Spared from the Ax

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Operators that seek to cut costs in response to the uncertain economy appear to be looking away from the marketing department.

In recent interviews, cable and direct-broadcast satellite insiders said as long as there is revenue growth to be had-and market share to protect-there are no plans to curtail marketing expenditures.

Business has changed dramatically since the recession of the early 1990s, a time when cable marketers said their budgets were so lean that there was no fat to cut. Since the middle of the past decade, competition from DBS has driven a year-by-year increase in MSO marketing outlays.

Over the last couple of years, budgets also grew to accommodate spending for new services, ranging from digital cable and video-on-demand to cable modems and competitive telephone services.

Given that kind of growth, marketing budgets could have been cut to their earlier, lower levels, given the economic downturn-especially if MSO executives are worried that cash-strapped consumers won't pony up heavily for extra services.

But instead, operators said they'll proceed apace with efforts to get consumers to spend, spend, spend.

"We continue to see the benefit of driving RGUs quickly," Cox Communications Inc. vice president of marketing Joe Rooney said in reference to revenue-generating units, an industry term for new cable-modem, telephone and digital-video customers. "Our core strategy of getting a bundle into the home is not going to change."

Cox devotes about 6 percent of its revenues to marketing. "It's higher than average in the industry" for a number of reasons, Rooney said.

Cox offers more new products and markets them within a wider footprint than other MSOs, he said.

"We also spend more money on image advertising," Rooney said. "It's paid off handsomely."

Industry-wide, marketing budgets average anywhere from 2 to 6 percent in relation to sales, said AT&T Broadband senior vice president of marketing and sales Doug Seserman. In the days before competition, operators could get away with budgets of 1 to 2 percent of sales.

"There's no business that can run at 2 percent or less and maintain its share in a competitive environment," Seserman said. He did not disclose the percentage AT&T Broadband spends on marketing.

And those percentages don't reflect the value of operators' cross-channel ad avails, which are theoretically worth millions of dollars in exposure each year, said Seserman.

DBS FEELS COST PRESSURE

At the earliest signs of an economic downturn, companies must determine whether to try and spend their way through the situation or hold back until things turn around.

"If there is an economic downturn, that will be something we've never worked our way through," said DirecTV Merchandising president Bill Casamo. "We don't know what we don't know."

Some Wall Street analysts have put pressure on DBS providers DirecTV Inc. and EchoStar Communications Corp. to trim subscriber acquisition costs. But Casamo has no plans to curtail DirecTV's subscriber growth.

"Our marketing budgets and staff are substantially increased over what they were last year," Casamo said.

DirecTV also plans to put more emphasis on local marketing, especially in areas where digital-cable providers are either particularly aggressive or slow to enter the market, Casamo said. The satellite company has not suffered from higher churn rates in markets where cable operators have launched dish buy-back programs, he said.

If the DBS or cable industries are holding off until the other side pulls back so they can ease up on their own marketing efforts, they could be in for a long wait.

"We're going full-speed ahead," Time Warner Cable senior vice president of marketing Brian Kelly declared. "We're actually more focused than ever on growing our customer base."

Rather than cut back on personnel, the MSO's marketing departments may even add some sales-oriented staff this year, Kelly added.

INSIGHT'S HELPING HAND

Insight Communications Co. workers are protected by a company-wide "no layoff" policy that's been in place since 1985, senior vice president of marketing and programming Pam Euler Halling.

But that's not the case for Insight customers in the Midwest, some of whom have been hit by downsizing in the automotive industry.

System-level executives keep their corporate bosses apprised of rising heating costs or layoffs in each individual market so Insight can respond. To soften the blow, Insight offers free pay-per-view movie coupons in markets where the news appears bleak.

In some markets, Insight's general managers have created spots that acknowledge the economic challenges, but remind subscribers that Insight's communications services are a solid value.

"You also want to say that it's not that bad now-that things are not dire," Euler Halling said.

Like others in the industry, Charter Communications Inc. senior vice president of marketing Mary Pat Blake is concerned that press reports on the economic downturn could create a self-fulfilling prophecy.

"I'm concerned that people on the street are going to believe this and stop spending," Blake said. "I truly hope consumers have the confidence to continue with their lives."

Blake said she'll pay attention to housing figures over the next several months.

"If those numbers are still strong, people going into those homes will be spending money," Blake said. Consumers tend to give more thought to entertainment and Internet access when they move into a new home, she added.

Not only are cable customers more likely to look at digital cable and high-speed cable modems when they move, but they also tend to consider multiple television hook-ups. Blake said Charter is even starting to see multiple PC hook-ups in the home.

Like DBS, high-speed cable modem services are so new that operators can't use history to judge how a downturn influences churn or growth. But if recent acquisitions are any indication, MSOs don't anticipate a slowdown.

"January was our best month ever" for cable-modem sales, Rooney said. And once consumers experience broadband, they don't go back to dial-up, Rooney added.

Cable-modem deployments can also help MSOs protect their core business when they tie high-speed service discounts to basic- or digital-cable packages.

"Overall, we see that churn drops with each additional product a customer takes from us," Rooney said. Cox is among the first operators to promote bundled service discounts.

TESTING BUNDLE'S RESILIENCE

Because Cox's telephone packages compete well with the local incumbents, Rooney does not think that product is vulnerable to an economic downturn. He also believes the new service will also protect the MSO's video business, because the best telephone rates are available only to customers who take other Cox products.

In the past, basic-cable services have been relatively recession-proof, because consumers will stay home to watch TV rather than spend extra money on movie tickets and babysitters.

Because they can be seen as discretionary expenses, digital-cable tiers are among the most vulnerable cable products in uncertain economic times, Rooney admitted.

Dove Consulting Inc. managing director Bob Davis warned MSOs against pushing free digital-cable promotions to consumers who may not be able to afford to stay with the service for the long term.

"This is a good time to very carefully segment the marketplace and go after those likely to be long-term buyers of the digital service," Davis said.

AT&T Broadband tries to minimize its non-paying subscribers through careful scrutiny of its database, said Seserman. But he doesn't plan to back away from aggressive promotions, because the large number of good, long-term customers they attract can offset any danger of nonpayment.

Added Euler Halling: "You tend to get more non-pays [among existing customers] as a result of a downturn." Insight tries to work out extended payment plans with those subscribers so they can keep some level of cable service.

"The message is, we want to help you any way we can," Euler Halling said.

Though their marketing budgets are relatively safe, executives are doing everything they can to squeeze more return from their dollars.

DirecTV is spending more time on "postmortems" after each consumer campaign, Casamo said. It will likely revisit its most successful effort, the free professional installation offer, in the future.

Cox expects to find marketing efficiencies by using the Internet to target customers, thus saving on direct mail, Rooney said. The MSO will also work more closely with its local systems on cooperative advertising efforts.

Time Warner Cable will also get promotional help from its new parent, AOL Time Warner Inc. America Online Inc. has recently delivered pop-up ads to online customers in Houston, Tex., and Greensboro, N.C.

Kelly said the company was discussing how to make the pop-up ads a more routine part of its business throughout all of its markets.

Going forward, AT&T Broadband plans to combine marketing for its voice, video and data into an integrated campaign.

"The future isn't about spending less or even spending more, but spending smarter," Seserman said.

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