Cable Advances In War With Satellite
By Jimmy Schaeffler
The cable versus satellite battlefield was featured during a panel discussion at the recently held National Cable & Telecommunications Association (NCTA) conference in Chicago (see SN, June 16). At the panel, entitled “DISH Can’t Be Right: Marketing Against the Competition,” The Carmel Group presented results from studies and reports that suggest cable operators are gaining on their satellite TV rivals.
Cable’s Bundles: The Wave of The Future
Recent studies by The Carmel Group suggest that the cable TV industry has upgraded its service sufficiently to gain an advantage on satellite service providers in one of nine critical areas of business operation and business development. That upgrade is blowing wind into the collective sails of the cable industry that boasts 65 million subscribers and holds a 3.5 to 1 advantage in subscribers compared to satellite TV operators. The boost for cable comes in the form of technical infrastructure advances known as digital upgrades. Beginning roughly eight years ago, cable TV operators responded to the introduction of satellite TV service by spending more than $1,000 per subscriber, totaling upward of $70 billion, to convert from analog to digital technology to match the signals offered by satellite. As a result, many wired customers can receive telephone, two-way interactive TV (iTV), audio/video, and Internet/broadband, all from their local cable TV provider.
That development is a major competitive edge for cable in the industry’s ongoing battle with direct broadcast satellite (DBS) providers. In response, U.S. satellite TV operators now must aggressively consider alliances with telephone providers, such as regional bell operating companies (RBOCs): Verizon [NYSE: VZ], BellSouth [NYSE: BLS], SBC Communications [NYSE: SBC] and Qwest Communications [NYSE: Q]. Other potential partners include key telecom companies, such as Sprint [NYSE: FON], AT&T [NYSE: T] and MCI.
Why should DBS players pursue these alliances, you may ask? DBS needs to compete with cable’s unparalleled ability to offer bundled services. Without these DBS-telco alliances (and even assuming continued subpar cable performances in the other eight critical areas), cable will do quite well in the 2004-2006 time frame against DBS.
The Nine Key Performance Areas
The nine critical areas measured by The Carmel Group are: 1) infrastructure (advantage: cable); 2) customer service (advantage: satellite); 3) financial metrics (advantage: satellite); 4) marketing (advantage: satellite); 5) distribution (advantage: satellite); 6) programming (advantage: satellite); 7) advanced services (advantage: satellite); 8) pricing/value (advantage: satellite); and 9) executive management (advantage: satellite).
Once cable gains traction against satellite in the two-way digital infrastructure, cable can pick and choose methodically the other eight areas to address with more resources. Customer service and financial metrics are obvious front runners for more attention from the cable industry.
Despite the pending advances by cable, an objective view of the competitive mix between the two industries still leaves DBS in a strong position. On a larger level, the battle is complex. A new twist will occur when the experience, passion and global synergies of Rupert Murdoch-led News Corp [NYSE: NWS] are introduced into the U.S. DBS market. News Corp’s deal to buy DirecTV and its Hughes Electronics [NYSE: GMH] parent, including DirecTV Latin America, Hughes Network Systems and PanAmSat [Nasdaq: SPOT], will let DBS continue to keep the playing field fairly level with the other U.S. multichannel players. EchoStar will have to step up to compete with a Murdoch-led DirecTV. Thus, the two players will intensify their competition with each other and with cable. The result could be the advent of some of the best telecom and media products and services that each technology can offer.
Another key point discussed at the NCTA panel was the unique nature of the current competitive landscape. Cable now is at a juncture where it no longer needs to simply react to competition from DBS. To regain subscribers, the cable industry must instead become proactive in responding to competition. Rather than waiting for DBS innovations and then reacting, cable must take risks and create new products that have the potential not only to regain customers lost to DBS but also to keep subscribers. Examples of these innovations include broadband bundling, interactive TV, high-definition TV, digital video recorders and video-on-demand services.
The NCTA’s cable vs. DBS panel featured seasoned cable industry executives — Time Warner Cable [NYSE: AOL] Corporate Vice President of Marketing & Product Management John Treirweiler; Comcast [NYSE: CCZ] Regional Senior Vice President Jaye Gamble; and Mediacom Senior Vice President of Marketing & Consumer Services John Pascarelli. Charter [Nasdaq: CHTR] Vice President of Product Marketing Richard Yelen served as the panel’s moderator.
Medicom’s Pascarelli emphasized the cable industry’s ability to: 1) produce local news and other programming, 2) provide a local call center, and 3) send local company representatives to a subscriber’s home. DBS cannot and may never be able to match these features, he explained.
Time Warner Cable’s Treirweiler showed several videos that emphasized positive themes for cable. One included focusing on subscriber retention and customer loyalty. In southern California, Time Warner’s “Because We Care” program is reducing cable churn. A small reduction in churn can correspond to a huge jump in system profitability, he added.
Comcast’s Gamble added that his company highlights product, distribution and service rather than price. Gamble and Treirweiler further cited the strength of cross-promotions and smaller subscriber acquisition costs as advantages for cable.
Ultimately, however, more and more savvy customers are learning to comparison shop. With that in mind, Comcast and other cable operators have little choice except to compete on price and on value per channel.
The Carmel Group has found that digital cable operators are closing the value per channel gap quickly. Nonetheless, the advantage remains with DBS nationwide, according to the accompanying chart entitled “Cable vs. DBS: Average Monthly Charge to Consumers (Expanded Service).”
In addition, an early June 2003 comparison of a basic cable package offered by AOL Time Warner in New York City and a basic DirecTV package offered nationwide found that DBS beats cable by 57 percent on a digital channel per digital channel basis. But when the “digital cable” package’s analog channels are added to the overall package, cable gains the value advantage by 16 percent over DBS. The monthly hybrid (digital and analog) cable price averages 36 cents per channel. It also is worth noting that AOL Time Warner’s basic offering of 188 channels is the exception and that most cable services nationwide offer considerably fewer channels with their basic packages. Nationwide, cable averages 91 video channels, including 70 analog channels, plus 43 music channels. Conversely, DirecTV’s 128-channel package for $38.99 is standard across the nation and is available to every one of the 107 million potential U.S. television households.
Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a consultancy based in Carmel-by-the-Sea, Calif., specializing in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached by e-mail, firstname.lastname@example.org, or by telephone, 831/643 2222.