The State of New York vs. Charter

Scale_of_justice_2_newEvery once in a while in this industry you come across a story about one of the big cable companies that just makes you shake your head. There is such a story right now where the New York State attorney general, Eric Schneiderman, has sued Charter on behalf of its 2.5 million data customers in the state.

The issue goes back to 2012 when the company was still Time Warner Cable. At that time there were a lot of complaints from customers saying that they were not getting the data speeds they were paying for. In 2013, in association with Internet speed tests conducted by the FCC, it was determined that Time Warner had widely deployed cable modems and WiFi routers that were not capable of delivering speeds of even 20 Mbps.

In July of 2013, Time Warner promised the FCC that it would replace and upgrade all customer modems in the state and would also make other system upgrades that would increase speeds, such as reducing the size of the neighborhood nodes.

Here is where the puzzling part comes in. The FCC never retested, which is normal, and instead relied on Time Warner’s promise that they would fix the problems and increase speeds. But it turns out that Time Warner didn’t make any of the promised upgrades. They didn’t replace customer modems. In fact, they routinely recycled the bad modems back into service when they were returned by customers.

Since then Time Warner (and now Charter) has advertised even faster speeds, yet none of the customer modems are able to deliver the speeds that the company is selling. The lawsuit says there are now over 250,000 customers who are paying for speeds between 200 Mbps and 300 Mbps, but who still have the old inadequate modems that get speeds under 20 Mbps.

To add insult to injury, the company has been charging $10 per month to customers to lease the old modems (at least that’s the current lease rate). Considering that these modems don’t generally cost the cable company even $100, these customers have paid enough to have replaced these modems multiple times since the problem was first caught.

Time Warner is also being accused in the lawsuit of manipulating the FCC speed tests in 2013 to show faster results. They did this by taking speed tests at times when there was not much demand on their networks, like the middle of the night.

Finally, the company has been accused of purposefully providing inadequate backbone so that Internet traffic was delayed and slowed down getting onto their network. This means they did not provide big enough data connections to the outside world for things like Netflix or for general Internet access.

Here is the lawsuit filing. It’s an interesting and easy read and is not overly technical. I know that big companies hate to spend capital dollars that they don’t think are necessary. But in this case they got caught providing old and inadequate modems five years ago and since then did nothing to fix the problems. We know from experience that even when companies are caught like this that they don’t usually undertake a crash repair program. But if Time Warner would have implemented some reasonable plan to upgrade the network and to replace the bad modems over time there probably would not be this big lawsuit today. What’s puzzling is how the whole management chain at the company decided to do nothing. They denied a direct FCC order and also continued to get piles of customer complaints.

The lawsuit does not name a specific amount of damages, but one has to think it’s going to be a big number. The lawsuit asks for ‘injunctive and equitable relief’, meaning the return of customer payments, as well as civil penalties, meaning extra damages. If Charter has the same kind of customer penetrations we see elsewhere with cable companies – 60% to 70% of the market – it’s going to be interesting to see how they find a jury for this trial.

Cable Industry Shorts – February 2017

television-sony-en-casa-de-mis-padresHere are a few industry shorts, each not quite long enough to justify a full blog:

New York Takes on Charter. On February 1 the Attorney General of New York sued Time Warner Cable (which is now Charter Spectrum) for delivering inferior products that don’t match what was being advertised to customers.

The specific issue is that the majority of the cable modems provided to customers in the state are not capable of delivering the speeds being sold to customers. For example, in 2013 it was demonstrated that ¾ of the modems sold to supply 20 Mbps service were unable to process that much speed. And it appears that most of those modems still have not been upgraded. The lawsuit accuses the company of never notifying customers that they had inferior modems, and also of recycling inferior modems back to new data customers.

Charter says that the law suit isn’t needed because they have been making improvements since purchasing Time Warner. But the lawsuit alleges that the old practices are still widespread. The lawsuit is asking for significant refunds to affected customers.

