Can Cable Operators Grow Subscribers?

Today's New York Times article looks at the new marketing push by Time Warner Cable to win back customers.  And the question is, can it be done.  "The company says it will spend at least $50 million on broadcast, print, online and direct mail ads for the campaign, which it is calling 'The Better Guarantee.'” But will they and other cable operators be able to convince consumers to return to them after switching to competitors.  While opportunities to come back for broadband and phone service is possible, the high cost of a cable subscription may make that return difficult.  Can a better service guarantee help; unlikely, as price seems to be the real motivation for consumers to switch providers.

To date, basic subscribers have been leaving at a slow but steady rate. Cost savings are real motivation; but the time involved to switch back and to be at home for the service call may dissuade households from changing unless a real cost savings is offered.  Even with a 30 day money back guarantee, consumers have become wary, especially if they have felt being mistreated in the past.  "AT&T and two satellite providers, DirecTV and Dish Network, have also ranked above the industry average, while Time Warner Cable, Comcast and other cable providers have remained below the average."

Cable operators are feeling the bite from cord cutters so this marketing campaign is a necessity to try and reduce, if not turn around their quarterly cable sub losses.  While cable operators are still finding growth in broadband and phone subscribers, cable growth may prove elusive.  Households are already using broadband to find similar programming to replace their cable, from Aereo to Netflix to Roku.  Until costs for cable service can be significantly lowered, customers will continue to migrate to cheaper services, regardless of a guarantee pledge.

Aereo Sees Content Key To Subscriber Growth

Aereo is a great example of disruptive innovation, as it challenges the current market structure with a new kind of mousetrap, one that could ultimately change the nature of the core business.  Key to what they do is take over the air broadcast signals and repackages them to stream as a subscription service to the consumer.  And because those signals are picked up without paying the broadcaster a "retransmission fee", thus keeping their content costs at zero.  Great for Aereo, but bad for broadcasters who have been getting payments from cable operators.  Obviously networks have sued because it turns upside down the current economic model, one that has been the "fastest growing sources of revenues for station owners including ABC, CBS, Fox, and NBC."

But broadcast programming is not enough as Aereo expands beyond the New York City DMA.  "I think of what’s attractive on the Internet: news and certain categories. There’s interesting international programming that’s going to come in."  But as Aereo expands, it must also consider the costs that it spends to add content to the  mix.  The appeal for Aereo for those not happy with the high costs of cable is that it provides streaming access to network programming at a much low cost, only about $8/month, to the consumer.  For households on a budget, Aereo brings a competitive low cost alternative.

Will the FCC kill the Aereo model or will they approve their business?  As Aereo has found a "loophole" that works, this disruptive approach may have a great financial impact on the network business.

Competition Restricted When Distributors Own Content

The cable industry is something of an oligopoly, few companies controlling the marketplace.  For years, your only choice for watching cable networks was to by a subscription from the cable operator in the market. In major cities, some customers have access to overbuilders like RCN offering a competitive service; across the country, if you didn't take cable, you may have opted for a satellite service like DirecTv or Dish.  In the last decade, Verizon and AT&T came out with a competitive cable service although their footprint is also quite limited.  So the choices for cable service have been quite limited.

How nice to know that Google is trying to break into that space with their own fiber footprint and have been testing their service in the Kansas City market, but the incumbent, Time Warner Cable, does not appear pleased.  So how does TWC find a competitive edge, by restricting access to programming.  As they spun off almost all of their cable networks into Time, Inc. TWC does not have much leverage, but they do own a Regional Sports Network.  And Google believes that TWC is not negotiating in "good faith" for them to put on the line-up.  And Google wants the FCC to get involved.

But this is not the first time for this kind of fight.  Back when Verizon was introducing FIOS into the Long Island system, Cablevision was accused of withholding their sports network, MSG from Verizon.  Finally, the FCC was brought in and a deal was struck.  So to will be the case for Google.  But it is the issue that a market faces when their is limited choice and access is denied for new entrants.   In cases like this, when free market is stalled, regulation is needed when it helps to promote growth.

Editorial Limits On CNET Not Atypical

There has been a lot of buzz about CNET's Best CES Award; specifically, that their corporate parent, CBS, decided to intercede on the process due to their legal issues with the recipient, Dish Network and the Hopper. More interesting was that the decision went all the way to the top of the organization.  "News of the top office's involvement in the award snafu was reported Monday by the technology news site The Verge."

While we all wish that editorial lived independent from the economics, the truth is that this type of involvement is not so unusual.  Look no further then newspapers and TV and the effect editorial has on the advertising side of the decision.  How many times has an article, news story, or even a TV show been pulled because of the effect on advertising revenue.  Wasn't it just a couple years ago that History Channel decided to not air their Kennedy Miniseries.  While it eventually found another distribution partner, History made an economic decision over editorial.

Sure CNET was prevented from awarding their prize to the Hopper.  Still, they will be awarded by others.  And all this media still gives them the same accolades that they would have received even if they had won the award.  The overriding issue though still remains.  Editorial issues are never made in a vacuum.  The bigger the company, the more risk they face.  And at the intersection of editorial and economics, editorial rarely wins.

Is Apple Gonna have A Bad Fiscal Quarter?

