Net Neutrality Questioned

Without net neutrality laws, content availability may govern platform success. Level 3 is arguing that the barriers to entry in the broadband marketplace is raised to a point where unfair competition occurs. "Level 3, which helps to deliver Netflix’s streaming movies, said Comcast had effectively erected a tollbooth that 'threatens the open Internet,' and indicated that it would seek government intervention. Comcast quickly denied that the clash had anything to do with network neutrality, instead calling it 'a simple commercial dispute.'” Should this concern the government, not to mention the public, seeking cord cutting alternatives to cable subscription fees? And should it be a concern, especially with the merger talks concluding with Comcast and NBCU?

This news certainly is coming out at an inopportune time. Preferential treatment for some content creators over others, could be argued. "In theory, without government action, Comcast could speed up streams of NBC programs and slow down streams of its rivals’ programs."

More is at stake than this one issue. As file sizes get larger, demand grows, and the bandwidth gets maxed out, then something has got to give. Should a free capital market put the onus on who can afford to pay for better treatment? Is it really possible to be completely equitable? With more mobile and web based activity, traffic needs to be managed properly; otherwise, you have delays and traffic jams for all. As long as broadband content gets through and is not stopped completely, then maybe a free market system is the way to go.

Microsoft eyes leap back into TV

Will cable lose to Microsoft? Once a partner to the cable industry with investments with cable operators and networks, Microsoft has lost its lead and its focus. Where they continue to excel is gaming and their product, XBox, may just be the driver back into the household. "The software powerhouse has held talks with TV networks to create a new subscription-based TV service on its Xbox gaming console that would rival efforts by Google Inc, Apple Inc and Netflix Inc, sources told Reuters." As Xbox 360 continues to gain momentum, online access opens much potential. In an era of cord cutting, users of XBox could easily connect with web based content and cut the cord to cable.

A lower level of service could be built at a much lower price point, and more suitable for today's household. "One scenario under consideration by Microsoft is to create a new TV service on its Xbox gaming console that would establish a "virtual cable operator." The service would charge a monthly fee for access through the Xbox to networks such as ABC, NBC, Fox, CBS, ESPN or CNN, according to two sources familiar with the plans." More ala carte, cheaper bundles, more consumer friendly. A boon for the consumer, a bust for cable companies.

Netflix’s Move Onto the Web Stirs Rivalries

The New York Times is noticing, consumers are too. Netflix has embraced the web and has found a better profit margin in serving it's content to consumers. Without the cost of postage, Netflix can get its content into the home instantaneously. Good news for consumers, bad news for the US Postal Service as well as cable companies. "For the first time, the company will spend more over the holidays to stream movies than to ship DVDs in its familiar red envelopes (although it is still spending more than half a billion dollars on postage this year). And that shift coincides with an ominous development for cable companies, which long controlled home entertainment: for the first time in their history, cable television subscriptions fell in the United States in the last two quarters — a trend some attribute to the rise of Netflix, which allows consumers to bypass their cable box to stream movies and shows."

Netflix's remaining dilemma is how to increase its inventory of content. Cable can boast more on demand content currently, but it is at a higher cost to the consumer. With a much lower price point than cable, Netflix may not have the most, but they may have enough of the right content. Cable and satellite also have promoted the fact that some top transactional movie titles are available a month before Netflix customers can view. As Netflix demand grows, studios may have to rethink this tactic.

As consumers watch their spending, Netflix represents a real game changer that can hasten the cord cutting threatening cable. With just a broadband connection, video content is instantly available. Technological innovation continues to change the entertainment landscape, turning leaders into followers.

Time Warner Cable Launches New Plans

Last week, Time Warner announced a new low end tier of cable service, less cable channels, for a lower price. Some expensive licensed channels, ESPN and Disney, were named as not included in this low end tier. It is a valiant attempt at keeping a customer from defecting altogether. A downgrade is better than a disconnect.

At the same time, Time Warner has enhanced its upper end tier pricing as well. "Time Warner Cable will charge high-end customers $199.99 per month for a new "white glove" service option that it has dubbed Signature Home. According to a report in Bloomberg News Tuesday, Time Warner Cable is testing the service in Charlotte, N.C. and will roll it out nationally in the next few weeks." Will this new high end service package upsell some, perhaps it will simply offset the same number that downgrade and hence a break even for the company.

Kudos to Time Warner for at least being innovative in their pricing, given the needs of their customers. Whether, the response matches or exceeds the effort remains to be seen. How much marketing is done to push these new pricing tiers will show us how committed they really are to these programs. And to that we will just have to wait and see.

More iPad Uses, More iPads

A product is only as good as what it does. Develop more uses, create more usage, and more products should sell off the shelf. So was the case with Arm & Hammer baking soda, and so is the case with the iPad. For baking soda, Arm & Hammer pushed more usage, not just in cooking, but as an air freshener in the refrigerator, as an additive to toothpaste, and so on. The result was that usage rose dramatically. For the Apple iPad, the more uses, the more desire to use, and the more users. Thus the upcoming announcement.

"Apple may hold a press event as soon as Dec. 9 with a number of print executives -- including News Corp's Rupert Murdoch -- to unveil a new subscription billing option for newspapers and magazines on the iPad." Building out new subscription models with unique content can only drive the value of the iPad brand. Apple understands the basic marketing business model and is successfully capitalizing off it. By creating more need for the iPad, sales will rise this Holiday season and beyond.

