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Broadband & Mobile Featured Article
February 15, 2008
Is cable recession proof?
By Gary Kim Contributing Editor
As fears of a possible recession grow, executives, analysts and investors are pondering the potential impact on cable, mobile and telephone companies. And the answers aren't so clear. In fact, there is more uncertainty than ever about cable company fortunes, for example, for multiple reasons. Historically, at least through the 1990s, cable has been "recession proof," growing through and despite every economic slowdown since the 1950s.
The general logic has been that in tougher times, it is hard to beat the entertainment value a family gets from cable, for the money.
In the 1990s, basic cable services demonstrated immunity to economic sluggishness. However, premium cable services, which include higher-cost channels such as HBO and Showtime, dipped to 41.6 million U.S. households in 1994 — about the peak of the recession — from 43 million a year earlier, according to Paul Kagan Associates, a cable industry research firm.
There obviously is historical precedent for a weakening of subscriptions to premium channels. The evidence for pay-per-view buying isn't quite so clear, as revenue in that category has different drivers than in the past. PPV traditionally is sharply affected by "event-driven" buys rather than movies, and one can make the argument that huge "boxing matches" that were huge revenue generators in the 1980s have not had the same drawing power since.
In contrast, cable operators now offer subscription PPV services and even ad-supported services whose viability in a recession of any severity has not yet been tested.
There are other differences today, compared to the early 1990s. Cable is much more active in the home phone market, another service that has been seen as recession proof, so that ought to provide a counterbalance to weakness in premium video growth. The difference from the 1990s is that there is a much more prevalent "wireless only" trend. With overall penetration in the 80 percent range, some users might be tempted to substitute wireless-only service for a wired connection, especially if all family members already have mobiles.
Then there's broadband access, again a service that hasn't been this widely deployed before, and experienced economic sluggishness. It also may be hard to separate out the temporary effect of any economic slowness from secular decline in growth rates. With or without any recessionary impact, broadband growth rates are slowing because the market is nearing saturation.
It might be difficult to separate any impact from recessionary tightness, for that reason. In 2001, some users might have concluded that an upgrade to broadband was temporarily optional, or that a downgrade to dial-up was temporarily necessary. We will have to test that sort of logic if a recession does emerge in 2008, and if it does last more than two quarters.
Also, cable now faces a more-competitive situation in its core video offerings as well. While cable always has had satellite to contend with, Verizon and AT&T (News - Alert) are new factors, for the first time, and already were starting to take share before any hints of recession arose.
The hand-wringing about possible recessionary impact on cable likely is more pronounced than in the past precisely because the background factors have changed so much, making old rules of thumb more suspect.
The conventional wisdom might suggest a split picture: basic video entertainment might not suffer, but other services such as some forms of digital video, might. Home telephone service also has traditionally been seen as recession proof. But broadband, at this level of penetration, has not yet been tested.
On the other hand, the existence of three anchor services where there once was only video will provide cable operators with additional "must have" services to rely on. And never before have so many of the services been wrapped up in bundles, which mean the downgrade of one service might in fact not save much money, as prices for the remaining services will rise.
If I had to call it right now, I'd say the issue will not be a recession, if it arrives, and if it is of the normal two to three quarter duration. Competition from Verizon (News - Alert) and AT&T, the background factor of wireless substitution and churn-reducing impact of multi-product bundles will blunt any "recessionary" impact to the point it will not be possible to determine whether there really was any recessionary impact.
Gary Kim (News - Alert) is a TMCnet Contributing Editor.
Don’t forget to check out TMCnet’s White Paper Library, which provides a selection of in-depth information on relevant topics affecting the IP
Communications industry. The library offers white papers, case studies and other documents which are free to registered users.
The general logic has been that in tougher times, it is hard to beat the entertainment value a family gets from cable, for the money.
In the 1990s, basic cable services demonstrated immunity to economic sluggishness. However, premium cable services, which include higher-cost channels such as HBO and Showtime, dipped to 41.6 million U.S. households in 1994 — about the peak of the recession — from 43 million a year earlier, according to Paul Kagan Associates, a cable industry research firm.
There obviously is historical precedent for a weakening of subscriptions to premium channels. The evidence for pay-per-view buying isn't quite so clear, as revenue in that category has different drivers than in the past. PPV traditionally is sharply affected by "event-driven" buys rather than movies, and one can make the argument that huge "boxing matches" that were huge revenue generators in the 1980s have not had the same drawing power since.
In contrast, cable operators now offer subscription PPV services and even ad-supported services whose viability in a recession of any severity has not yet been tested.
There are other differences today, compared to the early 1990s. Cable is much more active in the home phone market, another service that has been seen as recession proof, so that ought to provide a counterbalance to weakness in premium video growth. The difference from the 1990s is that there is a much more prevalent "wireless only" trend. With overall penetration in the 80 percent range, some users might be tempted to substitute wireless-only service for a wired connection, especially if all family members already have mobiles.
Then there's broadband access, again a service that hasn't been this widely deployed before, and experienced economic sluggishness. It also may be hard to separate out the temporary effect of any economic slowness from secular decline in growth rates. With or without any recessionary impact, broadband growth rates are slowing because the market is nearing saturation.
It might be difficult to separate any impact from recessionary tightness, for that reason. In 2001, some users might have concluded that an upgrade to broadband was temporarily optional, or that a downgrade to dial-up was temporarily necessary. We will have to test that sort of logic if a recession does emerge in 2008, and if it does last more than two quarters.
Also, cable now faces a more-competitive situation in its core video offerings as well. While cable always has had satellite to contend with, Verizon and AT&T (News - Alert) are new factors, for the first time, and already were starting to take share before any hints of recession arose.
The hand-wringing about possible recessionary impact on cable likely is more pronounced than in the past precisely because the background factors have changed so much, making old rules of thumb more suspect.
The conventional wisdom might suggest a split picture: basic video entertainment might not suffer, but other services such as some forms of digital video, might. Home telephone service also has traditionally been seen as recession proof. But broadband, at this level of penetration, has not yet been tested.
On the other hand, the existence of three anchor services where there once was only video will provide cable operators with additional "must have" services to rely on. And never before have so many of the services been wrapped up in bundles, which mean the downgrade of one service might in fact not save much money, as prices for the remaining services will rise.
If I had to call it right now, I'd say the issue will not be a recession, if it arrives, and if it is of the normal two to three quarter duration. Competition from Verizon (News - Alert) and AT&T, the background factor of wireless substitution and churn-reducing impact of multi-product bundles will blunt any "recessionary" impact to the point it will not be possible to determine whether there really was any recessionary impact.
Gary Kim (News - Alert) is a TMCnet Contributing Editor.
Don’t forget to check out TMCnet’s White Paper Library, which provides a selection of in-depth information on relevant topics affecting the IP
Communications industry. The library offers white papers, case studies and other documents which are free to registered users.