Comcast Charging for Roku Boxes. In perhaps the best demonstration of why Comcast is rated so poorly by customers, Comcast says they will still charge customers if they use a Roku box to watch TV rather than a Comcast settop box.

Comcast currently has one of the highest settop box charges around at $9.95 per month, per box.  They also then charge $7.45 for each additional TV in the home using an ‘additional outlet charge.” Comcast hasn’t announced the rate for using a Roku box, but speculation is it will be at the $7.45 rate. This is clearly a case of a cable company charging for something for which they are providing zero value. Perhaps the company has already been emboldened by an FCC and Congress that say they will be reducing regulations.

For a customer to use the XFINITY TV app on a Roku box they must currently subscribe to Comcast cable TV and broadband service. They must have and pay for at least one settop box and also have a cablecard and a compatible IP gateway in the home.

Esquire Channel Disappearing. There is a lot of pressure by the big cable companies to cut back on the number of channels, and the expectations are that less popular networks are going to start disappearing.

The latest network that will vanish from cable line-ups is the Esquire channel. It’s a low-rated channel with content aimed at upscale men that is rated at 82 out of the 105 major cable networks. It was just launched in 2013 and had grown to 60 million subscribers. But last month AT&T and its DirecTV subsidiary decided to drop the channel, cutting 15 million subscribers. Charter is also considering dropping the channel, so NBC, the owner of Esquire, decided to kill the channel for cable systems. Some remnants of it will remain on-line.

Esquire joins the millennial channel Pivot and NBC’s Universal Sports as channels that disappeared in the last year. There are likely more to come and there are 23 networks with lower ratings than Esquire including Fox Business, Great American Country, Chiller and the Golf Channel.

Cable Companies Stop Sending Piracy Warnings. Just about every large cable company and telco has stopped forwarding messages to customers about piracy that were sent through the Copyright Alert System (CAS). These alerts were sent to customers who made illegal downloads of movies or music. The main purpose of these alerts was to warn customers that they were violating copyright laws. The content industry has always pressured ISPs to somehow punish habitual content pirates, but that has never happened to any significant degree.

Groups like the RIAA which were pushing ISPs for compliance have said they will look for an alternative. They said for now that they will probably back off from suing end user customers – a tactic that never seemed to make much difference. This is another case where technology outstripped the law. The CAS launched at the heyday of peer-to-peer file sharing, and while that still exists, it’s not the way that most copyrighted material is shared these days. We now live in a more nuanced world where there is copyrighted material on sites like YouTube sitting right next to mountains of non-copyrighted material, and it’s a lot harder to pinpoint copyright violations.

A Year of Changes

fast fiberI can’t recall a time when there were so many rumors of gigantic changes in the telecom industry swirling around at the same time. If even half of what is being rumored comes to pass this might be one of the most momentous years in the history of telecom. Consider the following:

Massive Remake of the FCC.  Ajat Pai has been named as the interim head of the FCC, but it’s been said that the president is already referring to him as the Chairman. We know that Pai was against almost every initiative of the Wheeler FCC and there are expectations that things like net neutrality and the new privacy rules will be reversed or greatly modified.

There are also strong rumors in the industry that the new administration is going to follow the advice of the transition telecom team of Jeff Eisenach, Roslyn Layton and Mark Jamison. That team has proposed the following:

  • A reapportionment of ‘duplicative’ functions at the FCC. Functions like fostering competition and consumer protection, for example would be moved the Federal Trade Commission.
  • A remake of telecom rules to remove ‘silos.’ For as long as I can remember we’ve had separate rules for telcos, cable companies, wireless companies and programmers. That probably made sense when these were separate industries, but today we see all of these business lines about to converge within the same corporation like Comcast or AT&T. The transition team says it’s time to change the rules to reflect the reality of technology and the marketplace.

At this point I’ve not seen any specific proposals on what those streamlined rules might be. And Congress will have to take an active role in any changes since the current FCC responsibilities are the results of several major telecom and cable acts.

