I got a letter in the mail today from Optimum / Cablevision, our friendly local cableco. We were Cablevision customers when we first moved to the area because Verizon’s FiOS service, which we had known and loved in Boston before we moved, was not available yet. We had broadband and TV from them and phone from Verizon. When FiOS duly arrived in our area, we signed up for the triple play from Verizon and ditched Cablevision without further thought.

Since that time we’ve received the odd piece of mail from Cablevision (”some FiOS customers are not getting what they thought they signed up for”, “wish you hadn’t switched?” etc.) and the other day a Brazilian guy doing door to door sales for the company showed up too.

But the letter that arrived today was a bit different. It appears Cablevision is tired of my refusal to come back to them and has decided to start with the scare tactics instead… I’ve embedded a small version of the letter below but click here for a large image and here for a PDF (both are scans of the original).

My wife brought me the letter in my office and just laughed about it. “Oh no, our house is going to burn down because of our FiOS service!” she said. She saw it for what it was - scare tactics, pure and simple. But would other customers? Would this work? And are they sending this to everyone, or just people like me that have said no too many times to the straight pitch?

Here’s the full text:

Dear Neighbor,

New York Public Safety Commission Inspectors have found that “a high proportion” - over 50% - of Verizon’s FiOS installations in customer homes had failed to adhere to some of the bonding and grounding provisions of the National Electrical Code (NEC); the Commission has ordered Verizon to undertake a comprehensive remedial plan. The NY State Attorney General’s office - supporting the Commission’s action - had also noted that many customers were unaware of the potential risks involved in these faulty installations.

State inspectors first found grounding problems in the spring of 2006. They discovered that some FiOS equipment - Optical Network Terminals, or ONTs - had been grounded to heating fuel-vent pipes and plastic pipe elbows, or were not grounded at all. The PSC report noted that improperly grounded electrical equipment can cause fires or electrocution in the event of equipment failure or lightning strikes. PSC inspectors found similar problems in a series of subsequent audits through the summer of 2008. Although Verizon has now improved its code compliance on new installations, a significant number of faulty installations still remain and, under Verizon’s plan, might not be fixed until May 2009. Verizon customers’ FiOS installations in areas that have yet to be addressed are still at risk for these bonding and grounding faults.

As an alternative, Cablevision offers our popular Optimum Triple Play which includes TV, High Speed Internet and Unlimited Calling in the US, Puerto Rico and Canada [why they think I need to know about Puerto Rico and Canada, or any area outside of the New York area, I have no idea] for just $29.95  a month each for two years with FREE professional installation. And there are no annual contracts.

For more information or to order the Optimum Triple Play, please call 1-866-***-****. Our sales representatives will be happy to help you, 7 days a week, 7am-midnight.

Thank you,

Kathy Filosa
Vice President

Note, no mention of them actually removing Verizon’s ONT, so one assumes this actually does nothing to solve the underlying problem, should there be one in the first place. Since Verizon’s fiber installations are permanent (i.e. no going back to copper) I don’t believe Verizon would ever take it away anyway, so by cancelling I’m probably even less likely to have them come and rectify the issue than if I at least remained a customer…

Advertising Age recently published its annual review of spending by the 100 leading advertisers. I was curious to see how the telecoms companies ranked in their data, and spent some time crunching the numbers.

First headline: The telecom players ranked in the survey end up as follows:

1. AT&T: 2nd overall, with spending of $3.2 billion in 2007
2. Verizon: 3rd, $3.0 billion
3. Sprint: 15th, $1.9 billion
4. Deutsche Telekom (T-Mobile): 52nd, $0.8 billion
5. Alltel: 93rd, $0.36 billion

(The only company spending more than AT&T and Verizon in 2007 was Procter and Gamble.)

