Cable’s Not-So-Secret Weapon Arrives

By Ted Livingston

There was little question at recent cable industry get-togethers, such as June’s National Cable and Telecommunications’ (NCTA) convention in Chicago and July’s Cable & Telecommunications Association for Marketing (CTAM) conference in Seattle, that broadband Internet is the cable industry’s most successful new product.

Speakers at both conferences spoke glowingly about high-speed data service as a critical competitive advantage for cable in its battle against satellite services. A first-of- its-kind consumer research study, High Speed Data: Challenges and Opportunities, developed by Horowitz Associates and Livingston & Co., offers supporting data for this conclusion.

The Horowitz/Livingston study was based on the results of a survey during May and June 2003 that queried current broadband customers, who used cable, satellite or DSL, and current dial-up consumers in markets where digital cable currently is available. The study’s findings showed that cable’s share of the broadband customer base – 56 percent in markets where modems are offered – far outstripped the 33 percent market share of DSL and the anemic 3 percent share for satellite. Regardless of the provider, broadband subscribers express extremely high customer satisfaction with their service. That level of satisfaction indicates that high-speed data customers are likely to be loyal to their current provider.

It is clear from this study that broadband technology to the home has the potential to reach critical mass once it becomes available in all markets. Twenty-seven percent of current dial-up customers in the universe of homes passed by cable-modem report that they are interested in subscribing to broadband. That finding suggests an overall 60 percent broadband penetration of Internet homes in the next couple of years. Once more than half of the consumers have chosen high-speed services, it is easy to foresee the virtual extinction of dial-up over the course of this decade. About half of those likely to convert to high-speed indicate a preference for DSL, but the marketplace has shown that two- thirds end up signing up for cable modems, reflecting cable’s more aggressive marketing and arguably superior technology.

Technologists typically do not believe that satellite technology is well equipped to deliver high-speed Internet services. However, rural households are good candidates for high-speed and are not served by cable or DSL. Also, current satellite subscribers may prefer to receive high-speed Internet from their video provider. Moreover, recently announced partnerships between satellite companies and telcos to offer bundled satellite and high-speed data products may entice current customers with attractive discounts and benefits. Whatever approach they take, satellite companies must be at least as aggressive and innovative as their larger competitors in the high-speed data business.

Understanding Usage

The Horowitz/Livingston study reveals somewhat of a paradox concerning broadband Internet usage. “Speed” is overwhelmingly perceived as the primary benefit of high-speed data by 89 percent of current users. Among those dial-up customers who consider themselves “likely to subscribe,” 77 percent identified speed as “very valuable.” Less than one-third of the same respondents said they “performed” activities where speed makes a big difference. Such activities include playing on-line games, downloading music, downloading video or movies, etc. However, enhanced promotion of these content-oriented services is necessary for consumers to continue to believe that they are getting a good value for their money.

The Horowitz/Livingston survey explores which pricing plans and add-on services will be instrumental in fueling broadband growth. Reflecting concerns for data security, viruses and spam, consumers say they are most interested in services that protect them from these Internet woes. Eighty-one percent of current subscribers and 71 percent of those interested in subscribing expressed a desire for these services. However, only 23 percent of current subscribers and 32 percent of prospective subscribers say they are willing to pay for such protections. That finding suggests that these types of services might be appealing to consumers if bundled with other broadband services rather than requiring a separate line-item fee.

On the surface, fewer consumers seem interested in premium content. For example, 40 percent of current customers and 60 percent of prospects expressed interest in such high-end content. However, these levels of interest are not insignificant. Many businesses would be thrilled to have penetration rates for their products that range between 40 percent and 60 percent. Moreover, certain market segments, such as younger consumers, families with children, women, upscale households, etc., show a considerably higher interest in these services. When asked if they would be willing to pay for content, four out of five respondents said they were not sure. That response shows that consumers need to be educated concerning why premium content is a good value. If marketers can identify and reach interested groups and can communicate the benefits of premium services, they stand an excellent chance of successfully selling broadband content.

Those who believe that lower-speed tiers of service will attract more consumers are likely to be disappointed by the Horowitz/ Livingston data. It suggests that dial-up customers interested in broadband want the full high-speed experience, not a watered-down version. On the other hand, there is potential for offering “super high-speed products,” which guarantee users a specified level of service that can optimize applications such as interactive gaming.

Who will be the big winner in the high-speed data race? The cable guys clearly think it will be them – and they have a nice lead “in the back stretch.” But the finish line is far in the distance. So far, innovation has not really paid off in the high-speed data marketplace. Consumers have been relatively satisfied with speed and the convenience of “always on” service. However, there is evidence that new, innovative pricing strategies will drive further sales growth for cable operators.

While remaining relatively conservative, cable companies are starting to experiment with a focus on high-end customers. One approach to tap these lucrative customers is to offer “super tiers” of service and add-on products. The phone companies, on the other hand, are mostly trying lower-priced, slower-speed introductory products in an attempt to attract resistant dial-up consumers and to differentiate themselves from cable. Both cable and telephone companies are bundling high-speed data with other services, such as video and phone. Satellite companies seem to be adopting a somewhat different, niche oriented strategy of focusing on their current customers, as well as partnering with high-speed data providers, such as regional telephone companies that can provide a bundled high-speed service through terrestrial technology.

In conclusion, the Horowitz/Livingston study shows that there still is a lot of growth potential for broadband Internet. A majority of consumers will subscribe to Internet access via broadband in the near future. As a result, dial-up service will lose so many consumers that it may be virtually extinct before too long. Another trend is that add-on services will be successfully introduced. The bottom-line is that broadband service providers who develop and test innovative pricing and packaging strategies will enjoy the greatest success during the next several years.

Ted Livingston is a principal at Livingston & Co., a Boston-based broadband consulting company. He can be reached at 617-232-7099 or [email protected].