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Cable “Digital Phone” Service Hits Speed Bump: No More Easy Money, Says Wall Street Analyst

Phillip Dampier July 27, 2009 Cablevision (see Altice USA), Data Caps 11 Comments
Richard Greenfield, Pali Research

Richard Greenfield, Pali Research

Wall Street media analyst Richard Greenfield of Pali Research is telling investors that the era of quick cash from “digital phone” service customer additions is probably coming to an end.

Greenfield penned a research note last week pointing out that despite the blizzard of postcards, mailers, and wall-to-wall advertising cable operators do to promote their “digital phone” services, it’s getting tougher to sign up new customers.  Mike Farrell in Multichannel News condensed the marketspeak down:

In a research note, Greenfield noted that industry-penetration leader Cablevision Systems, which has telephony in 40% of its homes passed and more than 60% of its basic-video base in a triple-play bundle, took six years to reach those milestones. Time Warner Cable after five years has about 15% penetration (27% of subs in a bundle); Comcast, four years into telephony, has 13% phone penetration and 24% of its subs in a triple-play bundle.

The year 2008, the analyst noted, was the first that net telephony additions fell for both Comcast and Time Warner Cable.

“While Cablevision is way ahead of its peers in telephony, the question is now becoming, will its peers be able to get to even 25% penetration, let alone the 40%-plus levels Cablevision has achieved or is the opportunity to further cement the bundle simply dwindling by the day?” Greenfield asked.

For the uninitiated:

  • “Homes passed” refers to homes where cable service is available;
  • “Triple play bundle” refers to customers who take three services – cable TV, Internet, and telephone service in a bundled package from a provider;
  • “Penetration” refers to market share.  In the case of Time Warner Cable, only 15% of their subscribers sign up for “digital phone” service, but the number is higher for those with a bundled package.

Greenfield, who often annoys cable companies and instigates angry press releases from some cable trade associations, represents the Wall Street investor types, who are not pro-company or pro-consumer.  They are simply pro-money for investors.

Investors are very concerned this year about cable company stock value.  They worry customers are starting to cancel cable television packages (or at least downgrade their service to get fewer channels), and are now also concerned telephone revenue will not grow at the traditional rate it has since “digital phone” service was introduced.

Broadband service is the exception.  It remains highly profitable and is continuing to grow even during hard economic times.

Stop the Cap! believes that cable operators will look more and more to broadband profits to help prop up their stock price, making it imperative that broadband service deliver as much profit as possible, while operators crack down on costs.  Internet overcharging schemes, such as limiting and discouraging access, raising prices, or a combination of both can reduce costs even further while maximizing profits, particularly in markets where limited or no competition exists.

Currently there are 11 comments on this Article:

  1. BrionS says:

    The bitter irony of raising prices on the one profitable market segment to prop up less profitable segments is that it will be off-putting to those users who feel, rightly so, that they are truly subsidizing unprofitable business models and will begin to tighten their belts on that segment as well.

    As the saying goes, you cannot get blood from a stone and you cannot get more money from people than they are willing to give (short of outright extortion). Cable needs to re-evaluate their business models in all market segments and re-invent the models so they don’t have to lean on their last profitable segment so hard as to drive it into being unprofitable.

    Change is painful but it will always come. Those who embrace it will survive, the rest will perish after fighting long and hard.

    • Tim says:

      What they need to do, to save the cable TV side, is go to a pay for what you want model. I know networks own several channels but still it is going to be that or people going to the net and watching TV there. Most people, myself included, are sick and tired of paying near $100 for TV service that comes with channels that are never watched or wanted in the first place. That is major reason fueling the internet TV revolution. People are just tired of being screwed in the rear.

      This is what is killing the digital phone service.

      http://www.magicjack.com/7/index.asp

      $40 for the USB and that includes a year of local and long distance calls for free. $20/year after that. Can’t really beat that. I am thinking about trying the service myself.

      • BrionS says:

        I’ve heard some good things about MagicJack but haven’t used it myself. I originally had Vonage then left them for SunRocket because their (Vonage’s) customer service was less than pathetic and their service was intermittent.

        Unfortunately SunRocket folded about 1.5 years after I joined (a 2-year up-front payment for services) and ViaTalk (http://viatalk.com) took me in. It took a bit to set up my phone with them because of the huge influx of people trying to get service after the SunRocket debacle, but they’ve been solid ever since and their customer service rocks!

        I still pay one year in advance ($200 comes out to about $17/mo for local and long distance for U.S. and Canada and all calling features including conferencing, forwarding, caller ID, block lists, simultaneous ring, etc.).

        As for ala carte TV, it’s really being stymied by the content owners like Viacom. They force cable companies to sell their content in tiers and packages and explicitly prohibit ala carte sales (because that would mean useless unpopular content would go away and the content producer would get less $$).

        Viacom and other content providers will be the death of TV if they don’t release distribution channels from the “channel packages of death” model they have now. I’m sure cable would be happy to save their TV revenue from extinction by changing to an ala carte model, but they simply can’t do it for contractual reasons. I’m also sure they’d lose some money in that move because packages and tiers are profitable, but it’s better to lose a toe than your whole leg.

        • Smith6612 says:

          As always, I’d love to see TV go pay for what you want to have, but even so all I do is watch content on the internet now, and that’s because despite my lack of bandwidth here on the DSL lines, there is more content that I can get for free, that is also ad-free as well. Viacom I know as well as many other networks have been giving TV companies trouble when it comes down to prices. LIN TV and Viacom both had issues during the Winter months here with Time Warner over price agreements. Now, I have satellite TV so this wasn’t much of a problem for me, though I do recall the local LIN network channel saying people should get satellite, FiOS TV or Antenna to use/wait until an agreement could be reached. It wasn’t Time Warner’s fault at all for not agreeing to what LIN wanted at first, same with Viacom, they’re only trying to keep TV prices low. Turns out, the channel that owned LIN TV was playing these ads, and was most likely because they wanted people to think that Time Warner was the “bad guy” in this whole fiasco. They insist it’s the economy but yet even companies like Viacom, who still can’t manage to run a site like GameTrailers.com without having to bug the place up every time they do something turn up raking in a bit of money and have a large amount of capital at hand.

