Tag Archives: Cable television

Finally a la Carte Programming?

English: Signature of US Senator John McCain.

English: Signature of US Senator John McCain. (Photo credit: Wikipedia)

 

John McCain recently introduced a bill to the Senate that would allow for a la carte programming. The bill will be known as the Television Consumer Freedom Act of 2013  and is attached by clicking the link. Also here are the comments made by McCain when he introduced the bill.

Here are the things the bill does:

  • It makes it voluntary for cable operators to offer a la carte programming.
  • It mandates broadcast networks (ABC, CBS, NBC, FOX, etc) offer their channels to cable providers on an a la carte or face the possible loss of their broadcast license.
  • Programmers like Discovery and Disney can only sell their programs as a bundle if they also offer them a la carte. So cable operators can buy only the programming that they want.
  • It threatens that any broadcast network that pulls its programming off the airwaves would lose the spectrum and also any rights that go with being a broadcaster. This is a threat for local networks to not mimic Aereo.
  • Current sports blackout rules won’t apply in cases where the stadium being used was publicly financed.

Here are the practical consequences if this bill becomes law:

  • Cable companies could save money by eliminating channels they don’t want to buy. I helped one client get into the cable business a few years ago who ended up taking almost twenty more channels than they wanted due the bundling requirements from the programmers. And so I see cable providers shedding channels. This may not necessarily result in any price cuts and might just increase the profits of the cable company. But over time this ought to help hold down costs and rates.
  • This bill does not mean that any customer will get a la carte programming. In McCain’s announcement he said that ESPN costs $4.69 per month. That is the price that a cable provider pays for the ESPN suite of channels if they agree to make them available to, and charge every customer for them. But if ESPN is forced to sell this on an a la carte basis, they understand that a lot of households are going to opt out of paying for it since many households have no interest in sports. I would expect that ESPN’s a la carte price is going to be a lot higher than the $4.69 bundled price. If that occurs (and there is nothing in this law that would prohibit it) then the math for ESPN and customers changes drastically overnight. Rather than everybody paying $4.69, if only one-third of households would want ESPN the price would have to go to nearly $15. And this same kind of math is true for every cable network. So my prediction is that none of the large cable companies will move their programming to a la carte. But there might be small ones who try it.
  • This benefits companies who want to deliver programming in a non-traditional way. This might open the door for Aereo or web-based companies to buy programming. I can see sports fans willing to pay $30 a month for a suite of sports channels and nothing else. But the first cable company that tries this is going to see the wheels come off. It could end up costing consumers as much to buy the channels they want a la carte as it is to buy the big bundles of today, due to the way the current pricing averages the cost across millions of homes instead of just those who want to watch it.
  • I can see cable operators who will put the broadcast networks on a la carte. There is a huge battle between local stations and cable companies over retransmission fees and I can envision cable companies who will price each channel according to what they must pay and letting the public deciding what they want to watch.
  • Marginal cable networks will fold. Some of the large programmers have made cable providers buy channels they didn’t want, and if enough of them elect to shed some of these networks they will fold.
  • It would be interesting to know if this law would override existing multi-year contracts for programming or if it would force new contracts immediately.

The primary benefit of this law is that it breaks the bundling being done by the large programmers who own many channels. The cable business is not profitable for cable operators and I have some clients who lose money on cable. They make almost all of their profits on data and voice. If cable companies have the ability to set any line-up they want they might be able to return some sanity to what they pay for programming. Over time this might be the change that breaks some of the power of the programmers and stops the insane price increases. McCain cites a 6.1% average increase in programming costs since 1995, but where I have been tracking it in the 2000’s it has been more than 7%. These kinds of rate increases are heading the whole industry towards a consumer revolt. If the 6.1% increase that McCain cited continues unabated, a $75 cable bill today would be over $136 within ten years.

The real shame of the bill is that the public will interpret this bill to mean they are going to get to pick just the channels they want to watch and that is still unlikely to happen. The bill is a good idea, but it’s really a la carte for the cable companies, not a la carte for consumers.

A Look into my Crystal Ball

Technology of the FutureI have spent quite a bit of time recently reading futurist books and articles that think about the most likely future. I’ve done this to the point where my wife asked me if I am unhappy with the present! After chuckling, I told her that I am happy now. But thinking about the future is a worthwhile effort when one is engaged in a technology-based industry. Everything I have read tells me that selling to residences is going to change a lot over the next few decades. And I believe that those who understand where the trends are taking us can begin preparing for that future today.

