Yogi Berra's quip, "the future ain't what is used to be" came to mind as I
reviewed 2nd quarter broadband subscriber results (graciously compiled by Leichtman
Research Group).
I thought of Yogi, because as recently as a year ago, cable operators were
scoring quarter after quarter of robust broadband subscriber additions and
strong future growth was assumed as the telcos' DSL product posed anemic competition.
However, in the 2nd quarter of '04, telcos surpassed MSOs in broadband subscriber
additions for the first time, 895K to 831K. This reversed the results from
the 2nd quarter of '03, when cable added 929K subs to the telcos' 620K.
Surprisingly (or not surprisingly given the parallels in the cable industry's
early reactions to DBS competition), many cable leaders still do not consider
DSL a true competitor, due to its slower speed. Judging by all the speed enhancements
made by MSOs to their broadband services this past summer, it is clear that
MSOs consider speed to be their key differentiator. Speedier service is the
basis of MSOs' premium pricing strategy, as reflected in their ARPU (average
revenue per unit) in the $40's. Meanwhile, it's no secret that telcos have
focused strongly on price, with DSL offers now as low as $24.95/mo in certain
packages.
Can the cable industry combat this price- based competition and re-assume subscriber acquisition leadership without cutting its prices?
With 40-45%, of all internet connected homes now using broadband, the key
questions for cable are how to persuade dial-up users, and to a lesser extent,
new internet users, to both adopt broadband and choose cable over DSL. While
the obvious option of offering a discounted, competitively-priced service equivalent
to DSL may be an option, this route risks incenting price-sensitive existing
subscribers to downgrade, causing irreparable damage to ARPU.
Solid clues for how to successfully target the dial- up audience can be found
in understanding generally how technology-based products are successfully adopted
by the masses. To me, there's no better guide than the bible of high tech marketing;
Crossing the Chasm , by Geoffrey Moore, the book that popularized the concept
of a "Technology Adoption Life Cycle", which begins with the "Innovators" and "Early
Adopters" segments. Following these is the so called "Early Majority", which
accounts for about a third of the total potential customer base. Today's broadband
penetration suggests the prospective customer's profile has moved into Early
Majority territory. Getting the "Early Majority" to adopt broadband is a classic
chasm-crossing challenge.
Understanding the "Early Majority" profile and why new technologies are adopted.
Moore believes that while these people are technically literate, they are
fundamentally pragmatists about their technology adoption - that is, they adopt
technology products when they can clearly see how these products will make
a percentage or incremental improvement in things they are already doing .
Pragmatists seek references from credible sources, want to see competition
(alternatives to fall back on) and want to buy from a branded provider (so
quality support will be provided). Finally, they want the best deal, unless
special differentiation of competitors can be observed. Sound familiar to you?
Moore asserts that the best way to succeed with this market is to slice it
into well-identified niches, based on particular needs and usage behaviors.
Casting a wide marketing net is tempting, but often fails. The key is to offer
superior value to these niches and turn them into referenceable mainstream
customers, who in turn fuel word-of-mouth marketing among their cohorts, ultimately
leading to broad- based adoption.
Characterizing the Early Majority this way makes it hard for me to reconcile
why speedier MSO broadband service will resonate with prospective broadband
customers. Aside from intuiting that "faster must be better", will they understand
what a megabit is and why 4 megabits/second vs 1 or 2 megabits/second matters
enough in their day-to- day online usage to justify cable's price premium?
If the answers are anything less than a resounding "yes", then speedier service
isn't likely going to be the key to cable's future success, except possibly
as a retention tool for current high-end users. (Ironically, there may even
be an argument that enhanced cable broadband is in fact "overshooting" its
Early Majority's speed expectations. If so, retention, not acquisition, actually
would be the key benefit of increased speed. More on this in the future).
How Programmers Can Help.
However, if MSOs chose to follow Moore's advice, they could look no further
than their programming partners, who have made a business out of identifying
and targeting pragmatist niches. In addition to their linear channels, programmers
have invested heavily in building elaborate web sites, which attract millions
of users on a daily basis. While many of these sites already offer features
geared for broadband users, including video, audio and "always- connected" applications,
a significant percentage of these sites' visitors (anecdotally 25-50%) still
access them via dial-up.
This points to two big opportunities for MSOs. The first is to enlist programmers
in the marketing effort to convert dialup users to cable broadband, in ways
that go far beyond today's zip code-based referrals. The second, and more important
opportunity, is to work with programmers to develop heavily branded broadband
applications that are exclusive to cable broadband subscribers. Getting pragmatist
users to interact more intensively with their favorite sites seems like a smart
bet, and can also work well as an aide in getting these users to migrate to
unfamiliar MSO- sponsored broadband portals.
Enhancing the Traditional MSO-Programmer Relationship To Benefit Broadband.
Since the internet has empowered programmers, through their web sites and
related tools, to have unprecedented direct interaction with the end-user,
I believe it is inevitable that MSOs will have less control over their customer
relationships than in the past. However, this can be turned into an advantage
for MSOs, as the industry's strong preexisting relationships with programmers
are something telcos don't enjoy. MSOs should create an incentive structure
for programmers to create cable-only applications. This means new, innovative
compensation arrangements that recognize the brand strength that programmers
can bring in helping cable meet its broadband acquisition goals.
For example, this new model would entail incenting programmers to share select
site usage information with MSOs which can become the basis for logically extending
these sites' most popular features into exclusive applications for MSOs' broadband
customers. These applications would be easily understood and valued by the
pragmatist target user, because, by definition, they would be incremental to
what they're already doing at these sites.
At a high level, these deep broadband applications and their respective programmers
are easy to imagine. For example; kids' applications from Nickelodeon, Disney,
Discovery and National Geographic, sports applications from ESPN, Fox Sports
and Golf, and on and on. The benefits of these applications can be messaged
and promoted effectively to their target audiences. Incrementally improving
users' existing site behaviors as a lever to help fuel cable's broadband acquisition
dovetails with Moore's advice for how to succeed with the Early Majority. For
the cable industry to regain its leadership in broadband subscriber acquisition
and retain the value of its premium price, now is the time to start moving
ahead with these types of initiatives.