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Cable Technology Feature Article

September 27, 2010

Telcos and Cable Face Cost Issues

By Gary Kim, Contributing Editor

If there financial truth any capital-intensive business must contend with, it is that the rate of utilization matters greatly. As the old truism goes, an airplane can't earn money when it is sitting on the ground. But with increased competition, stranded assets are a growing problem for cable and telco executives alike.

A stranded asset is an investment that cannot earn money. It includes access facilities deployed to homes and businesses that are not customers. A telco might build new facilities that pass 10 homes, but have residents of only three homes as customers. The other seven homes passed represent momentarily stranded assets. However, there are all sorts of other related effects of lower customer penetration rates for services such, as video entertainment or voice. 

Time Warner (News - Alert) Cable chairman and CEO, Glenn Britt, recently pointed out that TWC’s overall programming costs rose 6.5 percent in 2009,  and programming costs per subscriber increased by 8.3 percent that year, reported Multichannel News. 

In 2010, it is estimated that programming costs per subscriber will rise 9.7 percent while overall programming costs rise at a steady 6.5 percent. The reason is a declining video customer base. 

At Comcast (News - Alert), programming costs rose about 8.8 percent in 2009, while per-subscriber costs increased 11.6 percent. For 2010, it is estimated that programming costs per subscriber will rise about 12.3 percent if overall programming increases remain steady at 8.8 percent. 

Lower volume is one reason for the growing disparity. Programming contracts are tied to volume, and as volume decreases, prices per unit rise. In a sense, that is a "strained asset" problem of a new type. Over time, cable operators have to spread a fixed cost over a smaller base of customers. 

One can note the same trend at work in the telecom industry. Back in the 1990s, both AT&T (News - Alert) and Verizon earned double-digit profits each year. Now, each sees profits measured in single digits. A great deal of the reason is competitive pressure, which forces companies to price more aggressively, and raises marketing and sales cost. But at least some of the issue is a growing cost per subscriber caused by declining landline voice customers. New video and broadband customers help, but are not quite matching the revenue losses from voice customers. 

A rational person could not conclude anything but that costs per customer are going to keep rising. By some estimates, 23 percent to perhaps 25 percent of US homes no longer buy fixed-line voice service, and Metaswitch Networks CEO, Kevin DeNuccio (News - Alert), thinks that could rise to as many as half of all U.S. homes. That will require spreading fixed investment over a much-smaller number of customers or revenue-producing units. 

All of this should matter to policymakers. It is one thing to place new burdens on a highly-profitable, rapidly-growing industry, or on an industry that clearly lacks competition, and structurally could benefit from more competition (some declining industries are highly concentrated for a reason, and more competition will not help). 

It does not appear that the US telecom or cable industries are poised for rapid growth. In fact, recent forecasts from Atlantic-ACM have US telecom revenues remaining flat though 2015. Some might argue that is the likely outcome stretching as far as a rational prediction can be made. Remove mobile revenues from the forecast and there is no question but that fixed-line revenue would show a declining trend. 

Prudence might suggest this is not the time to make struggling industries carry more burdens.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Jaclyn Allard