The End of Customer Discounts?

When we’re working on broadband feasibility studies, one of the things we try to do is to get a sample of customer bills. We’ve found that the amount that the big ISPs charge for service differs by market and that the difference is usually manifested through promotional discounts given to customers. We’ve seen some markets where a majority of customers have discounts and others where it’s a far smaller percentage. Understanding the level and extent of discounts is another useful data point to have when considering competing in a market.

It sounds like the biggest proponent of special pricing was Time Warner Cable. CEO Tom Rutledge of Charter says that at the time of the merger with Time Warner, that the company had over 90,000 different customer packages due to deals that had been negotiated between customers and customer service reps. Charter is ending the Time Warner discounts when promotional periods end and asking customers to pay full price. They are not trying to keep customers who threaten to leave.

Charter is not the only company that is ending discounts. AT&T and DirecTV have been shedding hundreds of thousands of cable customers in the most recent quarters as the company has decided to let go of customers who refuse to pay the full price after the end of a promotional discount period. AT&T has decided they’d rather not keep customers if they aren’t contributing to the company’s margin.

The impact of ending customer discount can be huge. I recently analyzed a city where it seems that most of the customers had discounts that ranged from 15% to nearly 50% of the total bill. In many cases, the discounts are as great or greater than the profit margin on cable and I’ve always wondered why the cable companies offered such deep discounts.

One cause of big discounts historically came from the win-back programs offered by big ISPs. Anybody who has tried to quit service with an ISP is familiar with being handed to a win-back representative who is authorized to offer discounts to get customers to stay. These reps earned commissions for retaining customers and were usually liberal with the offered discounts.

Customers losing discounts on cable TV face a few stark choices. They can agree to pay a lot more to keep the same service. They can cut the cord and drop cable TV, but in doing so they face a second financial penalty of losing the bundling discount they had for buying multiple services. A third option is to step down to a lower-cost cable package. For example, Charter now offers an online small cable line-up called Spectrum TV Essentials that provides 60 channels for $15 per month. Most of the cable companies are offering similar small lineups.

We got a glimpse at cable TV margins recently when the Wall Street analyst firm Cowan looked at the cable market. They estimated that the Comcast has the gross highest margin on cable TV at 40% (cable rates less programming costs) followed by Charter and Dish Networks at 35%. They estimated that the margins for smaller cable companies like Altice are only 20%.

I was always surprised by some of the discounts I saw on bills because some of the bigger discounts looked to be giving away all of the margin on the cable product. Now that I see the estimates by Cowan of gross margins, in some cases, employees at these companies were giving away discounts larger than the margin.

I’ve wondered for years when the big companies were going to wake up and end the discounts and associated practices. The cable companies have largely won the battle against DSL and in most markets they have no effective competition. DSL seems to be keeping customers that care about price more than speed and the cable companies are getting the higher-margin customers. Cable broadband has become so much better than DSL that it’s getting hard to imagine that many customers will willingly go back to DSL.

Only the cable companies are going to know the math but eliminating most promotional discounts ought to be equivalent to implementing a 5% to 10% overall rate increase. Customers breaking the bundle will add even more to margins. Customers need to get used to the idea of paying full price after their initial discount period is over. I have to wonder when the cable companies will stop offering promotional discounts to get new customers in non-competitive markets.