Going for Broke BSATM 351

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DECEMBER 5, 2011 | MULTICHANNEL NEWSWWW.MULTICHANNEL.

10 COVER STORY

PPay television operators, faced with rising programming costs,

regulation and ferce competition have another worry to add to that already ormidable

list: Teir customers are running out o money.

Aordability is becoming the new mantra in pay V. ime Warner Ca-

ble, Comcast and Charter Communications have all created packaging

and programs geared toward the growing number o Americans that

are fnding it harder to make ends meet, a segment that is unortunately

growing at an alarming rate.

Te strongest evidence o the growing poverty problem or cable has

shown up on subscriber rolls. Cable operators have been shedding video

customers since 2002 — the industry lost a collective 7.1 million basic vid-

eo customers between 2002 and 2010. And though the losses are begin-

ning to slow down, subscribers are still leaving the space in large numbers.

According to estimates, cable companies lost about 555,000 basic-video

customers in the third quarter. Tat’s an improvement over the 784,000

the industry shed in t he same period last year, but more than the 440,000

customers lost in th ird-quarter 2009. In t he frst nine months o 2011, ca-

ble lost about 1.5 million customers, compared to a loss o 1.7 million sub-scribers in the frst nine months o 2010. Cable lost about 1.5 million video

customers or all o 2009.

Pay television is by no means the only industry aected by the econom-

ic downturn. Te recession has battered every sector o the economy —

according to the U.S. Department o Agriculture, 46 million U.S. citizens

are on ood stamps, 49 million Americans aren’t sure where their next meal is com

rom and 44 million, or one in 15 people, are below the poverty line. Tat is up rom

years ago, when 27 million were on ood stamps and 37 million were below the pov

GOING FOR BROKEHow Poverty in America Is Changing the Cable Business

by MIKE FARRELL

by MIKE FARRELL

Readily available broadband Internet service has been a national priority or the cur-rent Federal Communications Commission. But

is help or accessing low-costV just as important?

As part o the overall eco-nomic-stimulus package, the

Obama administration setaside about $7 billion to as-sist in extending high-speedInternet access to rural andneedy communities, and the

FCC made it a condition o ap-proving Comcast’s $30 billionNBCUniversal joint venture.

So Comcast launched itsInternet Essentials program,oering broadband serviceor $9.95 per month — and a voucher or a low-cost com-puter — to amilies acrossits ootprint with at least one

school-age ch ild part icipat-ing in the ederal school lunch program. Earli-

er in November, other cable operators such asime Warner Cable and Cox Communicationsannounced plans to roll out similar initiatives.

But some critics have said other poor amiliescan’t aord computers, let alone broadband ac-cess — which is why several ederal programsincluded buying computers or low-income am-

ilies or extending broadband access to librariesand other public institutions. But television, al-ready ound in about 87% o U.S. homes, or some101.2 million domiciles — and arguably the mainsource o news and inormation or poorer com-munities — is let in the lurch.

While poor amilies can still get their newsand inormation rom local broadcast stationsover the air or ree, in some areas reception is

poor, and that limits choices. And particularduring busy news cycles, a growing number Americans are getting their inormation rom cble channels like CNN, MSNBC, Fox News Cha nnel and others.

Mediacom Communictions group vice president government and public aaihomas Larsen said that th

government should get moinvolved in making aordable video available to pooramilies. While stopping shoo asking or subsidies, Lar

en said that by keeping programming costs in check, thgovernment can assure thits citizens have ull access tnews and inormation at a resonable price.

TV IS EVERYWHER“Te FCC has really ocused omaking sure low-income peple have access to cheap Inte

net, but they are not ocused at all on access t

cheap television,” Larsen said. “So ew peophave a computer in the lower income bracket

but everybody has a V. Why aren’t we ocuseon getting an entr y-level video package that is aordable?”

