The Battle Will Be Televised

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With so much competition, why does L.A.’s big cable provider, Time Warner, charge so much?

Everybody wants to hate cable companies. They’re big, they’re bureaucratic, they have a history of lousy service, and they charge customers on average more than $100 a month to deliver TV programs—what used to come over the airwaves at no charge. Time Warner Cable, with its 1.6 million subscribers in Southern California, is one of the industry’s most conspicuous punching bags. Among the many grumblers: actor Patrick Stewart, who tweeted about trying to set up a new account, “but 36hrs later I’ve lost the will to live”; and Ira Kalb, a Santa Monica marketing consultant, who is convinced that the company raised his rates in retaliation for disparaging comments he made on a business Web site. “I’m not very happy,” he says, “and people have long memories.”

The case against TWC, and pay TV in general, omits quite a bit, starting with the obvious: Free television in the days before cable—we’re talking about maybe a dozen stations in the L.A. area, many of them difficult to receive—has little relation to the hundreds of channels that are available with the most basic pay-TV packages. TWC charges you more than $1,200 a year because you’re getting massive amounts of programming that the cable company must pay for, including rights to Laker and Dodger games. The costs of such megadeals are passed along to customers. That’s the simple explanation, but there are many permutations in getting those programs to your home, especially since video streaming has become a growing alternative. The result is a free-for-all unlike anything the industry has ever seen.

Think of the business as a giant television sandwich. The top slice is made up of media companies that want to jack up program fees by bundling their most popular channels (say, ESPN, which is owned by the Walt Disney Company) with a bunch of lesser lights (say, the fledgling Disney Junior). Either take all of it or none of it. The bottom slice is made up of subscribers who want maximum selection at the lowest price. In the middle of the sandwich are the cable and satellite services, dubbed multiple system operators, which need to appease both sides. Capitulating to the networks means higher rates (losing customers in the process) or lower earnings (losing shareholders). Saying no means having to drop popular channels. “This is my frickin’, painful life,” says an industry executive in describing the trade-offs. “Each one of the big media companies has a small number of must-have networks, and all the other crap gets tied to it. In this sort of ecosystem they’re holding their viewers and our customers hostage.” Earlier this year pay-TV powerhouse Cablevision, which operates mostly on the East Coast, took Viacom to court over the bundling practices.

The problem isn’t only higher fees—it’s additional competition. Netflix is investing more than $100 million in original series like House of Cards that can be streamed onto computers and television sets, thus circumventing pay-TV operators. Hulu, which is owned by Disney and News Corp., delivers content through a mix of subscriptions and advertising. The Barry Diller-backed company Aereo is capturing over-the-air signals of local stations and then streaming them to subscribers for a fraction of the cost of cable (Fox, which is among the big media companies that have tried in court to shut down the service, has threatened to eliminate over-the-air broadcasting by making its network a cable-only channel). Add to that telecoms, such as Verizon’s FiOS and AT&T’s U-verse, which grew by a total of 1.4 million customers in the United States last year. These and other emerging models don’t necessarily mean everyone’s ready to be a cord cutter—in a recent survey only 8 percent of viewers indicated any interest in giving up on cable—but they have caused complications. “Why am I paying $110 a month when most of what I watch I can get without cable?” asks Jamie Court, president of Consumer Watchdog, a Santa Monica-based advocacy group.

For many customers that’s no longer an idle question. Between 2007 and 2012, Time Warner Cable’s video subscribers fell about 8 percent, or by 1 million (another 119,000 were lost during the first quarter of 2013). Profits were up 29 percent last year, though that was largely because of the company’s growing Internet and phone services. TV is another story: In the past four years program fees surged 32 percent, more than three times as much as the Consumer Price Index, which measures inflation. During that time, subscription bills went up, too, but according to chief executive Glenn Britt, not enough to offset the increases paid to content providers. Britt says that the industry is going through a “complicated set of structural imbalances” that hurts consumers as well as the bottom line. “It’s clear that it can’t continue forever,” he told analysts. “What is less clear is what will happen to change the situation or when.”

Time Warner Cable effectively took over Southern California seven years ago, when it worked out a deal with Comcast to acquire the assets of scandal-plagued Adelphia Communications for $17.6 billion. As part of the agreement the two companies swapped several coverage areas, giving TWC virtual control of the L.A.-area cable market. But the transition did not go well. With systemwide outages, lengthy waits for customer service, unqualified outside technicians contracted to handle repairs (at one point 30 different companies were used), and unwelcome adjustments to the channel lineup (moving CNN created an uproar), the company went into crisis mode. Hundreds of customer service representatives were hired in late 2006 to smooth things out, though thousands of subscribers still wound up canceling their service. “We took on a lot, and we tried to move too quickly,” says Deborah Picciolo, regional vice president of the Southern California division. These days the company has a 33 percent market share among the 4.9 million video subscribers in the L.A. area, according to the media research firm SNL Kagan. DirectTV is close behind (at 26 percent), followed by DISH (13 percent) and FiOS (10 percent).

