How Much Should You Spend to Stay in the Cable Business?

Old TVOne of the questions I am often asked is, “How much money should I be willing to spend to stay in the cable TV business?” It’s a really great question because I think every small cable provider probably understands that they are losing money today on cable. Plus everything they read tells them that the cable business poised to undergo tremendous change.

The cable business is by far the most capital intensive of the three triple play services. Cable headends are expensive and they seem to need constant upgrades. Programmers alone cost you a lot of money. They move networks between satellites; they change the compression on channels; they push you to add more high definition channels and additional networks. And settop boxes cost a lot to maintain. They break and wear out. People move and take them with them. And they get obsolete – Scientific Atlanta recently stopped supporting one of the more common settop boxes in the market.

Additionally there is always pressure to offer all of the bells and whistles. A lot of content is being added to video on demand and customers seem to really like it (although they don’t spend as much on VOD movies as we were all once promised). The big cable companies offer TV everywhere so that customers can watch TV on computers, laptops, tablets and smartphones. The middleware vendors are always coming out with updates and improvements and want to charge more.

This leads you to ask the big picture question – how much money do I pour into a business line that is losing money? This is something that every business faces from time to time. I know a decade ago many of my clients faced this same question with their sales of PBX and key systems. Most of them lost money on that business line if they were honest about the real cost of being in the business. And many of them decided to cut the cord and ditched the losing business line, although others kept it.

Business school basics would tell you that you need to ditch lines of business that are losing money. But dropping cable is not easy, and for a triple-play provider it would be like McDonald’s dropping the Big Mac. It’s not easy for a triple-play provider to decide to get out of the cable business, and for most of them it’s not practical. So what do you do about this situation? Every company is different, but here are some ideas worth considering:

Charge More. If your cable line of business is not profitable, then reduce your losses by raising your rates more than normal. I had one client who raised rates 10% per year for four years and finally got close to profitability. You will lose some customers along the way, but there is no particular reason for you to subsidize a losing product by having rates lower than the surrounding market. And within the product line make sure you are charging enough for settop boxes, HD channels and the other ancillary cable products.

Pinch Pennies on Capital. If you are losing money on cable then you will never recover any investment made in cable assets. Delay upgrades and delay putting in new channels as long as possible. Make sure you are buying forward-looking settop boxes that will be compatible with future changes in the industry.

Don’t Try to Do Everything.  At some point you need to decide if you can really afford all of the bells and whistles. You really need to understand your market and your customers and decide what will happen if you don’t offer TV Everywhere or if you don’t update the VOD system. Let’s face it, little companies can’t keep up with big companies like Comcast. Comcast has headends that serve millions of customers and that makes it easier for them to justify upgrades. Unless your customers absolutely demand everything, then start paring back your offering. Perhaps cut channels and don’t implement every industry upgrade. It may not feel right to not have the state-of-the-art system, but it feels pretty good to not be bleeding money.

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