The Power of the Brand: Where’s the Beef in Private
Broadband Services?
By Mark Sherman, WSNet
In today’s society, we are inundated with advertising messages every day. Continually, we are bombarded with brands selling products, services, and even lifestyles. Network television, by far the most effective advertising medium, contains at least six minutes of advertising for every half hour of programming. Listen to the radio and find your music constantly interrupted with advertising spots. Newspapers and magazines are filled with eye-catching ads trying to reach your subconscious. Even the World Wide Web is not immune from this ubiquity of branding. So, what is the purpose of all this relentless advertising and branding? It’s simple: to try to influence the audience – whether it be a consumer or a business--to identify the advertised company, or its products or services, with attributes that either encourages an immediate purchase decision, or at the very least creates a preference for when a purchasing decision eventually is made. It is through this branding that a company ultimately defines for the marketplace what they are, what they do, and the products and or services they provide.
How does branding affect property owners and private broadband operators in making a selection decision on picking a digital programming or Internet provider? A thorough analysis of these trends, and the assumptions behind them, illustrates when branding becomes important, as well as the value branding plays in selling products or services to both property owners and residents.
The key assumptions behind branding are that it creates a positive relationship between a consumer and a product, that there is a relative value or “promise” to a consumer about that product or service, and that there is consistency in the delivery of that value. To understand when branding is important, it is essential to understand how the power of the brand is created.
Most marketing experts agree that a good solid brand is created when a company makes an emotional connection between a product or service and a consumer. Examples of powerful brands include FedEx with the message, “Absolutely, Positively, Overnight,” or Nike with “Just Do It” or Wal-Mart with “Everyday Low Prices.” Essential to the power of the brand is the placement of a subconscious emotional connection in a consumer’s mind. It is for this reason that companies spend hundreds of millions of dollars on television and print advertising. The FedEx television commercial showing a harried business professional trying to get a packaged delivered to an important client the next day established an emotional connection with business consumers: If they were in the same situation, their preference would be to use FedEx. Nike has used television ads showing sports superstars overcoming obstacles to compete, thus encouraging the viewer to also compete in life and recreation – and when we did, to buy Nike products. For Wal-Mart it is the bouncing smiley face hopping around a Wal-Mart store reducing prices and guaranteeing the consumer “everyday low prices” on clothing and household items.
Brands tend to play important roles in two critical stages of an industry life cycle. First, when an industry is struggling to establish itself and; second, after many competitors have entered the field and differentiation is essential to a consumer’s product selection. Federal Express had to create the brand and the awareness of the overnight delivery industry because they were creating an entirely new industry. Until FedEx was formed, people had no choice when it came to mailing letters and packages: letters went through the U.S. Postal Service and United Parcel Service (UPS) handled packages. FedEx spent millions of dollars creating awareness of their service in order to drive demand. Once the overnight delivery industry was established, FedEx then used its brand to differentiate itself from UPS and newcomers such as Airborne Express.
For Nike, it was not so much the need to inform people of recreational sports or the need to buy running shoes, but rather to trigger an emotional response in the viewer to be competitors and endorse participation in recreational sports. Nike is largely credited with creating the tremendous growth over the past 20 years in recreational running and other team sports. As participation in recreational sports grew, Nike was forced to fend off competitors like as Adidas and Reebok to capture consumers purchasing shoes or sports apparel.
Wal-Mart did not invent retailing, it re-invented it. It accomplished this by drawing consumers from specialty retailers and department stores to one huge store offering “everyday low prices.” In so doing it began to differentiate itself from discounters such as K-Mart and Target, as well as department stores like Sears and JC Penney. Initially, Wal-Mart didn’t spend significantly on advertising, but instead focused on providing low prices and excellent customer service to attract and retain a loyal customer base. As they grew in size and became a significant factor in retailing, they began to focus on branding as a way to retain their customer base against competing retailers who tried to reinvent themselves in order to compete with Wal-Mart.
