[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Swinburne Sees Most TV Revenue from Subs by 2015 6-2-11.mp4[/flv]

With the advent of high speed broadband and streamed online video, an analyst at Morgan Stanley is predicting that by 2015, more than half of all television revenue will come from subscription fees charged to access it.  Ben Swinburne says the entire television model is being turned on its head by broadband video, with cable, phone and satellite companies scrambling to protect the average $85 Americans spend every month for broadband Internet and television service.

Among Swinburne’s predictions:

• Cable and telephone broadband will increasingly be the delivery platform for television programming with at least 50% of all televisions connected directly to the Internet by 2015;
• Advertising revenue will continue to lose prominence, with networks and programmers seeking direct payments from consumers in the form of monthly subscriptions or pay-per-view to access even traditional over-the-air programming;
• Satellite television is at a distinct disadvantage not offering broadband Internet access, something satellite companies are trying to change;
• Cable companies will face the potential of “online cable” competitors delivering multichannel video packages over broadband connections;
• Content producers, networks, and the cable industry will continue to maintain a united front against a-la-carte television, which could dramatically reduce the revenue the entertainment industry earns from selling multi-hundred channel cable and satellite video packages.

Swinburne speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.”  (4 minutes)

Click to enlarge

Your cable company has a problem.  Collectively, the cable industry has lost more than 2 million video customers over the past year, and the problem may be getting worse.  Some of the largest cable companies in the United States are making excuses for the historic losses:

• The bad economy
• Housing and foreclosure crisis
• High unemployment
• Family budget-cutting

But cable companies should be rethinking their excuses, according to a new report from Strategy Analytics.

“Throughout the past seven consecutive quarters of subscriber losses, the inclination of cable has been to point the finger at various external factors,” said Ben Piper, Director of the Strategy Analytics Multiplay Market Dynamics service. “Our analysis shows that neither the economy nor the housing market is to blame for these subscriber defections. The problem is one of value perception.”

Value perception.  That’s a measurement of whether or not one feels they are getting good value for the money they pay for a product or service.  Value comes in several different forms, starting with emotional — do I feel good, safe, secure, or nostalgic using the service?  Can I imagine life without it?  What about my friends and family — will I stand out if I am not buying this product?  It’s also practical — Can I afford this?  Can I find a cheaper or better alternative?  Do I really need this service anymore?

Tied into value perception is customer goodwill.  If you have an excellent experience with a company, letting go of their products comes much harder.  If you feel forced to deal with a company that has delivered poor and expensive service for years, pent up frustration will make it much easier (and satisfying) to cut them loose at the first opportunity.

Embarq used to be Sprint's pathway to prosperity in the local landline business, until cord cutting put landlines into a death spiral.

In the telecommunications industry, value perception is a proven fact of life.  It began with phone companies.  Formerly a monopoly, landline providers have been forced to try and reinvent themselves and become more customer-friendly.  First long distance companies like Sprint and MCI moved in to deliver cheaper (and often better quality) long distance service.  Sprint even got into the landline business themselves, forming EMBARQ, which at its peak was the largest independent phone company in the United States.  When Voice Over IP providers like Vonage and the cable industry’s “digital phone” products arrived, they promised phone bills cut in half, and introduced the concept of unlimited long distance calling.

The value perception among consumers became clear as they began disconnecting their landlines.  The alternative providers offered cheaper, unlimited calling services, often bundled with phone features the local phone company charged considerably more to receive.  Even though VOIP is technically inferior in call quality in many instances, the value the services provided made the decision to cut the phone cord easier.

But local phone company landline losses would only accelerate with the ubiquity of the cell phone, but for different reasons.  What began with high per-minute charges for wireless calls evolved into larger packages of calling allowances, with plenty of free minutes during nights and weekends, and often free calling to those called the most.  Most Americans end the month with unused calling minutes.  As smartphones gradually take a larger share of the cell phone market, the accompanying higher bills have forced a value perception of a different kind — ‘I can’t afford to keep my landline –and– my cell phone, so I’ll disconnect the landline.’

The cable industry has traditionally faced fewer competitive threats and regularly alienates a considerable number of customers, but still keep their business despite annual rate increases and unwanted channels shoveled into ever-growing packages few people want.

