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Cable Operators

Cable’s New Double Play

10/25/2010 4:01 PM Eastern

As basic-video growth continues its
downward slide, competition increases and the
economy tanks, cable operators can point to at least
one positive, albeit curious, growth metric — cable
customers who don’t get cable TV.

The number of cable customers who have opted for
the non-video double play has more than doubled in
the past five years, according to analyst estimates,
while at the same time basic-video subscribers have
dipped by about 5%. But instead of a call for panic,
most analysts see the rise in non-video double-play
subscribers as a positive: It allows operators to extract
a highly profitable revenue stream from customers
that may never have been cable subscribers in the
first place and it presents an opportunity to eventually
up-sell those customers to video.

MCN Cover story Oct. 25One operator — St Louis-based Suddenlink Communications
— is aggressively targeting non-video
subscribers. Suddenlink chief operating officer Tom
McMillin said about 12% of the MSO’s customer relationships
are with non-video subscribers, up from
about 8% two years ago. Suddenlink is actively pursuing
non-video homes, especially satellite-TV customers,
using sophisticated targeting and segmentation
tools in its door-to-door, direct-mail and outbound
telemarketing channels.

“We recognize that many [direct-broadcast satellite]
households can’t currently switch because they
are in a long-term contract, so we tailor messages and
offers to them that don’t even discuss TV, but focus instead
on Internet, phone or an Internet-phone bundle,
which is still a tremendous value,” McMillin said.

Suddenlink sees a huge potential in non-video
households. The company estimates it does not have
a relationship with one of every two homes its network
passes and, because it has already made the infrastructure
investment to pass these homes, signing
them on to high-speed Internet, phone or both services
represents a substantial upside.

“What’s more, once we’ve established a relationship
through phone or Internet with these households, upgrading
them later to a triple-play bundle — when their
DBS contract expires — is much easier,” McMillin added.

Charter Communications was one of the pioneers in focusing on the non-video
double play; it began
breaking out its nonvideo
customers in its financial statements in
2003. Since then, nonvideo
subs have grown
from 105,800 on Dec.
31, 2003, to 539,000 as of
June 30, 2010.

Across all cable operators,
non-video subscribers
made up about
10% of total customers as
of second-quarter 2010,
according to research
company One Touch Intelligence.
That includes
about 12.4% of Time Warner
Cable’s customers
and 10.3% of Charter’s.
Comcast does not break
out its non-video subscribers,
but One Touch
estimated that about 10%
of the MSO’s 25.8 million
customer relationships
were non-video subs.

Time Warner Cable
said in an e-mail message
that it does not break
out non-video customers
separately, but added
that it has about 1.4 million
high-speed-dataonly
customers (about
10% of its total customer
relationships).

While some critics
have pointed to the
growth in non-video
customers as evidence of
cord-cutting, not all analysts
believe that is true.

Wunderlicht Securties
media analyst Matt
Harrigan said there was
a “huge amount of truth”
in the notion that the vast
majority of non-video cable
customers are either
satellite-TV subscribers
or get their video overthe-
air. He added that he
believes concerns about
cord-cutting and overthe-
top video are overblown.

Harrigan also said the
growing number of nonvideo
customers could
be a factor of satellite
customers who are unwilling
to part with DirecTV’s
exclusive “NFL
Sunday Ticket” out-ofmarket
game package but
are lured by the higher
speeds and reliability of
cable broadband.

“This is a testament to
the cable modem being
a better product,” Harrigan
said.

Leichtman Research
principal Bruce Leichtman
said it makes sense
for cable to go after customers
that may not have
ever been customers by
leveraging a line of products
that they can’t find
readily elsewhere.

“They [cable companies]
have three major
products and they’re
looking for ways to drive
those products. It doesn’t
always have to be with
cable [TV] in the lead,”
Leichtman said. “Broadband
is the lynchpin to
the bundle anyhow.”

That seems to be suppor
ted by net newsubscriber
gains at No. 1
satellite provider Direc-
TV (about 2 million since
2007) and No. 2 provider
Dish Network. Dish, despite
losing 19,000 customers
in the second
quarter this year, is still
ahead of the game, gaining
nearly 1 million net
new customers since
2007.

In contrast, cable operators
have been bleeding
basic-video customers for
years; according to the
National Cable & Telecommunications
Associat
ion, cable-TV
customers have dipped
from 65.4 million in 2005
to 62.1 million in 2009.

Charter Communications
was one of the first
MSOs to openly seek out
non-video customers,
beginning the practice
in earnest in 2003. While
some critics saw Charter’s
efforts back then
as a way to mitigate big
customer losses to satellite,
non-video subs have
become a growing and
highly profitable end of
the business. Charter
has more than doubled
its non-video base since
2005, from 228,000 customers
to the 539,000
reported in this year’s
second quarter. In the
same period, it has shed
about 1.1 million basicvideo
customers.

Non-video double-play
customers also appear to
be more profitable: Margins
for broadband service
average about 80% to 90%,
according to some analysts,
and phone margins
approach 70% before selling,
general and administrative
(SG&A) expenses.
Video margins are bringing
up the rear, in the 50%
range.

But while broadband
has been growing, that
growth has slowed as economic
pressures weigh
more heavily on consumers.
Broadband penetration
is stuck at 62% of households
today and will likely
stay there unless there is a
meaningful change in unemployment
and the overall
economy, wrote Sanford
Bernstein cable and satellite
analyst Craig Moffett
in a research report last
week. So far, though, most
of that stagnation seems to
be due to declines in digitalsubscriber-
line service from
telephone companies offsetting
high-speed-Internet
service gains for cable.

The disintegrat ion
of DSL, with its slower
speeds and choppier service,
has been going on for
years. In his report, Moffett
said cable’s share of
new broadband customers
has swelled from 51.3%
in the second quarter of
2006 to 91.4% in the second
quarter of 2010. At the
same time, cable’s overall
share of the broadband
business has remained
fairly steady — 59.8% in
2010 vs. 61% in 2006. DSL’s
share has sunk from 38.3%
in 2006 to 31.5% in 2010,
Moffett said.

Moffett also noted that
non-video subscribers
could represent a potential
wellspring of future
pay TV customers.

“The cable companies
could simply increase their
broadband prices (since
in most markets, households
have no other choice
for sufficiently fast broadband)
and simultaneously
drop their video pricing,
leaving the price
of the bundle unchanged,
to recapture
video share,”
Moffett wrote.

That is already
happening with one
major MSO. Time Warner
Cable in Albany, N.Y.,
is offering a data-and-video
double play for $56.95
per month for 12 months,
just $2 per month more
than the $54.95 it charges
for data only. The No. 2 U.S.
MSO recently increased
the monthly charges for
the data-only product by
about 10%.

TWC declined to comment
on its efforts in Albany.

Despite a slowdown in
high-speed-data growth
in the cable sector, there
are good reasons to believe
that overall broadband
penetration will
grow to more than 70%
over time, Moff ett noted in
his report. The main reason
for Moff ett’s optimism: the
7 million to 8 million dialup
Internet customers that
still exist today.

While many of those
customers may end up
switching to digital subscriber
line — especially, as
Leichtman believes, AT&T
and Verizon Communications
step up their efforts
on that front — some may
find their way to cablemodem
service where it is
available. And that should
bode well for cable’s new
double play.

September