The news sounds onerous as Apple has reported that it is cutting orders for parts for its iPhone 5.  "Rumor of Apple's iPhone order cuts have been circulating for a month. Interestingly, analysts have been raising their iPhone estimates lately. Many of them are anticipating Apple's March quarter is a mess."  So what is the problem?  For me, the challenge across the board is the frequency of hardware updates on a faster and faster basis.  With consumers on a 2 year phone subscription, phones can only be replace so often without paying a greater share for the latest toy.  As a consumer, if the current phone works fine, why keep replacing it, especially if the next hardware update is only  6 months  away.  The same holds true for Apple's other products.  Many have bought the iPad Mini over the holidays.  So to hear that the next generation model is less than a year away makes the consumer a bit frustrated.  Apple needs to rethink the timing of these hardware releases.

On the other hand, tweaking the software should happen frequently.  Adding more value to the product only keeps us loyal to the brand.  And for Apple to rebound, it means it needs another new product that adds value to the line.  The iPhone wristwatch, an Apple subscription service, an Apple TV; it is time to expand the line.   For now, the market sentiment may be negative, but I still believe that Apple has opportunity in front of them.

US Cable Subscriber Base Shrinking

According to reports, cable household subscribers may have finally hit the tipping point and will begin to decline.  "The number of Americans who pay for cable-like TV products is declining, says a research forecast that claims subscriptions peaked at nearly 101 million in 2011 but will decline to less than 95 million by 2017."  Blame the high cost of cable, blame the internet for bringing competition to the cable model, call it cord cutting, but subscriber numbers are declining.

But not to worry because cable companies are not about to go belly up.  For one thing, the decline is a long way from serious economic jeopardy. And second, these same companies are operating in a multi-platform world where they are finding revenue from content spread across the market.  And as the Paid Content article directly exclaims, "The first cable decline is a tipping point, not a revolution."

Internet Connectivity Everywhere At A Cost

For almost all of us, we are on the grid.  Wherever we go, we are found.  We can track our iPhone, but our iPhone also tracks us.  We can drive anywhere we want, but our EZ Pass tells others which check points where passed and how much to charge us.  And we can be constantly connected to the internet, whether through our TVs, phones, laptops, and yes, our cars.

Sirius has had a pretty exclusive connection to us in our cars with satellite coverage and a wide assortment of music, news, sports, and more to entertain us.  But the rise in internet connectivity has enabled competitors to enter this space as well.  "But Pandora is making a huge push to get into the car, a move that dovetails with ubiquitous wireless access that makes it easier to listen to its service.
'Internet-enabled radio in the car has already begun,' Pandora Chief Executive Officer Joe Kennedy said in an interview. 'It will grow as a snowball, initially small but growing exponentially.'"  And ultimately, more competition means lower prices to consumers.

Interestingly, according to the article, Sirius and Pandora each face different cost structures with Pandora paying out far greater royalty payments.  And to complicate the cost issue even more..."Traditional radio pays nothing at all to SoundExchange, although it pays composers to air their music."  

Wireless connectivity is big business these days and the above growth is just one indication why Dish Network wants to buy Clearwire and compete in the space.  Because at the end of the day, to be connected, we as consumers must also pay for access to wireless along with the services themselves.  And with more desire to be "always on and connected", wireless connectivity is moving more and more away from an all you can eat model toward a usage fee, with heavy users paying more to be connected. 

Cheaper iPhone, All About iTunes

Apple has dominated the "luxury" side of the mobile marketplace with high priced smartphones and tablets.  And while Apple leads market share on the tablet side at the moment, the iPhone is losing share to the lower cost market, especially in the international arena.  Sure older model iPhones have come with lower prices, but Apple sees the need to offer cheaper models "in a bid to grab more customers in developing countries". 

Some have argued that lowering prices on iPhones and Mini iPad tablets are resulting in a lower profit margin for Apple, but I believe that they are negating the value of further increasing the subscriber base to the infrastructure, namely the iTunes and App Store.  Others, like Amazon and have priced their Kindle product line with lower margins specifically to gain customers to their own store.  And they have the added advantage of the Amazon Prime subscription service to bring more value to the consumer and more revenue to the company. 

Apple's entree into cheaper products to grow the customer base should be followed by a similar approach to Amazon, a premium subscription service that brings added content at a monthly cost.  And while more customers could mean more purchases on the iTunes Store, companies and Wall Street both love to see a consistent, regular revenue line, that an iTunes subscription service offers. It is the iTunes and App Store that has the best opportunity to grow at double digit rates, bringing more and more revenue to Apple.  Cheaper iPhones may be the first step, but other lines, like the Apple TV box, and iPod, and yes iPad should definitely follow.  More products sold to more consumers means more sales on iTunes.  

3D TV Not Appealing

Back in November, 2010 I wrote a blog asking 3D or Not 3D and felt the glasses limited the value and enjoyment of a 3D set.  In other blogs I wrote, I suggested that I saw little incremental value both in the home and in the movie theater.  With rare exception on a couple of movies, 3D wasn't important to me.  And I guess others agree.

"This year at CES, very few television makers even mentioned 3D, Troy Wolverton of the Mercury News reports."  Today the push continues to build connected TV sets as well as to hype bigger screens with more pixels and better Hi Def experience.  And while my own instincts in 3D were proved right, I am sorry for those companies that invested in those products.  Would I revisit 3D; perhaps, when the experience can be created with a set of glasses to wear.  Viewers love to be immersed in the video experience, and once that can be created cleanly with a "hologram" like experience, I would be very interested.  Yes, once again, Star Trek science fiction pushing to be science fact.

So goodbye 3D for now.