This pent up frustration with the cable company has led to perennial calls for additional competition.  That originally came from satellite television, which involved hardware customers didn’t necessarily like, and no option for a triple play package of phone and broadband service.  The cable industry offers both, and by effectively repricing their products to discourage defections from bundled packages, customers soon discovered the resulting savings from satellite TV were often less than toughing it out with the cable company.

As a result, satellite television has never achieved a share of more than 1/3rd of the video market.  Many satellite customers are in non-cable areas, signed up because of a deeply discounted price promotion, were annoyed with the cable company, or didn’t care about the availability of broadband or phone service.  When the price promotion ends or technical issues arise, many customers switch back to cable.

More recently, researchers like Strategy Analytics have discovered some potential game-changers in the paid video marketplace:

• The impact of broadband-delivered video content
• The Redbox phenomena
• Competition from Telco TV
• The digital television conversion

Strategy Analytics studied consumer perceptions and found customers braver than ever before about their plans to cut cable’s cord.  According to the consumers surveyed, nobody scores lower in value perception than cable companies.  Citing “low value for money,” over half of the cable subscribers surveyed told the research firm they intended to disconnect their cable TV package in the near future.

While other researchers dismiss those high numbers as bravado, there are clear warnings for the industry.

“Much ink has been spilled on the topic of cord cutting and even skeptics are now admitting that it can’t be ignored,” said Piper.

Indeed, Craig Moffett, an analyst with Sanford Bernstein who almost never says a discouraging word about his beloved cable industry, told Ad Age Mediaworks the issue of cord-cutting was real.

“It’s hard to pretend that cord cutting simply isn’t happening,” Moffett said.

Craig E. Moffett, perennial cable stock booster, even admits cord-cutting is real.

The most dramatic impact on the cable industry has been in the ongoing erosion of the number of premium channel subscribers, those willing to pay up to $14 a month for HBO, Cinemax, Showtime, or Starz!.  The reason?  Low value for money.  As HBO loses subscribers, Netflix and Redbox gain many of them.  Netflix still delivers a considerable number of movies by mail, but has an increasingly large library of instant viewing options over broadband connections.  Strategically placed Redbox kiosks deliver a convenient, and budget-minded alternative.

The loss of real wage growth, the housing collapse, and the down-turned economy do put pricing pressures on the industry, but some cable executives hope the time-honored tradition of customers howling about rate increases without ever actually dropping cable service continues.

But as new platforms emerge, some delivering actual pricing competition to the cable TV package, increasing numbers of customers are willing to take their video business somewhere else.  Some are stopped at the last minute with a heavily discounted customer retention pricing package, but that doesn’t keep them from sampling alternative online video options.  Among those who actually do leave, some are satisfied with the increased number of channels they get for free over-the-air after America’s digital television conversion.

Many others are switching to new offerings from telephone companies.  Both AT&T and Verizon deliver video packages to many of their customers, often at introductory prices dramatically lower than their current cable TV bill.  When considering a bill for $160 for phone, video, and broadband from the cable company or $99 for the same services from the phone company, $60 a month in savings for the first year or two is quite a value perception, and the inevitable disconnect order is placed with the cable company.

Ad Age‘s own survey, more skeptical about cord-cutting, confirmed that many former cable TV customers left for budgetary reasons, but many also kept their triple play packages.  They just bought them from someone else.

Also confirmed: a dramatic upswing in online viewing, sometimes paid but often ad-supported or free.

Strategy Analysts concludes in its report, available for $1,999, that the ongoing erosion of cable TV subscribers isn’t irreversible, but it requires urgency among providers to become more customer-friendly and increase the all-important value perception.

In other words: respecting the needs and wishes of your customers.

Thankfully, the cable industry is dealing with competitors like AT&T, who are willing to assassinate their current lead in value perception by slapping Internet Overcharging pricing schemes on their broadband service.  That will certainly raise the ire of their DSL and U-verse customers, many who are treating the customer unfriendly usage limits as an invitation to leave.  Their former cable companies are waiting to welcome them back.  The real question remains, will cable customers now be treated better?