Senator says Comcast/NBC may have broken law

On Friday, I asked a simple question, was the naming of executives prior to an approved merger common or unusual. I never asked, was it legal. Well, today that question is being asked. "Senator Al Franken, a critic of Comcast Corp's (CMCSA.O) proposed deal for control of NBC Universal, asked the Justice Department on Monday to investigate whether the giant cable company had engaged in 'illegal collaboration' concerning its intended target." And as it has been noted, Al Franken was a long term writer/performer on SNL, an NBC TV show. So perhaps, Senator Franken has some more thoughts than others on this merger.

To my question if this pre-merger announcement was unusual, came this comment. "An antitrust expert agreed it was not unusual for executives to be named for posts before the companies get government approval to close." I simply want to understand if there is a difference in planning pre-merger privately and announcing publicly. It seems that by announcing, the current lame duck managers are left doing nothing till the merger occurs. And that work stoppage hurts NBC.

Netflix Pushes Streaming and Price Increase

Netflix based its business on DVD mailers. They saw an opportunity to better their competitor, Blockbuster, with no penalty fees, low costs, and quick response and built a leader position. As a result, they toppled their competition and gained a loyal customer base. But like any business story, the lead can quickly be lost if you don't adapt to a changing environment. In Netflix's case, they did.

The biggest change for them was embracing a different distribution platform. While the DVD was their business model, their willingness to move from it to streaming could also be viewed as hurting the core of what they built their business on. But change, while difficult can also lead to greater successes. And Netflix is succeeding.

"The company based in Los Gatos, Calif. previously announced that more of its members are watching more content streamed over the Internet than on DVDs. To deal with this shift, Netflix says it will spend more this quarter to license streaming content than to buy DVDs" And with this shift in expenditures comes a need to increase customer pricing, too. "Existing members will incur the price increases in January, while people who are new sign-ups will face the higher prices immediately. Netflix has more than 16 million members in the U.S. and Canada and predicted in October that it would gain another 2.1 million to 2.9 million customers by year's end. That means Netflix could enter 2011 with more than 19 million subscribers, doubling the service's size in two years."

As consumers become more streaming savvy, Netflix has maintained and expanded their leadership base. And they are raising prices at the same time. Certainly any price increase hurts the consumer, but when the choice for content is cable or Netflix, Netflix continues to look like good value. Netflix is positioning themselves as a real alternative in the entertainment industry. While Blockbuster was once their adversary, it seems now that Netflix is after bigger game, the cable industry. And cable, concerned about cord cutting, is watching just where their audience is heading.

Comcast NBC Deal Done?

Maybe it is because I am close to the cable industry, maybe it is typical for other mergers, but I have to say, I don't recall previous mergers announcing their management structure changes BEFORE the ink has dried. So, I find it quite unusual to read about management changes for NBC and Comcast prior to its approval by the FCC and DOJ. Is this typical?

What is the current management team supposed to do today? Is it like a lame duck Congress, filing papers and cleaning their desk? And what happens IF the merger is not approved. Is this deal rubber stamped for approval so no use waiting for the formalities. It just seems odd to me.

And what IF the merger is actually disallowed. Does everybody simply go back to square one and have a do-over? Is that possible or will bad blood exist as a result of the memo. As I said, it just seems odd that these announcements have been made prior to approval by the government. Unusual or not, let me know.

Cord Cutting? Cable Subscriptions Drop Again

Let's see the scorecard. For Q3, Comcast lost 275,000 cable TV subscribers, Time Warner Cable lost 155,000 subs, Charter lost 63,800, and Cablevision 24,500 subscribers. For both Time Warner and Comcast, each has seen basic sub losses for the last 6 quarters. back in Q1 2009, Time Warner added 36,000 customers while Comcast lost 78,000 subs. In fact,as far back as I have tracked, Q4 2008, Comcast has been losing basic customers, a total since then of almost one and a half million basic subscribers.

To be fair, not all these cable cord cutters are dropping cable TV service altogether; rather, most are switching to Satellite or Telco. Since Q4 2009, the "cable" companies have lost more than 2.7 mm subs, while Dish and Direct TV together have added more than 2mm and AT&T and Verizon have added over 3.75 mm TV customers. So while TV subscription is growing, the trend is moving from cable to alternative providers.

The other factor to consider is the level of service being purchased. As cable TV rates rise, customers are moving to satellite and telco for better deals. Customers are also dropping additional services like premium TV. HBO for instance has seen a significant drop in subscription. With VOD as well as over the top service like Netflix and Redbox, customers are choosing to buy individual films over a premium subscription. It is partly why these providers are pushing more original series to their audience. Exclusivity of content to maintain their audience share.

Lastly is over the top content providers. With Hulu pricing lower their premium level of service, price elasticity is at play to generate more customer buys. As Hulu becomes more robust at a manageable price point, pressure to drop cable service for broadband content will also impact cord cutting. Series through Hulu and other content sites and movies through Netflix and others, all at a at a reasonable price point, may cause consumers to reallocate their entertainment budget from cable subscription to elsewhere. And TV manufacturers and gaming console providers are making it far easier for consumers to connect broadband content to their TV set.

So the challenge of a bad economy, poor price-value proposition by the cable companies, cheaper alternatives, and over the top choices for content are negatively affecting the subscriber numbers for cable companies. The trends over the last 2 years should be enough for cable companies to realize that their dominance is at risk. Maybe not today, maybe not next year, but market forces continue to take bigger bites to eat away their market share.