So what will the future residential customer want from a telecom company? Everything I have read tells me that traditional telephone service and cable TV service as we know it today will not be around. Voice will have become a total commodity. You will probably be able to put a phone in your house if you insist, but it will be an IP device and very few people will still have a traditional telephone.

Within twenty years voice will be a commodity for cellular service also and the cell phones we carry today will also be a thing of the past. There will be devices far smarter than our ‘smart’ phones. Many of these devices will be somehow integrated into our body and will be far more sophisticated than the first generation of Google glass. I am not enough of a futurist to predict the specific technology that will win the battle, but we will not be carrying around a device whose primary purpose is to talk to people.

Cable TV is headed down the same path and there will no longer be a subscription to hundreds of channels for a high price. Video will be available ubiquitously on any device you want to watch it on. People will subscribe to the programming they want and will not pay for what they don’t want.

But people will still want bandwidth at their homes – lots of bandwidth. As we move towards the Internet of Everything, where multitudes of devices will include cheap chips and will be networked together to make our lives easier, the average house will want a lot of bandwidth.

And there will be two kinds of bandwidth providers – dumb pipe providers and service providers. There are already dumb pipe providers today. I live in the country and I get my Internet access through a wireless link from a nearby tower. And that wireless link is all that my ISP sells. They don’t offer any other services over that link and I doubt I would buy them if they did. I have my smart phone to give me everything else.

Many of today’s networks will morph over time to become dumb pipe providers. They will raise the price of bandwidth until it is high enough to compensate them for their network. They will have much smaller staffs than today who will be needed just to install and maintain the network.

But there will be another kind of provider that I call a full-service provider. They will also deliver a bandwidth pipe to the house, but they will also provide a host of services. And mostly these services are going to look like a future version of today’s Geek Squad. These companies will send technicians into people’s houses to help them make everything work together. When there is an Internet of everything it is going to get complicated. People who are not very technological are going to want lots of help to customize the many options to get just what they want. And so when a technicians visits he might be asked to help a customer get a medical monitor working right, find some programming they had trouble locating, fiddle with the controls for the lighting, and put a different personality on the home AI. The service-oriented provider will build customer loyalty and will be perceived as something very different from the dumb pipe provider.

There is a lesson today from envisioning this future. Far too many service providers today sell products that they treat as commodities, and once they sell them they rarely talk to their customers unless there is a problem. Technology has already gotten complicated for the average household and I think there is already a market for sending technicians into homes to make things work together better. I have clients who do this and they say that changing to a service model is the best change they ever made. They generally sell something new every time a technician visits somebody’s home. But the vast majority of the telecom companies I know look a lot more like the dumb pipe provider. They may sell telephone and cable TV on their data pipes, but what are they going to be left with when those products turn into a commodities and then disappear into the cloud?

What is Behind the Aereo Controversy?

Image representing iPad as depicted in CrunchBase

The Aereo ruling on April 1 certainly has the cable industry in an uproar. In that ruling a federal appeals court upheld a lower court ruling that Aereo’s wireless streams to customers are not a ‘public performance’ and thus do not constitute copyright infringement. On Friday Glenn Britt, the CEO of Time Warner, said that his company was considering pulling the broadcast networks off of his cable TV systems and sending them to customers over a radio in the same way that is being done by Aereo. And recently, in response to the Aereo ruling the broadcast networks threatened to pull all of their content off the air and move their programming to cable TV. So what is up with Aereo, and can these companies do what they have threatened?

Aereo has an interesting product that seems to have found a market niche, at least in New York City where it is now operating. Aereo sets up a radio link to each customer and sends them a 28 channel packagethat includes the major networks, some other low-cost networks and some spanish and asian-language channels. Aereo can be installed on any Windows or Mac computer and can then be streamed to iOS devices like the iPhone, iPad or Apple TV. It can also be made to work with a Roku box. And one would imagine it will soon be made to work with other pads and tablets. The service also lets a consumer record some programming for later playback. The pricing is cheap compared to cable TV with a $1 per day plan, monthly or annual plans, including a monthly plan for $8 that lets a customer watch everything live plus record and play back 20 hours of programming per month.