Mediacom operates mainly in more rural seondary markets, where over-the-air receptioisn’t always an option. And because o high rtransmission-consent costs, the per-month pricbroadcast basic service or a typical Mediacocustomer is in the mid-$20s.

Mediacom is one o several cable, satellite an

telco operators that have banded together to loby or changes to the FCC’s retransmission-consent rules. So ar, the agency has sent out a notico proposed rulemaking and scheduled hearing

Broadband or TV?Some Say Government Should Help Keep Video Affordable

0 10 20 30 40 50

0 10 20 30 40 50

MAKING ENDS MEET

2006: 27 million

2006: 37 million

2011: 46 million

2011: 44 million

Number of Americans on Food Stamps:

Number of Americans below the poverty line:

Number of unemployedAmericans

September 2011:

14 million

Number of Americans outof work for 27 weeks or more

September 2011:

5.9 millionSources: U.S. Dept. of Agriculture; U.S. Bureau of Labor Statistics

NCTA’s Michael Powell: “There is arelatively strong view that the Inter-net will provide.”



DECEMBER 5, 2011 | MULTICHANNEL NEWSWWW.MULTICHANNEL.COM

COVER STORY

line. In addition, unemployment continues to hover in the 9% range,

new housing starts are fat and wages and salaries are stagnant.

POOR FUNDAMENTALS

O the 14 mill ion Americans that were unemployed at the end o

October, 5.9 mill ion had been out o work or 27 weeks or more,

according to U.S. Bureau o Labor Statistics. Tose aren’t neces-

sarily the building blocks or a growth industry.

Sanord Bernstein cable and satellite analyst Craig Moett

rst sounded the alarm in 2009, with a report warning that the

global economic recession was creating a cl ass o consumers

who exhaust their discretionary income ater paying or the ba-

sic staples. In a May 2011 report titled “Te Poverty Problem,”

Moett noted that the two bottom quintiles o U.S. households,

roughly 40% o the population, had no money let ater paying

or housing, ood, transportation and health care.

“He [Moett] is asking the question no one is willing to talk

about: ‘How can people a ord this?’ ” Mediacom group v ice

president o legal and public aairs Tomas Larsen said. “His

analysis is rank ly the scariest thing I’ve read in my more than

a decade in the cable industry.”

For Moett and some others, the question or multichan-

nel video-service providers isn’t whether their customers will

reach a point when they can no longer pay or service — it’s

when. Disposable income or the bottom o the population

hasn’t risen in real terms in the past 10 years, according to Mo-

ett. At the same time, rates or multichannel video serv ice have

climbed about 30%.

“It doesn’t take a math major to gure out that at some point

there is going to be a major problem,” Moett said. “But it is

impossible to pinpoint when, because the problem is going to

CHEAP SEATS

TV Essentials:Time Warner Cable of New York C

MyTV Choice:

Comcast

The largest cable operatorshave begun to offer low-cost servic

to low-income families.

Price: $29.99/month (rises to $49.99/monafter 12 months)

What You Get: • 47 basic-tier channels (including 14 broacast stations)

• 42 cable channels (including ESPNews, Ltime, USA Network, CNN, Nickelodeon, T

• 45 music channels

Price: Starter package starts at $24.95/mo

What You Get: • 45 basic-tier channels (including 17 broacast stations)

• 32 additional cable channels (includingDiscovery Channel, TBS, AMC, A&E NetwComedy Central, Lifetime)

• Music Choice music channels

Starter Plus: Sports

Price: $10/month in addition to Starter Paage charges

What You Get:

• All channels in Starter Package

• 11 sports channels (ESPN, ESPN2,ESPNews, regional sports networks, Golf Channel, Versus, BBC America, CBS SportNetwork)

Starter Plus: News & Information

Price: $10/month in addition to Starter Paage charges

What You Get:• All channels in Starter Package

• 21 additional news & information channe(including CNN, Bloomberg, CNBC, Fox Bness Network, Fox News Channel)

Starter Plus: Kids:

Price: 10/month in addition to Starter Pacage charges

What You Get:


• 11 additional kids’ channels (includingDisney Channel, Disney XD, NickelodeonNicktoons, Sprout)

Starter Plus: Movies

Price: $10/month, in addition to Starter Paage charges

What You Get:• All channels in Starter Package

• 16 additional movie channels (includingEncore, Turner Classic Movies, SundanceChannel, IFC)

Starter Plus: Entertainment & Lifestyle

Price: $10/month, in addition to Starter Paage charges

What You Get:


• 31 entertainment and lifestyle channels(including MTV, Bravo, G4, E!, Oxygen, TNLogo)

SOURCE: Individual companies

but is no closer to making a decision.Larsen said that the FCC doesn’t have to subsidize video,

but making it an integral part o policy, much as it has done with broadband, could go a long way.

“Te broadband plan is not law; it’s not regulation,” Lars-en said. “Tat is getting companies to voluntarily commit todoing something, saying that this is good or society, let’s doit. Why not talk about video in the same context?”

“I don’t have the magic answer,” he added. “But i some-one doesn’t come up with an answer soon, it’s going to be bador all o us.”

National Cable & elecommunicationspresident and CEO Michael Powell, a or-mer head o the FCC, said that he knows

o no initiatives to boost video adoptionamong poorer amilies.

“Tis FCC has been almost exclusively ocused on broadband being the 21st-cen-tury communications architecture,” Pow-ell said. “Te things they have chosen toocus on are heavily ocused on that part o the bundle. Tere is a relatively strong view that the Internet shall provide, and that theInternet provides an enormous amount o value rom a content, inormation and en-tertainment perspective that we once re-lied exclusively on in a closed regulatory architecture. I thi nk it is more a question o ree over-the-air V. Te commission alsois trying to take spectrum away or a moreimportant purpose — broadband.”

Cable operators have raced to market in recent months with lower-cost tiers aimed at making V aordable or moreprice conscious-customers.

“I don’t get the sense that any o [the economy V packag-es] have hit the sweet spot yet,” Sanord Bernstein cable andsatellite analyst Craig Moett said. “Tey all tend to be rel-atively expensive and the price-value proposition is, at leaston the surace, not terribly compelling.”

For its part, ime Warner Cable charges $29.99 month-ly, but values its V Essentials package at about $49.99 permonth, including 12 o the top 20 Nielsen-rated cable chan-nels, representing major genres like kids, news and inorma-tion, liestyle and sports, as well as its popular “Start Over”and “Look Back” services.

According to some operators, the economy packages h igh-light the intrinsic value o their higher-priced tiers. ime

Warner Cable chie market ing o cer Je Hirsch said in a re-cent interview that many people who call to inquire aboutits V Essentials package end up taking a higher priced tier.

“Te key is to continue to rene the products and services we have, whether it’s V Essentials, Signature Home or El Pa-quetazo,” Hirsch said. “At the end o the day, we need to havethe right sets o content to get people to continue to buy romime Warner Cable.”

COMCAST’S ADD-ONSComcast has taken a dierent tack withits MyV Choice package, currently beingtested in Connecticut, Charleston, S.C.,and Seattle. Te nation’s largest MSO has

opted to create a core package o broad-cast stations and 39 cable channels soldor $24.95 per month. Customers may thenbuy additional channels in several dier-ent genres (Sports, News & Inormation,Entertainment & Liestyle, Movies andKids) or an additional $10 per month.

At Charter Communications, the em-phasis has been more on retention and new customers with its Charter Starter package,said spokeswoman Anita Lamont. Char-ter Starter is a low-cost triple play o base-level video, Internet and phone or $80 permonth, or base-level video and Internet or$65 per month. Customers are required tomake a pre-payment or the rst month o

service plus an install ee and as they develop a payment his-

tory, other services like aster data speeds, digital video tiersand enhanced eatures are unlocked.Other operators, such as Mediacom Communications and

Cox Communications are experimenting with dierent pack-aging options, but have not yet rolled out a ormal economy package.