Verizon Looking to Buy a Cable Company. It’s been reported that Lowell McAdams, the CEO of Verizon, has told friends that the company will be looking for a cable acquisition to boost demand for its wireless data. McAdams also talked to analysts in December and described how Charter might be a natural fit with Verizon. There is also speculation on Wall Street that Comcast could be the target for Verizon.

Mergers of this size are unprecedented in the industry. Charter has over 20 million residential data customers and is second behind Comcast’s 23 million data customers. And both companies now have a significant portfolio of business customers.

I remember a decade ago when AT&T started buying back some of the RBOCs that had splintered off during divestiture back in 1984. We all joked that they were slowly putting Ma Bell back together. But I don’t think anybody ever contemplated that the biggest telcos would ever merge with the cable companies. That would remove the last pretense that there is any competition for broadband in urban areas.

More Merger Mania. At one point it looked like the new administration would be against the AT&T and Time Warner merger. But Wall Street now seems to be convinced the merger will happen. The merger will likely come with the typical list of conditions, but we know from past experience that such conditions are only given lip service. AT&T has already taken a strong position that the merger doesn’t need FCC approval. That would mean that most of the government analysis would come from the Justice Department. Just like with the rumored Verizon acquisitions, this merger would create a giant company that operates in all of the FCC-controlled silos. We don’t really have an effective way today to regulate such giant companies.

Verizon might need to hurry if it wants to buy a giant cable company since there is a rumor that Comcast, Charter and Cox plan to go together and buy T-Mobile. That makes a lot more sense than for those companies to launch a wireless company using the Verizon or AT&T platform. Such an arbitrage arrangement would always allow the wireless companies to dictate the terms of using their networks.

Cable TV Rates

eyeballTrying to get your arms around industry trends for cable TV isn’t easy. There are a number of different entities that track various cable statistics and they are often not in synch. This week I saw a new press release from Leichtman Research that said that the average rate increase in cable rates this year has been around 4%.

I keep an eye on these kinds of statistics because most of my clients compete against the bigger cable companies. Leichtman says that the average monthly spending on pay-cable TV is now $103.10, which is 4% higher than 2015. This is an eye opener because household spending on cable increased from $73.63 in 2011, or an average increase since then of 7.7% per year. For the increases to finally drop to 4% is big news.

But like anything in the cable industry, there are a lot of moving parts in trying to see the future trend of cable rates. Consider all of the following, which have some bearing on current average nationwide cable spending:

  • There was a press release in January where Comcast said that their average cable bills would go up by 3.9% this year, right in line with this latest report. But in addition to raising cable rates the company also had a $2 increase in its ‘broadcast TV fee’ of $2 which affected every cable customer. All of the big cable companies now have these fees, which are just another piece of the cable rate, but which are not often counted as such. These fees let companies like Comcast hold down their advertised rates which increases overall cable rates.
  • Charter and Time Warner seem to have had a much lower annual increase than average due to the merger that was pending during the normal January rate-increase period. But one would have to think that now that the merger is over that these companies will make up lost ground. I’ve seen predictions that Time Warner customers could see a jump in their 2017 bills as large as $10.
  • Both satellite companies had one of the largest rate increases we’ve seen from them in years. DirecTV raised package rates from $1 – $9 and DISH Networks raised rates from $2 – $8.
  • Cablevision didn’t raise their rates at all at the beginning of the year due to their expected merger with Altice.
  • We know that there is a lot of cord-shaving going on, which would have a downward pressure on average cable bills. The large cable companies don’t report customers by size of package, but we have a lot of evidence of cord shaving due to networks like ESPN losing millions of customers since 2015. If the industry is not losing as many customers as ESPN then only cord shaving – people moving to a smaller package – can explain their customer losses. If lots of people buy smaller cable packages the average bill will drop.
  • Finally, with the big cable companies it’s getting really hard to distinguish cable increases from other price increases. I’ve seen estimates that most of the large cable companies have around 70% of customers in some kind of a bundle. Most people with bundles don’t know what they pay for any specific component of the bundle. But this also means that the cable companies can be arbitrary when separating the bundles into the component cable, data and telephone revenues. This means the reported ‘cable’ revenues from the big cable companies can be fudged to meet reporting goals or any other purpose.
  • In this last year we are starting to see increases in broadband rates from many of the cable companies. For example, Cox just recently increased various data rates from $2 to $7 per month. But for customers in a bundle these revenues fall into the same muddy bundled price along with the cable rates. Do customer in a bundle really care which piece of their bundle increased?

