Give Your Customers a Carrot

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The news that fuel costs will soar 40% this winter sent chills down the spine of anyone who has a home to heat, including me, as I write this wearing a sweatshirt and bathrobe in mid-October.

Wal-Mart Stores Inc. — the nation’s largest retailer, which posted losses this past summer because of rising prices at the gas pumps — said last week, amid the much-anticipated bad news about rising home-energy prices, that it would immediately offer discounted prices for the upcoming holiday sales season, when it does its greatest volume. That’s far earlier than usual.

So what does that mean for cable companies, whose products, like Wal-Mart’s, are largely discretionary spending items? At least Wal-Mart is dangling carrots at its customers. Cable needs to do likewise.

One could rationally ask: Is Wal-Mart overreacting? After all, the country is not in a recession. We’re clicking along at 3% steady growth, according to the Oct. 7 edition of the Kiplinger Letter, albeit a rather conservative barometer of the overall economy.

While cable came through largely unscathed in 1990 and 2000, two years of recession, rising home energy prices present a far more daunting challenge this go-around. Markets move largely on consumer psychology, but if your customers are sitting in their bathrobes watching television, afraid to turn up the thermostat, that’s not just a perception — it’s a reality.

In previous economic downturns, cable subscribers tightened their belts largely by cutting costly premium services like Home Box Office and Showtime. And cable operators eventually got them back by offering free trials and discounts.

Today, far more is at stake for cable — like the possibility of a customer cutting off their cable modem or other advanced services. If you read Multichannel News senior finance editor Mike Farrell’s report, “Fuel Cost Hikes Could Bite Cable,” this week (see Finance, page 31), there is cause for pause. Farrell cited a Citigroup Smith Barney report that forecast bad news for the sector.

For example, the report said that cable-modem users could dump that product and go back to dial-up to save money, or switch to digital subscriber line, with its cheaper pricing. Already, DSL is growing and cable-modem additions are flattening out.

Another growing revenue stream for cable, voice over Internet telephony, could be in peril as well.

There are a growing number of people, trying to save a buck, are dropping their landline services, altogether and making do with wireless cell phones. The bad thing for cable companies is, none offers wireless service on a large scale. Instead, most cable operators offer a triple play of high-speed access to the Internet, voice-over-Internet protocol phone and digital video. Some of those bundled services are attractively priced.

For example, both Comcast Corp. and Cablevision Systems Corp. offer customers that kind of package for under $90 a month. That’s a bargain, but there is a hidden hitch. It’s only for new cable subscribers, as cable attempts to lure customers from satellite.

And in my market, Comcast barely advertises that package, because its phone service is so new here and in other markets, like Arlington, Va. However, this market — Cape Cod, Mass. — is being deluged with ads for direct-broadcast satellite and wireless companies offering steep discounts.

What can cable do to become more competitive? One risky solution is to offer the triple-play package for under $100 a month to all of its customers — not just the new ones, but current subscribers as well — at least throughout the winter, when their wallets will be drained paying heating bills. In essence, that’s what Wal-Mart is doing to ensure that it keeps its customers.

My problem with cable is that it is not rewarding its stalwart customers for staying the course. God knows, there are plenty of other alternatives to which cable customers can turn to lower their bills. Skype, a new wireless service, is taking off among my limited circle of friends, because it is free. How Skype makes any money, I haven’t a clue, but it’s appealing for folks who are recalculating their discretionary spending habits.

So is the Citigroup Smith Barney doom-and-gloom report for cable on the mark? Cable operators have long argued that the bundle of voice, video and data, even priced at around $150, provides enough “glue” to retain customers and keep them from defecting.

Cable & Telecommunications Association for Marketing president and CEO Char Beales thinks cable is better positioned now than in 1990 or 2000 to sustain the new economic threat because it now offers a more diversified product line. But even Beales, cable’s ultimate optimist, worried about the impact rising energy costs could have on some of cable’s newer offerings.

In particular, Beales wonders if cable operators can sustain growth in rolling out digital video recorder and HDTV services, clearly two services that are very discretionary, if consumers feel that money is better spent on things like heating oil. But even after saying that, Beales believes that the savings offered by IP phone will keep cable’s bundle intact.

Personally, I’d like to hear the industry talking less about glue and more about offering carrots.