Keeping the US Cable Industry Attractive
If long term profitability is the ultimate measure of industry attractiveness, what can be said about the US Cable industry? The following article explains how the threat of substitute services is the biggest factor, turning the industry into a hyper competitive environment, where profits are likely to decrease. To prevent this, Cable companies will need to know their customers better than Verizon, AT&T, and rival 4G providers.
Just taking the major MSOs in isolation, the US Cable industry is characterized by large incumbents with dominant market shares, cooperation between the players, and geographically clustered markets. Despite this cozy situation, the net margin for the industry is relatively low at just 4.1% (Reuters Knowledge, 2010). This is due to the high capital investment needed to build the infrastructure, high programming costs, and the erosion of profits from substitute services provided by satellite, telecommunication companies (telcos), and the internet.
Porter’s five forces framework can be used to evaluate the competitive dynamics and determine the overall attractiveness of the industry. The framework has been extended to include a sixth force, complimentary products, due to the importance of technology partners to create compelling content. A summary is illustrated below:
Each of these forces are described in more detail below:
Rivalry Among Existing Competitors
The rivalry between existing MSOs is low and characterized by a high degree of cooperation where Cable companies are not operating in the same local market. This is demonstrated by various technology initiatives including, CableLabs and Project Canoe. The services delivered by cable are increasingly bundled as triple-play packages, providing buyers with a convenient single source for telephony, television and data. Pricing of these triple-play bundles are generally kept at around $100 per month and price-wars between MSOs are rare.
Threat of Substitute Services
The threat to the cable industry of substitute services provided by satellite (like DirectTV) and telcos (like Verizon and AT&T) is high, although the substitute’s market share is much lower than cable. Satellite companies offer comparable TV services, but lack the return path needed for enhanced interactive and video on demand TV, high speed data, and telephony. The telco’s fibre services directly compete with cable’s digital services and put pressure on cable services, especially triple-play bundles. The build outs of Verizon’s FiOS and AT&T’s U-Verse fibre infrastructure is expensive and will take a long time. Wachovia estimates that at the current pace, by 2010-11, they are unlikely to cover half of US households – 48m households vs. cable’s 124m households. However, the impact has been significant, taking market share from cable as can be seen below:
Figure: Video Net Additions for Cable, Satellite and Telco Platforms in USA
Source: Wachovia, 2009
In addition, the cable industry faces substitutes from the internet for their television services, their data services face competition from third generation wireless providers, and the phone services competes with those offered by traditional fixed-line and wireless providers.
Threat of New Entrants
Historically the barriers to entry have been high in the cable industry because of the capital costs and technical expertise of rolling out fixed wire networks to households. Cable networks are not an easy tangible resource to imitate because of the cost and time they take to build out, however, wireless is threatening that resource in the future. Since 2006, MSOs have been upgrading infrastructure, plants, and set top boxes (STB) to provide digital services. This has further increased barriers to entry; however, it has involved high capital expenditure which has constrained operating profit. Telcos have been rolling out their own Fibre To The Premises (FTTP) infrastructure to challenge the cable infrastructure. This has led to the increased threat to new entrants, which will increase competition and put more pressure on pricing.
Bargaining Power of Suppliers
The bargaining power of suppliers is increasing, with programming costs rising. Video programming costs are a major component of cable operators expenses and so margins related to Television services are likely to decline. Several MSOs have tried to offset these rising costs by adopting backwards vertical integration strategies by acquiring programming companies, such as Comcast and NBCU.
Bargaining Power of Buyers
The cable industry has two main buyers; subscribers and advertisers. Due to the economic downturn, the traditionally weak subscribers (Chan-Olmstead, 2006) could be gaining bargaining power by rejecting the triple play bundles in favour of a la carte services or to go without cable TV altogether. Advertiser’s buying power has also been relatively weak, representing around 5% of cable operator’s revenue, however, this has been in decline since the beginning of 2009 (Wachovia, 2009).
The cable industry is heavily reliant on technology partners to enable the distribution of content to the home. With bandwidth capacity increasing in the cable infrastructure, there are growing opportunities for more two-way interaction between the home and cable headend increasing the attractiveness of content. Cable companies also partner with wireless vendors, such as Sprint, to offer quad-play mobile services to its subscribers.
The cable industry is developing into a hyper-competitive environment as defined by D’Aveni and Gunther (1995). A hyper competitive environment is created when new entrants attack the markets of incumbent players, the incumbent attempts to raise barriers to entry, and an escalating trade war ensues. The cable companies attacked the incumbent telcos when they launched digital telephone and data services in the early 2000s (Drodz, 2009). In response, the telcos launched television services based on FTTP. Hyper competition increases the industry’s rate of change making it difficult to sustain competitor advantage and maintain profit margins. To compete against substitutes the MSOs will need to stay one step ahead of their customers to ensure that they do not switch to FTTP or 4G providers.
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