The Price for Triple Play?

I was recently working on a project for client who is thinking about competing in a new city and wants to understand the real market rates customers are paying. We solicited copies of bills from existing subscribers to the incumbent telco and cable company to find out.

I doubt that anybody would be surprised from what we found, but it was good to be reminded of the billing practices of the big ISPs. Here are a few of the things we found:

  • Both incumbents use promotional rates to provide lower prices to new customers or to existing customers who are willing to negotiate and to sign up for a term contract. Promotional discounts were all over the board and seems to mostly range between a $5 and a $25 discount per month. But there was one customers who was getting a $60 discount on a $180 monthly bill.
  • Both incumbents also offer bundling discounts, but they were applied erratically. Our sample of bills was not a statistically valid sample, but roughly half of the bills we saw had a bundled discount while other customers buying the same products were not getting a discount.
  • The cable incumbent offers the typical three tiers of service offered by most cable companies. While every cable customer had one of these three packages, we surprisingly didn’t see any two customers paying the same price.
  • The cable company had programming fees that were separate from the base programming charges – one fee to cover local programming costs and another labeled as a sport fee. These were not always billed at the same rate and there were not being billed to all customers with the same packages.
  • There was also a varying range of fees for settop boxes and cable modems by the cable company and WiFi modems from the telco.
  • What surprised me most was how widely the taxes varied from bill to bill. Customers with the same products often had tax charges several dollars apart. This makes me wonder why more taxing authorities aren’t auditing bills from time to time to see if all of the tax due to them is even being billed.
  • Nowhere on the bills was any customer told the speed of their broadband products.
  • There were obvious billing errors. For example, I saw a bill charging the subscriber line charge to somebody who doesn’t have a telephone line. They probably had one in the past and are still paying $6.50 per month long after they dropped their landline.

I hadn’t looked at that many customer bills from a single market for a while. I’ve always known that prices vary by customers, but I didn’t expect them to vary this much. My primary take-away from this analysis is that there is no one price for telecom products. I hear clients all of the time saying things like “My primary competition comes from a $49 broadband connection from the cable company”. But that’s not really true if most people are paying something different than $49. Some customers have discounts to lower that price while others may be paying more after considering ancillary fees.

The bills were confusing, even to me who knows what to look for. It would be easy, for example, for a customer to think that a local programming fee or an FCC line charge are taxes rather than revenue that is kept by the service provider. Both ISPs mixed these fees on the bill with actual taxes to make it impossible for the average customer to distinguish between a tax and a fee that is just a piece of a product billed under a different name.

These bills also made me wonder if the corporate staff of these big ISPs realize the wide range that customers are paying. In many cases there were fees that could have been billed that weren’t. And there was a a wide variance tax billing that would make a corporate CFO cringe.

These bills reinforce the advice I always give to clients. I think customers like transparency and I think the best bill is one that informs customers about what they are buying. In this market most customers could not tell you what they are paying for the various products. Bills can be simple, yet informative and some of my clients have wonderful bills. After seeing the billing mess from these two big ISPs, I think honest straightforward billing is another advantage for a competitor.

The Downside to Bundling

bundleIt’s so common for triple play providers to bundle their services that it’s become the standard product of the industry. There aren’t any great stats on the percentages of bundles sold at the big cable companies, but I’ve seen speculation that it’s north of 70% of all residential customers. Certainly, with that kind of success it’s not hard to see why triple-play providers like bundles.

Back when bundles were first created all of the talk in the industry was that bundles would make customers ‘stickier’ – meaning that customers with a bundle were less likely to churn to another provider. The original lure of the bundles for customers was that they saved money over buying each product a la carte – and customers saw savings when they bought bundles.

But in much of the country the cable companies have won the competition battle. They now offer data speeds in most markets that are faster than their competition, and so customers no longer have an equal choice between two providers. We can see this by watching the huge ongoing shift of DSL customers to cable modems in the cities – just last year Comcast added almost 2 million new customers, most formerly from DSL.

I suspect that customers don’t look at the bundle in the same way they did years ago. If customers don’t have a real competitive alternative then the bundles are no longer saving them anything. When you consider the impact of a decade of high rate increases, one has to think that most homes are finding the bundle to become more of a burden than a boon. I just saw a statistic yesterday that showed that the average price of just the cable TV portion of the bundle has increased from $70 to $103 since 2011.

My guess is that bundles have lost their appeal for most customers. The stickiness that the cable companies crowed about can feel like a trap to somebody who wants to downsize. The industry has been abuzz for several years about the big movement towards cord cutting. But none of the articles I have read on the issue mention how hard it is for somebody to drop cable TV while keeping a data connection.