One thing I see external to these big industry statistics is that my smaller clients are not seeing any drop-off in increasing programming and other cable expenses. If anything, because of the continuing big increases in retransmission costs they are seeing as large or larger increases in underlying cable costs as ever. Smaller cable providers will really feel the squeeze if they compete with somebody like Time Warner that barely raised rates in 2015.

While it’s not really good news, it appears that it’s likely that the ‘smaller’ rate increases from the bigger cables for 2015 are probably an anomaly and that these companies will be back to larger increases in 2016. But it’s anybody’s guess going forward if the annual increases are going to be in cable rates, broadband rates or something else. Like everything in our industry it’s getting a little muddier to predict.

Big ISPs and Everyone Else

Comcast truckMost of the news about our industry is about the largest ISPs – Comcast, Charter, AT&T, and Verizon. It’s easy to think that the things that happen to these big companies are going to happen to the rest of the industry, but on a smaller scale. Certainly in the past, small ISPs had a lot in common with the big companies. But I think we are now at a time when these big companies are pulling away from the rest of the industry to the point where they have become something very different. Let me look at Comcast as an example of this, but I could make a similar case for the other large ISPs. Consider this list of ways of how Comcast is already different than the smaller ISPs in the industry:

Content. Comcast is as much of a media company as they are a cable company. In fact, their stock prices now change more from the performance of their content than it does from the cable business. Comcast owns a lot of programming content. They own NBC Universal that operates the various NBC stations including MSNBC, CNBC. USA Network, E!, Bravo, Syfy, Sprout and others. They own Telemundo and a suite of Spanish language networks. They own 25% of the Weather Channel. They also own overseas content such as Movies 24 and the Style Network. The company is also in the movie business. They own Universal Studios which has already released fifteen new films in 2016. They recently brought Dreamworks. And Comcast owns 27 local NBC stations and affiliates in major markets like New York, Los Angeles, Chicago, Philadelphia, Washington CD, Dallas and Miami.

Sports. Comcast owns the Philadelphia Flyers including the Wells Fargo Center in Philadelphia. They own the rights to broadcast the Olympics in the US. They own Comcast SportsNet which has rights to professional and college sports in a number of large cities. They own the Golf channel and are part owners of the NHL Network and the MLB Network. NBC Sports also has broadcast rights for football and other major sports.

Other Assets. They own Universals Studios theme parks in Hollywood and Orlando as well as the real estate venture at Universal Orlando Resort. They own the ticket service Fandango. They operate Comcast Spotlight which produces and sells advertising for their cable company and many others.

OTT. Comcast is hedging their bets on cord cutting by being the largest owner of Hulu – which also broadcasts a lot of Comcast content. They also produce and distribute content through Comcast Interactive Media.

Cellular. The company has announced recently that they have major plans to become a big player in the cellular market. This business will also benefit from Comcast’s 9 million+ public WiFi hotspots.

Research and Development. One of the hidden gems for the company is Comcast Labs. The company recently bragged that the company could develop solutions in days that would take months by any other company. They also benefit from their role in the non-profit CableLabs. The company has used this research to develop proprietary software and hardware not available to the rest of the industry.

Security and Smart Home. In 2015 the company reported having over 500,000 customers to its Xfinity Home security and smart home platform. They will have the scale to make this a profitable business line where smaller companies will struggle.

