Hunting For Broadband Subscribers

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.