The New Selling Picture

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Comcast cable subscribers in Denver get a $10 break if they order high-speed Internet access for $44.95, along with their $45.69-per-month basic-cable service.

But non-Comcast customers can also get a $10 discount, if they order telephone service for $54.95, along with their $44.95 a month high-speed Internet access service. And they don’t even have to order television service.

Pitching data and phone services to noncable customers — without video in the equation — is a new marketing phenomenon that cable-system operators from Comcast Corp. to Cox Communications Inc. are beginning to embrace.

Why? As Cox president Patrick Esser puts it, it’s a way to get a customer in every household that his company’s cable passes. With six out of seven U.S. households already subscribing to some form of pay television service, it’s also a way to generate revenue from potential customers who don’t want to subscribe to TV at all. Or to generate revenue from customers of a satellite or another multichannel TV service provider.

OPPORTUNITIES MISSED

“We need to quit leading with video,” especially when marketing to customers who do not take television service, said Joe Rooney, senior vice president of marketing at Cox. One of Esser’s “key strategies is to get a line into every home. To do this, we can’t just focus on video homes. … We will miss too much of the broadband, telephony and wireless opportunity.”

When Time Warner Cable launched telephone service a few years ago, “it changed the dynamics of the sales call,” said Sam Howe, the operator’s executive vice president of marketing who was in charge of the company’s phone marketing efforts at the time. “We started to challenge the notion that everything starts with video,” he said. The company now often runs $70 to $80 a month offers for a data and phone bundle.

As digital telephone was Time Warner Cable’s newest service, Howe said, company telemarketers started to pitch it via sales calls, describing how a consumer can save money by buying voice-over-Internet Protocol service.

“Then we get into a discussion about other products,” he said.

In January, Comcast CEO Brian Roberts bluntly told a Citigroup investment conference in Phoenix in January that the Philadelphia-based operator will launch data and phone product-marketing initiatives aimed at noncable households, since market-share gains are more achievable for those products than for TV. It was the first time a cable CEO directly told Wall Street that data and phone or data-only subscribers were important to cable.

“I think you have to move way beyond looking at basic subscribers,” he told analysts at the time.

What was once considered heretical — a marketing effort without video as its centerpiece — is becoming increasingly commonplace in cable.

MARKETING EVOLUTION

From 1948 to the mid-1990s, video was the only product that cable sold, and the industry’s marketing efforts reflected that.

Even after cable providers added high-speed Internet service in the mid-1990s, operators still kicked off marketing efforts with video. They even played down the importance of any data-only subscriber counts, even as Internet customers proliferated.

“But a lot has changed in the past two years,” says Bruce Leichtman, president of the Durham, N.H.-based Leichtman Research Group, which analyzes service trends in cable. “There is even more saturation of the video marketplace.”

According to the Federal Communications Commission’s latest analysis of video competition, 85.9% of all U.S. homes have either cable or satellite service.

“There is not a lot of growth opportunity,” Leichtman said. The only gains on the video side are likely to come with lower-paying customers, and cable can’t really offer $25 or $30 per month video packages, for fear of undermining their higher-priced offerings.

There are roughly 78 million homes with personal computers — but only 43 million connect to the Internet via broadband, according to a Leichtman Research Survey. “There is still incremental opportunity there,” Leichtman said. “The greenfield is much, much larger for broadband.”

The data-and-voice bundle also is more efficient, because the same cable modem that handles data traffic can handle phone traffic on the same IP platform. Data-only modems cost about $40, while a phone-and-data modem costs about $70, according to Scientific Atlanta. A new phone customer therefore pays the operator back for incremental equipment costs in less than one month.

A monthly $80 data-and-voice bundle might produce $50 or more in profit — about a 60% profit margin, Leichtman said. Because of programming costs, video-only margins typically run in the 35% to 40% range, he said.

That also means cable can target satellite subscribers, offer a data and voice service that DBS can’t provide and increase profits and revenue, even without getting the video piece.

“Why not?” Leichtman asks.

SEEING AN OPPORTUNITY

Comcast has 22 million video subscribers and 800,000 broadband-only subscribers across 40 million homes passed, Roberts told financial analysts in January.

That leaves 17.2 million homes that take no Comcast service at all.

“We have to expand our view of where we’re going to get new customers,” says Marvin Davis, senior vice president of marketing at Comcast. “We now have a good value proposition for the products we offer.”

In the past, cable could use its cross-channel ad inventory to market data and phone service, Davis said. But by definition, nonvideo subscribers never see those ads.

Comcast is now buying national television advertising, Davis said, in part to educate nonsubscribers about Comcast’s entire video, data and voice product line. Many of those potential customers don’t know that Comcast offers broadband and now phone service.

Comcast does offer potential customers a data-and-phone bundle for $88 a month, a $25 savings off the combined standalone prices of telephone service ($54.95 a month) and high-speed data service ($57.95 a month). “We’ve been doing that for almost a year,” Davis said.

Comcast customer service representatives will make sure potential subscribers know the value of Comcast’s three-product bundle — but also will ask questions to determine what products there’s most interest in.