Why does this controversy even exist? Can’t people just receive the broadcast networks over the air? On June 12, 2009 all full-power analog television transmissions ended and starting with that date the full-power television stations, which include all of the major networks like ABC, CBS, NBC and Fox could only broadcast in digital. Customer now need a Digital Television Adapter (DTA) to receive the signals and any home that is near to a station can receive it for free. But it is not easy for the average consumer to get these signals from the TV to mobile devices, and Aereo’s real marketing niche is providing signals to computers, iPhones and iPads.

Why are Time Warner and the cable companies so stirred up over Aereo? Aereo seems to have found the niche of people who want to watch mainstream programming without being tethered to their TV. If Aereo was limited to New York City this probably wouldn’t be a huge deal, but they have announced that the service is coming to 22 other major markets in 2013.

As is the case with all big business controversies it all comes down to money. In the 1992 Cable Television Consumer Protection and Competition Act, Congress required that all cable operators obtain the permission from broadcasters before carrying their signals on their cable systems. For a while this permission was granted for free, but in recent years the broadcasters have asked for significant fees and it is not unusual to see each local broadcast network charging $1 or more per customer per month for retransmission consent. So a cable system now has to pay that much each for ABC, CBS, NBC and Fox, and in some markets multiple stations of some of these. This has driven large increases in cable rates and is now a point of huge contention between broadcasters and the cable companies.

The broadcasters are angry that Aereo is able to bypass their fees since retransmission fees currently make up as much as 10% of their revenue. And the cable companies are angry that Aereo has gotten out of paying the same fees that they must pay. And they are worried that Aereo will accelerate the trend of customers who are ditching traditional cable TV in favor of programming from the web and elsewhere, the trend referred to as the cord-cutters.

Can Time Warner really do the same thing that Aereo is doing? Certainly Time Warner or anybody could form a company that does the same thing as Aereo and compete with them. Such a company could sell the same sort of line-up and do it using radios like Aereo has done. But they first must recognize that it’s important that Aereo is using radios because this is what allows them to not be a cable TV company, which is defined as somebody who delivers cable content using cables. So Time Warner would have to use radios also. And Time Warner is still hoping that the Supreme Court will look at the issue so it’s not entirely certain that Aereo, or anybody, has the legal last word that this is okay.

So Time Warner could establish an Aereo-clone company and do exactly what Aereo is doing. But they could not do this as an alternative to putting the network channels onto their cable system. In the aforementioned 1992 Cable Act, Congress set forth the rules for cable systems to carry broadcast channels, referred to as the must-carry rules. Congress said that a cable system with 12 or fewer channels must carry at least three local broadcast channels. Larger cable systems must carry all local broadcast channels, up to a maximum of 1/3 of their system. This means that Time Warner could not pull the local broadcast networks off of their cable and deliver it in a different way. But Time Warner could probably sell an Aereo-like product to somebody if that is the only product they sell to that customer.

Finally, can the broadcast networks pull their signals off the air and move them to be cable only? I can’t think of any reason why not. At that point they would no longer be a broadcaster and they would avoid all of the FCC rules applicable to over-the-air broadcasters. But if they do this they would become like any other cable network, and so ABC would be treated the same as HBO or TBS or any other cable network. It is likely that such a change would infuriate Congress since around 15% of the people in cities still receive free TV over the air. There would certainly be political repercussions from a broadcast network deciding to become just another cable network. For instance, might they lose their ability to carry professional football?

At the bottom of this controversy are huge dollars and also the underlying fear of the cable industry that Aereo is one more factor that is accelerating the bypass of their systems. It seems like Aereo might be in a similar position to MCI back when they broke the long distance monopoly. Aereo has stuck a sharp stick in the eyes of both the cable companies and the broadcasters and there is one hell of an interesting fight yet to come.

How Much Bandwidth Can a Cable TV System Deliver?

Cut showing the composition of a coaxial cable.

Cut showing the composition of a coaxial cable. (Photo credit: Wikipedia)

There are a number of techniques that are available for a traditional cable TV network to upgrade the bandwidth on the network available for customer data. If you are operating or competing against a cable TV system you should recognize that there are a number of upgrades that can when combined can drastically improve data speeds. Each of these upgrades comes at a cost, but you can’t discount the technical capabilities of an HFC network if data delivery becomes the primary goal of the network.

