CRTP-18

"Turning the Cables: Economic and Strategic Analysis of Cable Entry into Telecommunications"

Glenn A. Woroch
February 1996

This paper explain cable television's entry into telecommunications in the U.S. and elsewhere.
Efficiency motivates the industry's decision to diversify into local telephone, whereas 
strategic considerations are essential to understanding the choice among various entry modes 
into these markets. Engineering advances now offer scope economies between video and telephony 
services, and regulatory initiatives have removed many legal barriers separating the two 
industries. Together with favorable market conditions, these developments make cable telephony 
a lucrative opportunity at a time when video markets have come under attack from several new 
competitors. To predict whether this opportunity is exploited through direct entry,
acquisition or joint venture, we assess the strategic and nonstrategic merits of each entry 
mode. A key strategic factor in each case is whether the cable operator can make credible 
and effective threats to follow an alternative entry path. Finally we briefly examine 
policies governing mode of entry and find they can have unintended consequences, such as 
when banning acquisition results in uneconomic direct entry or no entry whatsoever.