Cable's Speed Addiction

In February, the Association of Cable Communicators will announce the winners of its annual Beacon Awards "honoring excellence in communications and public affairs throughout the cable industry." (Stop laughing, we haven't reached the punch line yet.)

Were there an instructive "What-Not-to-Do" category in the judging, Time Warner Cable Inc. (NYSE: TWC) would undoubtedly share top honors for its "Usage-Based Billing in Beaumont" PR campaign with co-recipient Comcast Corp. (Nasdaq: CMCSA, CMCSK) for its "BitTorrent Throttling" customer appreciation program (chortle here). (See TWC to Test Broadband Toll Booth and Comcast's P2P Problem.)

Tongue-in-cheek cable PR comments aside, both episodes highlight a real problem for MSOs – the cost of their unchecked addiction to selling speed.

It's no secret that broadband Internet access has been the engine for cable operator cashflow growth over the last decade. To keep that motor humming, MSOs have continually ratcheted up the advertised peak downstream burst speed for their broadband Internet products. The motivation is twofold.

First, creative marketers that they are, cable operators have concluded that being "the fastest" is their optimal differentiation in the broadband marketplace. Second, by continually adding more megabits to their product, MSOs have avoided lowering broadband Internet prices in the face of DSL competition. So far, the approach has worked insofar as it as helped MSOs maintain broadband Internet ARPU (average revenue per user). However, cracks in the façade are starting to appear.

It's not surprising. Logically, increasing access speeds opens the door to increased consumption, and thus, the expenses required to fulfill it. That means more capital outlays for infrastructure hardware upgrades, as well as skyrocketing expenses for fatter backbone connectivity.

So, while ARPU may remain steady, two other key metrics by which MSOs are judged – operating cashflow and capital spending – are put under pressure. Hence the recent maneuvers by MSOs to curb consumption, either by throttling bandwidth-hungry applications (like Comcast) or tinkering with usage-based billing plans (à la Time Warner).

Here's a sign of the severity of cable's speed addiction. At the same time MSOs are feeling the pain from spiraling consumption-related costs, they are touting plans to further increase access speeds, as high as 100 Mbit/s, by shelling out more capital for Docsis 3.0. It seems they just can't help themselves. And unfortunately, the conflicting messages MSOs are communicating to the marketplace are confusing consumers.

An MSO talking 100 Mbit/s out of one side of its mouth and usage caps out the other is like a bi-polar buffet restaurateur. They continue adding more entrees to an all-you-can-eat spread, and then reduce the size of the plates and tell diners they only have 10 minutes to chow. It's a recipe for dissatisfaction. The buffet looks bigger and tastier – so the patron's hunger grows – and then they are asked to practice portion control.

Confused and cranky customers tend not to be loyal customers, particularly in a soft economy, when they are on the prowl for savings.

Even for bigger spenders, cable's "being the fastest" positioning has drawbacks. Because MSOs have convinced consumers that speed should be the primary criterion for their broadband purchasing decision, all a competitor needs to do is offer a faster product to win away cable customers. Can you spell "FiOS"? Additionally, ultra-fast pipes enable competition from over-the-top video providers. Worst of all, though, the always-increasing speed strategy rewards (from a profitability perspective) cable's worst customers.

By its own estimates, Time Warner Cable reckons it is suffering from "5 percent of subscribers who utilize over half of the total network bandwidth."

Back to the buffet analogy, it's like an old Hill Street Blues episode where a raging, rotund fellow pulled up a rolling stool to an all-you-can eat salad bar and started coasting around and pigging out. His defense: "But it says all you can eat!"

Wisely, the manager called the cops on the guy, instead of telling everyone else in the restaurant to eat less. Cable operators should do the same. Rather than capping – and irking – 100 percent of their customers, MSOs should simply refuse service to the hogs. Let them switch to FiOS and cripple a competitor's cashflow.

Selling by speed, and then compensating with caps, is a recipe for trouble.

What really matters to broadband consumers is the overall quality and value of the experience, a blend of access speed, low latency, reliability, support, bundled applications, and freedom from worries about usage penalties – all at an attractive price, of course. It's time for cable to slow down with speed-related hype and sell on quality and common sense.

— Michael Harris, Chief Analyst, Cable Digital News

Interested in learning more on this topic? Then come to Docsis 3.0 Strategies: From Product Development to Service Deployment, a conference that will take a comprehensive look at the cable industry's plans to roll out its next-generation architecture around the world. To be staged in Denver, March 19, admission is free for attendees meeting our prequalification criteria. For more information, or to register, click here.