The FCC Tackles Settop Boxes Again

Settop boxFCC Chairman Tom Wheeler just announced a proposal that would take another shot at standardizing settop boxes. The FCC is proposing that standard protocols be developed, enabling people to then buy a box from a third-party vendor rather than pay a monthly rental to the cable companies for each box.

Chairman Wheeler says that this is different than the AllVid proposal that has been around for years and that companies Best Buy, Google, Sony and TiVo recently resurrected. AllVid would create an updated version of a cable card – a device that could be added to an off-the shelf settop box to make it work. The FCC rejected AllVid a few years ago and many engineers think it’s not practical.

This time the FCC wants the industry to develop open standards for settop boxes. Chairman Wheeler was quoted saying, “We need to have standards the same way we have standards developed for cell phones, standards developed for Bluetooth, standards developed for Wi-Fi”. If such standards were developed, then third party manufacturers could make settop boxes directly for consumers, meaning they could avoid having to lease boxes from the cable companies.

This is obviously intended to quell the complaints from consumers about having to lease settop boxes. Many of the large cable companies have crept the monthly lease prices up to $8 per month, per box. My small clients can buy settop boxes that cost between $100 and $180, and surely the giant cable companies can buy these boxes for less than that. The math is pretty straightforward and a cable company can recover the cost of a $150 box in 18 months – and the average box probably stays at a home for three of four years, often longer.

Even with open standards there would be a number of technical challenges with the idea, due to the fact that all cable providers don’t use the same technologies. The settop boxes in a standard cable system operate differently and perform different functions than a box in a fiber network or DSL network. And even traditional cable systems aren’t going to keep the same technology forever and there is already some experimentation of converting cable systems to IPTV.

The idea of some standard solution gets even murkier when you consider that cable companies have been experimenting with delivering cable on other boxes such as Roku and the Xbox. This is not something that they have been able to do casually and it apparently took years of research to make this work. And not everybody is doing this the same way and there is a lot of custom programming and unique apps written to get cable to work on a different receiver.

There are also changes underway in the industry that have to be considered. There was a time when most of the brains of the cable delivery was in the settop box. All of the functions a customer used were controlled by software loaded onto the box and which controlled hardware within the box. But the industry has been experimenting with moving a lot of these functions to the ‘cloud,’ or at least to the headend. For example, some cable companies are now offering remote DVR storage, letting customers record shows at the headend to watch later.

One just has to wonder if a standard can be created that will allows companies to offer widely different features and options for customers? It probably can be done, but the time to do this was a decade ago when settop boxes were similar everywhere and the functions that cable providers offered were similar. We are finally starting to see experimentation among providers which has to complicate any attempt to create standards.

If the main goal is to give consumers a way to escape paying too much for cable boxes there is a much simpler solution. Why not just force every cable company to sell whatever box they use to customers at cost? This would give customers a way out of the monthly rentals and would shrink the claimed excess billions of dollars of cable profits. This would also create a secondary market for settop boxes since customers would be free to sell one that they owned to others. This would allow every cable provider to continue to pursue a different technological path with their boxes while still offering a break to consumers. This could be done immediately without having to wait for a protracted period of developing standards, and then manufacturing the boxes to meet those new standards.

The Power of the Bundle

coax cablesOne 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.

How’s Cable Doing?

Cord cuttingWith all of the talk of cord cutting, cord-shaving and the general demise of the cable industry I thought it would be useful to take a snapshot of the cable industry at the end of the third quarter of 2014 to see how the industry is doing. Here are some key facts for a numbers of major cable providers:

Comcast. For the quarter they lost 81,000 TV subscribers compared to losing 127,000 in the 3rd quarter of 2013. Meanwhile they gained 315,000 data customers compared to 297,000 customer a year before. Overall profits were up 4% over the year before. Comcast now has 22.4 million video customers and 21.6 million data customers.

Time Warner Cable. The company lost 184,000 cable subscribers in the third quarter compared to 122,000 in the previous year. But the company did add 92,000 residential data customers for the quarter. Earnings were up 3.6%, driven by cable rate increases and growth in the business services group. The company saw a 9.6% increase in programming costs, driven by a bad deal they made for the programming rights to the LA Dodgers.

Charter Communications. Charter lost 22,000 video customers for the quarter compared to 27,000 a year earlier. They saw data customers increase by 68,000 compared to 46,000 a year ago. Overall profits were up 8% driven by rate increases and data customer gains. Charter finished the quarter with 4.15 million cable customers.

CableVision. The company saw significant loss of 56,000 cable customers, Profits for the company dropped to $71.5 million for the quarter down from $294.6 million a year earlier.

Cable One. The company lost 14,000 video subs and ended with 476,000 at the end of the quarter. The company has not renewed programming from Viacom starting in April of this year

Suddenlink. The company added 2,200 video customers for the quarter compared to a loss the previous year of 3.200 subs even though they have dropped Viacom programming. Revenues increased by 6.6% compared to a year ago.

AT&T. U-verse added 216,000 cable customers for the quarter and added 601,000 data customers. The company now has more than 6 million video customers and 12 million data customers. U-verse profits were up 23.8% compared to a year earlier.

Verizon. The company added 114,000 new video customers and 162,000 new data customers for the quarter. The company now has 5.5 million video customers and 6.5 million data customers.

DirectTV. The company saw a decrease of 28,000 customers for the quarter while revenues grew by 6% due to rate increases. The average satellite bill is up to $107.27 per customer per month.

Netflix. Netflix added 1 milllion US subscribers and 2 million international subscribers for the quarter. They now have 37 million US customers and almost 16 million international ones. But these growth rates were less than their predictions and their stock tumbled 25% on the news.

Amazon Prime. The company does not report number of customers. But their earnings release says they gained significant customers even while increasing their annual fee from $79 to $99.

What does all of this mean? As can be seen by looking at all of the major players who make quarterly releases (companies like Cox do not), one can see that total video subs are down by maybe a net of 100,000 for the quarter. But cord cutting is growing when you consider that the industry used to routinely grow by 250,000 customers per quarter for now households being built. So it looks like cord cutting is growing by perhaps 1.5 million per year.

Within these numbers one can’t see the effects of cord shaving. It’s been widely reported that customers are downsizing their cable package as a way to save money. None of these companies report on their mix of types of customers.

Netflix and Amazon Prime continue to grow significantly along with other on-line content providers. It’s been reported that over half of the households in the country pay for at least one of the on-line services and many others watch free content available at Hulu and other sites.

One thing that is obvious is that broadband is still growing for all of the service providers. In fact, Comcast and other traditional cable providers are starting to refer to themselves more as ISPs than as cable companies.

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.