Now, how does this relate to the private broadband industry and the buying habits of property owners and residents? Well, if you look at the video side of broadband services, you find that cable operators have spent very little to develop brand name services. They didn’t have to – they were de facto monopoly services. Consumers had few choices, if any. The only emotional response the cable operator needed to create in the mind of the consumer was a desire to watch something other than network programming. As a result, most cable companies, in partnership with programmers such as ESPN and HBO, spent their significant advertising dollars promoting the programmers and not the cable companies distributing the programming. Creating an emotional tie-in with a favorite team appearing on ESPN, or emphasizing the wide selection of movies available on HBO without commercials, proved itself an easier - and much more lucrative - strategy. As long as there was a monopoly in the cable business, branding was not very important. In fact, neither was customer service, since consumers faced giving up their favorite programs if they chose to dump their cable companies. But that didn’t happen very often. The vast majority of consumers stayed simply because their emotional tie to the programmers was stronger than the frustration they experienced with their local cable company.
In the real estate industry, the story was quite different. As they do today, real estate property owners cared deeply about customer service. Residents would regularly express to the property owner the frustration they felt with the poor customer service they received from the local cable company. In addition, for developers building new properties, cable companies provided more frustration by demanding high prices to wire those properties, by demonstrating an inability to provide services in a timely manner to properties outside the immediate cable franchise where most growth was occurring, and by showing a general disrespect for the issues facing property owners. Out of this situation grew the private cable industry that today serves approximately 1.5 million residents in over 2 million units nationwide. These figures represent approximately 40% market share of the entire MDU residential opportunity. Private cable operators succeeded and grew because they provided property owners and residents the programming they wanted with a level of customer service superior to that provided by the local cable company.
The multi-channel video industry has changed dramatically in the last six years. This has been driven by a new satellite distribution technology call Direct Broadcast Satellite (DBS) television. Led by DirecTV, the DBS industry has become the fastest growing consumer electronics product ever. Within six short years, over 13 million consumers have elected to receive their multi-channel video programming from DBS providers DirecTV and DISH Network. Clearly, this has been a wake-up call for cable companies: now there is competition.
In order to create this success, DirecTV invested heavily in developing a national brand. They have spent hundreds of millions of dollars promoting DirecTV on broadcast television, as well as in newspaper ads. Like FedEx before them, DirecTV needed to establish a strong brand in order to create the demand necessary to encourage consumers to switch, in this case from cable to DBS. The issue of branding was also important for DirecTV because their distribution model depended upon consumers purchasing equipment through consumer electronics stores. By partnering with consumer electronics stores, DirecTV was able to educate and drive demand for its services.
Until last year, the cable industry seemed paralyzed as they watched their subscribers migrate to DBS. What were the essential elements of DirecTV’s branding strategy? Choice in programming and providers. With DirecTV, consumers could watch hundreds of video channels versus the 40 to 60 channels available on their local cable systems. And for the first time, the consumer could express directly frustration with the local cable company by cutting their service and switching to DirecTV. This aggressive branding was essential in the early days of DBS in order to inform consumers that they did, in fact, have a choice.
DISH Network’s experience demonstrates the value of timing as it relates to branding. Introducing its service two years later than DirecTV, DISH Network initially spent little money on branding since it had chosen satellite dealers as its distribution channel. Since the dealers already had relationships with satellite consumers in rural areas, DISH Network was able to grow to over 4 million subscribers using just a fraction of the power of DirecTV’s brand. Now that both DirecTV and DISH Network are shifting their strategies to urban markets with the advent of local-to-local programming, both are increasing their advertising and branding efforts in order to differentiate their services. Whereas DirecTV is focusing on providing the best programming choices, such as the NFL Sunday Ticket and DirecTicket pay-per-view movies, DISH Network is positioning itself as a national cable company by investing in over 2,000 trucks and installation crews in those markets where they are providing local-to-local services. While it is still true that much of their branding efforts continue to focus on differentiating themselves – and especially their technologies - from franchise cable, DirecTV and DISH Network are increasingly trying to differentiate themselves from each other.