Let’s crunch those numbers a bit. First, let’s look at how much these companies spent in relation to their revenues:

• AT&T: 2.7% of revenues
• Verizon: 3.2%
• Sprint: 4.7%
• T-Mobile: 5.9%
• Alltel: 4.1%

With the exception of Alltel (more on them in a minute), the trend is very clear among the first four players on the list: the smaller they were, the greater a proportion of their revenues they spent on advertising. It’s obvious why: if these companies want to have a similar impact to the larger companies, they need to spend as close as possible to their larger competitors, but that amount is a (much) greater proportion of revenues for them. In fact, only Verizon actually approaches AT&T in size of spend (and it increased its spend 8% in 2007 while AT&T reduced its spend by 4%, perhaps thanks to the advertising Apple did on its behalf with the iPhone, but likely also because it was able to consolidate spending once it had unified its brands).

This is a massive scale advantage for the larger players, and a massive scale disadvantage for the smaller ones. For Sprint and T-Mobile to even remotely compete with the two big guys, they have to eat into their profits considerably more, which creates further disadvantages. Alltel, as to some extent a regional carrier rather than a national one, perhaps spends its money a little more carefully, realizing that large national campaigns are going to hit a lot of people not in its core service areas.

Another interesting set of data to look at is the media these companies spread their advertising over, and the portion of total spend that goes to each. One might think it would be fairly similar, especially for the larger players, but in fact there’s quite a range, as you can see from the chart below.

Alltel spends 71% of all its ad spending on TV advertising, while Verizon only spends 42% on TV. Verizon and Sprint spend 32-35% of their money on newspaper advertising, while AT&T thought that medium was worth only 15% of its spend. Meanwhile, Internet spending is a fraction of the total for all five carriers: from 5% for Alltel to 8.8% for Verizon. However, this reflects overall Internet ad spending trends as much as carriers’ reluctance to advertise there: Verizon is the third highest spending company on Internet advertising, while AT&T is eighth. But what drives this difference in the media used for advertising? Even if you allow for the fact that the balance between mobile and wireline offerings is different for these five carriers, that doesn’t seem to explain it. They just seem to have fundamentally different views of what’s likely to work best for them.

On another note, there’s no category in here yet for mobile advertising - for all the hype, it’s still tiny. and even Internet advertising, another category telcos could have a stake in, is just 4% of total advertising spend today (although rising relatively quickly). But it amounts to just $4 billion in total for the US in 2007, not a big pie for telcos to try to take a slice of. TV advertising seems a much better bet, to the extent that they can take a chunk away from the cable operators, with almost $35 billion of spending in 2007. Meanwhile, the cable companies themselves (with the exception of conglomerate Time Warner) don’t make it into the top 100 at all.

Mark Cuban recently posted on the topic of online video, and the likelihood that it would generate far lower advertising revenue than the equivalent video delivered through the traditional CATV systems. His analysis is centered on and borrows heavily from analysis by Craig Moffett of Sanford Bernstein. Quoting from that report, he says:

Five years into the video-over-the-Internet revolution, we have learned two things. First; consumers won’t pay for content on the web, so it will have to be ad supported. And second; it won’t be ad supported.

This is the main thrust of the argument, again from Moffett:

In the cable TV network world, half of all revenues come from affiliate (carriage) fees paid by the Comcasts and DirecTVs of the world. The other half comes from advertising. But in the TV world, a typical half hour show supports an ad load of about 8 minutes.

On the web, early evidence suggests that consumers will tune out – click away – if they are forced to watch more than 30 seconds or so of advertising up front, and maybe another 90 seconds of advertising over the next thirty minutes. Hulu.com, for example, which has already been lionized by many as the future of TV, serves two minutes of advertising for every 22 minutes of programming (i.e. the programming duration of a typical half hour show from television). Assuming identical CPMs for web video and TV, and after accounting for lost affiliate fees, a 30 minute program on the web with two minutes of advertising yields approximately 1/8th as much revenue per viewer.

Are content producers prepared to reduce production costs…by 88%?

