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Consumers Aren't Gonna Pay a Lot for Telco TV

[qi:032] Telephone companies pushing television services will gain customers by offering lower prices than cable or satellite providers, according to a survey being presented today by Heavy Reading. The survey, which consisted of about 200 consumer interviews, found that price, more than special interactive features, will dictate which provider consumers turn to. That’s grim news for the telcos, which have been spending heavily to lay fiber and upgrade their networks so they can offer the triple play of voice, video and data in order to better compete with cable companies.

The pitch on the part of telcos is that consumers tired of boring TV delivered by their cable company could switch to a more interactive experience through, such as those offered by AT&T’s (S T)  U-verse service or FiOS TV or Verizon (s VZ). And for the privilege of such an experience, they would pay more. Of course many of those features, such as alternate camera angles and personalized channels, haven’t yet been rolled out. In the meantime, cable companies are offering digital video recorders and interactive services such as Start Over as part of their digital cable packages.

In fact, a survey in September found that consumers weren’t even happy with the current pricing or service being provided by their cable companies — suggesting that undercutting cable companies while providing better service is the key to gaining their business. That being said, many of the consumers in the September survey said they’d be happy to switch to telco TV if the price was right. It looks like that for all the technical innovation, the promise of the triple-play bundle isn’t about service, but about the bargain. Carriers will have to find other ways to boost their bottom lines for the time being.

7 Responses to “Consumers Aren't Gonna Pay a Lot for Telco TV”

  1. The biggest problem with pricing is you have to have all those channels you don’t want. The ESPNs add about $5 to your cable bill. I could careless if I got certain channels, but their model IS the problem whether it is a Cable outfit or a Telco.

    People want choice and that means some sort of ala carte television. Having to have a $180 package to get say the Food Channel is ridiculous. I wouldn’t mind basic channels, the networks and news networks and a few others, but expensive channels like ESPN, Disney, MTV, etc. should be on another tier. If you hate sports but like movies or TV shows, why do you have to subsidize the NFL (sports in general)? Same with a sports nut that could careless if he or she gets the Food Channel or Sundance.

    The problem here is that programming, channels, are forced down consumers throats. Anything else we seem to have choice? You can buy a Honda with this and that and avoid Ford. Honda without a sunroof? No problem. Cable package without ESPN? Not available. Want the Golf Channel? Sorry, you need the Ultimeate package for $180.

    If consumers really want to buy programming in tiers, they should cut off cable en massee. Unless consumers do that, Cable and the Telcos will continue to subsidize channels some hate for the benefit of others. Sports nut meet the art channels. Art nut meet ESPN. Movie nut meet NFL Network. Consumers need to vote with the wallet on it. Call the Cable or Telco television company and say, “I’m okay with a basic lineup, but not the rest of this garbage. I want SCI-FI but no need for ESPN. If you can’t give me what I want, cancel my cable till you can. Thanks.”

    As far as the “competition crowd,” arguments against a basic tier with add-ons is ridiculous. Give the people what they want. That is the reason for all the disastisfaction. Consumers get choice in restuarants, stores, perfumes so why not cable? If consumers were relegated to one restaurant or store, they’d buy less. So, either give the consumers better choices or you might not just have any consumers at all.

  2. John Q Customer

    File this under “duh”.

    The telcos campaigned to bypass local cable franchising, on the basis that they would offer a higher-quality product at a lower price than cable and satellite.

    They aren’t.

    We noticed.

  3. The telco versus cable fight is tricky to handicap. When there are only 2 choices, it’s very hard to decide the right strategy for a company. You’re on target the telcoTV and DSL takeup is disappointing, and even FIOS is having worrisome quarters. It’s a high fixed cost, low marginal cost business, so it makes sense to drop prices to get more customers. VZ and AT&T are among the most profitable companies in the world, making over $20B/year, so they can afford to do whatever it takes. That’s how the textbook says markets work – if they have plenty of competition.

    2 Player games are different. AT&T has resolved most of their operational problems so can handle more U-Verse customers. Let’s consider what would happen if AT&T did drop prices, selling triple play for $70. That’s about the price in France, adjusting for our higher Hollywood take.With 85% of the U.S. already paying for television, there’s no big pool of potential customers now able to afford the service at a lower price. Most of the customers have to come from the competition. Say it worked, and they won many customers away from cable.

    What would cable do after they start losing customers? The first guess is they would have to lower their price to match. Result: companies back in a stalemate, holding on to their customers but collecting $20 less from each. Consumers are happy, a handful buy more services at the lower prices, but company profits go down. Without antitrust laws the industry would be stabilized at a high profit rate, just as J P Morgan used to do. That’s the profit maximizing strategy.

    With antitrust laws, the two companies have to signal each other where they want to price, or the consumers get a lower price. Often, that signaling works as well as it did recently, when four wireless carriers raised SMS rates to 20 cents at about the same time, while SMS cost less than a penny. Other times it doesn’t. Ivan Seidenberg feared his company would fail if he didn’t build FIOS to hold off the cablecos. That’s $20B before he has many customers. If the opponent is doing a reasonable job, a new entrant (especially with high initial costs) generally has no choice but to price low, as you’re suggesting.

    But pricing low isn’t profitable if both sides do it. So what’s the right strategy? You want to price low if the other guy will stay high. You don’t want to drop prices if you think it will be matched. It turns on many factors, and is hard to say. I happened to be involved in a choice like that (under non-disclosure) because they brought me in to give them perspective on what cable might do. They had some clues, I had some perspective, but the result was “how the heck do we figure this out.” I was out of there after my presentations, so maybe they found a “right” answer, but I couldn’t see anything other than guessing the other guy’s strategy and then yours, then his to you …

    Which is why I find this tricky to handicap.

    In broadband and now tv, almost all the carriers have a high price strategy, keeping profit per customer high. Instead of reducing prices, they offer introductory deals or increase advertising. 10% of the people hate their cableco, so they will drift over. 15% of people move each year, so you have a good shot at them. Of course you try to have different featured to win customers.

    If AT&T decided to price to take customers, they risk falling in a stable situation at a low price. So they move very cautious, watching. It will get even trickier when DOCSIS 3,9 comes in, 2-20 times faster.

    I can predict the technology, but I don’t know how to predict the right strategy here/

  4. The only problem is that these monopolistic / duolopy companies will not compete on price. This is already evident in the very limited areas they actually “compete” (that word is used quite losely).

  5. I agree, it’s all about price. I have Comcast cable for internet and television. Verizon ran FIOS through our neighborhood a few years ago and sent me their $$$ prices. Fiber is fast, yes, but I’m perfectly happy with my cable speed. I’ll be glad to pay less, but not more. Ditto with Sprint’s XOHM. It’s now available in my neighborhood, but why pay them $35 per month when I already have internet for $42/month (I’d have to buy a $79 modem)?