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.

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.

 

A Funny Thing About Cord Cutters

Much has been written about the Nielsen position on cord cutting…that it is, in fact, happening, but among segments that are not of core importance to the TV industry.  A key paragraph from the June 2010 Nielsen press release below:

“….shifting to online video mainly appears to be happening in small pockets of the population, including young, emerging households.  Households with no cable subscriptions at all, but who subscribe to a broadband service, also reflect a younger population of college graduates and lower to middle income consumers who may not be fully convinced of the need to pay for digital cable.  However, Nielsen data shows that these individuals are typically light TV viewers who watch 40% less TV per day than the national average.   And while they stream about twice the average amount of video, they still only stream about 10 minutes per day, hardly an indication of a monumental shift to online-only viewing.”

The delicious irony of this position:  according the the theory of disruptive innovation (Clayton Christensen, The Innovator’s Dilemma, 2003) it is precisely among non-core audiences that disruptive innovations gain their initial foothold.   Check out this quote from The Innovator’s Dilemma:

“First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits.  Second, disruptive technologies are typically first commercialized in emerging or non-significant markets.   And third, leading firms’ most profitable customers don’t want, and indeed initially can’t use, products based on disruptive technologies.   By and large, a disruptive technology is initially embraced by the least profitable customers in a market…”

So…according to the Nielsen analysis, disruption of the TV business is proceeding more-or-less in textbook fashion.  Not what they intended I’m sure.

One niggle to applying the concept of disruptive innovation to cord cutting: disruptive innovations generally deliver a lower quality product (offset by other benefits).   At least at first.   While most cord cutters would likely argue that the quality of their viewing experience through their over-the-top devices is quite as good as they would get from multi-channel providers.

I’d argue, though, that cord cutters are sacrificing ease-of-use.  Not every mainstream consumer would know what over-the-top device to get or how to hook it up.  Lack of knowledge and a hassle factor keeps the disruption isolated among demographic pockets with greater economic need and some technological savvy…who are willing to go through a little trouble.

We’ll have to see, as going over-the-top gets easier for consumers, whether cord cutting expands beyond (and how far beyond) these initial demographic pockets:

  • Will exclusive content, only available through multi-channel subscriptions, become a critical barrier against the increased penetration of cord cutting?   Live sports, in particular, may be a key factor that keeps people from cutting the cord so long as there is no easy/legal way to get major sports events over-the-top.   If this is true we may see female-headed households and those who care less about sports become the next demographic frontier for cord cutting.
  • Is there a psychological barrier for a significant portion of TV viewers (particularly heavy viewers) against the on-demand only type of experience that cord cutting entails?   To the degree that there is an inherent need to surf channels…there may be an anti-cord cutting barrier for heavy viewers.
  • Will the TV Everywhere initiatives of the major TV players help forestall disruption of their business?

It will be fascinating how it all plays out…

But one thing we must not do is dismiss the phenonomenon based on its initial audience characteristics.   Quite the contrary.

 

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