A Credit Suisse report Monday charges cable operators with failing to come to terms with the threat today’s teens pose to their business over the next decade. Dealing with questions on whether a generation reared on free Web content and Netflix will subscribe to their pay-TV services, they often go with the “first job, big screen” argument, which indeed seems short-sighted.
Still, as long as the operators control the broadband pipes, they might be able to put their heads well in the sand. There aren’t too many more attractive businesses over the long term than one giving wide reign to set prices for access to online video, one of the most attractive entertainment options ever.
If today’s 13-year-old wants to cord-cut, cord-shave, cord-never, cord-whatever in 2021, they’ll still need that gateway. And, unlike the challenge of the pesky DirecTV or Dish, cable operators mostly face competition in broadband access from just one other source -- a Verizon or AT&T -- in a particular market. And they claim superior service.
Arguably, the most difficult question they’ll face is how rapidly to increase prices (especially if they extend access on the go). With perhaps only one other choice, consumers might find themselves grappling with a dynamic that has some monopoly-type implications.
They may bristle at a Comcast pricing bump and could go to Verizon, but will Verizon offer markedly lower prices with such a vital product? Is Wal-Mart going to spend a fortune to offer a low-cost alternative? The financial barriers to entry are massive.
Google might have the bucks to help salve consumers and offer a blow to operators. The company is launching a broadband service in the Kansas City area early next year, which it claims will offer speeds “more than 100 times faster than what most Americans have access to today.”
Google says pricing will be “competitive,” but hasn’t offered details. The bet, however, is Google may just be using the service to learn more about consumer behavior and won’t opt to go much beyond Kansas City. Its future would seem to be winning over today’s teens with what happens on the Web. Leave the expensive business of how to get them there to someone else.
Consumers have come to expect relatively good deals for Web access. But as broadband becomes the primary focus for cable operators, those days are waning and significant annual cost hikes (with all kinds of usage caps) will become the norm. A teenager today very likely will find a broadband single-play in 2021 costs as much, or more, than a triple-play costs now. Maybe sooner.
It will be intriguing to watch for the inflection point when cable executives find themselves grappling with enough TV subscriber exodus to begin trying to win over Wall Street with an aggressive broadband-first – we-win no-matter-which-way-the-wind-blows -- position. (They can toss in the access business comes without having to pay huge carriage fees to networks.) That change in emphasis probably won’t come this year or next, but investor pressure might call for some change in tone sooner than planned.
Credit Suisse analyst Stefan Anninger gives a sense with the following bolded comment Monday: “We view the generational culture shift surrounding video consumption as the biggest challenge pay-TV providers will face over the next 10 years. Unfortunately, it does not feel like the industry is yet willing to admit that reality.”
Operators seem to like the “first job, big screen” riposte, which goes: so what if a young person is comfortable with TV on a smartphone growing up and then on a laptop in college, the minute they get that first paycheck, they’ll be headed to Best Buy for the huge HD set. And then, they'll sign up for a premium cable package. And if they don't go that route in that first job, then certainly when they begin starting families.
Credit Suisse’s Anninger, however, indicates that pattern may not win out and there is a potential for mass “cord-neverism.” The lure of a killer HD set can go down if a generation has aged up with the Internet and over-the-top (OTT) delivery serving as a “reasonably satisfying video experience.”
Still, as much as Anninger takes operators to task, he does suggest their assertions about customer losses these days due to the economy have merit. Subscribers moving to new residences are opting not to sign up again due to prices, while “first-time householders” aren’t doing it at all because of dollars and cents.
But, if the economy continues to bumble and “OTT options strengthen,” then he says there will be more time for some people to get comfortable with a broadband-only existence. He further notes that operators could begin to offer cheaper packages as Time Warner Cable has done to build subscriber rolls.
But Time Warner Cable hasn’t given any indication that gambit has been a home run. Fortunately, cable operators have their broadband systems that should always come up a winner.
Right now, content providers have the muscle vis-à-vis distributors, but today’s OTT-oriented teens could help alter the balance in their favor tomorrow.