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Before “cord-cutting” became a popular term we predicted almost five years ago consumers would use the Internet to bypass conventional Cable TV. Later when Wall Street dismissed the practice as an urban myth in 2009, we concluded Cable operators may ultimately divest CATV service in order to concentrate on high-speed Internet.

Download 6-minute audio narration to iPod, iPhone, and iPad here.

Presently, “cord-cutting” is the Pay TV industry’s foremost concern. Netflix, Hulu, iTunes, and Amazon.com are pioneering alternate ways to acquire popular programming over the Net as opposed to Cable systems. Equally important is “Long Tail” content on YouTube and other Internet video sites.  “Long Tail” theory implies that while we share interest in popular content, we also have more narrowly defined interests shared with viewer-groups too small to justify mass market distribution. But the Internet shatters such limitations enabling video content to be made available for vanishingly small audiences. Arguably, cultural programming has already migrated to the Net.
While “cord-cutting” threatens Cable operators, it is a clear-and-present-danger to Satellite TV systems. That’s because only a small fraction of Satellite TV subscribers also get Internet service via satellite.

The two dominate domestic Satellite TV operators are DirectTV and Dish Networks. In combination they have about 33 million domestic subscribers with an estimated one-third in rural locations. Most subscribers also want Internet access, but Satellite TV operators subcontract Internet access to third parties which are generally telephone companies. Thus, when Satellite TV subscribers choose to bypass Pay TV by metaphorically “cutting-the-Satellite-cord”, they are most often discontinuing Satellite TV service and upgrading ISP service from telephone carriers. Consequently, Satellite TV operators lose the Pay TV subscriber without benefitting by keeping, and upgrading, the Internet subscriber.

Unfortunately satellite-based Internet service is often unable to compete effectively. Since geosynchronous satellites are 22,000 miles distant, the round trip to a file server on the Internet is 88,000 miles. The lengthy round trip combined with sundry routing & processing results in delays of nearly a full second which is a near-eternity in the Internet world. The inherent lag is intolerable for a number of applications such as Voice-over-IP (Skype), Internet gaming, and Virtual Private Networks.

Fortunately, terrestrial Wireless Internet Service Providers (WISPs) provide an opportunity for DirectTV and Dish Networks to meet the challenge of “cord-cutting.” Since Wireless ISPs normally utilize licensed-exempt spectrum, DirectTV and Dish can build their own WISP networks, or can acquire existing ones.

A Wireless ISP provides broadband Internet service from fixed base stations to antennas typically mounted outdoors on customer premises. Base stations connect to the Internet backbone via fiber, cable, or point-to-point microwave lengths known as “backhaul”. Much like Satellite TV companies, Wireless ISPs originated in sparsely populated rural markets where broadband Internet access from Cable operators and telephone companies was unavailable.  Presently, the WISP industry has about 2 – 3 million subscribers.

There are two reasons why WISPs are good diversification investments for Satellite TV operators. First, they enable Satellite TV companies to offer broadband Internet service under their own control. Given WISP subsidiaries, DirectTV and Dish will no longer be as reliant upon the Cable and telecom “partners” used historically. Second, use of license-exempt spectrum will enable WISP networks to roll-out quickly in response to subscribers who are discontinuing Pay TV service.

Finally, a combination of technological and regulatory advances are enabling WISPs to (1) reach more distant subscribers and (2) gradually encroach into more densely populated geographic markets.

First, FCC approval of television band white spaces increasingly enables Wireless ISPs to reach subscribers who could not be adequately served by conventional unlicensed bands. This applies to both rural and — to a lesser extent — urban markets. Second, WISP transceiver and router hardware prices are quickly declining owing to a shift in recent years toward suppliers who utilize commercial integrated circuits and open software, as opposed to the custom chips and proprietary software employed by the former leading market-share equipment vendors.

In short, DirectTV and Dish Networks may wish to consider (1) building their own Wireless ISP networks, and/or (2) acquiring existing WISPs. Additionally, both Satellite TV operators have the funds required to capitalize on the mostly (to date) latent capabilities of TV Band White Spaces for Internet access.