What’s The Best Cable Unbundling Strategy?

Last week I wrote a post questioning whether TV Everywhere is a sufficient defensive strategy for cable providers.    If the issue for some customers is simply that the price of cable has become too high offering cross platform access for the same price may not solve it.   Even if we see rising consumer uptake of TV Everywhere it may not indicate effective defense, not if the uptake is focused on core users while the mostly likely cord cutters – less upscale, younger, lighter TV viewers – continue to fall away.

Given that line of thought, it was interesting to see yesterday’s item in Reuters on the sudden interest of cable operators in a la carte offers after years of resistance.   In other words, operators seem ready to open another defensive front by offering consumers more limited, lower cost network bundles. Citing some key paragraphs:

“The plan represents a complete reversal from cable operators’ long-held opposition to what is known as ‘a la carte’ programming. Over the last decade, the cable industry battled ferociously with regulators to protect the right to bundle programming, arguing it offered customers the best value.

But executives now say the change is a necessary response to shifting dynamics such as higher carriage costs and using the Web to watch programs, as well as a weak economic recovery that has forced many consumers to cancel cable television subscriptions.”

If unbundling the video offer is an edging its way onto the table, the question becomes how to unbundle to minimize negative impact and maximize retention effectiveness…

The only marketplace example I’m aware of is Time Warner Cable’s TV Essentials package that went into test market last November and is scheduled to expand beyond the test according to press in the last few days.   This is a striped-down basic package that omits ESPN and other sports-focused networks at a price of $30-$40 a month.   The package is not heavily promoted but rather pitched to customers when they call to disconnect service.    No on-demand content is included for free, but for incremental cost.

I understand that operators are under multiple pressures, not just from increasingly price sensitive consumers but from rising programming/carriage costs and from media companies that rely on the bundling of their primary and secondary networks and who are particularly allergic to the notion of a la carte.   And I realize the desire to keep limited low-cost bundles in the background, encouraging as many customers as possible to pay full or premium prices…

Yet I’m not sure the generic bargain-basement approach to unbundling is necessarily best.   There may be a sweet spot in the space between the $30-$40 price of TV Essentials and the average cable video bill of roughly $75.   Though sports programming is most expensive it is also the most irreplaceable; a striped down package that’s only sports or only sports and news may motivate households – particularly lower income households with men – to keep at least one foot in cable rather than cut the cord.

And if younger audiences are among those most likely to defect, some combination of a striped down channel lineup and cross platform on demand access may be most potent…some hybridization of a lower cost bundle and TV Everywhere.   For if Netflix and Hulu (Amazon and iTunes) are the competitors that cord cutters are most likely defecting too, offering an option that’s more similar to these competitors may be the best defensive strategy.

Why The iPad Changes Everything

I would love to know how iPad owners compare the experience of watching full length video on their device versus watching the same content in traditional lean-back mode on their TV screens.   I think this is the critical question.  If the full length video experience on the iPad is judged equivalent or close to equivalent to traditional TV viewing, for most content most of the time, then we can expect the iPad and the tablet form generally will fundamentally change the future of TV.

I bet the same question for laptops would get a very different answer.   There are times, places and circumstances when people watch full length video on their laptops but, given the option, I expect they would mostly prefer to port the content to the big screen.   In contrast, the iPad may be more than an on-the-go, on the train, in the airport alternative; to the degree that it is a strong viewing option for full length video in any circumstance…that makes it a game changer.

Prior to the iPad all full length video was ultimately headed toward one door.    For Netflix, Hulu, Amazon, etc…the critical step was to get ported over-the-top to the TV screen.    It is in this scenario that on demand competitors might actually supplant cable and satellite subscriptions for at least some group of people who cut the cord.  And it is in this scenario that on demand competitors could compete with cable and satellite time –fighting for control of viewing behavior in the 10-foot screen.

In this pre-iPad reality, laptop and smartphone screens would likely play a secondary role for actually consuming full length content; their usage would be tilted to short form.  They would play a key role in helping people find the full length video content they’re looking for and let them socially interact around it.   These roles for other screens remains…but the iPad blows up the centrality of the traditional TV experience and opens another major door for full length video consumption.

