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.

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.

The iPhone Versus the iPhone

After nearly four years, AT&T has lost its exclusivity on Apple’s iPhone. It has been a great run. Now AT&T faces the formidable competition of Verizon, who started offering the iPhone in February of 2011. Market shares are about to shift. Let’s look at how they might change.

Market shares among established customers shift for one of two reasons. (See Audio Tip #40: The Components of Market Share Change" on StrategyStreet.com.) First, a competitor may “win” market share by offering a benefit that more than half of the market suppliers do not offer. On the other hand, market share may shift away from a competitor if it “fails” its customer relationship and opens that relationship to other competitors. A company “fails” a customer relationship when it refuses, or is unable, to offer something that half the other competitors in the market can or will offer.

AT&T garnered much of its share gain over the last four years with a “win.” That “win” was due to its exclusive offering of the Apple iPhone. While it won business with the iPhone, it developed a reputation for problems in the quality of its services. iPhone users tended to overwhelm the AT&T network and cause interruptions and dropped phone calls. AT&T’s customer service has been suspect as well. Still, its market share has grown with the iPhone, primarily at the expense of the smaller carriers. Its market share growth due to the exclusive on the iPhone offset its “failures” in its network and customer service.

Now Verizon enters with its own version of the iPhone. Today, any customer who wants an iPhone can choose either the largest competitor in the market, Verizon, or the second largest competitor, AT&T as his or her carrier. So, Verizon can “win” market share against the smaller competitors as well. These competitors, such as Sprint, Virgin Mobile and others like them, do not offer the iPhone and are unlikely to do so soon.

Verizon should also be able to gain share at the expense of AT&T. Here’s how. iPhone-using customers who are dissatisfied with their current service with AT&T now have a viable, high quality competitor offering an equivalent service with the same phone. Some of these customers will leave AT&T because they perceive that AT&T’s services are not up to the standard of the other competitors, especially Verizon’s, and migrate to Verizon. This is a phenomenon we call “flight to quality.” This “flight to quality” is also an example of a “weak win,” where a competitor gains share only after an incumbent supplier has “failed” the customer relationship.

This “flight to quality” is unlikely to be dramatic. A company can “win” share quickly with a unique Function. On the other hand, a “flight to quality” usually brings share gains in dribs and drabs. It produces share gains slowly, over time, because of inertia in the customer relationships. This inertia allows AT&T time to get its house in order before it suffers a great deal of customer immigration. (See Video #36: Probable Priorities for Innovation in Hostile Markets on StrategyStreet.com.)

Winning and Failing in a Marketplace

Analysts widely expect that Apple will offer its popular iPhone through Verizon by the end of this year. In anticipation of the loss of its iPhone exclusivity, AT&T is busy upgrading its network in an attempt to retain its current customer base in the face of the prospective Verizon competition. This story provides a useful illustration of how winning and failing works in a marketplace.

We use particular definitions for “winning” and “failing”. A “win” occurs when a company offers something that less than half of the other competitors in the industry can, or will, offer. (See “Audio Tip #34: How Does a Company “Win” in a Market?” on StrategyStreet.com.) A “failure” occurs when an incumbent supplier will not offer its customer a benefit that more than half of the industry competitors can, and will, offer that customer. (See “Audio Tip #35: How Does a Company “Fail” in a Market?” on StrategyStreet.com.)

Both a win and a failure can drive a change in market share. With a win, a company often offers a unique benefit, for example, a new feature for the product user. In fast-growing markets, wins are the drivers of much of the change in market share. In other markets, a failure must occur before market share will move. Once an incumbent supplier has failed its customer in some way, the customer opens its purchasing relationship to other suppliers and shifts some, or all, of the purchases it made from the failing supplier to another supplier. (See the Symptom & Implication, “Customers are adding suppliers because incumbent suppliers failed them” on StrategyStreet.com.) We call this situation, in which a supplier gains market share after an incumbent supplier has failed, a “weak win”. It is a weak win because the supplier who gained share was not able to offer something that the customer felt was a winning benefit. It simply gained its market share only after the incumbent failed.

In the early stages of the smart-phone market, AT&T had exclusive rights to the iPhone. The iPhone proved very popular, especially with consumers. This drove market share to AT&T in the smart-phone market and was a clear win by AT&T.

The iPhone brought some unique problems, however. It overwhelmed AT&T’s network and made a shambles of its capacity forecasting system. The result has been dropped calls and a deteriorating reputation with subscribers. AT&T is now failing some of the subscribers with whom it is the incumbent due to its exclusive offering of the iPhone. Many of these failed subscribers are now ready to open their relationships to another supplier, in this case, Verizon.

Verizon here is likely to be the beneficiary of a weak win situation. Without the iPhone, Verizon could not pull many of AT&T’s subscribers away from it. The Verizon benefits were not great enough to win market share in competition with AT&T’s iPhone. But, once AT&T has failed some of these subscribers and now that Verizon has the iPhone, Verizon can gain share at AT&T’s expense.

Some of the share shift is almost inevitable now. AT&T probably does not have enough time to get its network upgraded by enough to thwart the loss of some portion of its disgruntled subscribers. This is a fluid situation, though. AT&T was caught unawares by the significantly different patterns of cell phone usage among iPhone users. It’s possible that Verizon will be similarly overwhelmed. That should not be the case since Verizon could see AT&T’s problems. “Forewarned is forearmed”. If Verizon does encounter the same quality problems AT&T has had to face, it will not gain all the customers that it might have gained through AT&T’s current failure. But, in the short term, Verizon is bound to gain share from AT&T’s failure problems.

