Lessons From a Quarter to Forget

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Cable did not have a good spring. From April through June, the industry lost some 300,000 video subscribers, while DirecTV Inc. and EchoStar Communications Corp.’s Dish Network added 800,000 subscribers.

While some of those losses were college students, who will return, and others who may be less-than desirable price-chasing consumers, a swing of more than one million homes can’t be so easily glossed over or explained away.

To make matters worse, cable modem service lost market share to digital subscriber line service for the first time in history. The split was 52% to 48%, roughly 900,000 to 830,000 subscribers, according to Leitchman Research Group.

DOUBLE DOSE OF PAIN

That’s two punches to the gut, unprecedented in cable history. At a minimum, it serves to reinforce the fact that cable faces an increasingly competitive environment. At a maximum, some would argue, cable is in trouble. It’s the kind of uncomfortable self-assessment that’s probably going on behind closed doors at all MSOs these days.

So what, exactly, is going on? Why are even the most well-run cable companies losing subscribers and/or losing market share to DSL?

Consumers have a wide range of emotions when it comes to their cable companies. You’d think all the dissatisfied customers would have left by now. But even if all of cable’s 300,000 defectors went to satellite last quarter, that means 500,000 nonaligned homes chose direct-broadcast satellite in a straight-up pick over cable.

Why? Snazzy packaging and low-price promotions are one reason. Availability of HDTV, digital video recorders and all-digital channels may be another. And a third reason, whether cable wants to admit it or not, could well be lingering perceptions on customer service and price hikes. There are likely thousands of customers who relocated this year, had the chance to “start over” with video service and chose DBS.

Likewise, DSL providers have been able to create enough noise, even conflicting noise at times, that they have a better priced, high-speed service. If you’ve never driven a Ferrari, a Ford may suit you just fine for getting around.

The phone business has the potential to be a bright spot for cable, and kudos to Time Warner Cable for laying the groundwork for its nationwide voice-over-Internet Protocol service this year that should pay dividends, quarter in and quarter out, over the next three years. But Vonage Holdings Corp. is at 250,000 subscribers and AT&T Corp. has launched VoIP nationwide, while cable’s response is hardly ubiquitous.

One stat missing from the second quarter was the cumulative wireline phone losses, and the gains at wireless and VoIP providers. The regional Bell operating companies lost over 1 million access lines, while the major U.S. wireless carriers added roughly 4 million customers. Cable added nearly 150,000 telco subscribers. Some of the wireless additions are likely to be in add-ons to wireline phone service. (The Yankee Group estimates close to two million homes per year are permanently getting rid of landline phones for wireless.) Yet any gain for cable with VoIP comes directly from the local wireline provider.

It’s clear that cable is undergoing a transformation, both in how it packages product lines, how it defines success with those product lines and how to communicates those changes to Wall Street.

Cable operators correctly pointed out to Wall Street that despite their basic subscriber loses, revenue per subscriber actually grew in the second quarter. But that did little to dent investor thinking that cable was in trouble.

It’s clear that if cable wants to be viewed by different metrics, on a permanent basis, and not just on what number looks good for a particular quarter, it will have to continue the evolution of how it markets service to consumers.

Perhaps it’s time to offer a lower-cost video-only package, or one that is bundled with data and phone to save subscribers before they abandon ship. Cablevision Systems Corp. caught some grief for its $90 triple-play bundled offering, but didn’t shut it down after three months, an indication that it’s working.

Mediacom Communications Corp. says it won’t require high-speed data as a buy-through for its phone service when it launches VoIP next year. Add voice and video as cable’s latest bundle.

NON-VIDEO REVENUE

Cable doesn’t like to talk about its data and phone-only subscribers, save for Cox Communications Inc. (Cox also is out in front on offering a data-only package to potential subscribers.) But cable shouldn’t be so reticent about that data/phone category. The industry is getting hammered otherwise, and $70 per home is $70 per home, no matter how you get it. There’s no shame in announcing cable has, maybe, one million data-only or data/phone subscribers.

It is an uncomfortable, tenuous time as cable defines its marketing message and redefines the measure of success in its business. But it’s absolutely necessary if the industry wants to be seen as a strong player on the multi-tiered playing field on which it now operates.

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