What a difference a year makes.

At the start of 2005, the investment community was not giving the cable industry much of a chance in its turf war with the major telecommunications carriers.

But as 2006 dawns, Verizon Communications and AT&T, the two carriers challenging the cable industry, have signed up 2,500 video subscribers between them, while Cablevision Systems alone is adding about 1,350 telephone subscribers per day in the New York area.

So disgruntled was the cable industry with the public investment market that Cox Communications, the third-largest cable operator in the United States, acquired its outstanding shares and took the company private.

The founders of Insight Communications, the ninth-largest cable operator in the U.S., along with the Carlyle Group took Insight private.

New York-based Cablevision said it would do the same with its cable business. That plan was subsequently shelved, but 2005 proved to be cable’s summer of discontent with the investment market.

The investment market saw the cable companies as inflexible monopolies facing telecommunications carriers that were coming off an economic downturn that taxed all of their economic and executive skills.

The roles were reversed. The older telecommunications players were seen as the flexible challenger trying to wrest the title from the old champion that had never faced worthy competition.

Bigger Bite 

But as the year progressed, cable operators continued to take a bigger bite out of the telecommunications carriers’ voice business while the expected competition for video, the cable companies’ core business, has not yet emerged.

At the end of the third quarter of 2005, telephone service from the cable operators was available to 48.6 million households, up from 27 million a year earlier.

“The video storm of 2005 never occurred,” said Bruce Leichtman, media analyst with Leichtman Research Group, a research firm based in Durham, New Hampshire.

“Even the most aggressive statements from Verizon and AT&T said there would be 3 million homes with video capability by the end of 2005,” he added. “They didn’t make those numbers, but the telcos have done a great job of PR. Much of the video battle took place on the PR front, not in the field.”

Mr. Leichtman believes the cable operators lost the PR war partly by design. “Comcast and Time Warner were in the process of acquiring Adelphia so they were quieter than they would otherwise be,” he said.

In the heavily regulated communications industry, a number of consumer groups have been lobbying the U.S. Federal Communications Commission to reject the proposed purchase of Adelphia by the two largest cable operators.

An Insurgency that Never Came

Despite this, the cable operators remain wary of the expected insurgency from Verizon and AT&T.

“Twenty years ago cable did not pay attention when DBS [direct broadcast satellite] began emerging, and they lost 25 percent of their market,” said Jerry Keane, an analyst with BearingPoint. “Cable won’t make that mistake again. The technology keeps adopting IP flexibility.”

The technology underlying the current cable platform is generally seen as less flexible than the emerging IP platform being built by the telecommunications carriers.

The cable industry pools its research and development resources in CableLabs, its technology engine. CableLabs has been working on new software, DOCSIS 3.0, which incorporates some of the flexibility inherent in IP technology.

The proposed acquisition of Scientific-Atlanta, the second-largest maker of set-top boxes, by Cisco Systems, the unquestioned leader of IP networking, has also given cable operators a new opportunity to break out of the closed box they have lived in technologically.

About two weeks ago, Comcast, the largest cable operator in the U.S., announced partnerships with Cisco and Nortel (see Comcast, Cisco, Nortel Connect).

“Cable has a robust platform today, but they are about 24 months away from making their platform truly interactive,” said Mr. Keane. “And there are plenty of incremental improvements they can make in their platform in the interim.”

The old video champion has managed to retain its title despite the heavy betting against it.