One of the primary ways that the cable companies have built their market dominance is through bundling. We are all aware of the many bundles of cable TV, telephone, and Internet access that they sell, and for which they give you a discount.
But you have to wonder how much longer those traditional bundles are going to make sense. According to the American Cable Association, by 2020 most cable companies are going to be seeing zero profit margins on their cable product. And for many companies it’s not even that far away. I’ve done the math and many of my clients are already losing money on cable when you consider all costs of supporting the cable product.
I’m sure the very largest cable companies do a little better, but they can’t be making a lot of money on cable TV. They have economy of scale, which has to help, but other than Comcast who owns a number of the networks carried on their systems, the other big companies can’t be making a very big margin on cable.
The normal bundle discount works by providing a discount for buying multiple products. It’s not unusual to see a bundle discount of $20 for somebody buying the full triple play. Nobody outside the cable companies knows which products are discounted or how the cable companies count the discount on their books. I’m not sure that really matters to the companies, but it really matters to customers.
Bundles today seem to have become a tool for penalizing a customer for dropping a service rather than as a marketing tool to attract customers. Today most new customers at big cable companies are attracted by specials, and those specials then eventually revert to the bundle prices when the period of the special ends. So most new customers often don’t even know the bundle prices when they buy.
But you quickly learn the unbundled prices if you try to drop services. Let’s say you have cable and Internet product and are paying $69 for the bundle. If this bundle has a $15 bundling discount the products would cost $84 dollars if bought separately. If you want to cut the cord and cancel your cable, you will find that you will lose the whole bundling discount, and your remaining Internet connection might still cost you $45 or more per month, meaning that you save $24 or less from cutting cable. If you had planned on dropping cable and buying NetFlix and perhaps some other OTT service you might easily find yourself paying more after cutting the cord than you paid before with the bundle.
That is the power of the bundle. It is no longer a marketing tool to capture customers because the big cable companies only talk about their bundles prices in the very fine print in their advertising. Instead, the bundle is a way to penalize customers for cutting service. I see industry pundits wondering all the time why cord cutting isn’t happening faster. There are a lot of people in surveys who say they are going to cut the cord but then never do it. Since most cord cutters want to keep their Internet connection, I think a lot of cord cutters change their mind about cutting cable when they find out how paltry their savings are.
If anything, cable companies are probably going to have more opportunities to bundle in the future than they do today. People have been steadily dropping voice lines for a long time. And while cable cord cutting is starting slowly, it is picking up steam. But to offset these losses the big cable companies are adding new products like security, energy management, home automation and IoT, and WiFi phones.
The cable companies are probably going to have the opportunity to sell OTT cable packages. It seems likely that the FCC is going to give anybody the ability to sell smaller OTT products over the web, and one has to think that they are going to let the cable companies compete with the same smaller products. Today, cable companies have a regulated set of rules for how they must build their programming tiers. But I suspect that there is going to be more profit for cable companies to sell a 40-channel package than what they are making with today’s big 300-channel packages.
And so we are probably going to see a lot more bundling, but rather than the triple play bundle it will be Internet access bundled with these other new products. And certainly the cable company is going to continue to use the bundling discount as a way to make it hard for customers to drop their service. So my guess is that bundling is not only here to stay but that it has a big future as a tool for cable companies to continue to strong-arm their customers to stay with them.