Cable T.V. and Customer Retention

Recently, I decided to test the waters for a less expensive television experience. I have been a loyal cable subscriber for thirty-five years, but friends have told me that other systems, especially satellite, are cheaper. I went online to DirectTV.com to check their packages. We have been spending about $112 a month. The equivalent package from DirectTV appeared to be about $81 a month. I was shocked at the size of the price difference. DirectTV was more than 25% less expensive than Comcast, my cable supplier.




Given the size of these price differences, I did some investigation in what is happening in the market. Today there are four potential television service suppliers: cable, telephone companies, such as AT&T and Verizon, satellite and internet companies, such as Netflix and Hulu. The cable companies command 60% of the market. Phone companies have less than 15% of the market. The satellite firms, including DirectTV and Dish, control most of the rest. The internet firms are still small, though they may become larger in the future. Over the years, the cable companies have held a high price umbrella over the satellite companies. Now the phone companies are getting under this umbrella as well. The cable companies lost two million subscribers last year. The phone companies picked up most of that loss, while the satellite firms picked up a bit. The combination of the phone and satellite companies took virtually all the growth there was in the market.



Customer retention is a big deal. Even in fast-growing markets, you would like to be able to retain your customers when competitors seek them out. The cable companies have sought to retain customers by emphasizing more services to higher spending customers. These customers tend to be less price-sensitive. It appears that the cable companies are going to have to alter their courses. They simply can not afford to let their competitors take away their market share. Eventually, the competition will be as big and as strong as they are. They will lose the market leverage that a leader enjoys. For examples see GM in autos, IBM in the PC market and U.S. Steel in the steel market.



The T.V. market is speaking in clear tones. The phone and satellite companies offer a better value proposition. The cable companies have to listen soon.

Cost Reduction by Redesigning the Product

Over the last several years, we have studied many examples of cost reduction initiatives to improve productivity and create economies of scale. In simplest terms, there are four actions that improve productivity and economies of scale. First, reduce the rate of cost you pay for an input. Second, reduce the inputs that do not produce output. Third, reduce unique activities or components in products and processes by redesigning the products and processes. Fourth, spread fixed cost activities over new product output. The cellular telephone carriers are introducing measures to reduce their costs by redesigning the product.

The wireless carriers use cellular towers to broadcast their signals. The cellular product design offers signals traveling long distances, primarily for voice and for relatively low data speeds. A cellular tower is expensive but capable of sending a signal for several miles.

This cellular technology worked well until the evolution of the smart phone. The growth of the smart phone has put very high demands on the cellular tower infrastructure because of the heavy data usage it brings to the market. Since 2010, data has taken over the majority of network traffic from voice communications. Now the carriers and, in particular, AT&T with its Apple iPhones, is having difficulty keeping up with the growth in demand.

AT&T today and, likely a few others in the future, has found a potential innovative solution, adding Wi Fi access points. These Wi Fi access points are ideal for heavy data traffic sent at high speeds over relatively short distances. Wi Fi access points transmit signals over a few hundred feet. The Wi Fi access points are smaller, easier and cheaper to install than are cellular towers. This low-cost approach appears to make sense in areas with high density of users. AT&T has placed them in New York’s Time Square and Rockefeller Center, in downtown Charlotte, North Carolina, in neighborhoods surrounding Chicago’s Wrigley Field and in San Francisco’s Embarcadero Center.

But there are some drawbacks to Wi Fi access points. Sometimes, a user has to take several steps to connect to a Wi Fi access point. Signals from the Wi Fi access points may interfere with one another, if signals come from multiple networks. Some smart phones do not have Wi Fi capability. These disadvantages have, so far, held back Verizon Wireless’s adoption of this apparently low-cost approach to providing service.

AT&T is leading this cost-saving innovation experiment. Their network strains force it to be creative and experimental. AT&T saves costs by redesigning the product itself using a less expensive technology with some shortcomings. If the AT&T experiment proves both cost effective and acceptable to cellular customers, every other wireless carrier will be forced to adopt it. And since a Wi Fi access point is largely a fixed cost, the wireless carriers with the highest density of membership within the Wi Fi area will have the lowest cost per unit. In most areas of the country that is likely to be either Verizon or AT&T. They will end up getting a unit cost advantage over their smaller competitors…if this works.