Comcast and these other large ISPs are no longer like the rest of the industry. For example, while other companies suffer from shrinking profits on cable TV, Comcast buys a lot of content from their own subsidiaries and is more profitable than anybody else. And they have the luxury of being able to bundle cable customers with their many other product lines like Xfinity Home and the upcoming cellular product.

It was not too many years ago when the bigger cable companies were just bigger versions of smaller cable companies and mostly differed by scale. But for these large IPSs the landline business has just become one of their many other product lines – a luxury that smaller companies don’t have.

Big Company Customer Service

comcast-truck-cmcsa-cmcsk_largeI know that many of my clients compete against the bigger cable companies, and one of the easiest selling points for years has been that small companies have superior customer service. It seems like every few years the big companies go through a big public display about how they are working to make customer service better. But maybe, just maybe, this time they might be doing some things that will actually work.

A few weeks ago both Comcast and Time Warner were hauled in front of a US Senate hearing to talk about their poor customer service. The purpose of the hearings was to ask why customers pay more than the advertised prices for specials. The answer was obviously that there are many ‘fees’ that the companies do not consider as part of the base cable or bundle rates. But much of this is not disclosed to potential customers, even in the fine print.

The Senate committee issued a report and faulted Time Warner (now part of Charter) for overcharging customers. The committee further reported that Comcast was guilty of not allowing customers to disconnect without a ‘good reason’ (as if not wanting the service any longer is not good reason enough).

There are numerous stories on the web of customers that have tried unsuccessfully to disconnect from Comcast. Listening to the recordings make it obvious that the company was giving bonuses for ‘saving’ customers who wanted to leave Comcast and that some customer service reps were going overboard to earn those bonuses.

The process of disconnecting is something that customers really hate about the cable companies. There has been some discussion at the FCC and at state Commissions of requiring any ISP that lets customers subscribe online to also be able to disconnect on line. Everything should be as easy as subscribing or unsubscribing to Sling TV or an online music services.

But the companies say that they are taking steps to improve customer service. And maybe they are getting better; so far this year there have been no more of the painful recordings of calls where Comcast won’t let somebody disconnect.

Comcast says it’s taking specific steps to improve service, and they will be:

  • Experimenting in some markets with an online tool that lets a customer track the status of a repair technician. People waiting endlessly for a technician has been one of the biggest complaints about them for years.
  • Hiring over 5,500 US-based customer service reps over 3 years (although they say they will not be decommissioning overseas customer service centers).
  • Creating a ‘holistic’ view of a customer’s account history internally within the company so that a customer won’t have to start over from scratch each time they call Comcast about a recurring problem.
  • Opening or renovating hundreds of retail stores.
  • Devoting 125 new employees to handle complaints made on social media.
  • Providing an interactive trouble-shooting app to help customers diagnosis problems. I guess now instead of calling I can have the app ask me the requisite five times if I have unplugged and rebooted my cable modem!

Charter is making similar claims and plans on hiring 20,000 in-house customer service reps and technicians to replace contractors.

Time will tell if they get any better. After all, Comcast was in front of the same Senate panel just two years earlier. But some of the changes (like having a record of customer history) are things that most of my clients have had for decades. Most people interact with customer service so infrequently that if Comcast or Charter can make even modest improvements they will be perceived by many as doing a much better job.

Forcing Competition

charter-spectrum-logoThere was an FCC requirement in the Charter acquisition of Time Warner Cable and Bright House Networks that wasn’t much mentioned in the press. As a requirement to gain approval for the merger the FCC is requiring that Charter must build new networks to pass one million potential customer passings outside of its existing footprint. Charter must do this where there is already another ISP offering at least 25 Mbps, and Charter is required to offer at least 60 Mbps speeds.

The two main lobbying groups which together represent small cable companies and telcos for smaller ISPs  (the American Cable Association and the Rural Broadband Association) are suing the FCC to stop this.

This seems like a very odd requirement. Charter is being directed to build in markets that already qualify as having broadband under the FCC’s definition, so this won’t bring broadband to anybody new. But I guess the FCC hopes it will create networks that will compete against each other with price and service.

