For Sale

Capsule: Are TV, broadband and phone service distributors defeating their business models in order to win a crowded field?  Does dysfunctional discounting inevitably reduce a product's lifespan when distributors accept too large a gap between what they charge and what customers actually pay?

Sample Sale



There's a difference between what customers pay for tv, broadband and phone service and the published rates.  There's also a difference between what customers pay today and what they'll be willing to pay in a year.  The smartest content and distribution businesses are anticipating these differences in shrewd terms.  As we enter the next global economic round of "Survivor", the winners will have to transform their economics with some new products that can hold their pricing power for longer than a day.

The smartest consumers in every product category know to shop for sales, referred to in the subscription business as "offers."  In very competitive situations--like now, when the economy is weak and the competitive field strong--customers shop for offer pricing constantly, including by threatening to downgrade or disconnect service. 

Distributors react to increasing competition and consumer demands by increasing their offer discounts--initially with offer rules and restrictions reserving the best prices for certain types of service for certain types of customers at certain times of the year--hoping to retain business and stimulate additional product sales.  As the market matures and add-on sales opportunity declines, distributors inevitably reach the point where the economic effect of their actions is to destroy their own value.    The power of offer discounting is temporary.  Eventually, the market soil is exhausted.  Just like in retail since December, 2007, paying full price for anything feels like a rip-off.  And, the more prices fall, the less we feel like buying anything at all.

Dysfunctional discounting in media is about to have a head-on collision with product obsolescence.  The smart money is on the distributors who recognize the declining value perceptions offer discounting has created and the explosive acceleration of pricing inelasticity amongst subscription products that are closing in on the end of their useful lives.

Take phone service.  Some estimates claim that the New York DMA has already lost one third of its fixed line "home phone" service to cord-cutters relying solely on wireless.  The value of wired home phones has deteriorated because of cheaper wired alternatives: once Skype entered the market, however ineffectively at first, with free internet voice, the end was clear. 

But the biggest deterioration of the wired consumer phone business occurred because cell phone service improved and coverage increased with increased competition.  The phone companies competed with themselves and lost; in order to win more and more valuable cell customers across traditional regional wireline territories, Verizon and AT&T made their cell products better than their wired products on price and product features, making it increasingly senseless to pay the same providers for both kinds of phone service at once.

There's still a lot of revenue in the fixed wireline business, but its subscriber numbers and its profitability have declined significantly because of cell phone competition and offer discounts.   These declines have begun to turn subscription bundling into slow-acting poison, counter to the best instincts and experiences of most subscription marketers.   The most commonly bundled telecom products are wired voice and broadband (high speed internet) service, with pricing economics so tight that customers can almost pay more for one service in the combination than they pay for two.  When a distributor reaches this type of offer pricing aggression--the kind of offer pricing that makes you call your own sanity to account--you know the business will fail, nudged by the exploitation of some internal frailty or an encounter with a superior competitor--at an accelerated rate.

Where does regulation enter this picture to protect consumers and the businesses on which employees as well as customers rely?  Where do legal controls help or hurt?  Appropriately, as long as distributors don't price below their wholesale costs--in this case, the largest cost being the cost of completing a voice or internet connection or the cost of TV sports and entertainment content--pricing and offer discounting are largely unexamined and undisturbed.  Here's a reason for TV distributors to love content rate increases even as they rail against them.  The complexity of the pricing relationships between TV content producers and pay TV distributors is sufficiently tremendous to accommodate a wide range of annual rate increases as well as complementary-until-they're-contradictory offer discounting.

As the rate gaps between full-priced subscription packages and their skinny, seductively attractive offer-priced twins get bigger, aggressive offer pricing forces more and higher rate increases as subsidy.  And as full-priced packages cost more than competitive offer-priced alternatives, the price-value relationship for the distributor's "best"--here meaning "longest tenured"--customers is destroyed.  The likelihood of the "best"--here meaning "highest paying"--customer either cancelling the distributor's service or threatening to cancel in order to negotiate lower rates is increased and the destructive cycle is complete.

Triple Play TV, broadband and voice bundles face special pricing and product challenges in this cycle.  Like mature adults who have survived their wildly successful youths, mature Triple Play bundles are suffering a value deterioration related to their great success when they were first put up for sale.  As the value of wireline voice deteriorates, the weight of its piece of the bundled price-value relationship weakens, adding to the price-value deterioration of the Triple Play bundle and destroying some of the value its broadband and TV products must sustain.

Tougher still for major Triple Play distributors may be solving for the transfer in price-value elasticity between broadband and TV service.  Broadband products are supremely profitable--the smartest players in the distribution menu--while wired TV service continues to carry the greatest weight for the content and distribution businesses, including content costs and related rate increases.

As a potential fourth player in the media distribution bundle, wireless data (as distinguished from cell phone calling and texting) is coming to the market with high hopes for its likely product value and its related ability to sustain the perception of an a la carte price.  If wireless data can complement wired distribution and itself birth a new product family with multiplier-economics, the currently healthy Triple Play distribution business can continue to grow. 

Alternatively, new products and related economics may take their place.   Either way, serious public and private attention should be paid to the inter-dependencies amongst media alternatives as they develop.  We should all want to avoid an intensified media industry weakening brought on by a perfect storm.  The sale of GM forced tremendous value and job destruction resulting from a bad balance between pricing aggression and product weakness.   Continued media industry consolidation will put even more pressure on the sustainability of the right balance and its requirement that the products we sell continue to increase in value relative to the prices they command.