In fact, the actual economics of web-based video are far, far worse than this. Our 88% decline ignores the corrosive impact of à la carte on traditional video economics. In the public debate in Washington, the phrase à la carte refers to the idea that a few strong networks demand the carriage of a host of weaker ones, effectively subsidizing a much larger family of channels. But there’s a much more important aspect of web-based àla carte that is rarely mentioned–that is, the “à la carting” of the few best shows from the rest of the day’s schedule. Or even worse, of the best few moments (news stories?) from the rest of the show. On the web, watching SportsCenter not only robs ESPN of its ability to pull through carriage fees for ESPN Classic and ESPN U (and SoapNet and Toon Disney), it also, and much more importantly, robs ESPN of its ability to use SportsCenter to support the economics of the rest of the 24-hour ESPN schedule. And watching just the best 30 seconds of SportsCenter robs ESPN of its ability to support the economics of… well, you get the idea. Expecting a few ad supported shortclips on the web to substitute for the affiliate fee revenues lost by multiple networks 24 hours a day is lunacy. “

The irony is that all this is happening at the same time as telcos, and especially mobile operators, are attempting to build significant new revenue streams based on advertising. As I’ve posted on a couple of previous occasions, advertising itself is under threat. Customers don’t like it, they bypass it whenever possible, and when they’re offered opportunities to skip it entirely, such as those offered by DVRs and video on demand, they do.

The TV industry needs to realise this, and realise it quickly, and it needs to make some significant adjustments. More of the revenue will need to come from direct payments from customers - whether subscriptions or on-demand fees - and less from advertising. This may mean increasing prices of both subscription and on-demand options, but it may well also mean producing less overall content. Whereas the Internet is said to have enabled the long tail of content and media, this trend actually argues in the other direction.

When the stuff of niche interest is no longer cross-subsidized by the stuff of broader interest, it will no longer get made, because there will no longer be a way to fund it. Everything will have to stand on its own, because the costs of production for a TV show are far greater than the costs of production of an individual music track or the other items for which the long tail theory works. This may well mean less documentary and other fact-based content and more big-bang, high production value content, which is probably a bad thing. But it will also mean that networks become a lot more selective about the kinds of things that get funding, so it may also have a beneficial effect in reducing the amount of trash we’re subjected to.

Without a doubt, this is a long-term trend, and not a short one, and we’re in the very early phases. But over the next few years, the adjustments the TV industry will have to make will be at least as significant as those the music industry is already having to make, and probably much more so.

“ABC thinks you’re an idiot” says Marc Andreessen. And I’m tempted to agree. This goes back to a previous post. The theme is that ABC (and others, including cable companies) are trying to prevent consumers from fast-forwarding shows when they watch them on demand, in a trend that has been going on at least since 2005. This is yet another example of media companies fighting their customers tooth and nail when it comes to advertising. Instead of accepting that customers don’t want advertising and trying to find another business model, or simply raising prices to make up for the fact that customers aren’t watching the ads, these companies insist on trying to enforce the same old business model.

There’s a fair amount at stake here, to be sure. Total advertising spending in the US in all media is estimated to have been $155 billion or so in 2007 according to TNS, with the biggest single category being Internet spending (although only because TV is broken up into several sub-categories). However, taking Comcast as an example, it made $1.5 billion from advertising in 2007, compared with $17.7 billion from video services, so it’s less than 10% of total revenues from TV for the cable companies.

Surely the combined brains of the television networks and the cable companies, together with the satellite guys and new telco competitors, can come up with some way to offset these declines as people make more use of DVRs and on demand programming. Otherwise, we’ll begin to think that they - and not we - are the idiots.

The mobile world is keen to replicate the success of Google (and to a lesser extent others) in making advertising pay on the web. Mobile advertising was one of the major themes at the last two CTIA shows and will likely continue to be so. But I always find myself wondering whether mobile advertising isn’t just another example of these companies doing what they want, not what their customers want.

Pretty much all advertising, Superbowl notwithstanding, is an attempt to force on consumers something they don’t want. And the last thing I want is another venue (my cellphone) where I will be subjected to it. Isn’t this one of the biggest reasons why the pause and FF buttons on your remote are so important? I certainly understand the constant drive towards new sources of revenue, and there are some interesting business models which rely entirely on advertising, but I can’t help but feel that in this case mobile operators are inherently fighting their customers. If they were to use advertising on an opt-in basis to reduce service fees I can just see customers responding to it, but I assume they’re just going to use it to grow revenues, and it will end up being a source of considerable friction with their customers.