I’ve written in this blog a number of times about how Comcast forces me into buying basic cable TV in order to get a fast broadband product. I didn’t want that cable product on day one and I have tried over the years to ditch it. But I’ve always been told that I would have to drop my data speeds to a really slow product in order to buy standalone data. So what I have is a forced bundle – one with no options for breaking the bundle into the components and only buying what I want.

There are bundles in the industry that are not as rigid as mine, but which instead impose a harsh monetary penalty for breaking the bundle. Customers don’t know what they pay for any given piece of the bundle. But if you try to break a bundle, you find out that there was very little value assigned to whatever product you want to ditch and, thus, the savings when breaking a bundle are never as large as expected.

This phenomenon certainly has to be a contributing factor for homes not buying data from Google Fiber. It’s been widely reported that many people really like the cable products the big companies put out these days. The products are much improved over past years with cloud DVR, slick remotes and the ability to watch programming from anywhere on any device. But breaking a bundle to keep cable TV and then buy data from somebody else comes with such a significant financial penalty that it’s hard to justify.

Where bundles were once used to attract customers in a somewhat competitive environment, they have turned into anchors around customers’ necks. I have to think that a lot of the low rankings that the cable companies get on customer satisfaction surveys comes from the resentment over bundles. Nobody likes feeling of being forced to buy something they don’t want. From time to time I see articles ruing that we don’t have a la carte cable programming so that we can buy the channels that we want. But the fact is, that for most of us, we no longer even have many options for a la carte products that are not in a bundle.

The Need for Networked WiFi

Wi-FiThe way that broadband providers wire homes continues to evolve and ISPs are always looking for ways to provide good broadband while cutting down the amount of time they have to spend in a home for an installation.

Historically a lot of ISPs connected each of the triple play services in a home to the existing wiring for that service. But this meant dealing with any existing inside wire issues, and it also meant stringing new wires when there weren’t wires where the customer wanted service. It was not unusual for a FTTP installation to take 4- 5 hours for a crew of two installers.

Today some ISPs have gone to the other extreme. Comcast brought a coaxial cable into my house and tied it into the existing coax in the house and put a WiFi router where the coax entered the house. One installer came to my house, installed the drop and wired up the services in about an hour. (It should have taken a bit longer because he was not the person that buried drops and so he just laid it across my lawn.)

A lot of fiber providers are taking the same path as Comcast. They drop the cable TV onto existing coax and place a WiFi router. While this has cut down on installation time, I have clients who are now re-examining this decision because a large percentage of their trouble calls are now about WiFi problems and not network problems.

There are ISPs that use the powerlines in the home to move data from room to room. But companies are abandoning that for the same reason that WiFi is having problems today. The problem is the big increase in bandwidth demand in homes. Customers today want big bandwidth and they want mobility within the home. Every room in my house needs to have broadband today. We have the typical array of desktops, laptops, tablets, smartphones, a smart TV, some IOT devices, and two Amazon Echos. And we often use them all at the same time.

Some ISPs have started to battle the bandwidth demand by changing the way they wire. One new strategy is to run a wire directly to the devices that use a lot of bandwidth to lessen overall demand on the WiFi network. For instance, I have clients that offer centralized DVR service and they are now running a category 5 or 6 cable to the primary settop box which can have a huge bandwidth demand.

But the one thing almost no ISP is doing yet is making WiFi work right. A WiFi signal of any power deteriorates when it passes through solid impediments like walls. It doesn’t really matter if you are starting at the WiFi router with 50 Mbps or a gigabit, the WiFi signal will usually die by the time it gets to the far reaches of the house.

ISPs are already reconsidering the strategy of deploying only a single WiFi router. And they are coming to different conclusions. I know one ISP that no longer supplies WiFi routers and leaves that to the customer – this way they can blame poor WiFi performance on the customer. But most companies would see that as very bad customer service.

Some ISPs are going to the other extreme and installing the best WiFi router they can find. But one router, no matter how good it is is not a good solution for a significant percentage of homes. The solution that is needed is to install a WiFi network consisting of several hotspots all sharing the same core router.

I think the industry is missing a big new revenue stream from charging to set up and maintain networked WiFi. Companies have always known that they make money leasing out boxes – and settop boxes and that modems are some of the most profitable products they sell.

Since customers want their broadband to work all over the house they are probably willing to pay to make it work right. Networked WiFi requires spending more time again during the installation, but it’s probably worth that to get happy customers. And it ought to cut down on future truck rolls that are really WiFi problems. I know of a handful of ISPs starting to sell the service and they say it’s very popular. It’s not hard to see why – the majority of homes are unhappy with their broadband, at least in some parts of the home.

