Two very good articles worth reading concerning cable and telco companies are a Financial Times article Battle of the bundle is at the doorstep (subscription required) and a Mark Cuban article Think the Internet will replace TV ? Think again.
Aline van Duyn and Paul Taylor in their FT article discuss the bundling that will decrease the churn rate and increase loyalty.
Steve Burke, president and chief operating officer at Comcast, recently observed that all the telecoms companies in the US combined could offer an integrated three-product bundle to about 1 per cent of the same homes that can get these from Comcast. “We have a real head start...and we’re going to be very aggressive in 2006 and beyond,” Mr Burke said.
Indeed, financial results from cable operators that are ahead of Comcast in rolling out triple-play show why hooking up customers to more than one service is one of the recipes for success. Cablevision, based in the New York region and more usually in the headlines due to the various feuds and strategic U-turns taken by members of its controlling Dolan family, surprised investors last month with the strength of its financial performance. About 24 per cent of its subscribers are triple-play customers, a proportion that analysts expect to grow to 37 per cent this year and nearly 50 per cent in 2007.
The rate at which customers are leaving their traditional telecoms providers has exceeded expectations. Yet bundling reduces the rate at which customers are subsequently inclined to switch services. This improved loyalty can vastly improve the profitability of cable companies: the longer a customer stays, the more they make because the initial costs of installation and marketing are already covered. Importantly, Cablevision has shown it can increase prices for its bundle once promotional offers are over – subscribers paying $115 a month face a jump to $140.
Mark Cuban goes to comment in his blog that the Internet simply lacks the capacity to replace television.
More importantly, in 60% of the country, there are simply no new networks on the horizon, and the existing infrastructure from the telcos – DSL running at speeds of just 1.5Mbs or so – simply won’t be adequate to be considered “broadband” in five years or so. That includes wireless networks, by the way. Current and planned wireless networks – including the over-hyped Wi-Max technology – offer the promise of satisfying today’s definition of broadband, but simply can’t feasibly support the kind of bandwidth required for the kind of dedicated point-to-point video connections that will be required to be considered broadband tomorrow.”
Craig [Moffet of Bernstein Research] is right. The last mile into our homes wont have enough bandwidth to support all that we will want to do via our internet connections at home. There is no moores law for bandwidth to the home. THere is a huge misconception that bandwidth will just continue to experience unlimited expansion for every broadband household. Its what we are used to with hard drives, processors, all technology. It gets faster, cheaper, bigger. Thats not the case for the next decade with bandwidth.
My own impression is that investors are underestimating the strength of the cable companies. My thinking is rather simplistic in that I believe that cable's bundle on digital cable, Internet services, and VoIP (Internet Telephone) will cause consumers to choose cable over satellite or telcos. Satellite cannot provide the same breadth of services and telcos are facing a tremendous challenge in both building their networks and programming.
One of the knocks against the cable industry is that it is perpetually spending capital to add features to fend off the competition. While that might be true to a certain extent, I think the average revenue per user will also increase because the cable companies will continue to add more value added services to its subscribers.
I have held and continue to hold Comcast shares.
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