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Nearly three decades ago when Tom Wheeler — President Obama’s nominee to be the next chairman of the Federal Communications Commission — led what is now called the National Cable and Telecommunications Association, he was frequently out-front on the key issues of the era.
It was a time of explosive growth and change for cable, which was just emerging from a legacy of providing distant signals to areas with poor TV reception and becoming a consumer service whose signature was a broad array of programing, movies and other content.
During his tenure from 1979 through 1984, Wheeler was regularly available to the media to push his group’s agenda. The NCTA then was only made up of cable operators and he made their causes his own and helped build the wired world.
As the NCTA convenes its annual convention, which runs Monday through Wednesday in Washington, D.C., cable is well past the era when its video services were the big growth area. Today the biggest profit margins are from selling broadband and phone service, and even those are reaching a point of penetration in American households that means there will be fewer new customers.
Entering his third year as the NCTA’s leader, Michael Powell operates the association with a steady hand but a much lower profile. He makes carefully planned public appearances and scripted speeches but rarely does tough interviews or makes off-the-cuff remarks.
Powell is highly respected as a former FCC chairman. He is known to be intelligent, knowledgeable and personable — even charming. However, his strategy of embracing a low profile doesn’t appear to be the natural reticence of someone trained in the law. It is because his association is very different today than it was in Wheeler’s day. Since the late 1980s, the NCTA has been composed of both cable operators and program suppliers. While they might have once had common goals, today they are going off in very different directions.
“He can’t speak out like Wheeler did because his membership is no longer of one mind,” says a Capitol Hill insider. “Some of his members are cable program suppliers who want higher rates and others are cable system operators who don’t want to pay higher rates and are having trouble passing costs on to consumers.”
Maybe that is why you will find few profiles or in-depth interviews with Powell since he took the NCTA post. The Hollywood Reporter requested an interview three weeks in advance of the NCTA convention, but his spokesman said he was just too busy to get on the phone for even a few minutes.
On Wall Street, where cable stocks have mostly soared over the past decade, there is already a sense that a time of great change is coming and its not yet clear who will survive the shakeout.
“There is disarray in the cable industry that is a reflection of all the issues they face, many hitting around the same time,” says veteran Wall Street analyst Harold Vogel. “Nobody knows what to do. Some companies like Comcast are well diversified while others are pure cable operators. This used to be a tight industry with a unified view. That was 20 years ago when the growth was huge, new subscribers were coming on every day, every year. Now the industry has matured and it has spread out to different interest blocs.”
Vogel compares it to the Motion Picture Association of America, which under Jack Valenti spoke with one loud, unified voice because the member companies had similar goals – the movie business. In the world after Valenti some of those members are also in television, consumer electronics, video games, satellite services and other things that frequently conflict with the interests of movie distributors and theater owners.
“Overriding everything for both movies and cable are two important effects,” adds Vogel. “One is that technological change is so great, which is causing a fundamental movement toward mobile platforms and other devices both industries do not yet know what to do with or how to cope with.”
“The second is that the economy is still under pressure,” adds Vogel. “For cable there was an ability to pass on price increases for what seemed like forever and ever, but that is just not there anymore.”
No wonder Powell sticks to issuing statesman-like statements on those things all of his members can agree on, such as promoting the growth of broadband (which they sell along with video and phone services) and the adoption of programs to help the poor pay to be online.
“It’s very hard for Michael to go out on the road with the consensus opinions of his members that he can sell to Capitol Hill when the membership itself can’t arrive at a consensus opinion,” says Craig Moffett, a longtime cable watcher who recently formed his own firm, Moffett Research.
Moffett points out that cable seems to be approaching a point where future growth is more limited, which squeezes everyone involved.
Moffett lays out some of the reasons:
· Pay TV (meaning TV people pay for) penetration is unmistakably shrinking.
· This creates an almost intractable dilemma for the industry. Programming costs are already rising at unsustainable rates.
· This further squeezes pay TV subscribership, forcing lower-end consumers to look elsewhere … accelerating the rate of cord cutting (people who drop pay TV).
Moffett says over the next six months, the cable industry will face even greater legal, legislative and regulatory challenges.
Wired cable already competes with satellite services such as DirecTV and Dish, and phone-company competitors led by AT&T and Verizon, but now nipping at its heels are the over-the-top players like Aereo.
There are also the de facto a la carte sellers including Netflix, Amazon Prime and Roku — even though it tries to position itself as a friend of cable. The reality is when consumers get 30 or more hours of programming from any of these, they soon feel there is no reason to pay hefty cable bills as well.
Losing some customers may not seem like a disaster because millions more are locked in, often buying the “triple play” of video, broadband and telephone services, which is a hard thing to shake once you have them in your home or office.
However, the loss of even some customers will slow growth, which causes Wall Street to value the stocks less, which makes it harder to attract investment, make acquisitions or even to recruit talent who see more future in the digital realm.
“The big risk to cable is death by a thousand cuts,” says Moffett. “It’s just bump, bump, bump, cord cutting around the edges that keeps the subscriber base from growing, even when household formation is picking up. It comes on the heels of continued pressure from programmers (who want bigger fees and retransmission consent payments).”
Vogel calls it the “termite strategy.”
“It’s a little bite here and there,” says Vogel. “Nobody gets upset about losing a couple thousand subscribers a quarter because it’s not really meaningful. The technology changeover is gradual, but the psychology of the users is changing. It’s imperceptible losses until you turn around five or seven years later and its, ‘Wow! What happened to the business?’ Cord cutting is like termites.”
A report out of Canada last week by the consulting firm Boon Dog Professional Services estimated pay services there lost more than 8,000 subscribers in the last quarter of 2012 and more than 5,000 customers in the first quarter this year.
That report blamed people switching to Netflix and other services. In Canada, says Boon Dog, the answer has been to bring to the market more video-on-demand options and TV-everywhere services.
TV everywhere has also been an answer in the U.S. to the threat raised by Reed Hastings of Netflix and others who predict that eventually content owners will go directly to consumers, eliminating the middlemen.
For now you can get HBO Go on your phone but only if you also subscribe to HBO on cable. However, pressure is mounting to change that.
Senator John McCain (R-Arizona) has been arguing for years that cable customers are “ripped off” by having to take bundles of channels when all they want are a few. He asks why everyone pays for ESPN when not everyone watches it?
McCain has introduced the Television Consumer Freedom Act to provide consumers with the option to choose channels from an a la carte menu. The cable industry is united on that one – they hate it. They say bundling is good for consumers and encourages diversity. They compare it to a volume discount — paying wholesale for a lot of content rather than retail for one channel or another.
The McCain bill has little chance of passage in the current political environment, but it is an idea being talked about.
Even Michael Powell has spoken out about the impact of the rapid business and technological changes. In recent testimony to a Congressional committee, Powell said the time is coming to engage in a dialogue about the state of video and to consider rewriting the 1992 act that regulates the industry.
“The 1992 act that currently governs the video marketplace for incumbent providers is fraying; increasingly incomplete and out of sync with the reality of the marketplace,” Powell told Capitol Hill. “ We are not presently calling for a comprehensive rewrite of the video laws, because we believe that in this fast-moving and tumultuous period it is difficult and perhaps imprudent to try and link an effective full-scale comprehensive regime.”
If he is waiting for his own association to be more “comprehensive” that day may be a long way off. But if we have learned anything in recent years it is that big companies and institutions can shuffle along, but technology and talented people are not going to wait. They are already crowding the fast lane on the electronic superhighway
So as the NCTA celebrates its success this week, they need to also be looking over their shoulder at those who will not wait.
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