But if Charter expands using coaxial networks, then this ruling will force Charter to build a second coax network in markets, often in places where poles are already getting very full of wires. Charter could instead build with all-fiber, but then they would be creating a pocket of customers using a different technology, and big companies have shown they are not very good at handling one-off situations. For example, Verizon had such a hard time integrating fiber processes into their existing company that they literally created FiOS as a whole new internal organization separate from copper. What I find even more troubling is that any market where Charter builds is not likely to then ever attract another fiber overbuilder.

I know that the FCC is very bothered by the fact that cable companies don’t compete against each other. The FCC reports every year that the majority of residents in the country only have one choice for decent broadband speeds, and I am sure that is what prompted this requirement. But I think there is a reason for that – cable companies are largely a natural monopoly. A cable company has no technological advantage by building alongside of another existing coaxial network. I am sure that cable companies have done the math over the years and if, for example, Charter was to build to compete against Comcast, then in the end both companies will under-earn in the market with dual competition.

I love real competition and it’s always interesting to watch how a cable company reacts when somebody builds a new fiber network to compete with them. But I don’t think that a regulator can force competition. They can require Charter to build new network, but they can’t really make them act competitively in the same manner that some smaller fiber provider would act. A competitor has to be hungry to be competitive and it’s hard thinking that this requirement is going to make Charter show up in new markets and act like a competitive overbuilder.

The smaller ISPs are worried because they suspect that Charter will pick their markets to meet their requirement rather than going up against Comcast or Mediacom. And there is certainly a good chance they are right. I am sure that Charter really does not want to create bad blood between them and the other large cable companies. Together these companies own Cable Labs. Comcast and Charter both own a piece of Hulu. They do not want to be out marketing against each other if that can be avoided. And so Charter is likely to select smaller markets where either small cable companies or telcos are the primary ISP.

I really have to ask what good this requirement does in the long run. If Charter’s heart is not in this they will muddle through competing in the new markets and they won’t do well. Some customers in those markets may benefit by the newly created competition, but then again Charter may decide to not compete on price. One might suspect that in the sixth year of the new venture that Charter might be selling off these new networks to somebody else.

My gut tells me that you can’t force a company to be competitive when it’s against their nature. I am sure there is a lot of groaning in the departments of Charter that are being tasked with completing this requirement. But the company will choose some markets, probably close to where they already have headends, and they will build new networks until they pass a million and one potential customers. They may or may not make enough money to pay for these new networks, and at some point they will walk away from the venture if it’s a financial failure. I may be wrong, but this doesn’t feel like an idea aimed towards success.

How’s Your Competition Doing?

comcast-truck-cmcsa-cmcsk_largeA large percentage of my broadband clients compete against some of the biggest ISPs in the nation – either the big telcos, the big cable companies, or both. And so it’s worth taking a look from time to time to see how those big companies rate in terms of comparative customer service. The 2016 ASCI (American Customer Satisfaction Index) was recently released and reveals some of the following things about the biggest players in the telecom space:

The ASCI survey each year talks to 70,000 customers about more than 300 large businesses in 43 industries and 10 economic sectors. The survey gives each company a grade on a scale of 100.

As a sector both ISPs (overall rating 64) and Cable TV companies (overall rating 65) are still the two lowest rated sectors within the overall survey. To put those ratings into perspective there are a number of industry segments at or above a rating of 80 such as full-service restaurants, credit unions, household appliance makers and shipping companies.

ISPs as a whole are up slightly from an overall rating last year of 63 to a rating now of 64. There was a lot of change in positions of the big companies. Verizon FiOS is the highest rated company and went from a 68 rating in 2015 to a rating of 73 this year. At the bottom of the scale is Frontier Communications that fell from 61 last year down to a 56 rating for 2016. The other big gainers were Time Warner Cable (58 to 66), Bright House Networks, (63 to 67) and Charter Communications (57 to 63). The other big loser for the year is AT&T U-verse which dropped from the highest rated in 2015 of 69 to 64 this year.