Time Warner Cable’s new free iPad application, giving authenticated cable customers a selection of live cable channels to watch on the portable device, crashed under heavy demand last evening, hours after the company unveiled it in a mass e-mail campaign to customers.

Time Warner Cable TV for iPad is Time Warner’s first serious effort at delivering a cable TV experience to an online audience, initially streaming 31 cable channels in HD to customers who pay for both cable television and broadband from the company.

Several of the featured networks were part of earlier contract battles with the cable company. Scripps-Howard’s Food Network and HGTV are there, as is Fox’s FX and Fox News.  Some smaller “less-connected” networks like Hallmark Channel also made the cut.  Comcast-NBC’s networks also have a prominent place, including Bravo and CNBC.  All four major cable news channels are included.  Time Warner has been making a point to negotiate for on-demand and streaming rights with cable networks as part of contract negotiations.

Channel Lineup

Requirements

• iPad™ with iOS 4.
• Time Warner Cable video package at the Standard (Expanded Basic) level or higher.
• Time Warner Cable Internet Service (Road Runner^® Standard or higher recommended for best experience. EarthLink^® High Speed or EarthLink^® Cable Max is also supported).

[flv width=”416″ height=”254″]http://www.phillipdampier.com/video/TV for iPad Time Warner Cable Ad.flv[/flv]

Time Warner Cable advertises its new iPad app for online viewing.  (15 seconds)

Time Warner Cable's new app for the iPad delivers 31 channels of live cable network viewing for free -if- you are a cable subscriber willing to watch from home.

Plenty of channels are missing though, including local broadcasters, Turner Broadcasting-owned networks like TNT and Turner Classic Movies, and sports networks.

But the most obvious limitation is that the service only works from inside of your own home, over a Time Warner Wi-Fi broadband connection.  You cannot take your viewing on-the-go.  This limitation seemed curious, considering other companies provide similar online viewing apps that can be used anywhere a wireless connection exists. 

Despite the limits, AdWeek reports several unnamed cable networks fired off warning shots yesterday to Time Warner Cable executives warning them they were streaming networks without permission.

Network legal reps are issuing a flock of heated missives to the nation’s No. 2 cable operator, calling for an immediate halt to a new service that allows subscribers to stream video content to iPads and other tablet devices. Although Time Warner Cable introduced the free app just 24 hours ago, a number of cable network groups have already made it abundantly clear that they had not signed off on any such distribution arrangement.

[…] “Distribution via any sort of third-party app is not addressed in our carriage deals with Time Warner Cable or any other operator,” said one affiliate chief. “There is going to be a messy dissection of what the rights are, but our position is that [this sort of distribution] is not authorized by our affiliate agreements.”

TWC CEO Glenn Britt has cautiously navigated the syntactic rapids, offering carefully worded assessments about the nature of the service. “Certainly all the business structures with the owners of copyrights are not fully in place, but you can begin to see a very exciting future for this set of industries and for the American consumer,” Britt said last August, after announcing plans to bow the iPad app. “There is great potential in all these devices…But it’s also a complicated process.”

Cable networks are concerned viewers who are not authenticated cable subscribers could get free access to programming from account sharing.  But considering Time Warner Cable has locked down viewing to inside the home for the time being, it is unlikely Time Warner Cable faces the same degree of wrath that could be heaped on Comcast and satellite dish TV providers who deliver apps that permit anywhere-viewing.

Time Warner Cable's new iPad app crashed under a heavy load last night.

The cable company’s heavy promotion of the newly-available app in mass e-mail announcements was probably a mistake, however.  The online viewing party came to a rapid end last night when the company’s servers, unprepared for the demand, ended up turning away many would-be viewers.

Jeff Simmermon, director of digital communications for the cable company, said they did not anticipate the level of demand they got last night.

“At about 8 o’clock last night the app crashed under a much heavier load than we anticipated. Our engineering team is working as hard as they can to put a fix in place and get everything up and running as soon as they can,” Simmermon wrote on Time Warner’s blog.