It is a truism in marketing that branding can become extremely fragile during shifts in industry dynamics. Remember those powerful personal computer retail brands – Apple, IBM and Compaq? When consumers and businesses shifted their buying habits to direct marketing companies, those powerful retail brands lost out to new up-and-comers who changed the distribution strategy from a retail shelf space battle to a mail order catalog strategy. The result: Today, Dell and Gateway are the most powerful brands in personal computing. This appears to be happening in the DBS industry, as well. DISH Network is now adding more new subscribers on a monthly basis than DirecTV. A recent third entrant to the DBS space – World Satellite Network (WSNet) – is now providing a private label service to operators across the country. At the same time, the cable industry has consolidated into six major multiple system operators (MSOs) ― Adelphia, AT&T Broadband, Charter, Comcast, Cox and Time Warner ― and these operators are focused on developing more local brand identification, improving customer service and upgrading their infrastructure to provide digital cable, high-speed internet and voice services.
While DBS’s branding efforts have been largely successful in the single family home marketing producing over a 17% penetration rate of the multi-channel consumer base, DBS operators are expected to capture around 500,000 subscribers in MDUs by the end of 2000, according to the Carmel Group. That is around a 2% penetration of the total MDU households. If branding were the most important factor in driving consumer demand, one would expect this penetration rate to be significantly higher. Some argue that there is less consumer spending in MDUs for multi-channel video services, but the same was once said for rural subscribers. Rural subscribers now account for 65% of the DBS subscriber base, with average monthly bills around $54 per household, significantly higher than the average of $35 for rural cable subscribers. The expanded programming lineups of 100+ basic channels and the improved value proposition presented by the premium multiplexes offering over 10 premium channels for around $10 to $15, as well as access to pay-per-views (PPV) movies, accounting for $6 of monthly revenue, drive the increase in DBS revenues.
MDU residents face the same limited selection of video programming channels both from private cable and franchise operators. Once provided the expanded channels and better movies through premium services and PPV, MDU residents will eagerly pay $50 for these services. But if DBS can provide the product and has the brand name recognition, what is keeping DBS subscriber penetration in MDUs so low?
As it turns out the power of the brand in the MDU segment does not play the same role as in the single-family home consumer segment. DirecTV and DISH Network have developed the demand for 200 channel video services. The few MDU residents who are early adopters who don’t mind overcoming some obstacles, have gone out and purchased DBS services from consumer electronics stores and installed dished on their balconies (if they are lucky enough to face south). But since this restricts DBS to less than 25% of the residents (those that face south), and since residents must overcome significant hurdles to install a dish – fighting with property owners, running wires without altering the landlord’s apartment, and buying a box and a dish they eventually will have to move, just to name a few – there have not been many takers.
Another key reason for this low uptake is the fact there are two customers involved in the buying process. Since MDUs, and specifically apartments, are considered private property that a resident rents, in many cases the property owner or manager ends up playing the role of gatekeeper. Private cable recognized this early on and developed more of a business-to-business marketing strategy to obtain rights of entry and the right to provide video services, in many cases on an exclusive basis to residents of a property. In this case, the power of the brand of the private operator did not mean as much as the power of the brand of the programming services that residents wanted. As long as private operators could provide HBO, ESPN and CNN, and remain competitive with the lineups of local franchise cable operators, they were able to win service contracts with properties with better customer service, customized video amenities including security channels, apartment specific channels, and unique ethnic channels. This is not much different from how cable successfully marketed itself when there was no competition.
So now that the power of branding has driven residents to demand 200 channel video services, what are property owners to do? In many markets, franchise operators have opted to delay deployment of digital cable to many MDUs in order to concentrate on more attractive single-family neighborhoods. So when property owners call up asking for digital cable, they are told their property is “in the 2002 build out plan,” cold comfort to a property owner is when residents decide to rent based on today’s availability of 200 channels. The same issue exists for the demand for high-speed Internet. Many residents are now demanding high-speed Internet service on properties as a part of their selection criteria (although actual penetration rates to date have been only around 10-15%). Driving the resident demand for high-speed Internet is largely the result of the marketing campaigns of cable companies and DSL providers targeting single-family homes but influencing prospective residents.
