Just one word...

Dec 20, 2001 12:00 PM

It's said that by providing TV, telcos can multiply revenue-per-subscriber. In 2000, the FCC found the average monthly charge for residential telephone service to be about $20 per line. Of course, data service can potentially add to this revenue-per-household, and most households accessing the Internet install an additional analog line to do so, doubling revenue to about $40. 

The rest mostly use either DSL or cable modem services, adding between $30 and $50 per month (let's say $40, on average). But despite widespread availability, relatively few households have jumped aboard the broadband wagon. Although the majority of American households use the Internet, only about two million of them use DSL, and about 3.6 million use cable modems, according to FCC figures published in August. In either case, this is still pretty low.

Give or take a little, the average cable TV bill is about $35 to $40 a month per subscriber. If a telco were to offer TV service (and a subscriber opts to take it), in addition to the existing voice service, the revenue from that subscriber increases from about $20 to $60. Because the telco will likely use DSL to pipe in TV service, it costs the telco little more to provide data service to that household. And before you raise objections about sufficient bandwidth, remember that full-rate ADSL represents an 8 Mb/s pipe that can carry two TVs plus voice and data, simultaneously.

To review the equation thus far:

$20 (voice) + $40 (broadband data) + $35 (TV) = $95 per month/per subscriber

By anyone's standards, more than quadrupling the voice-only revenue stream by selling them TV and broadband data service is pretty darned good. Revenue potential alone should easily establish TV as a high priority for any telco or broadband network operator wishing to accelerate the payback for its broadband network investment.  And the $35 to $40 per month for TV excludes a broad range of additional TV-based entertainment services that have the potential to double that amount, which we'll discuss in future columns.

Before we charge headlong into a TV deployment with rose-colored glasses, we should reflect on the competitive environment. First, it is rapidly becoming a level playing field. The SEC filings of virtually all the major cable operators will tell you the extent of their preparations and expenditures to offer voice telephone service. Further, for a telco to compete, it must build a TV delivery infrastructure that the cable operator already has. Both telcos and cable operators can offer broadband data service. So if we add up all three - voice plus broadband data plus TV - we end up with competing types of service providers, coming from differing positions of strength.

However, the telcos have inherent strengths to leverage. For one, phone folks know about reliability. If you think about it for a minute, the last thing to "go out" is phone service. Even if the power is out. Even if there has been an earthquake. Telco dial tone is nearly as inevitable as air and water - we expect it. Cable voice subscribers, on the other hand, are known to lose service for hours, even days, at a time. Then, there are the other communications services.  In most markets, the same telephone carrier that offers residential POTS also offers cellular, paging, high-speed data backbones and more. 

Another opportunity to beat the incumbent TV carriers is by one-upping their own service bundling game. Cable and satellite have long offered network TV, plus premium programming and movie channels, for a bundled price that's lower than the prices of these channels if taken individually. These discounted bundles create subscriber loyalty. If I try to reduce my TV bill by unbundling some of the premium channels, it may still cost me the same for the reduced lineup. And it may even cost me just to make the change. Powerful disincentives to change; powerful incentives to buy or keep the bundle.

Telcos can easily take the upper hand.  Let's compare the total offering:

Most telcos can offer a range of services that the competing TV provider can only dream of. If you do the arithmetic, it's clear that regardless of how much a carrier spends on its digital or TV upgrade, the payback will be a whole lot faster if it can offer more than just voice and data service. Also, it has new opportunities to cross-sell additional services.

Earlier, I said that the one word was TV, yet I've presented a scenario with multiple bundled services. Have I gotten carried away? No. TV is the fulcrum with which the telco may tip the balance in its favor in its battle with the cable TV industry. In a future column, we'll see how some telcos have increased their broadband take-rates by adding TV-based services. Stay tuned.

Steve Hawley is a consulting analyst and president of Advanced Media Strategies, Issaquah, Wash.  He can be reached at steve@tvstrategies.com.

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