I spent the last few months studying the cable television industry, which is admittedly a tough place to find innovation as a venture capitalist.  There have been only a few break-out companies over the last twenty years in this sector and many more wipeouts.  However, I am betting that the ecosystem is about to change because of broadband.

In 2000, at the peak of the Internet boom, 95% of US households were still relying on 56K dial-up modem access.  I had to look this up in two different places because I didn’t believe it was true, but the FCC confirmed it.  We had the greatest bull market of all time because people were overwhelmed by the potential of dial-up access.

Today, 60% of US households have broadband.  The average curb speed of broadband is now 3.5mbps (this is the actual speed as measured in the house, which is substantially slower than the advertised speed of 5-10mbps).  3.5mbps is a magic number because that is fast enough to stream HD video.  And with 60% broadband penetration there are now more US households with broadband access than households that subscribe to cable television.  This paradigm shift only happened over the last few months.

My thesis is that the next generation “cable” system will use the Internet to provide last mile access (in quotes because “cable tv” may not be delivered over cable at all – it may be wireless).  This is different from the “digital cable” we have today.  For instance, it will be searchable, two-way, with infinite DVR, no set-top box required, and available on every device.  And it will probably be much cheaper than the TV service we have today because there are no cable monopolies across the Internet.

There are a lot of areas that benefit from this trend, and I have been focused on a few of them below.

1.) Ad serving.  DG FastChannel (Nasdaq: DGIT) is the world’s largest ad serving company, almost exclusively focused on television.  They use antiquated satellite systems to connect advertising agencies to publishers and tv stations.  The next generation system will use the Internet for distribution, blurring the borders of TV, mobile, and web video.  I have made a bet in this space called Extreme Reach.  They are not well-known in the digital world, but as tv and Internet merge they are well positioned to become a universal platform for video of ad trafficking.

2.) Next generation MSOs (i.e. the new Cablevision and Comcast).  People don’t love hunting across websites to find content.  Someone is going to package  content together, program it, and sell it to consumers for a subscription online.  Think of Netflix but with 500 channels of live TV.  I recently made an investment here although it is still in stealth mode.

3.) Ad measurement.  Nielsen is worth $17BN because they own the measurement standard for TV advertising in the US.  But did you know that the entire Nielsen platform is based on only 5,000 households?  This excludes the other 109,995,000 households with a TV.  Ad measurement in the future will be entirely IP-based, which allows you to do practical things like measure ACTUAL TV viewership for the first time.  Our current bet in ad measurement is Vizu, which is the leading infrastructure provider for the web.

4.) Media trading.  All $60BN of television advertising spend is locked up with agency contracts today.   The agencies in turn allocate dollars to TV networks based on Nielsen data.  In the digital world these budgets are linked to real-time performance, which advertising agencies have struggled with this historically.  I expect that we will see a new crop of media agencies emerge, many of whom will come from the Internet side, that can provide better targeting and campaign performance.  We have invested in a number of companies in this space, including Lucid Commerce and Collective, which are already running targeted TV advertising.

This is just a subset of the new opportunities coming down the pipe.  I picked these out because I think they are big opportunities.  If you have creative ideas on other areas let me know.