          Really, I don’t know. That’s why I’ve been sticking to the Internet for content. TV’s gotten too expensive for too little value to me now. I have TV here for others in my home but I don’t use it much anymore.

          • BrionS says:

            I’m with you – I don’t pay for cable or satellite because the value simply isn’t there for the amount and type of TV I watch. However, I’ve found there is not really any “good guy” in the TV world except perhaps PBS because they are non-profit and have to fight for viewership and donations just to keep airing their content (so it can’t really be a bunch of fluff that no one wants).

            As evidence I submit the battle between Time Warner Cable and Viacom in 2008 over Spongebob Squarepants and MTV (http://www.redherring.com/home/25695) and way back in 1992 also over MTV (http://news.google.com/newspapers?id=rSgVAAAAIBAJ&sjid=aAcEAAAAIBAJ&pg=4405,352695&dq=time+warner+viacom).

            In March 2004, Viacom also got into a dispute with Echostar (DishNetwork) and resulted in one day of no Viacom channels on Dish. (http://www.cedmagazine.com/echostar-viacom-fight-over-costs.aspx) The result was a compromise was reached and Dish customers (including me at the time) got a coupon for a free movie on demand as compensation for losing Nickelodeon and MTV for a day (though Dish did put other channels up in its place including a music video channel from Canada that was awesome — I wish Viacom had never come back)

            During the 2008 episode, Time Warner (around here anyway) were putting advertisements telling people to watch their Viacom shows online to show Viacom price increases for programming won’t be tolerated. Once a settlement is reached a year later Time Warner is decrying the evils of online TV in that it’s stealing revenue that’s rightfully theirs (or more precisely that they have to pay for content from Viacom while Viacom and give it away for free online which isn’t fair — *boo hoo*).

            Satellite TV isn’t much better. The lowest-end packages are usually the best value, but the prices mount quickly for extra packages and HD content. That’s not to mention the virtually non-existent upgrade path that doesn’t require the purchase of expensive hardware. Finally hardware and line service from the dish to your TV is not included like cable and very costly if you pay to have it done.

            Only OTA HD is worth the cost (initial one-time hardware cost for antenna and digital tuner if not built into your TV) and even then signals may very wildly based on your location and the weather or nearby structures and trees. But with ad revenues declining I wouldn’t be surprised if broadcast stations decide to stop broadcasting in the next 5 – 10 years due to loss of revenue streams.

            Your best bet is to learn to live without TV. Now the Internet…that’s a different story…. 😉

            • Smith6612 says:

              My Gaming PC has a Digital OTA/FM Radio/S-Video TV tuner in it. Scanning for channels on a small 6 inch antenna hooked up to the back of it gives me roughly 8-14 channels depending on the day. They come in nicely and look nice in 720p (even though my monitors are running at 2560×1600). But certainly, if anything the Internet is one of the last things to go here.

  2. Uncle Ken says:

    Brion all they need to do is block all tv, streaming anything, video, and they will be happy and there is nothing we could do about it. Why did I always know TV over internet
    would be the downfall. The system was not built for tv and gaming.

    • BrionS says:

      Downfall of what? TV or the Internet?

      I argue the network was built to transmit data. At first it was email and simple files (with fetch and gopher), and later it was enhanced and adapted with new protocols or ways of transmitting data that allowed users to view web pages.

      Over time it continues to evolve and change the format and types of data being sent but in the end it’s still a bunch of 1s and 0s in specific patterns. The fundamental concept of sending one bit of data from location A to location B hasn’t changed, only the speed at which that happens and the information those bits represent has changed.

      As with everything in human history, technology will continue to advance and new ways of sending data faster and in greater quantities will evolve. TV and video are far from the end of the Internet. Indeed, I think it’s the beginning of a new era of the Internet. Fifty or 100 years in the future our concept of the Internet will seem slow and primitive. I can imagine nearly instantaneous transfers of data in the terabytes at the touch of a button – data representing anything you can imagine to be stored in a computer: personal health records, restaurant menus, live weather data with interactive video, even 3D or holographic representations of some data.

      My vision is futuristic to be sure and far enough in the future that I will never see those days, but I have confidence (with history as my evidence) that any schemes the cable industry has now are short-term and will not survive to become the future of the net – it has never tolerated limits well. Look at China and other authoritarian governments as an example of how the Internet, despite their very concerted efforts to contain it, continues to exist and thrive and grow even within the countries themselves but certainly without them.

      I think our society is not so resigned to our fate as to allow the cable companies to block TV, streaming video, and hold us over a barrel to get us to pay for TV and Internet separately. There are enough self-serving politicians who will be interested enough in their own re-election (like Charles Schumer, D-NY) to listen to irate constituents and prevent or punish ISPs who abuse their monopolies (or collude with the competition in duopolies/oligopolies).

      At the very worst it might force our obese children to play outside instead of watching TV (because their parents can’t afford both TV & Internet and Internet has a more direct and meaningful impact on their lives when its gone.

  3. Rob says:

    I remember the days when wall street analysts were claiming everyone would purchase cell, Internet, and phone service from one company. They called it the triple play. They claimed consumers would love it because they would save money by bundling services. As it turns out most people don’t want to do this or can’t. Why put “all your eggs in one basket”?

  4. jr says:

    “we should charge extra to call the police”-cable phone execs

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