Right now the numbers are small.   The latest U.S. penetration number that I’ve seen for tablets is 6%, as cited by Mark Walsh in MediaPost a couple of weeks ago.     Nielsen reported just under 5% earlier this year.    Sales projections are very bullish though:  Gartner is projecting worldwide tablet sales of 63.6M in 2011, up from 17.6M in 2010 and rising to 326.3M in 2015…so there may be 5-6 fold increase in penetration over the next few years.   Most important is data reported by In-Stat : “50% of tablet owners are viewing not only feature-length movies on their device, but TV shows as well”.    We don’t know how much, how frequently…but we have some indication that tablets are being widely used as a multimedia device, as a way to watch long form video.

And in that role they have the potential to change everything.

TV Everywhere: How To Assess Success?

With widespread availability of TV Everywhere in North America as of this summer according to a Parks Associates study and with a consumer awareness campaign recently launched by Turner Broadcasting it is interesting to think about what success would look like…in terms of what distributors and their network partners are trying to achieve.

It seems to me there are three goals:  (1) stimulate cross-platform uptake and usage of programming and thereby extend the reach of the advertising, (2) reduce the likelihood of cord cutting behavior and (3) reduce cannibalization of cable or satellite time by on demand alternatives.  Though there’s some payout associated with the first goal the second two defensive goals are the key to why TV Everywhere platforms are being implemented…to subsume evolving consumer behavior into the existing business model and prevent the dynamics that disrupted the music business from affecting TV.

At this point I haven’t seen uptake or usage numbers surface in the public domain.   The NYT piece about the Turner campaign launch cites nothing more definitive than “millions”of users of HBO GO…since its launch earlier in 2011.   I’ve seen no numbers for Fancast Xfinity TV though its been available to Comcast subscribers since December 2009.

But, per my argument above, if we want to asess the success of this strategy, uptake is only part of the story.   We’d want to show that availability and usage of TV Everywhere makes customers less likely to cut the cord…because they can get a wide variety of on demand TV shows and movies along with their cable subscription they are less likely to cancel that subscription in favor of on demand options.   And we’d want to show that those who use TV Everywhere are less likely to dip into Netflix streaming or other on demand options…that one behavior effectively supplants the other.

It is possible, for example, that people likely to adopt TV Everywhere are a different set of people than those likely to cut the cord.   The former may be happy to expand cross platform options from their cable or satellite provider for no extra cost while the latter, under stronger financial pressures, feel a need to reduce their spending.   One group coming in the top may not forestall others falling out the bottom.

Of course there is serious question about how many people really are falling out the bottom.   As cited in a previous post,  a J.D. Power and Associates study released in June showed just 3% of cable or satellite customers had cut the cord, 6% among Generation Y…

Still, if one of the goals of TV Everywhere is to keep this behavior from expanding to more customers and to the industry’s core demographics, we need to explicitly monitor if A really does prevent B.    And if it does not, if cord cutting continues despite operators providing and touting TV Everywhere, we have to consider (as per recent comments by Bernstein Research’s Craig Moffett) that perhaps prices are simply too high; offering cross platform access for the same price just can’t match the allure of a la carte on demand services replacing the cable bill:

“Perhaps the most consistent theme in our research over the past two years has been the widening disconnect between flat-to-declining consumer disposable income, particularly in the bottom two quintiles of household income, and the rising price of media and telecommunications services”

The other defensive role that should be monitored is whether TV Everywhere customers are actually less likely to tap into on demand video services like Netflix or Hulu.   This is another case of whether A really does prevent B.   One question to keep an eye on is whether consumers tend to use TV Everywhere for a limited, specific purpose…catching show episodes that they’ve missed… while continuing to use competing on demand services for another function, mining a broad movie database for something, old or new, that fits their mood and preferences.   Just as Netflix, entering the streaming world, is struggling with their lack of new and original program content, cable and satellite operators expanding their presence in the on demand world may need to tweak the depth, organization and positioning of their offerings to keep on demand competitors at bay…for all the needs that people want from these services.

Implementing a defensive plan is an important first step for the industry.   The next step is making sure that it is, in fact, serving all the intended defensive functions.