“For the time being, the app is running with only 15 channels. We have found that by temporarily reducing the number of available channels, we can ease strain on the authentication process. This will enable us to offer at least some sort of an experience to our customers while we get a fix in place. We’ll add the other 17 channels back in as soon as we can fix the underlying issue, and we’ll be adding more channels in future iterations of the app as well.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/BTIG Time Warner Cable iPad App.flv[/flv]

Rich Greenfield demonstrates Time Warner’s new iPad app.  (3 minutes)

Frontier attempts to dig themselves out.

The Oregonian has been covering the plight of Frontier customers in the Pacific Northwest who signed up for Verizon’s fiber to the home service — FiOS — and are now facing down the new owners who want to raise the price by $30 a month.

Frontier has done itself no favors in the media with an ongoing series of reports of service problems, rate increases, and now the latest signs it wants out of the television delivery business altogether.

In a letter dated March 4th, Steven Crosby — senior vice president of government and regulatory affairs, told the city administrator in Dundee, Ore., Frontier FiOS TV has been a flop.

Since Frontier Communications Northwest, Inc., acquired Verizon’s operations on July 1, 2010, it has built on Verizon’s prior actions and continued to offer a robust and aggressively priced video product to attract Dundee subscribers.  Despite these efforts, however, customer growth has been disappointing and stagnant and Frontier has not achieved a commercially reasonable level of subscriber penetration.

Frontier also admits it has been under-pricing its video service to stay competitive and attract new customers, but those days are over.  The company earlier announced its intention to raise rates by $30 a month for its standard cable TV service, making it more costly than its nearest competitor, Comcast.

Frontier recognizes the impact its enormous rate increase will have on its subscriber base, soberly noting it is likely to “further depress subscriber penetration.”

With this in mind, Frontier is exercising its right under the franchise agreement it has in Dundee to provide notice it intends to terminate its video service at a future date, after providing subscribers with 90 days advance notification.

Similar letters went to city administrators in Newberg, McMinnville, and Wilsonville.  City officials had no reservations about interpreting the meaning of the letters and plans to implement a $500 installation fee for future FiOS TV installations.

“Looking at it, you expect there will be no new customers,” Dan Danicic, Newberg’s city manager told The Oregonian. “Getting this opt-out notice is not a huge surprise to me, but we are disappointed.”

Frontier's rate increases are driving many consumers back to Comcast for their television service.

Sources tell Stop the Cap! there was considerable debate inside Frontier’s offices last week on how to implement directives from executives to shut down FiOS installations as quickly as possible.  Initial efforts to quietly raise the installation price — without giving subscribers’ advance notice — were on track until Frontier’s legal department quashed the plan.  Concerns were also raised inside the customer support units responsible for taking orders and handling customer billing inquiries over how to deal with the inevitable subscriber backlash when the first bills arrived in the mail.

“Frontier hates dealing with FiOS and they can’t wait to be rid of it — they claim that the product is at least 10 years away from really returning any investment from its original deployment,” a well-placed source told Stop the Cap! late last week.

Frontier FiOS is an anomaly for the rural phone company, which delivers the vast majority of its broadband customers DSL service over copper wire phone lines, usually at speeds approaching 3Mbps.  Frontier FiOS “came along with the deal,” one Indiana Frontier official told local media there in response to rate hikes there.

Still, media reports that the company plans to ditch its TV customers created a small panic inside Frontier by the weekend.

“Getting customers switched over to satellite TV service in an orderly manner was the original plan, but reports the company was abandoning the service altogether risks we’ll lose our customers to Comcast, and many will take their phone lines to the cable company, too,” a second source informed Stop the Cap! this morning.  “We were told ‘orderly transition’ over and over again, so reassuring customers is today’s top priority.”

Dundee, Oregon

Evidence of this campaign was not difficult to find over the weekend, as The Oregonian amended its original story claiming Frontier does not have immediate plans to exit the video business.

Crosby told the newspaper: “Our actual implementation decisions will be business driven. At this time, there is no change in our FiOS video offerings or in our FiOS video service delivery to our customers. And this filing does not affect our FiOS high speed service.”

Stephanie Schifano, identifying herself as an employee of Frontier Communications, attempted to spin the letters sent to several Oregon communities as a simple matter of business and not a foreshadowed abandonment of television service.

