October 3, 2007

Cable Has Early Revenue Edge with Triple Play

By Jim Barthold

Cable operators can offer a triple play of voice, video and data services over single networks so they have a slight early advantage - revenue wise - over telcos trying to accomplish the same thing, according to a report issued by Pyramid Research.

"We're not saying [a triple play bundle is] not good for the business; we're actually saying, in terms of revenue growth, it's definitely beneficial, especially with the cable guys," said Daniel Locke, an analyst with Pyramid Research who co-authored the report, "From Triple Play to Quad Play: Strategies, Business Models and Best Practices."

The money trail is a tale of two providers. Comcast, for instance, "is doing very, very well in terms of revenues and profitability," Locke said. "When we looked at some telcos that have to integrate more than one network, their margins are suffering, at least in the short term."

It's simply financial.

"If you offer two services, broadband and TV, both for $50 on a standalone basis, and each costs you $25, you're making double your money. Once you start bundling, you're still paying $25 each, but the price comes down a bit, so it affects your margins," he said. "Ideally, you want to find a mix of a price point for those bundles where your margin is not going to get hurt."

Comcast, he said, found that mix when it started offering voice service on top of its existing television and high-speed data.

All on one network

"They're doing pretty well partly because they're offering it all on one cable network," Locke said.

Cable operators need to perform more maintenance and system upgrades to get to the triple play, but the cost is nothing compared to the short-term hit a provider like Verizon takes when it goes to bundle services.

"The margin is going to be hurt because they have higher operating expenses for marketing; they need to introduce fiber service, so they're probably going to advertise a lot more than Comcast. Establishing that message increases your operating costs, which lowers your margins in the short term," he said.

The upside for the telcos is that they have a leg up in the quadruple play space because they own their own wireless services, while cable is allied - at least at this moment - with Sprint Nextel on Pivot. The bigger upside is that telco pockets are deep, and they can afford to shell out pocket change in the short term for long-term results.

"They're not going to advertise like that continually, and some of these costs associated with these networks are going to become more efficient," Locke said.

—Jim Barthold