Cable companies overall improved slightly last year from 63 to 65. But most companies stayed about the same except for moves upward by Comcast (54 to 62), Time Warner Cable (51 to 59) and Suddenlink (57 to 62). Verizon FiOS continues to top the list with a 70 rating with AT&T U-verse just behind at a 69. It will be interesting to see how the Charter / Time Warner Cable / Bright House merger will change these ratings for next year. I’ve read several industry analysts that predict that customer service at those companies will suffer during the transition. As might be imagined, cable customers are pretty happy overall with things like picture quality but the survey showed that they are very unhappy with the call center experience.

Perhaps the most surprising change this year among big companies was the noted improvement of satisfaction for Comcast. Last year they were dead last among cable providers and 2015 saw a rash of negative news articles about customer service fiascos. Comcast says every year that they are taking steps to improve customer service, but perhaps they are finally starting to make some changes that are noticeable to customers.

In the telephone world Vonage leaped to the top of the list moving from 73 to 78. What I find interesting is that everybody else rated between 64 and 72 – not a lot better than the cable companies. I wonder if that rating reflects general dissatisfaction with the telephone product or with these large companies in general.

One thing this survey does every year is to remind us how poorly the general public views the big telcos and cable companies. The industries consistently rate at the bottom for all major industries – far below banks, insurance companies and hospitals.

But these ratings also remind us that it’s possible for these larger companies to get their act together to provide better customer service. I know one of the most dreaded events in our household is having to make a call to Comcast. But the last few times my wife called she said it ‘wasn’t so bad’, and perhaps that explains their improved satisfaction score.

There are certainly new tools and technologies coming to customer service that ought to make customers happier. Companies that provide alternate ways for customers to communicate without having to talk to people are finding that this makes a significant segment of their customers happier. And it looks like we are on the verge of getting some fairly intelligent AI agents to handle routine customer inquiries, and that, sadly, will end the very entertaining news articles about the outrageous things said by Comcast service reps. But it might improve the customer service experience.

Cable Companies Try Skinny Bundles

Comcast truckWhile all of the cable companies and their trade organizations publicly deny that cord cutting is a real phenomenon, in this most recent quarter most of the large cable companies have announced a skinny bundle package delivered over the web. It’s hard to think that these packages are aimed at anybody but cord cutters and in fact, one has to wonder if they might lure more people away from the big packages.

CEO Rob Marcus of Time Warner Cable says that their skinny bundle is an attempt to get rid of settop boxes. TWC just announced in New York and New Jersey that all cable customers can now use Roku instead of settop boxes. He said that TWC has a long-term strategy to get out of the settop box business, which is a big expense for the company and something that customers really don’t like paying for. I know that for most of my clients the monthly settop box rentals are one of the most profitable parts about selling cable TV and so his statement puzzles me a bit. But my clients are not working in major metropolitan markets and perhaps the total cost of tracking and swapping boxes is different for a large company.

But since TWC offers Roku for everybody I’m not sure that settop boxes are a very good explanation for their skinny bundle. TWC is now trialing a skinny bundle in New York City, available only to its data customers. It starts at $10 per month for 20 channels with options to add movie channels and other networks running up to $50 per month. That sure looks to be aimed at cord cutters.

And most of the other cable companies are also limiting their offerings to their own data customers. For instance, Comcast has launched a trial in the Boston area of a skinny bundle they are branding as Stream for their own data customers at $15 per month, including all taxes and fees. The package includes local networks, HBO, and some streaming movies. They plan to take this nationwide in 2016. The unique feature of the Comcast product is that it is not truly an OTT product since it doesn’t use the shared data stream but is delivered with separate bandwidth on the cable network.

Charter has launched what they are calling Spectrum TV. It starts at $12.99 per month and comes with a free Roku 3 player. This bundle contains 19 channels including the four major off-air networks. For an additional $7 per month customers can add more channels including ESPN, and for even more money customers can add HBO or Showtime. .