Google Fiber and the Triple Play

Fiber CableThere is some interesting news from Google Fiber lately about new product offerings. It was reported at the end of January that Google is testing a voice product for its fiber customers. And in early February Google announced that it was adding a 100 Mbps data product in the Atlanta roll-out.

News leaked out that Google is experimenting with Fiber Phone with members of its Trusted Tester Program. Google offered phone service to those customers and wrote the following:

With Fiber Phone, you can use the right phone for your needs, whether it’s your mobile device on the go or your landline at home. No more worrying about cell reception or your battery life when you’re home… Spam filtering, call screening and do-not-disturb make sure the right people can get in touch with you at the right time.

Google is installing the needed equipment for test customers and is at the beta stage of testing. There has been news about possible pricing or when this might be made available to all customers.

In early February Google announced it is now offering a 100 Mbps data product for $50 to go along with the $70 gigabit offering. In Atlanta the company has eliminated the ‘free’ Internet product where customers paid a one-time fee of $300 and got a 5 Mbps product for 7 years with no additional fees.

With these changes Google is looking more and more like a typical triple-play provider. It’s not hard to understand why they would make these changes. It’s very expensive to build a fiber network and the best way to pay for it is to get as many high-margin customers as possible on the network to pay for it.

As exciting as the $70 gigabit product is there are a huge number of households that just can’t afford that price. So by adding a $50 product that is still blazingly fast Google will make their broadband affordable to a lot more people in each market.

There is one interesting market dynamic that Google is probably going to soon see. In looking at the customer penetration rates for many of my client ISPs I’ve almost always seen that the fastest Internet product (assuming it isn’t priced too high) will get 10% to 15% of the customers in a given market. Given a choice, the rest of the customers will take something slower if it saves them money. This is not something that’s true only for fast fiber networks, but I’ve seen this same relationship hold true for cable companies with HFC networks and for DSL networks. There are only a few markets where a higher percentage of customers buy the premium data product.

If Google goes back and introduces the 100 Mbps product in their older markets they will probably see two things. First, they will add customers who find the $50 price affordable. But they are also going to see gigabit customers downgrade to 100 Mbps to save $20 per month. Overall I would guess this change will produce a significant net change upward in total revenues in Google’s older markets. In Atlanta I predict they will get a lot more 100 Mbps customers than gigabit customers.

And Google ought to do okay with voice. My experience is that they will have a hard time selling voice to existing customers but that they will do okay with new customers as they add them. The FCC reported that voice just fell under a 50% nationwide penetration, and that is still a lot of potential customers. I see clients still doing surprisingly well with residential voice and still doing extremely well with business voice.

It’s interesting to see that after a few years in the market that Google is morphing into a more normal triple play provider. I’ve expected this from the start because my take is that a large majority of the households still wants the double play or triple play and if you want to get a lot of customers you have to provide what customers want to buy. Anybody that expects customers to buy from more than one vendor to get what they want is going to drive away a lot of potential customers.

Expect Higher Data Prices

Numismatics_and_Notaphily_iconThe US already has some of the highest Internet prices among developed nation. This is due largely to the lack of competition in most markets, meaning that there is no downward price pressure. Brian Fung of the Washington Post reported on a recent congressional hearing where Craig Moffett, a well-known market analyst, said that prices for Internet access are likely to climb in the future.

Moffett’s reasoning is that cable companies, who have most of the data customers in the country, are losing cable customers (or are running out of the ability to continually raise cable rates), and so they are going to have little option but to raise data rates.

The large cable companies, who together control the majority of the data customers in the country, are mostly publicly traded companies (except for Cox) and they are very much driven by the need to have profits climb quarter over quarter, year over year.

For many years the revenues and the profits of the large cable companies have been driven by two phenomena—the quickly growing data market and continual large cable rate increases. While data customer penetration rates are still growing, the rate of growth has slowed down and the vast majority of homes that want and can afford high speed Internet access already have it. And so the cable companies are no longer going to see the steady boosts to their bottom line that comes from double digit growth in very high margin data customers.

The cable companies have also been living off cable rate increases. They loudly blame cable rate increases on increases in programming costs. But the truth is that they have almost always raised cable rates more than what was needed to just cover higher programming costs, and so each rate increase added to the margins from cable and went straight to the bottom line.

But we are now seeing what I call consumer rate fatigue with cable rates. As cable keeps getting more expensive we are going to see more cord cutters, and even more cord shavers. Cable rates have climbed to the point where the cable companies should now hesitate when thinking of raising rates more than needed to cover cost increases. One only has to do the math to see that raising cable rates only 7% per year will increase an $80 monthly bill to over $100 per month in only four short years. The math is finally catching up to the cable industry, and at a time when there are finally online alternatives appearing for content.

