How Cable Television Can Stop Losing Customers
One thing about the current model that's broken is that the cable television companies don't have the power to decrease the rates they pay to the networks. If the networks had to deal directly with angry customers, that market force would let the price-reducing power of competition work. This three-legged stool is the problem.
Nov 26, 2010 5:00 AM PT
Competition has been increasing in the cable television world in recent years, and we have been expecting prices to come down, but they haven't. I have been scratching my head wondering why competition from satellite and telephone companies wasn't working. Well, it's taken years, but apparently the wait is over.
The cable television industry has finally experienced two quarters of significant customer losses, thanks to this new competition. If this continues, what does this mean for pricing going forward?
I think customers will love what is about to happen. Investors may not, initially, but if the companies handle it correctly, they could end up staying happy as well. However, that means the cable television industry would have to reinvent itself from the ground up. What are the chances of that happening? Chances are better today than ever, but the job ahead is enormous.
The cable television model is broken and has been for many years. The problem is there has not been competition, so we had to deal with it. However, now that competition is becoming reality, this is the best opportunity to fix the broken model and create a healthy environment going forward.
Prices Have Been Soaring
In recent years, we have seen competition increase from both satellite television services and telephone company IPTV services. As that developed, I expected it to force the cable television companies to lower rates. Surprisingly, they have not. Yet. The reason is they have not lost customers. In fact, they gained customers.
Cable television rates that customers pay have been going up, year after year. Prices have doubled in the last decade, and that upward price trend continues. There are many reasons. One is the cable companies have to pay to carry the networks' programming -- and networks continue to demand more and more.
One thing about this model that's broken is that the cable television companies don't have the power to decrease the rates they pay to the networks. If the networks had to deal directly with angry customers, that market force would let the price-reducing power of competition work.
This three-legged stool is the problem. We have seen cases in the last few years of cable television companies putting themselves on the customer's side and shining a light on this broken way of doing business.
Time Warner is one example. It has been running television commercials for its customers over the last year or so outlining the problem, and saying this is broken and needs to be fixed. This finally puts the company on the side of the customer in this battle.
It's doing this because it will keep losing customers if it doesn't fix this problem. Whatever the reason, at least it is finally on the customer side. It is a step in the right direction -- but has not yet helped lower prices.
New competition from phone companies and satellite companies should have pressured the companies to lower prices, but instead they keep charging more every year.
Separately, companies like Comcast started charging extra fees for digital boxes so customers could continue to watch basic cable channels. Switching to this digital mode costs the customer more. Before, customers who just wanted a basic service got around 100 channels. Now, suddenly customers who do this only get the first 23 channels.
To watch more they have to get digital converters. They get the first three boxes for free and pay for the rest. That means in many homes, a few TVs get all the channels, and the rest do not. That is a problem the customer must deal with, and for no benefit except a few extra channels.
Investors like this. Customers do not. There are always competing interests. It is up to the company to focus correctly so everyone wins. I think when the average company focuses on the investors, they are happy for the short term, but the customers are unhappy.
However, when a company focuses on its customers and workers, they are happy, and the company runs better and more profitably, and that makes the investors happy. Making everyone happy is the healthier way to go. Companies like Apple who act this way traditionally have a very happy group of customers, workers and investors.
Competition Rears Its Head
Finally, competition is starting to work. Customers are now leaving cable television companies and switching to AT&T Uverse and Verizon FiOS, and to satellite companies like DISH Network and DirecTV.
No one wants to see the cable television industry hurt. However, the cable television industryalso has to care about the customer. That has been the missing component.
Significant and ongoing customer losses will get the attention of the cable television industry faster than anything else. Does this mean prices will start to fall? Maybe, but maybe not. Remember -- the three-legged stool needs to be fixed.
As competition has increased over the last several years, I have been saying prices should decrease. They haven't. To make matters worse, the cable television companies were actually gaining customers every year.
Today, we see the pressure is finally beginning. Cable television companies are now starting to lose significant numbers of customers. If that continues, the cable television industry will have to rewrite the rules. Either that or continue to lose business.
We are in the early innings of a new game now. The cable television business has to be saying "ouch" for the first time. The market is finally starting to roar and let the industry know what it thinks.
That is all very healthy, even though it can be a bit painful when you want to watch a World Series game but can't because it is temporarily blacked out as the parties negotiate.
Customers have to be part of the game. Customers have to not only understand what is happening, but also stand behind the cable television companies while they battle with the networks and others in an effort to slow and stop increasing prices. If cable television companies don't have to worry about losing customers, they will be stronger during the negotiations.
The current model is that cable television companies raise rates and offer a few extra channels every year. However, the average customer still watches the same 10 to 15 channels. The cable television industry doesn't understand that adding more channels and charging more does not make it a better deal. It just makes it more expensive.
Or maybe they do understand, and this was just the way they dealt with price increases over the years. This model works until the customer stops buying. Then it has to be fixed. That time may be coming quickly.
Suddenly, there is competition in many markets. Suddenly, the economy is rough and people increasingly want to save money. Suddenly, there are other new services that are popping up like Google TV and Apple TV and many more, taking us away from traditional television.
Does this mean prices will come down? To any logical thinker, the answer is yes -- but in this case, who knows? It has not been the case to date. The cable television industry has blindly continued to increase rates year after year.
Can the industry change itself, or will the government have to step in and help? It's always better when the industry fixes these issues on its own, but we just don't know yet.
Customers have finally had enough. Now, with new choices, they are making their move. This is a long-term problem. What happens next depends on how the cable television companies react. Will they become more customer-focused, or will they remain investor-focused? That is the next step we are all waiting to see.
Jeff Kagan's Pick of the Week: Cox Now Wireless
Cox, the No. 3 cable television company in the U.S., has just introduced its own wireless telephone service. A few years ago, Comcast and Time Warner tried to get into the cellphone business. That flopped. They marketed the service wrong. Will Cox be successful where they failed? Don't know yet -- but the game is now on.
Cox's new campaign is titled "Unbelievably Fair." It is building its own network in certain cities, and reselling the Sprint Nextel network everywhere else. It is launching in Hampton Roads, Va., Omaha, Neb., and Orange County, Calif., to start.
I spoke with Stephen Bye, vice president of wireless for Cox, and he told me, "It's been a long journey, but seeing the response from our customers makes every step worthwhile."
I haven't tried the service yet, but Cox has a strong reputation for offering a good quality and fair price. Whether it will be successful or not depends on how it approaches the market. We'll have to wait see and hope this is a success story for the customers, investors and workers.
Jeff Kagan is an E-Commerce Times columnist and a wireless, telecom and technology analyst, author and consultant. Email him at jeff@jeffKAGAN.com.