Cable's Rivals Lure Customers With Packages

The New York Times
November 22, 2004
By KEN BELSON

For years, consumers who wanted to cut the cord with their cable company found that getting television and high-speed Internet service often meant the inconvenience of finding two new providers.

That's now changing. Cable's two hungry rivals - phone companies and satellite providers - are stealing cable's disgruntled customers with cheaper all-in-one packages that bundle TV with Internet and phone services.

In theory, cable companies like Comcast, Cox and Time Warner Cable, a unit of Time Warner, are ideally suited to offer one-stop shopping for all telecommunications services, including new Internet-based phone services, with their single pipe into the house. But they have not been able to shake the perception among millions of consumers that cable companies charge too much for bad service.

Not surprisingly, cable's problem has created an opening for an ungainly alliance of regional Bell companies - Verizon Communications, SBC Communications and BellSouth - and the two biggest satellite companies, DirecTV and EchoStar, which runs the Dish Network, to lure away cable customers by selling each other's products at a discount.

Frustration with their cable company was what prompted Jonathan and Courtney Rothstein to subscribe to DirecTV when they moved two years ago from New York City to Chappaqua, in suburban Westchester County. The plan they picked from DirecTV was $20 cheaper than what Cablevision, the local cable company, offered in their new neighborhood. They also ordered a TiVo digital video recorder for $4.99 a month, and received free installation of the satellite dish.

"It was more for our money," said Mr. Rothstein, an architect. "The only thing with satellite is there are so many channels that I can't follow them all."

But the Rothsteins still face one problem. Their phone company, Verizon, does not offer high-speed Internet lines in their neighborhood. So they still have to pay Cablevision $49.95 a month for broadband service, about $15 more than Verizon's high-speed Internet line.

"When we moved in two years ago, it was really the only option, so I was hostage to the price," Mrs. Rothstein said. She will happily sign up with Verizon when it brings broadband connections to her area, she said.

With aggressive advertising campaigns like "Stop Feeding the Pig" that lampoon cable companies, DirecTV and Dish Network have attracted 24 million customers in the past decade with its low-cost pitch.

But to maintain that growth rate, the satellite companies knew they also needed to offer Internet access and phone lines. At the same time, phone companies crave the ability to offer television without having to invest huge sums of money.

"We feel good because we don't have to spend billions of dollars to provide our customers with video," said Ron Dykes, the chief financial officer at BellSouth which, like Verizon, sells DirecTV's service to its customers. "Our main objective is to replace cable."

SBC Communications, the most aggressive of the three Bells in recruiting satellite TV customers, works with Dish Network and has even invested $500 million in its parent, EchoStar.

The three Bells have signed up 325,000 subscribers for satellite TV so far this year, 13 percent of the 2.5 million new customers satellite companies have added over the period. Most of those customers were former cable customers.

During the first three quarters this year, the eight largest cable providers combined, excluding Adelphia, which is operating under bankruptcy protection, have lost 552,000 subscribers for basic cable services. Many of the losses have come at the weaker cable companies, including Charter Communications.

Still, 19 percent of American households now have satellite service, up from 12 percent four years ago, while cable's share of the TV market has fallen to 62 percent, from 66 percent, during the same period.

Some industry analysts say the partnership of satellite and phone companies has not greatly altered those industries. Others say the Bells will abandon the satellite providers once they start selling television programming over the fiber-optic networks they are now building.

"With the Bells poised to enter the video business, how long can these partnerships last?" said Craig Moffett, an industry analyst at Sanford C. Bernstein & Company. "They will go from a position when they were both aligned against a common competitor - cable - to a position where they are competing" against each other.

For the most part, the phone companies are just beginning to build fiber networks and assembling the programming necessary to sell television on their own. SBC, for one, has said it will offer programs from the Dish Network through its network, and struck a deal with Microsoft last week to acquire the software to do so. But until fiber lines become common, the satellite-phone alliance gives both industries a way to challenge cable's strengths.

The Bells are promoting big discounts - up to 20 percent off customers' monthly bills - if they order a television plan and a full complement of phone and Internet services. The discounts have also allowed the satellite companies to focus more on products rather than just price.

"We have been very successful at positioning ourselves as a low-cost provider," said John Scarborough, a spokesman for EchoStar. "Now we're positioned in a bundle with SBC, and we have the common objective of beating out the evil-doers of cable."

There are gaps in what the phone and satellite companies can offer, though. Satellite providers have fewer local and high-definition programs than cable companies, and satellite technology does not allow video-on-demand and other services that require two-way signals. Satellite customers also complain about losing television signals during rain and snowstorms.

Phone companies, too, have limitations in competing with cable. For one, they cannot deliver high-speed Internet connections to customers like the Rothsteins, who live too far from their local switching stations. That is a particular problem for customers in rural and suburban areas, and it limits the number of satellite customers who might otherwise sign up for broadband services from phone companies.

In the meantime, cable providers have responded aggressively to the new threat with advertising campaigns to promote cable-only features like free video-on-demand, their faster Internet connection speeds and cheap Web phone service.

"Bundles are where cable's priorities are," said Char Beales, the chief executive of the Cable & Telecommunications Association for Marketing, an industry-funded group. "If you look at the deals the satellite providers are putting together with the phone companies, they've definitely got bundle-envy. Cable is more consistent."

Still, she said it would take a long time to change consumer perceptions. Customer satisfaction surveys by J. D. Power and Associates showed that though the cable industry had improved in the eyes of consumers, it continued to lag behind satellite providers, which were considered friendlier and cheaper.

"It's hard for the cable industry to close the gap," said Steve Kirkeby, an analyst at J. D. Power. "Fundamentally, satellite customers are much happier than cable customers. And at the end of the day, there's no doubt that satellite is winning the hearts and minds of customers on cost."

For now, the phone companies are biding their time, riding on the satellite industry's coattails, until they can offer television programming of their own.