“Frontier is exercising our right under the franchise agreements to terminate the franchises. The right to terminate soon expires, and if Frontier didn’t give notice now we may have been required to provide this service, with these franchises, for another 12 years. This notice offers Frontier the flexibility to continue to analyze the FiOS Video/TV business and continue to service our customers,” Schifano wrote.

But both of our sources well-familiar with Frontier FiOS say the company’s actions speak louder than its words.

“When you increase the installation fee to $500 and raise your prices nearly $30 higher than Comcast, you would be crazy not to interpret the message Frontier is trying to send — go get your satellite dish from us and get off FiOS,” our second source told us.

Telecompetitor read into some of the company’s comments about utilizing the acquired fiber network in a new way, perhaps for over-the-top Internet video content.

“That’s wishful thinking,” our second source says.  “Frontier’s only online video efforts surround its rebranded Hulu service, relabeled myfitv.”

Frontier's online video platform serves up mostly repurposed Hulu content.

“The company has no plans I am aware of for a grand video strategy — FiOS covers far too small a service area and there is no way Frontier will spend more money to increase that fiber footprint,” our source adds. “Frontier wants to meet its general obligations made as part of its deal with state regulators when it bought Verizon FiOS with the landline deal, and little else.”

Frontier will continue to offer FiOS to broadband customers for the time being, regardless of what it does with its video package.

“If it’s already there and not costing a lot of money to maintain for broadband, why not?” our source says.

One direct sales contractor for competitor Comcast suspects that train may have already left the station.

Calling Frontier’s customer service operation “a circus,” the salesman says Comcast is benefiting from Frontier’s ball-dropping.

“Many Frontier customers are unhappy with the customer service side while stating they do enjoy their phone, Internet, and video services provided by the FiOS network, but lose the business on the practically non-existing customer service side.”

The contractor says he hears stories from Frontier customers all day who are fed up with the frustration of extended hold times, inaccurate or missing bills, online account access problems, excessive call transfers to deal with service issues and high fees.

For regulators, the aggravation is much the same.

After being promised by CEO Maggie Wilderotter that Frontier would be an aggressive competitor in a barely competitive marketplace, Frontier has raised rates by 46 percent, irritated their customers with customer service problems and outages, and now has served notice it intends to flee the TV business at an undetermined point in the future.

Peer to peer traffic no longer represents the largest single source (by application) of broadband traffic on the Internet.  Cisco’s Visual Networking Study now finds online video streamed from websites like Hulu and Netflix to account for more than one-quarter of all broadband traffic, displacing file swapping from the number one position.

File sharing activity has routinely been used by providers dreaming of Internet Overcharging as an excuse to introduce usage limits and throttled speeds for their broadband customers.  Peer to peer software allows customers to exchange pieces of files back and forth until everyone manages to secure their own copy.  Cable operators, in particular, have complained this network traffic saturates their shared broadband lines because customers upload far more data than they would without this software.  Up to 44 percent of all upstream traffic from residential accounts comes from peer to peer traffic, according to Cisco.

Providers and their friends have started to give up on their scare stories of peer-to-peer “exafloods” and data tsunamis triggered from too many online users engaged in file swapping.  As we’ve argued for two years now, the glory days of growth in peer to peer are behind us for a variety of reasons:

1. Downloading copies of TV shows and movies, always popular on file sharing networks, has declined now that content producers are finally serving the growing market for on-demand video programming;
2. The growing popularity of downstream delivery direct to consumers has reduced wait times for downloading to near nothing — to the point where some users are abandoning peer-to-peer altogether;
3. An increasing amount of fake files filled with viruses and spyware has made peer to peer-sourced files from underground websites more risky;
4. Copyright enforcement and other legal actions have made file trading less palatable for some.

While peer-to-peer traffic is still growing along with other online usage, online video is growing far faster.

Now some want to move the goal post — blaming online video for “forcing their hand” to implement overcharging schemes.

Broadband Traffic by Application Category, 3rd Quarter – 2010

• The marked categories contain video.

