Making the Cut
By: Joshua D'Souza & Michael Delplavignano
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
More than Just a Hockey Deal
On November 26, 2013, the Canadian hockey landscape experienced a colossal shift as Rogers Communications acquired the rights to broadcast all NHL games on its television networks as well as operate NHL GameCenter Live, the NHL’s online distribution platform, for the next 12 years. The move pulls the rug out from under its fierce rival, Bell Canada Enterprises, which is left with only a small number of regional NHL games to air on its networks. Rogers will shell out a whopping $5.2 billion over the life of the agreement, a figure almost six times the value of the NHL’s three current contracts with Rogers’ competitors: Bell and CBC. In an industry marred by intense regulation and fierce competition, telecommunications giants like Rogers have no choice but to continually pay a premium for live content in order to preserve the relevance of its legacy cable television business, despite declining revenues and increased adoption of cord-cutting.
As the cost of acquiring live content continues to skyrocket and cable television monetizing opportunities run dry, a more fundamental strategic question arises: is it finally time for Rogers to cut the cord on its cable television business?
Cable Television Falls Behind
Cable currently comprises a substantial 27% of Rogers’ total revenue, and is derived from internet, telephone and television services. Cable segment revenue has been expanding at a rate of 5% since 2010, with much of the growth attributed to increases in internet and telephone subscribers. The laggard of the bunch is cable television, which accounts for 14% of Rogers’ total revenue and is comprised of 2.2 million subscribers, a figure that is falling precipitously. Over the past four years, Rogers has watched 178,000 cable television subscribers leave its service, resulting in cable television revenue declining by 4% over the period. The loss of these subscribers also resulted in decreased viewership, which adversely affected advertising revenues. Although Rogers generates considerable average revenue per user (ARPU) of $70 per month through its cable television subscriptions, customer erosion poses a significant risk to the sustainability of its business. Furthermore, cable subscriptions have the largest ARPU with the highest operating margin (49.7%) of any of Rogers’ business units, making each drop in this segment significant to the bottom line.
Out with the Old, in with the New
Over the past 20 years the television industry has seen operating margins shift from upwards of 70% to a present day 35% due to rising content costs and increased competition from both direct competitors and alternative providers. Continued margin erosion appears to be inevitable as 16% of current cable subscribers report that they anticipate cancelling their cable subscription in the next year. Since cable television operates largely at a fixed cost, a reduction in subscribers will directly result in a lower overall profit margin. This segment of deserters is known as cord-cutters, consumers who have canceled or anticipate canceling their service. Cord-nevers, individuals who will never subscribe to cable television and represent approximately 3% of the Canadian population, are also accelerating the growth of this segment. These two groups (trend setters) are younger, more tech savvy and focused on consuming content in three categories: TV shows, movies and live sports.
Traditional cable television subscribers (traditionals) vary from trendsetters in their watching and access behaviour. Trendsetters target exactly what content they would like to watch, accessing it most commonly through their computer or gaming devices. Contrary to trend setters, traditionals value turning on their television set and having ready to watch programming aired in sequential order, instilling a more habitual schedule.
For sports, trend setters have the same watching behaviour as traditionals, but the two groups differ in their willingness to pay. Trend setters are not interested in the abundance of channels offered by traditional cable subscriptions and cannot justify high prices for access to sports (the only content they cannot currently legally access online).
To combat these consumer tendencies, cable providers are trying to keep customers engaged so they can continue to monetize their viewership. One avenue is through differentiation of their content offerings by focusing further upstream in the value chain, highlighted by Rogers’ acquisition of exclusive rights to live NHL games and joint acquisition of Maple Leaf Sports and Entertainment with rival Bell in 2013. Having control of live sports content is imperative in the world of television; however it comes at a steep cost as live sports content prices are anticipated to grow by a compound annual growth rate (CAGR) of approximately 8% over the next five years. A combination of increasing content acquisition costs and a decline in consumers’ willingness to pay for cable television (70% of consumers’ number one complaint about cable television is its cost) signals that a reliance on the cable television business is unsustainable.
Just Wide of the Net
To penetrate cable television’s murky outlook, Rogers launched a medium for online content distribution in 2010. Rogers Anyplace TV offers on demand TV shows in addition to select live content and movie rentals. The service is distributed through mobile devices and game consoles and is free to all Canadians with further exclusive access given to Rogers cable television customers based on their subscription. With much of Anyplace TV’s content already available for free on various broadcaster websites, the product solely adds value by consolidating content onto one convenient distribution medium. Without providing exclusive content, or significant additional value for cable subscribers, Anyplace TV fails to adequately convince cable TV customers to stay with Rogers over platforms like Netflix or Hulu.