Another factor affecting the success of DBS in MDUs is the complex infrastructure issues facing a DBS installation on a property. Today, most property owners want only a single dish on their property (although in the past they agreed to put up with five large C-Band dishes), or a least a single small dish per building in the case of garden-style properties. Most property owners and maintenance personnel don’t understand the technical requirements of installing a good working L-Band or SMATV headend on a property, so they have to turn to independent operators. The consumer electronics retailers that sell to consumers have relationships with installers that can support single family homes, but know nothing about the intricacies of a complex wiring on an MDU. So they turn to private broadband operators for a solution. In the past, both DirecTV and DISH Network tried to leverage their brands with private operators by providing agent relationships where they would provide operators a small annuity in the form of a 15% to 20% commission while providing a $100 launch fee per subscriber and one free receiver per household. These programs have been in place for the past three years and have been largely unsuccessful.
In fact many DirecTV system operators have either exited the business or have been thrown off of properties for a variety of reasons. Key reasons include poor customer service, increased customer confusion by having two bills – one from the DBS and one from the private cable operator. In many cases, private operators signed agreements with the DBS providers in order to say they could provide digital service on properties to address competitive and property owners concerns, but never actually invested or marketed the services, since they would end up with less margin with a DBS subscriber than their regular private cable subscribers, even though the actual resident was spending more money.
So where’s the power of the brand for private broadband operators? It exists in the marketing and customer service strategies they choose to employ. By branding their own service and associating their name with the emotional relationship that is generated by the hundreds of powerful programmers driving demand for movies, sports, and entertainment, and by building a strong customer service structure that consistently supports both the property owner and the resident, operators will create a powerful brand identity that will grow their subscriber base and value of their businesses. An example of where this power exists is in the grocery business. The grocery business tends to be made up of a number of large regional players that have built up an identity with their customer base in their local markets. The brands they use to build their identities are the products they sell – Kleenex, Tide, Crest, etc. They use they powerful brands to attract consumers to their stores in newspaper and radio advertising. But once there, more and more regional grocers are selling private label brands that offer the same quality product at a significantly lower price.
According to Gerda Gallop-Goodman, in American Demographics, brand name value is significantly coming under fire. For example in the super market industry – full of national brand names, sales of private label food and beverages in “the private label segment has grown at a rate of 6 percent per year for the past five years, while the entire retail sector has risen just 3.9 percent.” While this is happening, there are still no successful national super market chains. Why? Because the distribution of groceries is a complicated business that requires unique regional distribution strategies – shelf-life of produce, milk and meats require a regionalized operation to meet the needs of the consumers. In addition, regional tastes ― from Tex-Mex in Texas to Seafood in Boston to fresh fruits and vegetables in California ― all vary by market.
The multi-housing industry faces similar dynamics. While there continue to be a growing number of Real Estate Investment Trusts (REITs) acquiring large properties across the country, they tend to stay focused on a regional basis, and still only account for 3% of all properties. Real estate tends to be a local and regional service built upon local relationships with bankers, property developers, leasing services and contractors. Thus most properties are owned by individuals and local partnerships. The value of a national brand means a lot less than having a product that attracts and keeps residents both through the competitiveness of the products and the customer service provided by local operators. So how do you become a successful private broadband operator? Invest in your local identity, offer your customers the products and services they want (like a 200 channel digital service or a reliable high-speed internet offering), associate yourself with the brands that provide emotional appeal – ESPN, HBO and CNN, communicate regularly with your customers through billing and marketing promotions, and make sure you make enough money to provide the quality customer service that property owners and residents demand and deserve. That’s where the beef is.
About the Author
Mark Sherman is Senior Vice President of Business Development with WSNet. He may be reached with questions or comments via email at msherman@wsnt.com