Broadband Cable Association of Pennsylvania


November 13, 2012

When Georgia-based medical student Cathy Vu called Comcast Corp. last month to cancel her TV service and keep just Internet, she got a shock. Taking the Internet alone would cost her more, not less, a month. Assuming she wanted to keep the same Internet speed, her bill would rise by $20 a month from what she was already paying, Comcast told her. The 23-year-old, who says she watches video mostly online, decided there was no point in canceling TV. "People are pretty much forced into buying both services, and it just doesn't make sense to me," she said. Comcast confirms the pricing strategy, saying it is more valuable for the cable operator to pursue customers who will take multiple services than "single play" customers.

Ms. Vu's experience may shed light on a debate raging in the television industry in the past few years: whether the rising cost of cable TV and growing online video options are prompting people to cut the cord of pay TV. Quarterly subscriber numbers from pay-TV operators have done little to resolve the debate: in some periods, the industry as a whole has grown slightly, and in others, there has been a marginal decline in the number of cable TV subscribers. Several pay-TV executives say that cord-cutting is still a small trend that has largely stemmed from weak economic conditions. But one little-discussed factor is cable operators' pricing policies, which can prompt people to keep TV even if they don't particularly want it.

Cable operators "recognize that their most advantaged product is broadband," said Craig Moffett, analyst at Sanford C. Bernstein. "They don't want to sacrifice that advantage by giving the opportunity for customers to cherry pick their best product at a low price and take the rest of your services from somebody else. In effect, they are pricing the broadband at a price that discourages you from taking broadband only."

Comcast runs a promotion called "Blast Plus" which gives customers in certain markets the option to buy Internet service at a speed of 30 megabits per second and "digital economy" TV service, with broadcast networks and cable channels like CNN, Comedy Central and Disney, bundled together for $50 a month for the first six months. The same 30 mbps speed of Internet bought on its own, however, costs about $70 per month. In a similar vein, Time Warner Cable Inc. offers 20 mbps "Turbo" Internet for about $45 a month-but for just $5 more, the New York-based cable operator throws in basic TV with broadcast channels and video on demand features. Verizon Communications' FiOS charges customers in the New York market about $80 for standalone 50 mbps Internet service, but adds in more than 290 TV channels for just $5 a month more.

Both Time Warner Cable and Comcast say their offers aren't targeted at potential cord-cutters. Comcast said its offer was aimed at "our high-speed data customers who subscribe to a different video provider." Verizon said its aggressive pricing is specifically for the competitive New York market. Most of the bundles are promotional offers. The price typically goes up after six or 12 months. Offering deep discounts can increase the risk that customers will disconnect after the offer expires. "The deeper the discount, the higher the churn" at the end of the promotional period, one cable executive said.

Operators also offer far slower-speed Internet for less. Comcast has a standalone 6 mbps service that costs about $40, FiOS offers a 3 mbps speed for $60 and Time Warner Cable has a 3 mbps service for $20. Even so, as Ms. Vu's experience demonstrates, the bundle discounts can dissuade people from cutting the cord. People who are streaming video are likely to want fast broadband. On the face of it, such offers appear counter-intuitive. Cable executives and analysts say that about 90% of the money cable operators charge for broadband goes straight to gross profits, since there are minimal operational costs for providing Internet service. In contrast, only about 35% to 40% of what they charge per TV customer goes to profits, largely because of the programming costs they pay to media companies for the right to carry hundreds of TV channels. In theory, a $70 broadband customer would make more money for a cable operator than a $50 TV and Internet customer.

But cable operators are often more focused on the overall revenue generated per home passed by their network, Bernstein's Mr. Moffett noted. In addition, Comcast, Time Warner Cable and Verizon said that a customer who takes multiple services is more likely to stick with the cable company and add more products later on. All three operators said they put out a large mix of bundle offers across the many markets they serve, so any one offer doesn't have a huge effect on their profit margins. Wall Street Journal

YouTube has helped fund about 160 "channels" as part of a new strategy to make the video site more TV-like. And just like the TV world, YouTube isn't going to renew all of last season's programs.

This week, Google's video site will start offering new contracts to some of the channel programmers/creators it signed up in the last year. But not all of them: YouTube figures it will end up re-investing in up to 40 percent of its original channels by the time the renewal process is done. YouTube will handle renewals in batches, starting with the first set of channels that launched in January of this year. The new deals will largely mirror the ones YouTube set up last year, where the programmers got advances of up to $5 million to produce videos that would live exclusively on the site for more than a year.

Channels that don't get new deals won't get kicked off YouTube, and executives say they hope content makers will continue producing stuff for the site. In the cases where YouTube hasn't recouped its initial programming outlay, the site will continue to collect 100 percent of any revenue generated by the videos it paid for. What determines who makes the cut? Jamie Byrne, YouTube's director of content strategy, says the site is most concerned about engagement - primarily the total "watch time" a channel has generated - and cost - how efficient programmers have been with their programming budget.

Which means you can get a good sense of the most likely renewal candidates by looking at rankings published by Advertising Age and Deadline. But since those lists only measure video views, it's possible that some channels with relatively high ratings may not get new deals. Byrne and his boss Robert Kyncl are also not paying much attention to the channels' financial performance - a tacit acknowledgement that advertising for the channels remains a work in progress. "We've had some really great response from the advertiser community. As we continue to talk to advertisers and marketers, there's a real sense that they're looking at YouTube differently," Byrne says. "But as we look at this initiative, we are taking the long view here. It's not necessarily about immediate results." New York Times; more from Associated Press