Wag the Dog

Capsule:  Dynamic pricing is the most hopeful and the least practical idea for managing energy consumption through electrical smart grids.  The concept involves charging more for electricity during peak consumption periods and offering consumers the opportunity to manage their consumption or have it managed for them to peak efficiency.  Is there a similar pricing plan in broadband's future? 

The Economist


This week's Economist gives the skinny on "wiser wires" with the latest commercial thinking on smart grids.  Local and state governments are being offered Federal stimulus to invest in smart energy management.  Companies, detecting a brass ring in our energy management aspirations, are flocking to smart network construction, meter-making and in-home products that will enable their fulfillment.  This can be good news for all last mile media distribution companies who might be far-sighted enough to invest in new partner economics.

Start-up companies like Grid-Point and Silver Spring Networks have recently raised close to $400 million to develop systems where sensors on electrical plant will talk to smart meters in the home to rate, route and perhaps price electricity consumption.  Google and Microsoft are joining Cisco and IBM at the smart table with web-based energy management services, called PowerMeter and Hohm. 

And think tanks are debating whether consumers will play along with pricing plans that reward energy efficiency.  Unfortunately, an early effort by Seattle's Puget Sound Energy (PSE) was cancelled within 18 months of its 2002 launch when the flaw in the pricing scheme turned out to be charging the most energy efficient customers a counter-intuitive premium for their participation. 

Is there an opportunity in all this smart thinking for smarter products and smarter pricing in the media?  Bandwidth management for cable and telecom distribution is a major economic issue with few sympathizers.  To start, cable and telecom companies don't easily admit, for competitive reasons, that they have capacity issues.  Recently, on threat of wireless net neutrality regulation, telecoms registered their wireless bandwidth concerns.  Governments seem to understand, yet persist in thinking about media bandwidth only in terms of voter desires and the new media ambitions of Google and others for unlimited broadband capacity for their own profit-making use.

The bottom line on wired cable and telecom network capacity is that overcoming limitations will require investment and ingenious strategic thought.  It may also require a better dynamic partnership between content and distribution to reinforce the gig that pays the bills.

Today, if an average cable bill can be set at $113 per month, the largest piece of that bill--$70--is going to digital TV; $32 is going to broadband (80%--the estimated percentage of video customers taking broadband--of a $40 online RPS;) and, $11 (45% of a $25 RPS) is going to voice.  On an operating income basis, the economics change, with digital TV contributing $21; broadband making the largest contribution of $23.50; and voice contributing just over $5.50. 

The biggest cost inside the distribution business is content.  The biggest cost inside the broadband business is bandwidth.  The biggest cost inside the voice business is call completion.  Content costs, assessed only on the TV part of the business continue to rise, as does content consumption--slightly for digital TV and expansively for broadband.  Call completion costs are variable and decreasing, as unfortunately are paid wired voice calls as customers cut the cord in favor of wireless-only calling and very low cost internet plans.  The value of wired voice service will likely stabilize at a very low premium--below $5 a month, bringing in just under half in profit.

What's to come for digital tv and broadband economics?  Fewer digital TV customers along with reduced broadband growth and higher broadband content consumption.  Everyone will eventually lose in this scenario unchecked.  As the digital TV business loses value to internet based content alternatives, every digital TV player, from cable to satellite to telco TV will lose customers and growth opportunities as the broadband business grows fastest in terms of consumption and cost.  Wired distribution may keep pace by raising broadband prices but there is a serious incentive in not allowing the tail to wag the dog. 

In 2009, TV viewing through a wired digital TV system increased, with cable networks and broadcast stations all playing a part.  But the proliferation of TV alternatives online suggest that younger viewers will soon replace high revenue digital TV packages with heavier broadband use, increased wireless dependence, home media hubs and IPTV.  Distribution losses are big in this vision of a possible future.  Content, ambivalent about internet distribution dollars for fear of losing the sure bet of cable and satellite revenue share, will likely feel some pain as the markets weed out the least serious players in a competitive race that includes multiple distribution alternatives from Hulu to Google TV to Apple.

The best news in these evolving economics is how long evolution takes.  The digital evolutionary course will likely unfold over a decade or two, separating consumers into consumption patterns.  Older customers and major sports fans used to the convenience of cable and satellite TV on their HD home theaters will continue their digital TV ways for the foreseeable future.  Younger less established consumers will join the ranks of early adopters and vary their triple play consumption--first, cutting it down to a double play by losing the wired voice service and next by reducing or eliminating their digital TV packages.

Both content and distribution have real opportunities to turn evolution into profit transformation as life unfolds.  One confident move might be to introduce a new tier of online service that includes TV.  TV Online (or Roadrunner TV or Comcast High Speed TV or Optimum Online TV, etc.) might be an outgrowth of the TV Everywhere content efforts, now aimed at creating a scaleable authentication system that will approve TV consumption online according to the wired TV services purchased through cable, satellite or telecom. 

If the media aims at the younger, early adopter audience in its wise recognition that things change, authentication should evolve to become a two-way concept, meaning it will initiate with a broadband only subscription as well as with a traditional TV service.  Two-way here should also mean that depending on whether TV content is bought first online or on TV, either or both content and distribution can bill. 

TV Online's pricing might begin with the full price of a broadband subscription. Layered on: premium content brands to be purchased a la carte, in packages or through online content aggregators including cable-friendly Hulu and cable-agnostic Netflix.  If customers sign up for content purchases online, their billing relationship for just that content might be with the content store run by the content brand.  In exchange for broadband platform access and the managed services of the cable or telecom distributor, the content brand or aggregator might pay the distributor via a premium subscription revenue share. 

The a la carte content subscriptions layered onto the TV Online distribution service would cost less individually than their digital TV counterparts, but only on a network by network basis.  TV Online content subscriptions would not be bundled into basic and expanded basic formats like they are inside of our historically constructed and regulated multichannel world.  The bundles that would be carried through content aggregators would be built on an a la carte content pricing foundation that would be initiated on a practical level with TV Online.  Traditional wired media would negotiate into their programming contracts broad terms on how the TV Online content subscriptions would be priced and bundled in exchange for maintaining the healthy core economics of wired carriage.

When purchased in volume, TV Online would cost more than traditional digital TV, maintaining cable, satellite and telecom for now as the value rich choice, leading lower and middle income families as well as older more traditional consumers to maintain their TV status quo.  Why is the status quo important?  Because today's distribution businesses are the foundation of the media, having proven their subscription model economics superior in the near term to any comers.  These businesses support a robust content industry, while providing local jobs as well as paying taxes and franchise fees to local government.  Creative disruption doesn't have to become creative destruction if the underlying business remains productive.

In this model, when TV Online content choices are light, the combination of a TV Online subscription and online subscription content might be competitive with or less than today's TV and broadband double play.  Retained customer economics can quickly demonstrate the revenue advantages to a strategy like this for even the most successful cable bundler.  There are cost advantages too: by putting a la carte subscription costs back into TV consumption when its done online, customers will share in the cost of bandwidth.  And the eroding margins inside the cable, satellite and telco TV businesses may have a shot at stabilizing, while revenues and margins in the broadband business continue to increase.   Only satellite is challenged in this scenario for not having a broadband business, although broadband partnerships help.

There may be a new future for the media business that involves a healthier system of dynamic pricing than the energy business has been able to effect.  By thinking about media distribution platforms as a scarce resource to be renewed, government may contribute to productive media partnerships that will benefit consumers with more choice and greater value.  There might also be a wireless or even an energy management idea or two in a wired media distribution and content relationship that works.