Everyone agrees that cable operators have to work harder on attracting basic-video customers.
What they don't agree on is how much it will cost.
The cable industry's difficulties attracting new video customers became apparent in recent weeks, as most of the cable operators posted worse-than-expected numbers in what was already expected to be a seasonally weak quarter.
The nation's two largest operators of cable TV systems --
Time Warner Cable -- lost a total of 117,000 basic subscribers in the second quarter, and Comcast retreated from its prior forecast that it would add 100,000 subscribers in 2004.
Making the poor performance all the more apparent, direct broadcast satellite operators
added a total of 795,000 subscribers in the second quarter.
In recent years, the slow growth in basic video among cable operators has been more than offset by growth in advanced services such as high-speed data, digitally delivered video and telephony. But the latest quarter's unexpectedly bad basic numbers have aroused concern in the industry.
Commenting on the latest numbers, executives from both Comcast and Time Warner said they needed to be more aggressive about the basic business, with Time Warner's Don Logan talking about the need to market basic cable more aggressively.
The problem faced by the cable industry stems from an embarrassment of riches, says longtime cable TV industry consultant Steve Effros. The upgraded infrastructure at the heart of cable systems "can do so many things in addition to delivering basic video that it's hard to know where to focus," he says.
As the cable industry has rolled out new services, such as high-speed data, it has focused first on marketing those services to its basic video customers, he says. "There has been a legitimate criticism that the cable industry has tended to market only internally," says Effros. Offering those products to pre-existing customers, he says, "means we haven't been talking to the 40% of the audience who are
So what to do?
Operators have to allocate marketing dollars outside their systems, says Effros, who points out newspaper advertising as an obvious advertising medium.
Cable operators also need to point out cable's advantages over satellite: its capacity for video on demand, for example, and its carriage of local broadcast stations in high definition.
Effros doesn't believe it will cost a material amount of money to market basic more aggressively.
As for whether operators are or should be cutting prices for their services, Effros says it's a complex question that touches on how one defines price cuts. As an example, he points to reports that operators that once offered advanced services only as part of a package with basic video -- for example, a high-speed Internet connection -- have dropped the basic video requirement. "Is that price-cutting?" he asks. "No, it's changing the way we're marketing."
On the second-quarter call with analysts, Comcast Chief Operating Officer Steve Burke said the company would be aggressive with marketing and promotions in the second half of the year, focusing on field sales -- including measures such as door-to-door sales -- and dish win-back promotions, which are offers targeted at current home satellite customers.
A Comcast spokesman declined to comment, and a Time Warner spokesman didn't respond to a request for comment on the basic-marketing issue.
At least one Wall Street analyst has cut his ratings and price targets for cable operators based on the basic issue. In a report last month, UBS's Aryeh Bourkoff cut ratings for Comcast and
from buy to neutral, citing the second quarter's evidence of increased challenge of holding onto the 60% of cable customers who subscribe not to packages of services, but simply analog video. To illustrate his thesis, Bourkoff included four-year scenarios in which basic subscribers decreased by 1% each year, or in which average basic revenue stayed flat year over year. UBS has done recent investment banking for both Cox and Comcast.
But another analyst says he doesn't believe any basic revival effort will hurt the bottom line. Craig Moffett, senior cable and satellite analyst for Sanford C. Bernstein, says that cable's current marketing expense is low enough that even a substantial increase isn't likely to substantially dent EBITDA margins. "You're likely to see additional marketing soak up cost savings elsewhere," he says.
Contrary to some outsiders' speculation, cable operators probably won't participate in a basic-video price war, says Moffett. "If they've shown nothing else," he says, "they've shown discounting is a last-resort strategy. And they're very unlikely to start heavy discounting until after they've resorted to alternative strategies like incremental marketing."
The industry's poor performance in marketing to audiences who are not already cable customers is "not an intractable problem," says Moffett. "It means doing more of it -- making it a strategic priority." Moffett has an outperform rating on Comcast, and market perform ratings on Cox, EchoStar and DirecTV.
Continues Moffett, "Over the long term, it's not just possible but very likely that cable will successfully stem the erosion of basic subscribers being lost to satellite."