Human Studies: How TWC Is ‘Segmenting' Customers to Sell More Services

By Mike Farrell -- Multichannel News, 6/28/2010 12:01:00 AM

Why is the second-largest cable operator — with double-digit cash-flow growth, consistent results and a healthy stock — overhauling its core strategy?

Today, Time Warner Cable is knee-deep in an initiative to drive future growth by slicing, dicing and hyper-analyzing its subscriber base like never before.

While not new, the concept of segmentation — targeting products and services to specific customer groups, based on buying patterns and demographics — is leading the cable giant to reorganize the company around the strategy, reducing itself into two operating divisions.

And while other multichannel providers have trod this path, primarily through promotional offerings, TWC appears to be taking the concept a step further.

“They are definitely ahead of the pack,” said Cable & Telecommunications Association for Marketing CEO Char Beales, adding that companies like Cox Communications and Charter Communications have dabbled in segmenting markets, but on a broader basis.

“Time Warner’s segmentation is deep and broad,” Beales said. “They have more data, they can slice it more ways and they’re acting upon it in different approaches. They are really maximizing it.” Time Warner Cable chief operating officer Landel Hobbs said the reorganization of the New York-based company’s operating units was just one part of the process.

In May, Time Warner Cable began reorganizing its operational structure, consolidating five divisions (East, West, Midwest, Texas and New York City) into two (East and West), headed by longtime executive vice presidents Carol Hevey and William Goetz, respectively. In an interview last week, Hobbs said the reorganization was part of a periodic shifting of its operational structure — at one time, TWC had as many as 37 divisions — to fit the company’s and its customers’ needs.

The latest structure is part of a moretargeted focus for the company, particularly on the video side of the business, Hobbs said. Video has historically been the least standardized aspect of the cable industry, Hobbs noted: Cable companies were created primarily by cobbling together different franchises, and Time Warner Cable is no different.

“The video part of the business is very unstructured and very non-standard,” Hobbs said. “One of the benefits [of] going to two [regions] versus five is, you begin to standardize. As you standardize, you enable faster cycle times to get products to market in a quicker fashion.”

That also entails standardizing the physical plant, mainly by continuing to roll out switched digital technology, which has freed up channel capacity for more HD programming, and by realigning channel lineups. As of the first quarter, Time Warner Cable systems averaged about 100 HD channels, with that number ticking up to 124 HD channels for New York City.

Hobbs said the new structure will also build a strong local presence while allowing for regional marketing and call-center activity, and centralized branding and common pricing schemes.

“What we’re striving for is a balance to what should be done in the center, the region and locally,” Hobbs said.

This new structure, in theory, will make it easier for Time Warner Cable to move away from the “one-size-fits-all” mentality that has pervaded the cable industry since its inception. Instead, the nation’s second largest cable operator is developing and targeting products that are relevant to specific segments of the customer base.

Already, some of those streamlining moves have helped the bottom line: In the first quarter, growth in new services drove its first double- digit cash flow increase since 2007.

Hobbs wouldn’t reveal the MSO’s specific segments, but said they are centered on several factors, including the types of programming and services the customer already subscribes to and the amount they spend each month.

“If you break our population of customers up into five or six major segments, you see a lot of groupings begin to take place,” Hobbs said. “Yes, it’s based on ARPU [average revenue per unit], but it’s also based on whether you time-shift or not. If you use VOD, Start Over and [digital video recorders], typically you buy more products than if you don’t time-shift.

“Those are a couple of things that we have learned that are helping us direct our marketing spend more efficiently and prepare products for customer segments in a better way,” he said.

MINDSET SHIFT
Collins Stewart media analyst Tom Eagan said the segmented approach is not new in the entertainment industry, but it does signal a shift in attitude for Time Warner and other cable companies.

“They realize they have to become a marketing company,” Eagan said. “And part of that is to extract the most revenue from each customer.”

That apparently is holding true for the higher-end customer base, which is expected to receive heightened attention — and a new product offering Hobbs declined to identify — in the coming months.

Tying into that approach is a new tiered customer service. Hobbs said that in conjunction with the higher-end product offering, Time Warner Cable is planning to offer a “VIP” level of customer service for its higherpaying subscribers.

According to people familiar with the service, Time Warner Cable has assembled a team of customer-care representatives specifically trained for and dedicated to the high-end base. The approach, while fairly common in other industries, is new, at least in execution, to cable.

CTAM’s Beales said platinum-level service has been bandied about the industry for years — Harrah’s Entertainment CEO Gary Loveman even spoke at a CTAM conference about it in 2007. But to date, no cable company has embraced the concept fully.

“Everybody was really charged up about it, but it takes a while to be able to implement,” Beales said. “Now you’re seeing Time Warner implementing it.”

Hobbs added that the new model will entail a combination of products and services “that will be different than what people have seen from us before.”

Miller Tabak media analyst David Joyce said a similar approach was pioneered by DirecTV, and even smaller-market MSO Insight Communications, which early on saw the benefit of focusing on customer service and heaping services on high-value customers.

The results have been nothing short of stellar for those two companies — Insight has had positive basic subscriber growth for five consecutive years, and DirecTV has averaged an annual gain of about 940,000 net new subscribers over the past five years.

“You can generate good returns by sticking to your knitting and focusing on the customer,” Joyce said. “That’s worked for Insight, and it can work for all the cable companies. They just need to be smarter about their client base.”

Wunderlich Securities cable and entertainment analyst Matt Harrigan said that in the past, most of the segmentation efforts by cable companies have been centered around taking channels out of a package that customers don’t want, like regional sports networks, and offering a lower-priced package.

“A price segment at the high end is an interesting concept,” Harrigan said. “It’s tougher to do in this economy.”

Time Warner Cable has had success with the segmentation model, particularly in its ethnic packaging — subscriptions to its Spanish-language El Paquetazo tier were up 17% in the first quarter. But that, too, is undergoing some changes. Viewing habits of Hispanic households in Los Angeles are diff erent than those in Dallas or New York, he said.

“[We’re] taking a card from Procter & Gamble, doing ethnographic studies in home, where you go in and watch how people consume and use our products,” Hobbs said. “We’re doing a lot of that at Time Warner Cable to create experiences around segments. … We’re already differentiating the message depending on what segment you’re in.”

PLAYING CATCHUP ON 3.0
While Time Warner Cable has taken the segmentation model to the next level, one area where it has lagged its peers is in the rollout of DOCSIS 3.0 ultra-high-speed data service.

Hobbs defended TWC’s surgical approach to DOCSIS 3.0 deployment, adding that its highend Turbo product — which offers speeds of up to 15 Megabits per second — appears to be meeting customer needs at the moment.

High-speed data service was up across the board for cable operators including in the first quarter, driven by the higher-speed tiers.

Hobbs said that the company sees a big opportunity in DOCSIS 3.0, but at the moment its appeal is to a more select audience.

“There are virtually no applications that need that kind of speed,” Hobbs said. “You’re liable us to see us use DOCSIS 3.0 on a segmented basis. … I want to use a more rifle approach than a shotgun approach [to the rollout].”