Paying Attention to Low-End Competitors

When do we have to pay attention to low-end competitors? The cell phone operating system business gives us an indication.

There are a number of cell phone operating systems from which to choose. The major suppliers include Microsoft, Google, Apple, Nokia and Research in Motion. Google is the newest entry here, and is beginning to make waves with its free Android operating system. (See “Audio Tip #33: Strong vs. Weak Competitors” on StrategyStreet.com.)

There are two separate sets of customers for these operating systems. The first, and most important, are the carriers. The four major carriers include AT&T, Verizon, Sprint and TMobile. A secondary set of customers are the handset makers. These companies are secondary because they conform to the demands of the carriers in the U.S. These handset makers include Samsung, LG, Sony Ericsson, Kyocera, Dell, HTC and Apple.

In the cell phone operating system market, Nokia is the leader with its Symbian operating system. Research In Motion, with its operating system for its BlackBerrys, is also strong. The key growth market today is the smart phone market, where Apple has 13% of the market. Apple is gaining market share, at the expense of Windows Mobile, which has managed to hold on to 9% of the market. Google’s Android operating system is on only 2% of the world-wide smart phones. So should the operating system competitors fear Google’s Android? The answer is yes, for a couple of reasons.

The first, and most important, reason is that the largest carriers, all four of them, have agreed to offer Android phones. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) Whenever the largest customers in the market agree to carry a product, that product has to be taken seriously by other competitors. The adoption of Android systems by the top four carriers argues that Android is a serious competitor.

The next reason is that most of the phone set makers have also adopted an Android operating system for some of their phones. Motorola eliminated Windows Mobile in favor of Android. HTC plans for half of its phones to run on Android this year. And Dell is using Android for its market entry. Most of the other competitors, including Samsung, LG, Kyocera and Sony Ericsson are also making Android devices. Apple will not offer an Android phone. So, the secondary customers have also spoken and affirmed that Android is serious.

Once the major customers have endorsed a low-end competitor, that competitor’s impact on the market will be pervasive. Android will not be a low-end competitor for long. Google will use its growth in the market to fund product innovations which will bring its operating system up to the standards of the better players in the market. Further, the growth of the Android system, which is free, will inevitably reduce the volume of sales or the price, and probably both, of the higher end operating systems. A low-end competitor who continues offering low prices while, at the same time, improving its product’s performance will reduce the margins of all other competitors in the industry. Its performance for price proposition will focus customers’ attention on the marginal differences that the higher end operating systems offer for their marginal prices, depressing either sales or prices. (See “Audio Tip #80: Measuring Customer Cost Savings” on StrategyStreet.com.)

Just when they thought it was safe...

The telephone industry has had its ups and downs over the last twenty years, but the wireless business has helped it survive nicely.

Telephone customers are changing how they buy phone service. For the last several years, customers have been migrating away from land line phones to cell phones. Many of the under-35 set rely exclusively on cell phones for their phone service.

The largest telephone companies, including AT&T and Verizon, solved the problem of the lost land line business by buying cell phone carriers and expanding the cell phone business. This move kept their profits intact. These companies make most of their cell phone profits with voice communications. A secondary source of profits for them is data communications. Today the combination of land line and cell phone services produces an attractive business for both AT&T and Verizon.

They have had their challenges, though. One of these challenges has come from the internet calling unit of eBay, Skype. For the last several years, Skype has offered very low-cost telephone service using Voice/Over Internet Protocol (VOIP) to allow its subscribers to use the internet for their phone calls. The company claims to have over 400MM users worldwide. This low-end product has certainly had an effect on the land line businesses of AT&T and Verizon.

Now Skype is coming to the cell phone business. Skype has developed a service that allows its users on mobile phones to make calls and send instant messages on mobile phones, with Apple phones and BlackBerrys. This new service has the potential to allow customers to use data plans, rather than more expensive voice plans, to make calls using Skype.

This is an example of a low-end competitor posing a challenge to the leading products of the industry leaders. If industry leaders, whom we call Standard Leaders, do not stop or slow the growth of low-end Price Leaders and Next Leaders, these companies can eventually become Standard Leaders in their own right. (not likely in a Hostile market. See the Perspective “Commodities and Hostile Markets” on StrategyStreet.com.) Consider the following examples:

~ Dell began its career in the personal computer industry as a Price Leader.

~ Enterprise Rent-a-Car grew to become the largest automobile rental company, starting from a low-end base.

~ Today’s LG appliances compete against the GEs and Whirlpools of the world. They began as Price Leader Lucky Goldstar products.

~ Dean Foods grew to become the largest dairy producer in the United States beginning from its roots as a private label supplier.

~ Gallo entered the mid and high-priced segments of the table wine industry, from its beginning, with such low-end products as Thunderbird wine.

~ Southwest Airlines has become a leader in the airline industry from its roots as a discount air carrier.

~ VF leads the denim industry, where it once was a cut-rate competitor of Levis.

~ Nucor is the second largest steel manufacturer in the United States. It began its life as a seller of one of the industry’s cheapest products, rebar.

~ Toyota and Honda both entered and grew in the American automobile market, starting with the small car segment. Is Hyundai next?

~ Wal Mart has become the largest department store and grocer in the U.S., surpassing Sears, Macys and Kroger.

~ Charles Schwab has become a powerhouse in the brokerage industry, starting from its original base as a discount broker.