A closer look at quarterly earnings reports by the largest MSOs offers evidence of trends that could alter competitive dynamics in coming years.
For instance, the accelerating swap of residential landline phones for wireless mobile phones--hastened by consumer cutbacks--has virtually flatlined growth of Voice over Internet Protocol from a year ago. Comcast and Cox in particular are placing their bets on commercial VoIP and data. The successful strategy of bundling of services has given way to picking off voice and broadband customers who can be pried loose from satellite competitors. Telcos are ramping their competitive service bundles--best exemplified by the New York rollout this week of Verizon FiOS, although both Verizon and AT&T are struggling for every new broadband customer. Satellite rivals juggling their own problems are once again being swept up into consolidation speculation.
Marketing and promotions are rampant. For instance, Comcast is giving away Wii units with a certain level of triple-play services. Comcast says 20% of its 24.5 million customers take three products (nearly double from 2007), and 55% subscribe to two products.
Cable operators continue to be dogged by their bad customer-service reputation (exacerbated by recent foolhardy efforts to penalize bandwidth hogs) and an unwillingness to provide permanent price breaks to struggling consumers. (In fairness, the telcos are no better in managing their mobile phone advantage.) But cable's biggest error in judgment remains its stubborn blindness to the power of wireless interactive services outside the home. It is one of the surefire growth areas for the next decade for which cable operators have no clear strategy.
SNL Kagan on Thursday delivered the latest of booming wireless forecasts, calling for mobile data to grow at a compounded 16% to more than $100 billion by 2017, when wireless subscribers will reach 90% per capita penetration. Mobile video/TV will ramp the fastest at a compounded average 22.5%, compared with 13% for games and for music.
Wall Street continues to favor cable's fat pipe over other distributors to the home. Bernstein Research analyst Craig Moffett notes that cable is grabbing broadband share away from the telcos. Comcast's "far from spectacular broadband results," although slowing in growth from a year ago, still are strong enough to boost all of cable to taking as much as 90% of broadband net additions in the second quarter. It is an example of how the market for broadband net additions have contracted, but "aggressive marketing can still stimulate significant flow-share shifts," observes Goldman Sachs analyst Ingrid Chung.
Although the cable giant says it anticipated the slowing growth in many of its division, it points to individual subscribers generally spending 8.6% more on monthly services than a year ago. Such measurements of cable operators improving their haul from their own or telco and satellite subscribers is only part of the picture. In an infinite wireless mobile world in which so much is moving outside the home, cable's victories are minimized.
Cable operators' ability to participate in a wireless world will depend on making good on their jumbled intentions to buy spectrum or partner with Sprint to develop wireless services. Of course, the Internet may sidestep cable and bring content and communications directly to digital wireless platforms and devices. Bernstein analysts refer to it as "The Big One." Analysts also argue that disintermediation is good, and it's more important to focus on the supply and demand characteristics of broadband networks, including general WiFi and WiMax, rather than on distribution as a commodity.
For now, cable operators believe that all wireless mobile broadband eventually will come home. The likelihood is that cable will eventually share the 90% of U.S. broadband households with telcos. For now, cable, telco and satellite are scrambling for subscribers with bundled services that will attract an estimated 21% of U.S. consumers by year's end and as much as 40% by 2013. That is the big short-term play, lacking long-term foresight.
The digital transition will give cable a positive but relatively small bump in selling high-margin video product. Telephony is part of the bundle, generated about 1% of the earnings for each of the major MSOs, according to Goldman Sachs. Cable's marginal cost advantage over the telcos and ample capacity to compete with telcos and satellite puts cable in a sweet spot for capitalizing on the growing demand for broadband. But making a meaningful play for consumers and business outside of home and office will require competencies, skills and investments altogether different.
Cable's recent attempts to manipulate consumers--including Comcast getting its hand slapped by the Federal Communications Commission for trying to limit and penalize its big bandwidth users--suggest that the cable, telco and satellite providers can only go so far. In the bigger wireless broadband world, consumers pull the strings and are savvy about utilizing their best, more cost-effective options.
It is a world already fraught with disruptors; witness Apple's year-old assault on the mobile market with the iPhone, already in its second generation. With the wireless mobile interactive world rapidly unfolding, cable operators' quarterly gains and losses is beginning to look like a race without much broader relevance.