Going For Broke

How Poverty in America Is Changing the Cable Business

By Mike Farrell -- Multichannel News, 12/5/2011 12:01:00 AM

Pay television operators, faced with rising programming costs, regulation and fierce competition have another worry to add to that already formidable list: Their customers are running out of money.

Affordability is becoming the new mantra in pay TV. Time Warner Cable, Comcast and Charter Communications have all created packaging and programs geared toward the growing number of Americans that are finding it harder to make ends meet, a segment that is unfortunately growing at an alarming rate.

The strongest evidence of the growing poverty problem for cable has shown up on subscriber rolls. Cable operators have been shedding video customers since 2002 — the industry lost a collective 7.1 million basic video customers between 2002 and 2010. And though the losses are beginning to slow down, subscribers are still leaving the space in large numbers.


Pay television is by no means the only industry affected by the economic downturn. The recession has battered every sector of the economy — according to the U.S. Department of Agriculture, 46 million U.S. citizens are on food stamps, 49 million Americans aren’t sure where their next meal is coming from and 44 million, or one in 15 people, are below the poverty line. That is up from five years ago, when 27 million were on food stamps and 37 million were below the poverty line. In addition, unemployment continues to hover in the 9% range, new housing starts are flat and wages and salaries are stagnant.

POOR FUNDAMENTALS

Of the 14 million Americans that were unemployed at the end of October, 5.9 million had been out of work for 27 weeks or more, according to U.S. Bureau of Labor Statistics. Those aren’t necessarily the building blocks for a growth industry.

Sanford Bernstein cable and satellite analyst Craig Moffett first sounded the alarm in 2009, with a report warning that the global economic recession was creating a class of consumers who exhaust their discretionary income after paying for the basic staples. In a May 2011 report titled “The Poverty Problem,” Moffett noted that the two bottom quintiles of U.S. households, roughly 40% of the population, had no money left after paying for housing, food, transportation and health care.

“He [Moffett] is asking the question no one is willing to talk about: ‘How can people afford this?’ ” Mediacom group vice president of legal and public affairs Thomas Larsen said. “His analysis is frankly the scariest thing I’ve read in my more than a decade in the cable industry.”

For Moffett and some others, the question for multichannel video-service providers isn’t whether their customers will reach a point when they can no longer pay for service — it’s when. Disposable income for the bottom of the population hasn’t risen in real terms in the past 10 years, according to Moffett. At the same time, rates for multichannel video service have climbed about 30%.

“It doesn’t take a math major to figure out that at some point there is going to be a major problem,” Moffett said. “But it is impossible to pinpoint when, because the problem is going to hit at a different time for every family.”

While Moffett wonders when the economy will finally catch up with the pay TV industry, others are asking why any of this is a concern at all.

“The question to ask is, ‘What was it like 10 years ago?’ ” Bruce Leichtman, principal at Leichtman Research Group principal and former Continental Cable marketing guru, said. “For the bottom half of the economy, I don’t think it was that different.”

Leichtman pointed to an overall penetration rate of 87%, the highest it has ever been in the country; record thirdquarter net new subscriber growth for satellite-TV firm DirecTV; and improved customer losses at cable operators.

Although shrinking wallets should be a concern for any retail business, Leichtman said, lower-income families have traditionally been the heaviest watchers of television. And in tough economic times, that segment watches more TV, not less.

HOUSING-GROWTH CONCERNS

While Leichtman said that pay TV growth is increasingly a zero-sum game — any growth will come directly at the expense of the other companies in the sector — he believes the real impact will come from such macroeconomic factors as housing growth.

Moffett also considered sluggish housing growth — housing starts and completions have been essentially flat since the first quarter of 2009 at less than 0.5% annualized growth, well below the 1.12% average rate since 2000, he said. At the same time, vacancy rates have been rising and new housing formation has nearly stopped. According to Moffett, the number of new households is rising at about 0.5% annually, compared to 2% per year during the housing boom.

Adding to the concern is that not only do households in the bottom 40% of the economy have no disposable income after necessities, they are actually operating in the red. Moffett, using U.S. Census and Bureau of Labor Statistics data, wrote that households in the bottom quintiles spent about $1,024 more in 2009 than they took in. While that could mean that lower-income households were borrowing more to get by, access to credit has dwindled considerably for cash-strapped families.

“As a society, we have largely exhausted the cumulative buying power of the lower 40% of households,” Moffett said. “In prior recessions, debt was easy to come by for subprime households. They could borrow their way through tough times. That’s just not the case anymore.”

