Policy

Going For Broke

12/05/2011 12:01 AM Eastern

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.

Cover_Story_Image_12/05According to estimates, cable companies lost about 555,000 basic-video
customers in the third quarter. That’s an improvement over the 784,000
the industry shed in the same period last year, but more than the 440,000
customers lost in third-quarter 2009. In the first nine months of 2011, cable
lost about 1.5 million customers, compared to a loss of 1.7 million subscribers
in the first nine months of 2010. Cable lost about 1.5 million video
customers for all of 2009.

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

October