CableVision launched packages back in April of this year that includes a digital antenna for receiving local channels. They are offering a 50 Mbps data product plus the antenna plus HBO for $44.90 per month.

This isn’t limited to just the cable companies. CenturyLink is supposedly getting ready to trial a skinny bundle for its data customers. There are no details yet of pricing or line-up.

This all got started with Dish networks and their Sling TV product. Unlike these other products that, for now, are only available to the data customers of each ISP, Sling is available to anybody with a fast enough connection. I previously reviewed Sling TV and it had a lot of problems. I tried it during the first football game of the season and it was so bad that I abandoned it. I just watched Maryland beat Georgetown in basketball last night and the video was still out of sync with the audio. It’s getting better, but is still not as good as cable TV.

It’s interesting that most of the companies like CenturyLink say their skinny bundles are aimed at cord cutters, but even more specifically are aimed at millennials. I look at the channels offered and my bet is that baby boomers like me are going to more interested in this than millennials. I guess we’ll have to wait and see who subscribes to the skinny bundles.

Who is Dropping Cable?

RCA_CT100-hdFierce Cable reports that the average revenues per customer are rising at many cable companies as they lose customers. This seems to indicate that a lot of people that are dropping cable were buying the lower-priced packages.

Here are some of the numbers they reported from the second quarter of 2015:

  • DirecTV lost 133,000 customers but saw the average revenue per customer rise 6.4% to $109.93.
  • Dish lost 81,000 customers but average revenue per customer rose 4.4% to $87.91.
  • Charter dropped 33,000 customers and saw average revenue jump 4.5% to $92.88.
  • Overall the largest cable providers combined saw average revenue per customer in the quarter rise by 6.7%.

Now to be fair about those numbers, a lot of these companies raise rates in the first quarter each year, making the second quarter the first period that sees the full impact of rate increases.

But the numbers do hint at the underlying cause of cord-cutting. I will admit that I’ve always figured cord cutters were coming from the tech savvy and from those who have decided that that they can live with the many alternatives for entertainment available on the web. My perspective has probably been influenced by the cord cutters I know, and it’s always a dangerous thing to take personal experience and extrapolate it to a national trend.

But if it’s true that cord-cutting is more driven by economics then we have a different phenomenon. People are being driven off cable because they are getting priced out of the market. I’ve been predicting for years that this day would come because cable rates have been rising far faster than inflation for a long time. And that eventually has to have an effect.

Just look at the above numbers. I am a bit astounded by the DirecTV numbers. If $109.93 is the average revenue per customer then there are a lot of people spending a lot more than that to offset the low special prices the company offers to new customers.

It’s easy to forget how fast rates can get out of control. But an $80 cable package will cost $105 in five years with a 5.5% annual rate increase or $112 with 7% rate increases. Looking at all of the big companies, one has to wonder how they are going to sell the value of their product 5 and 10 years from now.

I can see how cable rates are becoming unaffordable for lower-income families, but it’s not going to be that long until this starts being out of the range of a whole lot more families. Even without the pressure from OTT programming, the industry is headed down a path of real trouble.

And you have to feel sorry for cable companies. The cost of programming has been skyrocketing. I have a few clients who have seen 15% rate increases over the past two years. They grimace every time they have to raise rates and they are all seeing customers falling off their systems.

Big companies like Comcast are probably going to find a competitive option for the big cable packages. They are already looking at their own version of OTT programming. But unless the FCC can break the monopoly of the programmers the smaller cable companies are going to have very few options other than to watch their customers disappear. Almost all of my clients are losing cable customers at a faster rate than the large ones and I have a number of them already seeing 5% to 7% annual customer dropoff.

But the FCC can fix the problem if they choose. One of the biggest problems today is that the major programmers make cable providers take all of their huge suite of channels if they only want one of them. We all know there are a ton of channels on cable systems that hardly anybody watches but that everybody is being forced to pay for. If cable systems could choose the channels they want, like is possible with products in almost every other industry, then they could control their cost and could get the rate increases back under control.