  1. Increase System Bandwidth. An example of this kind of upgrade is when a system is upgraded from 750 MHz to 1,000 MHz (or 1 GHz). This upgrade provides more bandwidth by widening the frequencies that are available on the coax. A system bandwidth can be a major upgrade and can involve replacing all of the power taps in the system, and in some systems even requires replacing the coaxial cable.
  1. Reducing Node Size. A node in an HFC system is a neighborhood of homes and/or businesses that share the same bandwidth. Typically there is fiber built to a node and then coax cable from the node to each customer. Historically, before cable modems, nodes were large, often at 1,000 homes or more. But many cable companies have deployed more fiber and reduced node sizes and some cable companies now have nodes in the 200 customer range. Making smaller nodes creates smaller pools of shared bandwidth, meaning there is more bandwidth available to customers at peak times.
  1. MPEG4 Compression. A lot of cable systems still use a compression technique known as MPEG2. This technology is used to compress the digital channels on a network today so that up to ten digital channels will fit into one 6 MHz analog slot. But with MPEG4 as many as 20 digital channels can fit into the same 6 MHz slot. The biggest issue with this conversion is that older set-top boxes won’t recognize MPEG4.
  1. Deploy DOCSIS 3.0. DOCSIS 3.0 is a bandwidth management technology that allows a cable modem to use a larger window of RF frequency for data. The way this works is that a cable system can ‘bond’ multiple channel slots together to that the cable modems can use more than one 6 MHz channel slow for data.
  1. Migrate Analog Channels to Digital. A cable provider can gain some bandwidth space by migrating analog channels to an existing digital line-up. There are often contractual requirements with programmers that make this difficult to achieve. However, as mentioned above, as many as 20 digital channels can fit in the same sized slot as an analog channel. There are always customer issues to also consider since this kind of conversion will shrink the analog offering and expand the digital tiers.
  1. Full Digital Conversion. In a full digital conversion all channels are converted to digital. Once completed, every customer needs a set-top box or other device in order to decode and view channels. There is now a device called a Digital Television Adapter (DTA) that is less costly than a set-top box that can support a customer remote. It is possible to send the ‘basic’ channels through the network un-encoded so that customers with a digital QAM tuner in their TV will be able to see these channels without a DTA.
  1. Deploy Data QOS. This technique does not increase system bandwidth, but rather allows the cable provider to sell faster data to some customers by allowing those customers to use a frequency allocation that is only used by these faster data customers. For example, Comcast advertises 100 Mbps service in most large cities, and they would deliver that kind of speed by giving the 100 Mbps customer priority over other customers in the node by having those customers send their data over a lesser-used frequency on the COAX. Of course, as the priority customer gets more bandwidth, everybody else in the node gets degraded service, and if too many premium services are sold then even the priority customer can’t get the promised bandwidth. But this technique does allow the cable company to selectively compete against fiber for selected customers willing to pay for the extra speed.
  1. Convert to IPTV. This conversion would allow a cable system to use more of the RF frequency on the network for bandwidth. On an IPTV system the programming, voice and cable modem service are all sent over shared bandwidth. An IPTV conversion does not automatically gain a lot of extra bandwidth and any savings come from the fact that the company does not have to broadcast all channels to all nodes all of the time, but rather can just those channels that somebody in the node is watching. There is a benefit, but it is not as large as the extra bandwidth gained by other strategies.
  1. Higher Spectral Efficiency. This technique involves converting to DOCSIS 3.1 and also changing the system modulation techniques. The traditional modulation technique is called QAM (Quadature Amplitude Modulation) and uses a 6 MHz frequency allocation.  The new technique is ODFM (Orthogonal Frequency Division Multiplexing) which uses a higher QAM modulation.  Where Current DOCSIS capabilities achieve approximately 6.3 bits per Hertz, DOCSIS 3.1 can achieve 10 bits per Hertz. New modulation techniques can create much larger bandwidth slots and can at the same time increase the bits to Hz efficiency of the frequency being used. In effect, this technology turns the cable system into a DSL system, with the difference being that there is more frequency available on a coaxial cable than is available on a telephone copper cable, but that a CATV node is then shared by multiple subscribers.

As can be seen, a cable company has a lot of options to increase bandwidth. So, how much bandwidth can be delivered? There are a lot of cable networks that have been upgraded through step 7 above. These systems can support some selected customers up to 100 Mbps download. But these systems probably only support 30 Mbps for all subscribers if the nodes are small enough. A system that is upgraded through step 8 can probably deliver 50 – 60 Mbps to most customers with selected customers being able to get much faster speeds. But a full upgrade to through step nine would allow a cable system to match the overall bandwidth delivered by a fiber PON system, although it is then shared with a lot more customers.