Karl Bode at Broadband Reports writes that he found Sanford Bernstein analyst and cable stock fluffer Craig Moffett telling CNET that if customers cut the cord, cable broadband companies will simply turn around and begin metering broadband customers’ bandwidth. In fact, Karl adds, Moffett goes so far as to insist ISPs will have “no choice” in the matter as streaming services like Netflix gain popularity.

Instead of simply raising prices on cable broadband, Moffett said it’s more likely that cable operators would move toward usage-based pricing. That way consumers who use more bandwidth to stream movies and TV shows end up paying more per month for service than people who may be getting their video from the traditional cable TV network. Time Warner has tested usage-based billing, but the company faced a huge backlash from consumers. Still, Moffett said that broadband service providers may have no choice as bandwidth-intensive video streaming services like Netflix become more popular.

CNET’s Marguerite Reardon calls that scenario a “heads we win; tails we win” situation, especially for cable companies.

Would you tell this man you are dropping your Comcast video package to watch everything online for free? (Neil Smit, president - Comcast's cable division)

Last quarter, some companies saw the number of subscribers actually drop for the first time ever.  Now Comcast reports in its latest earnings call the same thing is happening to them — losing 56,000 TV package subscribers during the third quarter.  Comcast surveyed some of their customers calling to fire their cable company.  Most of them are not switching to a pay TV competitor, said Neil Smit, president of Comcast’s cable division.  Comcast characterized them as “going to over the air free TV,” but would you tell your cable company you are dropping their video package to watch everything on their broadband service for free?  For a lot of cable customers, that would be tantamount to calling them up and saying you are now getting free HBO on your TV.

Both companies are still denying online video is cutting into their cable TV package business, but it’s an argument some stock analysts have begun to make as they watch cable profits struggling to hit targets.  Watching extra fat profits bleed away because “broadband piggies are watching all of their TV online for free” just won’t do for folks like Mr. Moffett, who will be among those leading the call to slap limits on broadband usage to protect industry profits.  Why leave good money on the table?

But before Moffett encourages cable companies to install coin slots and credit card readers on cable modems, he has another idea: jack up the prices of broadband higher than ever while cutting video pricing, making it pointless for customers to jump ship:

“Cable’s broadband dominance opens the door for renewed share gains in the adjacent video market,” Moffett said in his report. “Cable companies could simply increase their a la carte 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.”

He pointed to an example of this in Albany, N.Y., where Time Warner Cable raised its broadband price by 10 percent for its Internet-only customers to a rate just $2 below its promotional bundled rate for both services. The Internet-only price increased to $54.95 from $49.95. The 12-month promotional rate for video and data was $56.95.

Of course, Albany has Verizon FiOS breathing down Time Warner’s neck.  In late October, Verizon announced it was launching its video FiOS service in Scotia, just outside of nearby Schenectady. Bethlehem, Colonie, Schenectady and Guilderland already have FiOS phone and Internet services available, so getting a TV franchise to deliver competition to Time Warner Cable isn’t a big leap.

In Rochester (where Frontier Communications idea of video is a satellite dish), a similar promotional package from Time Warner runs $84.90 a month.

Highlights of the Cisco Report

• The average broadband connection generates 14.9 GB of Internet traffic per month, up from 11.4 GB per month last year, an increase of 31 percent;
• “Busy hour” traffic grew at a faster pace than average traffic, growing 41 percent since last year. Peak-hour Internet traffic is 72 percent higher than Internet traffic during an average hour. The ratio of the busy hour to the average hour increased from 1.59 to 1.72, globally;
• Peer-to-peer (P2P) file sharing is now 25 percent of global broadband traffic, down from 38 percent last year, a decrease of 34 percent. While still growing in absolute terms, P2P is growing more slowly than visual networking and other advanced applications;
• Peer-to-peer has been surpassed by online video as the largest category. The subset of video that includes streaming video, flash, and Internet TV represents 26 percent, compared to 25 percent for P2P;
• Over one-third of the top 50 sites by volume are video sites. There is a high degree of diversity among the video sites in the top 50, including video viewed on gaming consoles, Internet TV, short-form user-generated video, commercial video downloads, and video distributed via content delivery networks (CDNs). Video sites appeared more frequently than any other type of site in the top 50.