Much of the original content lifting cable's spirit and coffers is increasingly served on a variety of broadband wireless platforms and devices. The branded content stables that are cable's saving grace -- led by Turner, Discovery, Disney, NBCU, Fox and CBS--are increasingly repackaged and sold on competing Internet-based platforms and wireless mobile devices. As non-cable distribution of these programs grows, cable operators will face intensified competition in its product licensing and its stalwart resistance to a la carte--or charge consumers only for the content they want.
Time Warner's premiere pay TV outlet HBO is the most recent branded cable content provider to indicate that it will sell its programs through Apple iTunes in addition to streaming video and cable VOD, much like its content peers. The trend will eventually alter cable economics.
For now, the timing is ironic, as the strong ratings for such network cable fare (even exceeding some broadcast TV programs) may finally command ad pricing and overall spending on par with the Big 4 in the emerging upfront. Merrill Lynch analyst Jessica Reif Cohen expects the cable networks to "materially outperform" the broadcast networks with a best-case 5% increase in ad commitments or worst-case 3% decline. The upside that would normally come from increased ratings and unit pricing likely will be dulled by a slow economy.
That will exacerbate cable operators' immediate challenge to grow their share of local ad spending against the accelerated shift of ad spending from print and local television to the Internet. Morgan Stanley Tuesday lowered its U.S. ad forecast to 2.3% (from 2.8%) in fiscal 2008, and to 1.8% (from 2.3%) in fiscal 2009, also citing continuing declines in the local advertising budget.
By next year, cable will struggle to grow 4% as local TV stations face negative 6% growth and newspapers' negative 4.5% growth. The Internet will continue to grow 20%, despite marginal growth in the U.S. advertising market of $203.4 billion. Respondents to a new Morgan Stanley local advertiser survey said they prefer the Internet to local TV, given their desire for audience targeting and return on investment--a notion the Turner cable networks are aggressively countering in the upfront.
All this coincides with the cable industry's Project Canoe, a $150 million unified effort by leading cable operators to increase their portion of national ad dollars while protecting erosion of their spot ad sales. It also parallels intensified efforts by Comcast, Time Warner and Bright House Networks--in conjunction with Clearwire, Sprint Nextel and others--to build a wireless network from scratch to wrap into a quadruple play of bundled services. It is an attempt to capitalize on piecemeal broadband services and spectrum ownership after several WiMax false starts. By the time it is launched, the fiber deploying regional Bells and many of the new, specialized ad networks will have gained steam.
Although cable operators refer to these initiatives as their "offensive" response to increased digital competition, their surest, quickest impact could be their set-top boxes. Efforts are underway to integrate universal interactivity using next-generation hardware and software. Cable faces competition from Apple, Microsoft, the fiber-armed telcos and other tech giants racing to create the first in-home hub for digital content that would converge the Internet and the TV in time for next year's mandated digital conversion.
The branded portals they are building will not preserve their gatekeeper role. Just as cable operators have aggressively wrestled an estimated 14 million voice over Internet (VoIP) customers from regional Bell telephone companies, cable will face the same kind of collective damage from new digital content and services providers.
When that shift occurs, cable operators will no longer compete on content and bundled services pricing without battling tough rivals. To avoid becoming just another grand distribution option, cable operators are scrambling to endear themselves to consumers in new ways--a prospect that defies an industry reputation sullied by poor customer service and spiraling rates.
The most recent of these plays includes integrating social networks to strengthen video, data and communications sharing, inspiring Comcast's acquisition of Plaxo. Cable operators also are aligning themselves with e-commerce, search and other initiatives to strengthen user ties, but such maneuvers have yet to impact their valuations or stock prices.
In fact, the cable industry may turn out to be its own worst enemy. The University of Michigan's annual American Customer Satisfaction Index reiterates cable's historic worst showing among domestic businesses, save for the airlines. Bernstein Research analyst Craig Moffett rightly argues that this is a much bigger deal than cable being compared to satellite and telephone rivals, since it increasingly competes for consumers and advertisers in a broader sphere that includes video games, user-generated video, video games, pre-recorded media, video over iTunes, and pirated content.
Customers have been willing to endure long load times, clunky user interfaces, and low video quality for what they perceive as "free" media and entertainment. Says Moffett: "Weak customer satisfaction--for the whole industry--is an enormous Achilles heel for Pay TV. Perhaps more than any other factor, it threatens the foundation of the Pay TV model."