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What If They Held A Price War And Nobody Came?
It seems that ever since Verizon and AT&T seriously began entering the video market, Wall Street and investors have been bracing for what they thought would be the inevitable price war between cable companies and telcos.
But according to a report by Sanford Bernstein cable and satellite analyst Craig Moffett, cable operators aren’t lowering prices to compete with telcos, they’re raising them. And the telcos are the ones that started it all.
Verizon set the standard earlier in November when they announced that prices for its FiOS voice, video and data service would rise 11.6% in 2008. That comes off a 7.6% increase in 2007.
That would have seemed to be the perfect opportunity for cable operators to either keep prices stable or lower them slightly, but they didn’t take the bait. Three of the top cable companies – Comcast, Time Warner Cable and Cablevision Systems all are raising rates in 2008, according to Moffett. And while cable rate increases are not as high as Verizon’s, for some they are their highest in years.
According to Moffett’s report, Comcast is raising analog rates by about 5.8% in 2008, slightly higher than the 5.4% increase in 2007. Time Warner Cable is raising monthly analog charges in the mid-single digit range and Cablevision announced earlier this year that analog rates will rise an average of 4.7% in 2008, their biggest increase in at least three years.
Only the Cablevision rate increase is a hard and fast number from the company. Moffett estimated the Comcast increases based on published reports from some key markets like Houston, San Francisco and Seattle. So increases could end up being materially higher (or lower) once major markets like Boston, Atlanta, Miami and Philadelphia report.
With Time Warner Cable, Moffett took the average of rate increases in two markets – 9.7% in New York City and 5% in South Carolina – to reach his mid-single digit estimate.
The Cablevision increase was the most significant to Moffett, mainly because that operator has the most exposure to Verizon – FiOS is available to about one in every 4 Cablevision subscribers – and because Verizon has been the most aggressive telco in the video market (they had about 700,000 FiOS customers nationwide at the end of the third quarter.
“Despite widespread expectations of a price war between Cablevision and Verizon, price increases appear to be accelerating,” Moffett wrote.
Moffett wrote that cable rate increases are mostly to cover rising programming costs. And he added that other services like DVRs and VOD are starting to experience increases too.
For example, Moffett wrote that Comcast raised rates for VOD movies in its Denver system by $1, is raising the cost of DVR service in Chicago from $11.99 to $13.99 per month and is raising late fees in Wisconsin by 40%. Verizon, Moffett added, is charging $79.99 for service calls that were previously free.
So the inevitable video price war doesn’t look like it’s coming this year either. But any long-time observer of the cable industry shouldn’t bee too surprised by cable’s stance. Years ago, when Verizon and other telcos were offering digital subscriber line service for $14.95 per month, cable held fast with its $49.95 monthly charge for cable modem service, claiming (and it appears, rightly so) that consumers would be willing to pay for quality.
And cable has long resisted getting into a price fight with satellite TV.
With cable losing basic subscribers at an alarming clip – those three aforementioned cable companies have lost a combined 183,000 basic subscribers in the first nine months of the year – you would think that operators would be more willing to bite the bullet at least for a little while to boost market share.
But maybe the pressure from the telcos is not as severe as everybody once thought, according to Moffett.
“Once again, these price increases are a signal that, at least, in many markets, cable is feeling less competitive intensity than many investors believe,” Moffett wrote, adding that the increases appear to reflect high marginal costs (i.e. programming) rather than “sunk cost economics (i.e. a price war).”