For their part, the FCC and legislators have decided to o-cus on broadband because that’s where they eel the marketis ultimately moving. Te agency’s AllVid proposal, which would wed broadband, broadcast, cable and satellite in a V set-top device as a spur to broadband deployment and adop-tion, has been opposed by other larger multichannel v ideoservice providers like Comcast, ime Warner Cable, Direc-V, Verizon and A&, who claim that the industry already is moving in the right direction without another governmentmandate. ■

See COVER STORY, page 28

Sanford Bernstein’s Craig Moffett:“I don’t get the sense that any of the[packages] have hit the sweet spot yet.”



DECEMBER 5, 2011 | MULTICHANNEL NEWSWWW.MULTICHANNEL

28 COVER STORY

hit at a diferent time or every amily.” While Moett wonders when the

economy will nally catch up with thepay V industry, others are asking why any o this is a concern at all.

“Te question to ask is, ‘What was itlike 10 years ago?’ ” Bruce L eichtman,principal at Leichtman Research Group

principal and ormer Continental Cablemarketing guru, said. “For the bottomhal o the economy, I don’t think it wasthat di ferent.”

Leichtman pointed to an overall pen-etration rate o 87%, the highest it hasever been in the country; record third-quarter net new subscriber growth or

satellite-V rm DirecV; and improvedcustomer losses at cable operators.

Although shrinking wallets should bea concern or any retail business, Leich-tman said, lower-income amilies havetraditionally been the heaviest watch-ers o television. And in tough econom-

ic times, that segment watches more V,not less.

HOUSING-GROWTH CONCERNS

While Leichtman said that pay V growth is increasingly a zero-sum game— any growth wi ll come directly at theexpense o the other companies in the

sector — he believes the real impact willcome rom such macroeconomic actorsas housing growth.

Moett also considered sluggishhousing growth — housing starts andcompletions have b een essentially atsince the irst quarter o 2009 at lessthan 0.5% annualized growth, well be-

low the 1.12% average rate since 2000,he said. At the same time, vacancy rateshave been rising and new housing or-mation has nearly stopped. According

to Mofett, the number o new house-holds is rising at about 0.5% annual-ly, compared to 2% per year during the

housing boom. Adding to the concern is that not

only do households in the bottom 40%o the economy have no disposable in-come ater necessities, they are actual-ly operating in the red. Mofett, usingU.S. Census and Bureau o Labor Sta-tistics data, wrote that households in

the bottom quinti les spent about $1,024more in 2009 than they took in. Whilethat could mean that lower-incomehouseholds were borrowing moreto get by, access to credit has dwin-dled considerably or cash-strapped

amilies.“As a society, we have largely ex-

hausted the cumulative buying pow-er o the lower 40% o households,”Moett said. “In prior recessions,debt was easy to come by or sub-prime households. Tey could bor-row their way through tough times.Tat’s just not the case anymore.”

While the data is sobering, the re-

action rom cable operators has beena mix o outright ear and a hope thatthe industry ’s inherent resilience will win out in the end.

“I think any industry is blind i it does not recognize the toll that

the worst recession in the modern era is taking on American consumer and his disposable income,”

tional Cable & elecommunications Association prdent and CEO Michael Powell said in a recent interv“I you have a tin ear about that, you are sort o opeing at your peril. I you a re not in conversations andsensitized to these realities in the business judgm you’re making going orward, you’re probably maa grave mistake.”

But given the enormous impact o the global recessPowell is amazed at how well the cable industry has up during one o the most trying economic periods incent history.

“At least there is a sign o hope there and I think csumers see their multichannel subscription as a goodue or the dollar,” Powell said. “It seems to be one olast things they want to part with. I can’t make the ju

ment or any one amily, but some amilies part with o things beore they part with this.”