Without those two historic bottom line drivers the cable companies are left with having to raise data rates if they want to grow profits to meet investor expectations. The cable companies are all dabbling with new revenue streams such as home power management, security systems, WiFi phones, and other new products. But these new products don’t have the same kinds of high margins as Internet data, nor is it likely that cable companies will sell enough of these new products to make a real bottom line difference.

The industry has been somewhat spoiled for the last couple decades due to having the powerful triple play bundle of voice, video, and data. While the margins on video aren’t great, the other two products have extremely high margins. The bundles have allowed the cable companies to have relatively high penetration rates of all three services. But nobody expects the new products to do nearly as well as the triple play services. Rather than having a few products with very high penetration rates, the cable companies are likely to end up with a product portfolio containing numerous products, each with a relatively small 5–10% penetration. That is going to make them into very different companies than today.

And so expect to start seeing data rates raised every year. This has already begun with the base rates for many cable companies and the large telcos like Verizon. I would expect the rate increases to be small at first but to climb over time to feed the bottom line expectations.

This is all counterintuitive. Most of my clients have 70–80% margins on Internet service today and it’s probably higher than that for the large cable companies. It takes some chutzpah to raise the rates on a product that is already that profitable. But I completely agree with Moffett and I think this is inevitable that data prices will rise, considering the lack of competition in most of our markets.

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.

The Future of Triple Play Providers

HK_KEN~1I am asked often about what I see coming in the future and anyone who reads this blog knows that I look into the future a lot, be that two years, five years or 100 years. One thing that I have thought about a lot is the future of the small triple-play carriers that make up the majority of my client base. What is there business going to look like ten or fifteen years from now?

I see two very contrasting choices and I think every small carrier that survives into that time is going to have to choose one of these two paths. I think the choices are between being a dumb-pipe provider or a full service provider, and I don’t think there is much room for success to stay at status quo and be somewhere in the middle.

I think by now that everybody understands that cable TV penetration rates are going to erode over time as more and more people eschew the high price of cable TV and opt out for programming on the web. And there is always the chance at some point where the migration away from traditional cable could become a flood if somebody can find a way to get enough programming to the web to make that an attractive alternative.

A lot of small carriers today offer the triple play in a fairly passive way. They market and try to sell their products somewhat, but in their footprint they have most of the customers and they don’t do a lot of hard selling. For instance, they don’t push upselling of existing products very hard. But as they lose cable customers and even more voice customers the way they have been doing business is not going to work any longer.

If a carrier elects to become a dumb-pipe provider (or maybe calling them a distribution provider sounds a little better), then they are going to make a living by bringing fast Internet pipes to their customers and they are going to let customers pick up most of their products over the Internet.

If you are a dumb-pipe provider you are going to increase the speeds of your Internet product enough to keep customers happy. You are going to have to charge a lot more for that Internet connection than you charge today. If you are a triple-play provider today you will probably keep some voice, and maybe even some cable customers years from now, but for the most part those will have gone away and the data pipe is going to be your only significant product. From an operational perspective you will have to cut your staff and overheads back to the bare bones needed to keep the pipes working. Your company will be a stripped down version of what you do today, but you can make a profit doing this.

The other alternative is going to be a full-service provider. That means you will replace telephone and cable revenues with a host of other products and services that your customers are going to want. I am always asked what the next big thing is that people can do to make money, and the unfortunate answer is that there is no one big thing. There are a whole host of new product lines that you might get into, but no one of them is going to be as big as your telephone or cable business you are trying to replace.

So you will offer a host of new products – things like security, home automation, energy management, medical monitoring, cloud service resale and device monitoring and maintenance. Every one of these product lines, and the dozens of other that might pop up over the next decade will be of interest to some of your customers. And by having a suite of products you will have something for everybody.

Being a full service provider is going to require you to operate very differently than today. These new product lines are going to need you to spend a lot of time in people’s homes doing things like connecting new devices to their home automation system, making sure their medical monitoring devices are working right, making sure all of their computer-like devices are properly accessing everything.

And there will be one other big change in the way small carriers operate. Today the typical small carrier handles every aspect of a product from beginning to end. If they are in the cable business they have a full cable headend. But in the future when you will need to be in many product lines you are instead going to partner with and buy a lot of these products from wholesalers. That is going to take a big shift in thinking.

Finally, you are going to have to be nimble. The products you sell are always going to be changing and you will need to keep up with those changes. You will not have the luxury you have today to leisurely analyze new business opportunities, but instead you will need to be able to implement new products on the fly. You will need a very well-oiled product implementation plan to make changes fast while keeping customers happy.