These upgrades are expensive. But if you are competing against a cable company, don’t assume that they are incapable of delivering very decent internet speeds if they are willing to make enough investment in their network.

If you have questions or want to discuss this further call Derrel Duplechin at CCG at (337) 654-7490.

Choosing the Lesser of Two Evils?

FTTH fiber-to-the-home

FTTH fiber-to-the-home (Photo credit: dvanzuijlekom)

Today our guest blogger is Ron Isaacson, a former employee and still a good friend of CCG’s.

A number of years ago, the large ILEC in our area installed fiber optic lines in our neighborhood and soon started offering their FTTH product line in the area. The cable provider had already been in the neighborhood for a while and was already fiercely pushing their bundled service packages. We finally were going to have the competitive market version of a boxing match. SWEET!!

Our family had “Dish” TV service, satellite access that worked most of the time – except when bad weather interrupted the signal. We had dial-up Internet through a local ISP, back when the bandwidth offered on dial-up was still relatively decent, and we had our telephone service through a local CLEC. Being a telecom consultant I liked splitting services between the different vendors because no one monopolist had their claws fully in my back pocket. I might have been paying a little more for this split service, but it made sense to me.

However, the FTTH offerings changed the whole equation. Cable offered a full package too, so we had a choice.

Having had previous horrendous customer service experiences with both the ILEC and the cable company we were at a quandary as to which 21st Century telecom service to commit to, so I decided to take a poll: I asked a bunch of my neighbors which service they subscribed to and why, and how were the services provided?

The results were a classic case of monopolistic bad reputations! Either a family absolutely hated the ILEC and had signed up with cable, or they absolutely hated the cable company and had signed up with the ILEC. Apparently, no one truly loved either telecom provider and they just chose the company that they hated the least. (It’s been a few years, hopefully this has changed!) I couldn’t help but thinking that both companies are as bad as the worst of the stories about the airlines!

We chose the ILEC, but the notorious nature of the story was just getting started. Our telephone number, which we had for over 25 years, was an exchange-level “FX” number, meaning that all of the customers with that exchange were billed as if the service was down-county, closer to the metro-area. The rep advised that this was not a problem, that they could still do the switch.

Once the FTTH was installed, the Internet and TV service worked beautifully, but it took another 35 days for the phone service to be re-connected because, and this is a quote, “The fiber can’t handle the FX line.” At this point I laughed and replied, “I beg to differ. The fiber doesn’t know the difference, and doesn’t care….it is your systems that are messed up!”

After 35 days, they decided to run the telephone service over the old copper pair, and bill it as if it was on the fiber. This actually proved to be a good thing when the electric power went out due to an electric utility that also possessed byzantine customer service skills.

Years later the ILEC came back and reconfigured the FTTH to include the telephone service on the fiber. Incredibly, the telecom service that was the most troublesome for the telephone company to install….who knew?

Years later, this experience still shades my view of the ILEC, the gang that proved to me beyond a shadow of a doubt that they can and will shoot themselves in both feet.

Thinking of my installation experience with fiber made me think back to something that had happened to me earlier. Many years ago, in the hay-day of the long distance marketplace during a customer service training seminar, the class discussed the results of a poll showing the reasons that customers cancel their service with carriers. A couple of facts stuck with me: First, 3% of customers die and there’s not much one can do about that. Additionally, about 5 to 10% of customers move, or otherwise change locations. Again, not much (at that time) that could be done about that.

However, over 50% of customers cancel because of rudeness or indifference from customer service personnel in reference to a given incident. There were reasons filling in the rest of the 100%, but those three points stuck out to me – two that you can’t do anything about and one that we definitely can.

The bottom line I took away from that training, and my experience with the telephone company is to be sure that every customer is treated as if their service matters, as if their patronage is appreciated.

Will Poor People Get Google Fiber?