WEATHERING PAST STORMS

he cable industry has ared well in past recessioncable’s subscriber rank s increased by 1.7 million ding the 1991 economic downturn and by 300,000 in

2001 recession, according to SNL Kagan data. Butindustry is aced with a much tougher environm

this time around. Back in 1991 and 2001, multichnel penetration was around 50% to 60%, leaving mmore room or growth tha n today, with a penetrarate around 87%.

So ar, the industry has started to respond by ofeeconomy packages like ime Warner Cable’s V Es

tials and MyV Choice rom Comcast, but those prodare in their inancy. Other operators are testing so-calower-end tiers, but waiting to see t he overall responseore ully committing to an economy package.

Cable, which has lost customers or about a deccould start to see some modest customer growth in 2mostly at the expense o other multichannel providaccording to Mofett. He estimated that cable losses

moderate rom 2.2 million in 2010 to 1.4 million in 2turning to a gain o 453,000 in 2013 and 244,000 in 2But ater that, the pool o available customers shrinks csiderably.

“he market or high-end customers is already saturated,” Mofett said. “Tat is simply not ertile groanymore. Tat’s doesn’t mean that companies won’t c

tinue to ght over the customers who are already out thBut as a category, it isn’t growi ng. So you’re let with iitably having to sh where the sh are, and a lot o thcustomers are lower i ncome.”

But there are dangers in trying to attr act a greater nber o price-sensitive customers — mainly that such sscribers tend to churn at higher rates as t hey continuolook or better deals.

Said Leichtman, “You have to ask yoursel, is thatcustomer you really want?” ■

COVER STORY, from page 11

WHERE’S THE MONEY?FOR THE BOTTOM SEGMENTS OF THE POPULATION, EXPENDITURES FOR NECESSITIES ARE OUTPACING PRE-TAX INCOME:

HOUSING FOOD TRANSIT HEALTHCARE ENTERTAINMENT EDUCATION OTHER TOTAL

Lowest

Quintile83.3% 35.2% 28.7% 16.4% 10.2% 5.8% 37.7% 217.3%

Quintile 2 39.8% 16.8% 18.6% 9.1% 6.1% 1.4% 23.2% 115%

Quintile 3 30.2% 12.1% 14.9% 6.8% 4.7% 1.2% 21.2% 91.1%

Quintile 4 24.5% 10.6% 13.4% 5.3% 4.5% 1.2% 20.4% 79.9%

Quintile 5 18.9% 7.2% 9.4% 3.1% 3.7% 2.0% 18.6% 62.9%

SOURCE: Sanord Bernstein and U.S. Bureau o Labor St atistics Consumer Expenditure Survey, 2009

SHOW ME THE MONEYAmericans are increasingly strapped to fnd the money each month to

make ends meet. For the bottom 40% o the population, it is becoming

a losing battle.

Post-taxIncome

$18,616

Food

$4,035

Housing

$9,579

Transportation

$3,967

Healthcare

$2,060

Remainder

-$1,024

2009 ANNUAL INCOME

AND EXPENDITURES FOR

BOTTOM TWO QUINTILES*

AVERAGE EXPENDITURE ON CABLE AND SATELLITE TV SERVICES

Lowest Quintile $366

Quintile 2 $513

Quintile 3 $595

Quintile 4 $687

Quintile 5 $825

SOURCE: Bureau o Economic Analysis, Consumer Expenditure Survey, 2009

AVERAGE EXPENDITURE ON CABLE AND SATELLITE SERVICE AS % OF

DISPOSABLE INCOME

Lowest Quintile 3.7%

Quintile 2 1.9%

Quintile 3 1.3%

Quintile 4 1%

Quintile 5 0.6%

SOURCE: Bureau o Economic Analysis, Consumer Expenditure Survey, 2009

* Government agenciesand economists typical-ly divide dierent seg-ments o the economyinto statistical data setscalled quintiles, whichrepresent 20% o a givenpopulation, with the frstquintile being the lowestsegment.

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Going for Broke BSATM 351