News

Reaping the Bundle's Rewards

9/12/2009 2:00 AM Eastern

U.S. economic indicators are beginning to show signs that we may be climbing out of one of the steepest recessions in modern times. As economists look back on this period in history, they will try to understand the role that the stimulus program played in the recovery, as well as the benefits from the nearly $1 trillion of government spending on projects as diverse as “bricks-and-mortar” construction and building new broadband infrastructure.

We won't fully understand the true economic impact of the federal stimulus for some time, but a look at the cable industry's own decade-long stimulus project — its $130 billion transformation from simple analog video to an interactive digital platform — provides an interesting case study, the net results of which show that cable's investment has paid short and long-term dividends.

In simple terms, cable's technology investment has revolutionized the entire telecommunications marketplace, resulting in better products, more competition and significant consumer savings. When you compare the improved quality and better value of cable's services today versus 10 years ago, plus the savings subscribers are enjoying from bundled discounts, consumers are enjoying annual benefits approaching $35 billion.

After operating one-way coaxial cable systems for the first 30-plus years of their existence, MSOs made a strategically bold decision in the mid-to-late 1990s to invest massive capital resources to install fiber-optic lines and advanced equipment throughout their networks, bringing fiber to thousands of neighborhood nodes across the U.S. Between 1999 and 2008, cable operators collectively invested at least $10 billion each year, totaling $130 billion over 10 years.

The result of this investment is that cable systems were transformed from coaxial one-way video systems, with limited spectrum and fewer than 100 analog channels, into advanced digital broadband platforms, which today provide interactive video, and high-speed broadband Internet and digital voice services.

While cable companies can now launch exciting new services, perhaps the most significant outcome of cable's digital transformation is the way companies now provide services to the majority of their customers. The triple play of digital video, data and voice service has attracted a larger share of cable customers with every passing month. Now, about 60% of the cable industry's video customers also buy high-speed broadband service, and nearly one-third of their customers buy a “triple-play” bundle of video, data, and voice service.

Bundling has not only increased penetration of cable's new digital services, but it has also proven to satisfy consumers. Most consumers attach significant value to each of the three services provided by cable, and bundling encourages them to buy at least two, and often all three, of the services at a lower total price than they would separately pay for each.

Consumers in the markets served by cable have also gained from its investment, even if they choose to purchase services from other companies. This impact has been felt most strongly in the local voice markets, which were closed to competitive entry for decades.

With cable as a new entrant, the incumbent phone companies have been forced to compete aggressively to retain old customers and attract new ones. Faced with a dwindling share of the voice marketplace, the phone companies are investing billions to enter the video marketplace and improve their high-speed Internet service, throwing competition right back at the cable companies. Once again, consumers are reaping the benefits.

Cable's digital transformation has also opened doors for broadband Internet and voice services and provided the savings of bundled services to the benefit of Americans of all demographic classes.

Originally, broadband Internet was a service that higher-income households first subscribed to in much greater proportion. But over the past two years broadband penetration rates for lower-income households have increased substantially, reaching close to 50% in the geographic areas with the lowest median household incomes. Cable's digital voice service has also been popular across all income categories with penetration ranging from 21% to 29% across all households.

More customer savings, enhanced services and better technology — this is the result of cable's substantial investment. Cable's digital transformation is one that will continue to pay dividends for years to come.

September