“Clearly having a household with at least one service is better than one with none, but we’ve seen that most subscribers take more than one service,” Davis said, “We believe that’s a better value for those customers.”

TIME WARNER VIEWS

Some 40% of Time Warner Cable’s 10.9 million video subscribers take either high-speed Internet or phone service (or both) in a bundle, Howe said. That translates to 4.4 million customers in some bundle.

About one-third of total customers take two services, which translates to 3.6 million subscribers in two-product bundles, while 7% take all three products, which translates to 763,000 triple-play subscribers.

Of the 3.6 million subscribers taking a two-product bundle, a mere 1%, or 36,000, are data- and phone-only customers.

Years ago, if a cable company called a direct-broadcast satellite subscriber, the sales pitch would start with video, Howe said.

But through research, Howe found that strong anti-satellite sales pitches reinforced the DBS customer’s distaste for cable. Time Warner Cable even stopped running dish buyback ads, Howe said. “They didn’t resonate with the customer,” he said. “It served to remind subscribers why they didn’t like us.

“Now we begin the conversation differently,” Howe said. Customer-service representatives pitch phone and data first. “We have a new way of talking to them about our other products. The Road Runner brand [for Time Warner’s high-speed Internet offering] is very strong, and we talk about the notion of a cheaper phone service.”

While the company’s nonvideo subscriber base is tiny, it is growing, Howe said.

“The growth in triple-play subscribers is quite dramatic, and double-play subscribers are static,” Howe said.

The company is replacing customers who take two products as quickly as it’s selling two-product customers a third service. Bottom line: the number of single-product customers is falling, Howe said.

Howe said Time Warner Cable does sell two-product (data and voice) bundles in many of its divisions, with promotional pricing starting in the $70 to $80 a month range. “It does appeal to some people,” he said.

The marketer said Time Warner wants to “keep our markets in balance.” In Houston, where lower incomes contribute to a below average video penetration of 50%, “we’re not hung up on that [always] being a video sale. But we know our great strength is still in upsell and cross sell [opportunities]. We still get much more mileage out of video with phone or video with data.”

COX EXPERIENCE

Cox counts 6.7 million subscribers, which includes 700,000 data-only or data-and-voice only subscribers. The cable company’s plant passes 10.5 million homes, which means Cox has 3.8 million homes it could sell data or data-and-voice packages.

“We have given a valiant effort to go after the nonsubscriber and we’ll continue to get some of those with services like video on demand, interactive television and caller ID on the television,” said David Pugliese, vice president of product management and marketing at Cox. “We think we can get nonsubscribers to join us on video. But some of those will never come to us. Cox has come to that realization.”

Cox began test marketing a two-product bundle — data and phone — in six markets earlier this year, Pugliese said. While not disclosing numbers, he said Cox was satisfied enough with the results to repeat the offer in other markets.

“Many nonsubscribers think you have to get video to get data,” Pugliese said. “We need to correct that.”

The first step in marketing to nonvideo subscribers, Pugliese said, “is to understand what those nonsubscribers look like. We think a good chunk are only buying phone service,” and not data service, he said.

Another chunk are buying phone and dial-up Internet access or phone and digital subscriber line service.

A final chunk buy satellite-TV and phone company based digital subscriber line and telephone service.

By segmenting the nonvideo market, Pugliese said, Cox can develop marketing pitches based on “what their appetite is for our services.”

For those only buying phone service, he said, Cox’s voice over Internet-Protocol phone service can run $49.95 a month for local and long-distance calling, which can be cheaper than the combined local and long-distance bill of other telephone providers, he said.

“We are looking at a number of very aggressive offers to extend to nonsubscribers,” Pugliese said.

“If you look at the lifetime value, the numbers are phenomenal,” he said. “If they buy phone service for $50 a month and stick around for three years, that is an $1,800 value.”

Getting a phone-only subscriber who doesn’t have a computer, or has a computer but no Internet access, isn’t necessarily a turnoff for Cox. “We would be able to replace their phone product with superior phone product and then, as they are ready to step into the broadband world, we’re there,” Pugliese said.

Cox’s Rooney believes dial-up subscribers will migrate to broadband, and are just waiting for the right offer to make the jump. “Dial-up users are clearly frustrated with the slow speeds, the busy signals and the tying up of their phone lines, so they will switch,” he said.

Getting a phone-only customer is doubly important, Pugliese said. “That one phone line is so strategically important to us. If you sever the relationship from the regional Bell operating company, they lose a lot of visibility. They can’t do digital subscriber line. Getting a phone line is like getting two revenue generating units.”

WALL STREET MESSAGE

There is one last reason cable is emphasizing nonvideo growth, Leichtman said. “This is about Wall Street also. Wall Street has clung to the model of valuing cable on basic-subscriber growth and basic subs are flat,’’ he says. “That’s an archaic stat. The game has changed.”

High-speed Internet access, Leichtman points out, is the highest margin product cable has, and fits like a glove with telephony.

“Judge me on profitability” is cable’s message to Wall Street, Leichtman said. “Look at us differently.”

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