While the data is sobering, the reaction from cable operators has been a mix of outright fear and a hope that the industry’s inherent resilience will win out in the end.

“I think any industry is blind if it does not recognize the toll that the worst recession in the modern era is taking on the American consumer and his disposable income,” National Cable & Telecommunications Association president and CEO Michael Powell said in a recent interview. “If you have a tin ear about that, you are sort of operating at your peril. If you are not in conversations and are sensitized to these realities in the business judgments you’re making going forward, you’re probably making a grave mistake.”

But given the enormous impact of the global recession, Powell is amazed at how well the cable industry has held up during one of the most trying economic periods in recent history.

“At least there is a sign of hope there and I think consumers see their multichannel subscription as a good value for the dollar,” Powell said. “It seems to be one of the last things they want to part with. I can’t make the judgment for any one family, but some families part with a lot of things before they part with this.”

WEATHERING PAST STORMS

The cable industry has fared well in past recessions — cable’s subscriber ranks increased by 1.7 million during the 1991 economic downturn and by 300,000 in the 2001 recession, according to SNL Kagan data. But the industry is faced with a much tougher environment this time around. Back in 1991 and 2001, multichannel penetration was around 50% to 60%, leaving much more room for growth than today, with a penetration rate around 87%.

So far, the industry has started to respond by offering economy packages like Time Warner Cable’s TV Essentials and MyTV Choice from Comcast, but those products are in their infancy. Other operators are testing so-called lower-end tiers, but waiting to see the overall response before fully committing to an economy package.

Cable, which has lost customers for about a decade, could start to see some modest customer growth in 2013, mostly at the expense of other multichannel providers, according to Moffett. He estimated that cable losses will moderate from 2.2 million in 2010 to 1.4 million in 2011, turning to a gain of 453,000 in 2013 and 244,000 in 2015. But after that, the pool of available customers shrinks considerably.

“The market for high-end customers is already fully saturated,” Moffett said. “That is simply not fertile ground anymore. That’s doesn’t mean that companies won’t continue to fight over the customers who are already out there.

But as a category, it isn’t growing. So you’re left with inevitably having to fish where the fish are, and a lot of those customers are lower income.” But there are dangers in trying to attract a greater number of price-sensitive customers — mainly that such subscribers tend to churn at higher rates as they continuously look for better deals.

Said Leichtman, “You have to ask yourself, is that the customer you really want?”

CHEAP SEATS

The largest cable operators have begun to offer low-cost services to low-income families.

TV Essentials: Time Warner Cable of New York City

Price: $29.99/month (rises to $49.99/month after 12 months)

What You Get:
• 47 basic-tier channels (including 14 broadcast stations)

• 42 cable channels (including ESPNews, Lifetime, USA Network, CNN, Nickelodeon, TBS)

• 45 music channels

MyTV Choice: Comcast

Price: Starter package starts at $24.95/month

What You Get:
• 45 basic-tier channels (including 17 broadcast stations)

• 32 additional cable channels (including Discovery Channel, TBS, AMC, A&E Network, Comedy Central, Lifetime)

• Music Choice music channels

Starter Plus: Sports

Price: $10/month in addition to Starter Package charges

What You Get:
• All channels in Starter Package

• 11 sports channels (ESPN, ESPN2, ESPNews, regional sports networks, Golf Channel, Versus, BBC America, CBS Sports Network)

Starter Plus: News & Information

Price: $10/month in addition to Starter Package charges

What You Get:

• All channels in Starter Package

• 21 additional news & information channels (including CNN, Bloomberg, CNBC, Fox Business Network, Fox News Channel)

Starter Plus: Kids:

Price: 10/month in addition to Starter Package charges

What You Get:

• All channels in Starter Package

• 11 additional kids’ channels (including Disney Channel, Disney XD, Nickelodeon Nicktoons, Sprout)

Starter Plus: Movies

Price: $10/month, in addition to Starter Package charges

What You Get:

• All channels in Starter Package

• 16 additional movie channels (including Encore, Turner Classic Movies, Sundance Channel, IFC)

Starter Plus: Entertainment & Lifestyle:

Price: $10/month, in addition to Starter Package charges

What You Get:

• All channels in Starter Package

• 31 entertainment and lifestyle channels (including MTV, Bravo, G4, E!, Oxygen, TNT, Logo)

SOURCE: Individual companies