Cutting its Own Cord
Rogers is underutilizing Anyplace TV and would benefit from unbundling it from its cable television package, creating a separate, brand new service offering. The new offering would grant subscribers unlimited access to all the live sports content that Rogers owns, in addition to the library of recently aired TV shows it currently offers. For the cord-cutter, Anyplace TV would become complimentary to Netflix – giving trendsetters access to all three types of content they desire (movies, recently aired and archived TV shows, and live sports).
Anyplace TV would consist of three separate sections dedicated to live sports, TV shows and NHL GameCenter Live. The live sports section would offer access to live events in their usual format alongside new differentiated content such as alternative camera feeds and interactive content overlays. The TV section would offer recently aired television on-demand. The third section would integrate NHL GameCenter Live, which offers access to out of market hockey games within Anyplace TV. Currently offered movie rentals should be removed from the service, focusing on Anyplace TV’s core offering (sports and TV shows) while aligning it as a complimentary service to Netflix. Renting movies, while not appealing to cord-cutters, still provides value to traditionals and should remain an option through cable television. Rogers should continue to distribute Anyplace TV over desktops, mobile, and gaming consoles while increasing the number of devices covered and enhancing cross-functionality between devices. With little overlap to services like Netflix, Anyplace TV could bolster its retention rate, as it provides more unique, defensible value to customers.
The Price is Right
When purchased as a standalone service, Rogers Anyplace TV should be priced at $35 per month. Existing cable television subscribers should be charged an additional $5 per month for the service. This pricing strategy aligns with the content demands of cord-cutters and offers more value to current cable subscribers in an attempt to drive up ARPU. For trend setters, the Anyplace TV service can be paired with an $8 Netflix subscription, allowing access to the desired content at a price of $43 per month; lower than the price of cable subscriptions which range from $40-100 per month. The $35 price tag is even more appealing when considering there is currently no legal access to all live sports outside of premium cable television packages, which range from $70-100 per month. Although close in price, basic cable packages offer substantially less live sports content than the new Anyplace TV offering and do not offer a library of past content.
Line Change
By unbundling Anyplace TV, Rogers will be able to retain the current cable television customers that are contemplating cord-cutting (16%) by transferring subscriptions to the new Anyplace TV offering. Additionally, the new offering could attract the 400,000 Bell customers who are looking for alternatives to highly-priced satellite and IPTV packages. Lastly, Anyplace TV would better appeal to the cord-never segment, which is poised to grow exponentially in conjunction with generational rollover. At 3% of the Canadian population (or 420,000 households), gaining access to the cord-never segment represents an exclusive opportunity for Rogers to grow its subscriber base ahead of its biggest rival, Bell. In total, there are approximately 1.2 million potential customers for Anyplace TV in the next year. Given that Anyplace TV generates half the ARPU of traditional cable, Rogers would have to capture approximately 30% of the potential customer base in order to recuperate revenues from the 178,000 lost cable television subscribers over the past four years. In addition to recuperating lost revenues, Rogers would benefit from potentially increasing viewership of its live sports content, effectively driving up the advertising revenues generated.
From One Pocket into the Other
A risk of introducing Anyplace TV as a standalone offering is cannibalization of existing cable television subscribers; however, this is minimal since the new Anyplace TV offering is tailored to cord-cutters and is unappealing to the habitual traditionals. Subscribers that cut the cord in favour of Anyplace TV would have done so at some point in the future, and thus Anyplace TV allows Rogers a way of retaining these customers, albeit at a lower ARPU. Nonetheless, cord-cutters are switching to avoid the high costs of cable television and are inherently subscribers of lower-priced packages. In this case most of the lost cable television revenue would be offset by the incremental Anyplace TV.
As a separate service, Anyplace TV can participate in the bundling discounts Rogers offers its customers for keeping all their services under the same roof. This provides incentive for cord-cutters to procure their necessary internet and wireless services through Rogers. Should customers choose to bundle, Rogers would experience an increase in internet and mobile data usage, two highly lucrative business segments for telecoms. Overall, Anyplace TV supports the ecosystem that Rogers operates within; more importantly, it supports the services of the future for the company.
Last Minute of Play
The NHL deal presents the perfect opportunity for Rogers to land a major jab at Bell, with a hockey package that cannot be matched and a content distribution system offering far better value than the current cable television model. A Rogers-facilitated shakeup of the industry serves to accelerate the effects of cord-cutting while accessing an untapped customer segment of cord-nevers. With the NHL deal set to begin in Fall of 2014, Rogers must act immediately to ensure a timely launch ahead of the 2014-2015 season. In doing so, Rogers can become the go-to provider of live content over the internet, elevating its legacy cable television business to the television battleground of the future.