FiOS installed in Montclair, New Jersey

FiOS installed in Montclair, New Jersey (Photo credit: Wikipedia)

This was a great question that was posed by a recent article in Forbes Magazine. In this country we have a long history of having telecom provided by monopoly telephone companies and more recently by cable companies. Both incumbent providers have been mandated to serve almost everybody in their footprint. In the case of telephone companies this has been done by regulatory fiat by the various state Commissions that regulate telephone service in each state. Every state has rules for incumbent telephone companies that include a requirement for universal service using a concept known as carrier-of-last-resort. When a telephone company got the right to serve an area they were expected to provide service to everybody in that area, within reason, and then the costs of the more expensive-to-reach customers was averaged with everybody else. I say within reason, because even the telephone companies were allowed an out for really expensive-to-reach customers. For instance, if a farmer lived back a seven-mile long lane, the phone company might only provide a mile or two of the service line and expect the customer to pay for the rest.

And cable companies had similar requirement that came through the franchise agreements that they signed with local governments. If a cable company wanted to serve a town, then they were required to serve everybody in town in order to get the franchise.

Today fiber is being built by both regulated monopoly carriers like Verizon, but also by competitive providers like Google. But none of the fiber builders has the same carrier-of-last-resort or cable-like franchises requirements that the incumbents faced when they built their copper networks.

So to answer the opening question, will everybody get Google fiber?  The answer is no, for the following reasons:

  • Copper is still in place.  As long as the copper is still in place for the telephone and cable company, they can satisfy their service obligations by connecting customers on copper. They are thus relieved of building fiber everywhere as long as copper still exists.
  • Exclusive contracts with MDUs.  Anybody that builds with fiber needs to get the approval of the owner of multi-tenant buildings, be that apartments or multi-tenant business buildings. And some of those building owners are not going to give permission. Some building owners will have signed exclusive access contracts with the incumbent cable company. The FCC invalidated some types of exclusivity a few years ago, but there are still contractual ways for the cable company to keep out competition. Further, some building owners just don’t want to let a provider into their complex.
  • Places too expensive to serve.  Fiber overbuilders can pick and choose where to serve. It is often very expensive to bring fiber into apartment buildings, particularly older apartments, and many fiber builders choose to not build or selectively build to apartments. Verizon is famous for avoiding high-cost places. If you look at a suburban map of Verizon FiOS you would find a real patchwork of served areas. They will build to one pocket of houses but then skip over ones right next door, certainly due to cost. For the most part Verizon has elected to not dig up streets to build fiber, and so FiOS is more commonly placed in neighborhoods with existing Verizon aerial wires, or in neighborhoods where there is existing conduit in the ground. Verizon also often skips past apartment complexes. But I don’t want to single out Verizon since this is true of just about every fiber overbuilder.
  • Redlining, or the nearest thing to it.  As the article suggests, the build-out patterns of Verizon, Google and just about any other fiber overbuilder have a significant taste of redlining about them. It is easy for the fiber builders to say they are building where the cost is the lowest and the returns are expected to be the highest, but this means that they generally end up avoiding large apartment complexes and poorer neighborhoods. If they had set out to deliberately redline they would end up with basically the same networks that actually get built.

And so we are entering a future where there will be definite fiber haves and have-nots. There has been a lot of this for the last few decades since the introduction of DSL and cable modems. Rural areas for the large part have received very little broadband compared to urban and suburban areas. But the future digital divide is going to be starker, with the divide being everywhere, including the cities and suburbs, with some homes having fiber and others not.

For the last decade there has been conventional wisdom that having fiber connected to your home will add to the value of your house. I guess we are going to get to see this tested on a very large-scale.

Cable TV Trends

There are a number of trends affecting the cable TV industry that all add up to an industry that is going to be seeing big changes over the next decade. These are what I see as the biggest trends affecting the industry:

  • Cord Cutters. The number of people who are completely dropping cable is growing and the speed of that drop is accelerating. I have seen several different recent estimate that 5 million households will have completely dropped all cable service by the end of 2013. And only the cable providers know how many other million households that have cut back on the size of the package they buy rather than drop service totally. I anecdotally know many people, myself included, who have gone from the big cable packages to something less – in my case I now have only the basic package of about 20 channels.
  • Higher Programming Costs. Programming costs have been rising steadily for the last decade and until the last few years were climbing between 6% and 7% per year. Costs have climbed even faster in recent years due to the high fees being demanded by local network channels in each market (ABC, NBC, CBS and Fox). Local network programming was free for cable companies until a few years ago, but now they paying as much as $1 per month per customer for each major network channel. Many contracts between cable providers and programmers are for multiple years and those contracts show the price increases are going to continue to come.
  • Even Higher Rate Increases. The large cable companies have increased rates around 7% per year for many years. The programmers have usually blamed the size of the increases on increased programming costs, but until the recent increases in local network programming the increases were generally about twice what was needed to cover programming cost increases. If the rate increases continue at that level, then a $70 package today will cost $129 in ten years. Prices are already at a point that are forcing households off the network.
  • Very Solid Cable Modem Business. To a large degree the cable companies have won the war with DSL. However, they have stiff competition from Verizon and FiOS on fiber. There is limited competition outside the Verizon footprint, but with Google building fiber in Kansas City and having announced Austin and Provo there is going to be more competition for the residential business.

