but added a total of 919,000 fiber subscribers. FIber-based broadband now accounts for about 40 percent of AT&T and Verizon’s total broadband customer base.

Bruce Leichtman, president and principal analyst for Leichtman Research Group, pointed out that typically the first quarter is better than the second and third quarters of the year, and “2013 began with another strong first quarter.” Net broadband additions in Q1 2013 were about 500,000 more than in Q4 2012, and that bodes well for rest of the year.

A resurgent housing market and stronger economy along with our growing need for speed and connectivity are the reasons why demand for U.S. broadband is booming. Here are some numbers to give you an idea as to who is winning and who is losing.

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AT&T’s statement to the Verge on Monday notes that “by mid-June, we’ll have enabled those apps over cellular for our unlimited plan customers who have LTE devices from [Apple, Samsung and BlackBerry].” Besides FaceTime, Samsung and BlackBerry’s pre-installed video chat apps will also be included.

And more will be coming for all of its customers before the end of the year: “Throughout the second half of this year, we plan to enable pre-loaded video chat apps over cellular for all our customers, regardless of data plan or device; that work is expected to be complete by year end.”

When Apple updated its mobile video chat app to work over cellular last summer, AT&T came under fire when it announced subsequently that only customers who subscribed to one of its Mobile Share plans could use it. Several open internet groups threatened to file complaints with the FCC, calling the carrier’s policy a violation of net neutrality. Several months later, AT&T opened the service to anyone with an LTE device.

Based on broadness of the statement, it sounds like video chat apps like Google’s new Hangouts app, which is available over AT&T’s cellular network now for some iOS customers, will work over cellular for Android customers later on this year.

This post was updated on 5/21 to clarify that the iOS version of Google Hangouts is available for use over cellular networks now.

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Facebook debuted both its Home on Android launcher and the HTC First about a month ago in early April, but by last week my colleauge Kevin Tofel reported that AT&T had dropped the price of the phone to 99 cents with a contract. Om’s full review of the HTC First can be found here.

While phone promotions are common, it didn’t seem like a vote of confidence for the HTC First sales, which have only totalled 15,000 so far, according to the report. Kevin wrote why it could be a challenge to get consumers to pick them up:

“It’s difficult enough for a high-end flagship phone to stand out from its peers, let alone a mid-range handset. Frankly, I can’t see how Facebook Home helps the HTC First differentiate itself enough; particularly when the software is already available for download on better phones and is expected to arrive on other handsets in the future. Sorry Facebook, I don’t think the market likes your attempt at a smartphone.”

Facebook declined to comment on the report and referred me to AT&T, which has not yet responded to requests for comment. BGR has uncorked some whoppers in the past, such as a 2012 report that Sprint would be getting the iPhone 5 exclusively, but this report makes sense given the lackluster interest in Facebook Home and this phone in particular.

Facebook’s Home on Android has also suffered from poor reviews, garnering only two stars in the Google Play store, although Facebook said last week that it was working on some improvements that would make the app more appealing for Android users.

Updated at 2:25 PM: An AT&T spokesperson provided us with this statement: “As mentioned previously, we do pricing promotions all the time and have made no decisions on future plans.”

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I took a quick look at the new AIO Wireless (pronounced “A-O”) website and the plans remind me a bit of T-Mobile’s new Simple Choice offerings. There are just a few choices, and each advertises unlimited talk, text and data, although some of that data is at “high speed” while some is not. AIO will reduce or throttle speeds once you reach the limit for your specific plan.

For $40 a month, 250 MB of data is served at high speed while $55 each month bumps the fast data capacity to 2 GB. A $70 plan boost the fast data cap to 7 GB. You can pay $15 for a tablet to get on the data network but only get 250 MB of high speed service. The press release mentions “4G download speeds of up to 4Mbs”, so the company isn’t offering LTE. Adding an additional gigabyte of fast data service or international calling is available for $10 a month.

Handset choices are as expected for a pre-paid provider, ranging from $30 feature phones to $50 low-end smartphones all the way up to various iPhone models, both at reduced (refurbished) prices to $649.99 for a new iPhone 5. You can also check to see if your own device is supported — I’d be surprised if an AT&T-compatible phone weren’t — but if you have an LTE radio in it, it won’t be used.

It seems that the two largest U.S. carriers, AT&T and Verizon, are following suit when it comes to their expensive investments in LTE network upgrades: Keep the fastest services for those on contract. This helps recoup the investment faster by nudging high speed data users to generally more expensive monthly plans that practically guarantee an income stream for two years.

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A spokeswoman confirmed the outage, but had few details:

“We are currently experiencing a disruption with our Internet service. We are working with our vendors to restore service as soon as possible and apologize for any inconvenience this has caused our customers. We will continue to work towards resolution until all issues are resolved.”

Earlier this year in January, AT&T experienced a substantial service outage affecting thousands of its customers, and lasting for a few days. The culprit in that outage was a software update that affected some, but not all of AT&T’s 7.4 million U-verse subscribers.

While power outages, fiber cuts and even software updates can take out a subscriber’s broadband for a bit, nationwide outages are rare. Maybe tomorrow on its earnings call, CenturyLink will explain what happened to cause this one. Meanwhile, a mobile hotspot or event a project like the recently launched BRCK, would come in handy right now for CenturyLink’s subscribers.

Updated 12:20pm: A CenturyLink representative said all service has been restored as of around midday Pacific Time.

Updated at 1:20 pm: CenturyLink said it has identified the cause of the outage as a problem with its core routers, but is investigating the problem further.

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