Friday, November 05, 2010

Big Cable Is Bleeding

An interesting story today in GigaOm ruminates on the third quarter loses in video subscriptions for the top US cable corporations. While there is both an upside and and a downside to these reports the downside is pretty dramatically evident:
There’s now even more evidence that subscribers are cutting the cord and opting out of paying for cable: By adding up subscriber losses from four of the top five cable companies, we found that more than half a million users have ditched their cable companies....(No. 3 cable provider Cox Communications is privately held and therefore doesn’t have to announce its subscriber losses for all the world to see.)
As the story goes on to point out cable loses are not a new story; the available market is popularly understood to be pretty saturated but what is new is that satellite TV and IPTV (mainly Verizon in the east and ATT's UVerse) is no longer making up for cable's shrinking base.

Fewer people are subscribing to paid channels. Period. Full Stop.

That's a real change.

The Downside:
Much of the speculation on the net is that people are not watching less video but are instead getting their video over the internet. (The terms to google are "internet" and "cable cutters.") Less acknowledged is that the recent transition to Over The Air (OTA) HD digital broadcast may also have had an impact. A digital signal is by its nature clean (or not available); the "bad" snow and breakup that plagued analog signals at the edges of the broadcast area and the generally poorer-than-cable picture and sound is no longer true and people are discovering that their old antennas are bringing in a really nice picture. A combination of OTA local and network television with free internet downloads are very tempting. Add in a ready supply of "must have" TV and movies from the likes of Netflix and iTunes and you have a solution that makes for a more than adequate—and much cheaper—alternative for many.

All that has implications for Lafayette—even beyond the few people who hold stock in one of the big players. These days we all have an interest in seeing LUS Fiber succeed and prosper. And LUS has structured its business plan around seizing a substantial portion of the video market. I've no reason to think that there is any real trouble there in the short run. LUS knew well that the city's video market was already saturated and that it would have to take customers away from Cox to succeed on this leg of the triple play of video, phone, and internet services. The utility's business plan called for a three year ramp up to getting the 23% penetration that they've said we'd need to make break-even. We're at the beginning of that three-year cycle that kicks off when the system is complete and Huval has claimed that we're above that number in areas where the network has been in place for more than a few months. My guess is that the recent video-only price increase was intended to make sure that the video side continued to contribute its projected share to the plan to make break-even in the face of recent video price increases (example).

Because LUS has modeled its business plan after the video-focused one that has succeed so handsomely for the major players we need to be concerned when the larger industry has trouble spots like this one.

The Upside:
But an interesting counterpoint to gloom and doom is that while subscribers are declining the amount of money each subscriber that is kept contributes is continuing to rise:
Comcast reported on its earnings call that average revenue per user (ARPU) increased by 10 percent year-over-year, ending the third quarter at about $130 per month. Charter’s ARPU also rose about 9 percent, to $126. And while Cablevision’s reported average revenue per sub didn’t grow as fast as the others, it’s now a whopping $149.
What's happening, of course, is that prices are rising and people are, by and large, paying. That resulted in higher revenue and higher profits for the big cable companies. LUS has reported that people are buying more services (all of the triple play for instance) and higher tiers (especially on the internet side) than their original metrics predicted. That's good news, of course, all other things being equal it should mean that they could make break-even with a smaller number than originally predicted. (Though all other things are seldom equal...the upswing in video costs no doubt hits hard.)

The contrast between the incumbent cable market losing customers at the same time that profits and prices increase is evidence of some pretty serious market failure and confirms the idea that what we are dealing with is a quasi-monopoly situation. People pay until the can't pay any longer simply because the lack of real competition at any price, much less a lower price, means there isn't much in the way of practical choices.

Lafayette's LUS Fiber is an IPTV system...in this it is like AT&T and Verizon. The upside here is that this is the segment of the market that appears to be growing fairly strongly according to Q3 filings reports. In fact, that's the main point the GigaOm story misses: the adds the two new IPTV video providers have account for 440,000 of the half million loses the old cable side of the market suffered. That accords well with LUS' experience as well. They are growing their market; in our fairly simple context it is pretty clear that LUS' gains come at Cox's expense as far as the video market is concerned. What LUS provides that AT&T and Verizon do not is substantially cheaper, long-term, ungimmicky prices; LUS offers no discounts on bundles (hence part of their surprise at the larger-than-expected uptake of multiple services) and it offers no discounts that are "limited" in term. The traditional providers all offer special introductory offers, 6 month specials, and aggressive offers to "lost" customers.

The final upside, however, is the one that interests me as a supporter of LUS fiber the most: the moment is rapidly approaching when the quality of the internet connection is all that really matters to savvy consumers. When that day comes LUS will have a clear advantage. People can legitimately dispute over which video system is best. (I've my judgment and I argue it is well-founded but, hey, I'm pretty clearly biased toward the local provider.) But there is little to no room to dispute over the internet connection. It's simply faster, cheaper, and has vastly lower latency. If you like Netflix you'll love LUS Fiber. And in the not too distant future that's just about all that will matter.

Lagniapppe:
GigaOm has a new weekly series on cord-cutting that is, appropriately, offered via free streaming internet video. :-)

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