What do these trends add up to? I see them resulting in the following:

  • Ever decreasing cable customer base. The most dire trend for the industry is that young people are not interested in traditional cable, and as that demographic ages the percentage of households wanting cable is going to drop faster and faster. Add to this the households dropping due to never-ending price increases and most experts see cable subscribership going down the same path as landline telephones. Subscribers are dropping somewhat slowly now, but every prediction I have seen believes the rate of disconnects will accelerate over time.
  • Cable Providers Become Data Companies. As cable penetration decreases the cable companies will become more and more reliant on selling data. This is going to lead them over time to maximize their networks for providing bandwidth for data rather than cable TV. And I predict it also means that they will start raising data prices over time, something that we just started seeing in the last year. There is not much profit in selling cable packages and the cable companies could be more profitable selling data eventually (assuming they are in markets where they don’t have stiff competition).
  • Winnowing of Cable Networks. As the industry loses subscribers and as people downgrade from larger packages to smaller ones, the demand for some of the networks is going to diminish. One way for cable companies to control costs is going to be to whittle away at their line-up, and that is not that hard to do with 300+ channels on many cable systems. So some of the marginal networks are going to either die or greatly reduce the fees they charge if they want to stay in business.

There is one change that might affect the industry that could upset these trends, and that is a la carte programming.  There are a lot of barriers to make that happen, but cable companies might get new life if they are able to sell only those channels that people want to watch. It’s certainly possible that they could sell a package of 20 channels to a family at an affordable price and make more profit than they do today with the large expensive packages. But this is going to require a major change in an industry that is currently controlled by the programmers and not by the cable companies.

What Do Households Want?

The telecom industry has spent decades bringing residential customers the products we think they want. This has resulted in the ubiquitous triple-play bundle of telephone, data and cable TV. But one has to only spend a little time with a Millenial to know that customers are no longer satisfied with what we have been selling them. While many customers are still buying the traditional products, more and more people are actively looking for alternatives.

And alternatives are showing up. I have one client who has been serving over 20,000 cable TV customers for many years. But for the last year they have been steadily losing 200 customers each month and it doesn’t take a lot of math to see that in a decade they won’t have any cable customers left.

So I am advising clients to start looking at delivering products that people want today and into the future. To help figure out what those products might be, I think you have to start by understanding what customers want today.  I offer the following list of I have made a list of what I think households want today from their telecom provider:

The ability to use multiple devices shared across multiple networks. Customers want to a variety of devices to access the web. They want to seamlessly move from desk top to cell phone to pad to TV to game box. Customers want to be able to move back and forth between the cellular and home WiFi network for voice. Anyone who can facilitate this ability will have an edge.

Faster download and upload speeds. Households want to ability to operate multiple devices at the same time. This requires faster speeds and in some cases QOS.

Mobility. Customers want mobility in both directions, both into and out of the house. They want to be able to start a phone conversation on a cell phone and seamlessly transfer it to a landline when they get home or to the office. They want to be able to access data and do work at home or wherever they are.

Choice of video. Customers want the option to buy only the video they want to watch. And they want to watch it on multiple devices.  

Security and alarm services. Many households want reliable alarm services. They also want to easily operate cameras they can watch remotely.

Integrated entertainment. Customers want to share entertainment content. They want to watch what they want in different rooms and on different devices. They want to be able to move seamlessly from TV to PC to pad to phone. 

Use of cloud-based services. As more and more data is stored in the cloud, customers want an easy way to access and manage the cloud.

The ability to make impulse purchases. Customers want to be able to buy a TV show, a movie, a song and then experience it immediately. People are shifting from buying large monthly subscriptions (cable TV packages) to buying entertainment in small doses.

Help making things work. Households are faced with a confusing array of possible technical solutions and they will value anybody who can make their video, computers, wireless networks and other devices work seamlessly together.