Panel: Small Ops Turn to Broadband for Growth

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New York - As a sluggish economy, stiff competition and nearly non-existent new housing formation continues to lead to basic video customer losses, small cable operators are increasingly turning to another product to drive growth - broadband - according to a panel discussion at the SNL Kagan Cable MSO Summit here Tuesday.
Cable companies have lost a collective 8 million basic video subscribers since 2001 and the trend is expected to continue for the next several years. SNL Kagan estimates that cable customers will fall below 53 million in 2021, down from 58.9 million in 2011.
But while basic video customers have been leaving for other providers, over the top services, or are just avoiding a video service all together, some smaller market MSOs have managed to mitigate some of the pain by switching their focus to higher margin high-speed data service.
At Cable One, a unit of the Washington Post Co., with about 627,000 video customers in 19 states, basic video losses were about 9,400 in the third quarter. CEO Tom Might said on the panel that his company has been concentrating on broadband for years. In 2011, about 16.5% of its customers were high-speed data only, up from about 11.9% in 2009.
"The industry is realizing it can't hang its hat for the long term on the video product," Might said.
And though the focus on broadband would seem to encourage further video losses via so-called cord-cutting, Might said that is not the case.
"Our churn is not getting worse, our starts are not as good," Might said. He added that rates for video downgrades - customers that opt out of video service but keep either voice, data or both, have actually improved from 0.23% in 2009 to 0.21% in 2011.
"That's what a cord-cutter would look like; someone who had video and HSD and dropped video," Might said. "What I see is video avoidance. We have a lot more customers during that same period who have HSD-only, but it's not from people cutting the cord, it's new customers starting out with just HSD."
The rise of non-video customers is a relatively new phenomenon in cable. For many years, panel moderator and Citigroup media analyst Jason Bazinet said, data-only customers at the major operators was flat. But in the past six quarters it has grown significantly. Among publicly traded operators, Charter Communications leads the HSD-only charge with about 15% (730,000) of total customers only buying data service in the third quarter.
New Wave Communications CEO James Gleason took it a step further. New Wave has about 80,000 customers in Illinois, Indiana, Missouri and Arkansas. Last week it completed the sale of about 70,000 customers in Kentucky and West Tennessee to Time Warner Cable for $260 million.
"We've made a major switch from a marketing perspective, Gleason said. "Instead of being labeled the Cable Company, we're trying to be labeled the Internet Company. As a result, I think that makes a big difference on how you start, with advertising and direct sales, how you're going to sell to consumers. We now try to lead with our Internet product and bundle other services around that. It's not to say we're giving up on video, but our highest rated product when you measure consumer satisfaction is our internet product; it's just off the charts. That being said, we've started to change that marketing philosophy and lead with that product."
The smaller operators also had a few innovative answers to high programming costs. Might said that Cable One stopped adding new channels in 1997, it currently carries only about 41 channels, compared to more than 80 channels for other operators. But despite that channel deficit, Might claimed that Cable One has a higher customer satisfaction rating than any other publicly traded cable operator. And its programming cost savings - he said Cable One has lower programming costs per subscriber than Comcast, which with 22.4 million customers is more than 30 times its size - can be passed on to the consumer. Cable One offers a $75 triple play bundle ($25 for voice, video and 50 Mbps data) that grows to about $105 after the first year. Some larger cable operators offer a triple play promotion that starts at $99 per month.
"Customers really don't care about the second 40 channels," Might said,
On the subject of rising retransmission consent fees, Bazinet wondered why cable operators haven't just offered to install antennas on customer homes and let them get broadcast channels over the air, thus avoiding having to pay retrans. Gleason said that if the cost of those channels continues to rise at its current pace, New Wave may be forced to do just that.
"Usually unfettered greed does not go unpunished," Gleason said. "That's what's going on right now."