Convergence is no longer a dirty word (cable telephony)
nationalpost.com
Customers like getting their phone, TV and Internet services from one provider, and companies in those fields are rushing to fill that demand
Brahm Eiley
Financial Post
Thursday, October 09, 2003
Now that the dot-com trash has been swept away, leading North American cable, content, satellite and telephone companies are getting into each other's markets with a host of new products. Consumers can only afford to buy so much, which is why bundling, convergence's kissing cousin, has become a required strategy.
In Canada, SaskTel now sells digital TV and video on demand (VOD) service; Manitoba Telecom offers digital TV and will soon offer VOD, and both Bell and Telus plan to expand their digital TV offerings over telephone lines.
Canada's four largest cablecos offer VOD, and are beginning to push high definition television (HDTV). Satellite TV providers ExpressVu and StarChoice also offer HDTV. Atlantic cableco EastLink offers TV, Internet and telephone service over its network.
Meanwhile south of the border, U.S. telcos have been dramatically cutting their high-speed Internet access prices and partnering with the likes of Microsoft, Real, Sony and Yahoo to provide online content and tools to their subscribers. In retaliation, U.S. cable companies have come out with faster Internet access speeds at the same price.
U.S. cablecos are also getting into the phone service game. Cox, like EastLink, offers TV Internet and telephone service, and should have one million telephone subscribers by year- end. Cablevision and Time Warner Cable have also both started to roll out voice services.
U.S. cablecos are starting to see real revenue and customers for both VOD and subscription video on demand (SVOD). Time Warner Cable should have one million SVOD customers by year-end paying $10 a month, and Comcast is seeing approximately 50% more revenue from its VOD/pay-per-view customers than just pay-per-view customers.
EchoStar, North America's second-largest satellite TV provider, is giving away digital video recorders (DVR) for free, and BellSouth, SBC, and Qwest, have partnered with DirecTV (largest North American satellite TV player) and EchoStar, to sell bundles of voice, Internet and satellite TV services.
Not to be outdone by the cable and satellite TV players, almost all of the large American movie studios have banded together to form MovieLink and now offer movies online. Disney has its own new service called MovieBeam. On the game front, there should be approximately three million Microsoft and Sony game consoles online in North America by year-end.
It has been easy to knock AOL Time Warner for making a bad deal, but it is a lot harder to knock Time Warner Cable. Time Warner Cable is the least leveraged in terms of debt, has excellent operating margins, and has the best combined penetration rate of digital TV and Internet customers of all large U.S. cablecos; not to mention being the top North American cableco in terms of VOD, HDTV and DVR customers.
Despite Time Warner Cable's praises, its traditional markets (TV and Internet) are maturing and growth is slowing. There are obviously service providers a lot worse off than Time Warner, including Paul Allen's Charter and RBOC Qwest Communications, which were both hyped to no end during the exuberant 1990s. But for the most part, major providers have started to lower their capital expenditures, and balance sheets are on the mend.
So, why is all this convergence happening? Did not the analysts, pundits and new economy companies first tell us first that convergence was around the corner, and then that it was just a nightmare?
On the way to making and losing trillions, the purveyors of hype forgot to mention that, at least where the Internet was concerned, it had to beat out established industries such as TV, newspapers and retailers to survive.
Without going into the sordid history, the challengers lost. What is left is what the prize has always been about, the TV and telephone markets -- a conclusion in our recent report, The Battle for the North American Couch Potato: Bundling, Internet Access, TV, VOD, PVR, HDTV, ITV, Telephony, Portals, Games, Music.
Summing up what consumers pay for TV services, advertising and content sales, TV is an more than a $200-billion business in North America. The Internet is a $40-billion business, with the majority of revenue coming from Internet access, and the remainder from content and advertising. At current growth rates the Internet will continue to remain 20% of the TV market for the rest of the decade.
On top of that, North American telephone revenue is in the $300-billion range. Which is one of the reasons leading North American cablecos (save Cox and EastLink) are weighing heavily whether they are going to enter the telephone market whole hog. Although Cablevision and Time Warner offer telephone in a few markets, their offerings do not include power back-up. That makes their service more of a second line play, which may give them only a limited amount of customers.
Comcast, which has now declined to around 1.3 million telephone customers, has held back on increasing telephone coverage due to costs. It is now hinting that it will enter the telephone market in 2005 and probably with power back-up. If a few large U.S. cable companies decide to truly enter the telephone market, it will lower the cost of their equipment, making it easier for smaller Canadian cable companies to afford gear.
But won't this just put cable back to where it was in the 1990s when it was far from free cash flow positive? Yes, and no. For cable companies that can afford to enter, it's the perfect choice because TV and Internet markets will be quite mature by the end of 2005 and because, as Cox and EastLink have well demonstrated, offering three products reduces churn down to below 1% a month -- i.e. customers don't leave you when they have three products in a bundle.
As for the telephone companies, they have been lowering their Internet access prices and adding online content and tools, not just because they are behind cable in residential Internet subscriber market share. What is eating U.S. telcos (regional Bell operating companies) is that they are losing local telephone customers (their proverbial gravy). As the RBOCs have found, if a residential customer has both Internet and telephone they are about half as likely to leave. Hence why North America's two largest RBOCs, SBC and Verizon, have been dropping their Internet prices.
But telcos have another problem on top of the fact that cablecos are going to increasingly enter the local telephone market. Most telcos do not have a TV offering. Like apple pie and ice cream, consumers like to buy their TV and Internet services from one provider. Which is why most of the RBOCs in the United States have recently partnered with the satellite TV players. In Canada, because most Canadian telcos have a TV offering, they are one step ahead of their U.S. counterparts.
Finally, programming content makes up approximately half of cable, telephone and satellite companies TV operating expenses. Cable, telephone and satellite companies are all increasingly growing their own content business, especially by acquiring and launching specialty channels. With programming costs continuing to rise, expect more content-access mergers in the future, not fewer. |
