Cable Operators

Pipe Dreams Can Come True

3/03/2006 7:00 PM Eastern

Most cable companies now offer high-speed Internet, putting them in a good position to extend their music offerings beyond video and cater to trends such as the proliferation of MP3 players. At least that’s the prevailing logic among a lot of cable operators.

“Our thinking is that we offer users a high-speed Internet connection, and our objective is to help our customers make the best of their connection,” said Himesh Bhise, corporate vice president of high-speed Internet product management at Charter Communications Inc. “It’s based on what we’ve observed our users want to do with music.”

That’s why in January, Charter launched Music To-Go, where the company’s broadband customers can download an unlimited number of songs to an MP3 player for a flat monthly fee of $9.99. For an additional 99¢ per track, they can burn the songs to a CD.

Another example of how some cable operators are seeking to monetize music is Music Choice. When a cable subscriber purchases a CD through Music Choice, the order goes through the MSO’s billing system, triggering a royalty on the sale.

But there are some catches. On the download side, one issue is that 99 cents per song doesn’t leave much of a profit margin after the pie is divided up between the operator, the record label and any third parties, such as content aggregators. “On downloads, the margins are relatively thin,” said Steve Gorman, vice president of high-speed Internet marketing at Cox Communications Inc.

Cox already offers one-click billing so that customers can have purchases added to their cable bill. By acting as a trusted party, the company also hopes to overcome consumer concerns about sharing credit card numbers and other personal information with third parties. “As most e-commerce folks know, when you ask the consumer to get out a credit card, 80% to 90% of transactions drop off,” Gorman said.

But convenience and peace-of-mind aren’t the only motivation. By allowing customers to add purchases to their cable bill, Cox is cutting out the credit-card middleman, whose fee for handling the transaction would reduce the already-thin margin even more. For years, wireless carriers have used this approach for similar reasons as they rolled out ringtones and other music services.

Charging more for song downloads is another way to shore up margins, but doing so runs up against the consumer perception — created largely by Apple Computer Inc.’s popular iTunes Music Store service — that anything more than 99 cents is a rip-off. A recent example is Sprint’s Music Store: Users and reviewers complained that $2.50 per song was too much, even though that price provided two copies: one for their cell phone, and another optimized for their PC.

Sprint Music Store is a cautionary tale for MSOs and IPTV providers because their music-related revenue comes from the songs themselves, regardless of whether they’re sold individually or as part of a monthly subscription. By comparison, Apple makes most of its money by selling hardware, so it can live with thin margins on songs because doing so helps goose iPod sales.

There are signs that the 99 cent price point can be breached. For example, despite all the criticism, Sprint Music Store downloaded its 1 millionth song less than four months after it debuted. (By comparison, Apple’s iTunes hit the 1 million mark in its first week, and last month it passed 1 billion downloads.)

Shortly after Sprint launched Music Store in October 2005, the company said that it was targeting the 84% of wireless users who don’t also own an iPod. If cable customers have similarly low iPod ownership levels, then there’s a good chance that they’re not conditioned to believe that song downloads shouldn’t cost more than 99 cents.

Even so, the ideal would be to shift the business model from one-off downloads to subscriptions that can be used on a variety of devices. “The notion of spending $10 to $15 a month for access to a couple million songs and being able to take them with you becomes pretty attractive to consumers,” according to Cox’s Gorman.

The taking-it-with-you part is already available from Charter’s $9.99 per month Music To-Go service. Similar services are almost certainly in the works at other operators, thanks to initiatives such as the fledgling joint venture between Sprint Nextel Corp. and Advance/Newhouse Communications, Comcast, Cox and Time Warner Cable.

Announced in November 2005, the partnership gives operators a way to extend their music services to cell phones. “That’s one way that the cable company can solve the inconvenience factor,” Parks Associates research analyst Harry Wang said.

Most MSOs are tight-lipped about their wireless plans, but acknowledge that the sector is a way to extend their music offerings into the mobile and portable markets.

“It’s safe to say that we view wireless as a very critical part of our ever-expanding offering to consumers,” Gorman said. “It potentially creates new business models that allow content to be mobile. Allowing consumers to have access to content when and where and on what device [they choose] is critical.”

Cellular isn’t the only wireless way to send music to MP3 players and cell phones. There’s also 802.11 Wi-Fi, which is showing up in more and more cell phones.

Cable vendors are developing embedded multimedia terminal adapters that have built-in Wi-Fi, creating the possibility of sending songs directly to cell phones but without having the wireless carrier take a cut. For MSOs looking to monetize songs, that option is likely to be music to their ears.

March