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Wednesday
Sep142011

Why Video Cord Cutting is Bad for Telcos—Even Those That Don’t Offer Video

The Need for Speed

USA Today earlier this week published a lengthy, front page story on the video cord cutting trend. The mass-market publication offered readers a lot of data that most of us in the telecom and media industries already know:  cable companies are losing video customers to OTT programming, as consumers increasingly decide they aren’t interested in spending upwards of $100 per month for a massive package of programming. 

Economically squeezed consumers will hang on to their Internet connection and buy a Roku box or some equivalent device in order to stream selected programming to their TVs—often for savings of 80% or more per month.

With programming costs stubbornly high, it seems unlikely that cable companies will start cutting their prices any time soon, and to date they’ve been loath to create smaller programming packages at lower price points. They prefer instead to add on more bells and whistles, like TV Everywhere, for the same or similar price, than to lower monthly rates. 

As such, the video cord cutting trend is unlikely to wane, and as more and more consumers become aware of the vast price differential between pay TV service and OTT offerings (thanks a lot USA Today!), it may accelerate.

It’s a disturbing trend for the many telcos which have worked hard over the past decade to incorporate a video option into their “Triple Play” bundles.  Among the public telcos at least, video connections have remained the fastest growing segment we track in our quarterly connections charts.  In the first quarter of 2011, the public cablecos were losing video subs at a 3.3% annual pace, but the ILECs grew their video subscribers at a 16% rate. It’s important to note, however, that AT&T and Verizon, with their U-verse and FiOS offerings, were the biggest factors behind that growth trend.  Few of the other public ILECs could boast double-digit growth in video connections that wasn’t driven by an acquisition.

Among non-public ILECs, our annual Phone Lines study showed that out of 307 companies that responded to our survey, 132 offer video services via either cable, IPTV or fiber.  Seven more reported DBS subscribers, presumably through a resale arrangement, but only 78 offered non-cable video service.  Out of those, penetration of access lines was around 25% at the end of last year.  Presumably the local cable company services the remaining television households in the region.

My guess is that the notoriously unpopular cable companies make a relatively easy target for a well-managed telco competitor with a video offering—I would drop Comcast like a hot potato given a more attractive offering (are you listening CenturyLink??). But of course, we also know that it’s tough for an ILEC to actually make money with a video offering—hence the low 25% of non-public (non-cable owning) ILECs in our survey that have tried it.  However, if ILECs don’t come to the table soon with a competitive video offering, more and more customers will cut the video cord—and once their behavior changes, it’s unlikely that those customers will come back to any Pay TV provider, cable or ILEC. Their habits will have changed.

And therein lies one of the problems for telcos, which are still relatively new entrants to the video game. Because before a substantial video base can even be established, I fear that consumer behavior will have shifted—much like the advent of reliable mobile service nationwide has shifted voice communication behavior. These shifts will be driven by both video cord cutting AND the growing availability of high speed wireless connections.

As consumer behavior shifts and the video service is no longer an anchor for the communications service bundle, I believe the most important driver behind the decision to subscribe to a given cable, ILEC or wireless provider will be the SPEED, relative to the COST, of the Internet connection.

And though I’m not holding my breath waiting for CenturyLink to bring an upgraded VDSL2 Internet connection to southern New Mexico, which would likely beat the 15 Mbps speed Comcast currently provides, I’m told that Verizon intends to offer 4G LTE service in my town before the year is out.  If and when that happens, and assuming the speeds are all they’re touted to be, Comcast (and CenturyLink’s opportunity to steal me as a customer) are toast.

Another reason why 4G wireless competition and the video cord cutting trends can’t be ignored is the explosion in use of tablet devices. Apple’s iPad may get most of the headlines, but devices from Motorola, Samsung, HTC and others are also gaining traction quickly, and have already started to displace traditional desktop computers in some cases—and this trend is still on the low end of the proverbial hockey stick growth curve. Tablet devices are fast becoming a disruptive technology, and promise to replace a meaningful number of both computers and television sets in the coming decade.

And while many tablet users today are probably using the WiFi connection on their tablet in conjunction with a home cable or DSL line, it seems likely to me that a reasonably priced 4G option, (which removes the need for all those ugly cords and dust bunny gathering pieces of equipment that need to be rebooted far too often) becomes a very attractive option.

Ultimately, the point is that far too many telcos are behind the curve in terms of the broadband connection they offer. Cable is already faster than DSL, and 4G wireless promises to be as well. So while the arguments go on in D.C. over how to define broadband and how to pay for broadband in rural markets, the big wireless guys are moving in on your turf in all but the most rural markets.  Even long-suffering Clearwire offers better speeds than traditional DSL service.

Meanwhile, the USA Today article cited research that claims 13% of adult broadband users who subscribe to a pay TV service expect to cancel within the next six months, and that figure may run as high as 29%, according to a representative from the research firm Diffusion Group. He went on to speculate in the article that when the fast-changing television landscape produces a Net-based programmer to compete with current pay-TV services, “maybe we will start to see more people want to so-call cut the cord."

There are many rural LECs out there who clearly agree with this seemingly bleak outlook—they’ve signed on with either the NetAmerica Alliance or the Verizon LRA program in order to bring a 4G wireless option into their bundle.

But there are many more who haven’t taken action, waiting, it seems, to find out what regulatory relief might allow them to make the needed investment for higher broadband speeds at an acceptable rate of return.  My biggest fear for those, however, is that whatever Washington figures out will be too little, too late…If you’re not providing the fastest Internet connection in your market, or working on a plan to be sure that you do, you’re simply not gonna have a lot of customers a few years from now. 

Reader Comments (3)

Interesting observations and for the most part I agree with you and the article author especially in regard to the expected increasing rate of cord cutting. However I do not believe that 4G is will be the savior for your internet speed woe's as you are hoping it will be. To my knowledge the large carriers all have data caps and all 4G will do is allow you to use your cap/monthly limit in one day then watch out for sticker shock on your next bill. The second reason I believe 4G is not the answer to consumer broadband in the home is is this: A given 4G access point might be good for a maximum throughput of 100Mb (some say more but I'm not in that camp). Now imagine that 50 users are streaming HD video at 6Mb. Now imagine that 20 of those same 50 users have two TV's in their home both streaming at 6Mb. You now have a constant bit rate of 420Mb (70x6=420). The math doesn't work and neither will 4G.

September 15, 2011 | Unregistered CommenterEric D

This is a great post. Your observation about an ILEC's potential to grab unhappy customers before it's too late really resonated as I would happily switch service providers for a better (and local) provider but I don't have the option. Instead, I find that I am more and more reliant on my broadband connection for content.

September 15, 2011 | Unregistered CommenterRebecca Stone

I agree with Eric. 4G will be a convenience but not a replacement for FTTx in most households. According to Verizon their claimed 4G speed is 5-12Mbps and as we all know the actual will be less. No doubt this will hit certain demographics harder than others. Nevertheless, the point of the article is well taken in that we all need to ensure that we can provide internet at competitive speed and pricing.

September 16, 2011 | Unregistered CommenterJohn Harris

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