At the local TWC headquarters, a plain-vanilla building in the middle of El Segundo’s business district, the emphasis seems to be on erasing memories of those bad old days. A mission statement that hangs on the wall of the reception area includes a handful of tenets, such as “This is a great company. We are working to make it even better” and “We make our customers’ lives simpler and easier.” That last one almost sounds like a joke, which is part of the problem. “I don’t think people are connecting the price they pay with the value or potential value they can get,” says Kelly Atkinson, the company’s chief marketing officer in the western region (TWC also operates in Texas, the Carolinas, the Midwest, the Northeast, and the New York area). Earlier this year a $50 million ad campaign was launched to highlight such choices as a one-hour window for home service calls, a home security system that can be monitored remotely, expanded on-demand offerings, and various apps for smartphones and tablets. The company, however, remains in a kind of no-man’s-land, unsure whether it should be a flashy retailer or a dull-as-dishwater utility. “We’re not a commodity service; we’re different,” Atkinson says, though she acknowledges that the company could do more to toot its horn.

Even if competitive impulses were sharper, Time Warner Cable has a bigger problem: a lack of customer goodwill. Research firm J.D. Power and Associates ranked TWC seventh out of nine among pay-TV companies in a recent customer satisfaction survey (DISH was first). Among all companies in the United States, it’s the sixth most disliked, according to the American Customer Satisfaction Index. “People expect everything to always work,” says Kirk Parsons, senior director of telecom at J.D. Power. “They’ve had customer service issues—showing up late, not cleaning up after they leave. It’s hard to get over that perception.” Apple or Coca-Cola can afford the occasional miss because people are predisposed to like those companies. They’re not predisposed to like their cable operator, although many of the knee-jerk attitudes are outdated. TWC service calls, for example, have an on-time rate of 98 percent in Southern California.

Winning over the skeptics, however, will be a long process, and in the end perhaps more trouble than it’s worth. Executives won’t say it in so many words, but the strategy is no longer tied to being all things to all viewers. In December TWC decided to drop Ovation, a Santa Monica-based independent arts channel that was delivering tiny audiences but costing only a few cents per subscriber per month (ESPN costs $5 per subscriber). “They’re acting like a bully,” says Chad Gutstein, Ovation’s chief operating officer, who has been on a PR blitz in response to the move. “There’s no rational business argument for cutting off viewers from Ovation.” Actually, it was quite rational—TWC says that the cost of carrying the arts channel wasn’t justified by the number of viewers being generated. The airlines, after all, don’t give away tickets because their planes are going to be flying anyway. Other independent channels that draw small audiences and aren’t bundled with the big content providers—channels like Hallmark, WE tv, and IFC—could be on their way out as well.

TWC doesn’t need those channels. Instead it’s trying to cut deals that make the most economic sense. Its biggest bet these days is live sports, which has been one of the most lucrative niches because the viewer base is loyal and the games are generally unavailable online. Basketball and baseball, in particular, have long seasons that attract loyal audiences and advertising revenue over many months of the year. But even here programming costs are getting out of hand: With teams demanding huge amounts for rights to their games, regional sports channels like Fox Sports West and Prime Ticket are charging cable and satellite services more.

Looking to cut out the middleman, TWC has decided to deal directly with L.A.’s two largest sports franchises. First came the introduction last October of SportsNet and its Spanish-language sister channel, Deportes, both of which feature Lakers games as part of a 20-year deal valued at between $3 billion and $4 billion. Earlier this year plans were announced for an additional channel that will carry the Dodgers starting in 2014 at a cost of up to $8 billion over 25 years. The new TWC channels will result in higher cable rates for the entire customer base, no matter how many or how few subscribers watch sports. The logic behind long-term deals is sensible enough—they avoid significant hikes every three or four years when the broadcast rights come up for renewal. But any commitment going out two decades or more is a major risk. Kobe Bryant’s season-ending injury alone raises questions about how popular the team will be in, say, five years. L.A. sports fans can be fickle. So the company is forced to wager with a less-than-ideal hand and hope it can stay in the game—one more reason to hate Time Warner Cable and one more reason to keep watching.

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