Cause for LossA Case Study for the Cable Industry

November 29, 2011Team Ten ShareUCLA Anderson School of ManagementDana DuboisPaul GettoOrion Prout

Time to Play “Mythbusters”

Myth Number One:

It’s The Economy

Source: Nielson Cross-Platform Report: State of the Media – Q1 2011

Myth Number Two:

It’s Cord Cutters

141,000Source: Citi Equity Research – “This Just In Pay TV Subs Contracted, Again”

It’s No Myth, It’s The

Competition!

Then…

Now…

Triple Play Package Triple Play Package Triple Play PackageAdvertised Price

$79.99/mo 89.99/mo 89.99/mo

Effective Price

$116.48 $135.90 $129.25

Channels 150+ Unknown (unclear) 130+ ChannelsInternet Speed

15mbps 15mbps 12mbps

DVRMulti-Room DVR with 3 Boxes

1 HD DVR plus 2 Boxes

Whole Home DVR with 3 Boxes

Telephone Unlimited, Unlisted Unlimited, Unlisted Unlimited, UnlistedInstall Time 4 Days 9 Days 7 DaysIncentive $300 Prepaid Visa $200 Visa (Switchers) $200 Prepaid VisaTerm 2 Years 1 Year 1 Year

Best in category Parity Worst in category

Where is TWC in the

Marketplace?

The Competition Is Drinking

TWC’s Milkshake

Source: Citi Investment Research and Analysis, Company Filings

1Q092Q093Q094Q091Q102Q103Q104Q101Q112Q11

-200

-100

0

100

200

300

400

500

TWCDirecTVDishVerizonAT&T

Net Subscriber Gains

Who Is TWC In The Marketplace?

?

• Messaging Market leading broadband product

• Something for everyoneo Signature Home

o “TV Essentials” Package trials in New York and Ohio

o El Paquetazo

• Slingbox for top tier bundlers

• Wi-Fi Hot spots for “Cord-nevers”

• $100 & $200 gift cards for signing up.

TWC is doing some things right…

But They Are Also The Butt of Many

Jokes…

• Yelp – 1 Star Average Review (Out of Five).• “I wish I could give negative stars.”• “The sound went out on my cable and it took them a week to fix it.”• “I had to wait two days to get my internet turned back on.”• “Thank God for Fios.”

Video Provider Service

Satisfaction Index

Source: American Customer Satisfaction Index

Fios Uverse Direct TV Dish TWC50

55

60

65

70

75

2010

2011

Improved Customer Service

Strategy• Expansion of the current SignatureHome service

offering

o Make elements of SignatureService available to more customers to increase the value that they feel as customers

• Consider a “Net Promoter” model of accountability

• Expand service hours to match DirecTV

o 6-8am, 5-8pm, Sundays

• “Technician Tracker” shows where your tech is and how many appointments are in the queue ahead of you

• Send a text message 30 minutes prior to technician’s arrival

• Leverage WiFi Hot Spots to Improve Social Media Presenceo Actively monitor Twitter and Facebook

o Respond to complaints via a service app

Customer Lifetime ValueImproved customer service can further reduce the churn rate

that already drops by bundling YES, BIGGER IS BETTER.

But getting the customer there is the challenge…

Single Product (4% churn)

Double Play (2.68%) Triple Play (1.36% churn)$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$305.45

$1,933.87

$5,192.71

Beyond the Bundle – A Bold Move

THE TIME WARNER CABLE LIFETIME LOYALTY PROGRAM

WE’RE LOOKING FOR PARTNERS TO STEP INTO THE FUTURE WITH…

Revise message to consumero Match message with strategy of customer

service and retentiono Forward-thinkingo Debunk competitive value propositionso Give something the competitors aren’t and hook ‘em in

TWC Lifetime Loyalty Program

• “Rewards”o One point per dollaro Different valued awardso Designed to promote, not

giveawayo Higher tiers have larger

“rewards”

Sig. Home

GoldTriple Play

Silver Double Play

Single Product

• Overall Benefitso Reduce Churno Reward Spendingo Incentivize new serviceso Give a clear Goal

• Tierso Psychology – we like to look downo Reward based on tiero Communicate where the customer

sits

How it works – Tier specificsSINGLE DOUBLE TRIPLE

• One free VOD

• Two free VOD

• An Additional Premium tier for a year, 2 months free

• 3 months free upgrade from Digital Basic to Digital

• 3 months free broadband upgrade

• 3 months off free HD Box Service with upgrade from Digital

• Order phone service and choose 3 months free broadband upgrade, 5-flick movie pass, or 3 months off DVR service

• The five-flick movie pack: 5 free VODs

• 2 months free of all four premium tiers for a year

• 4 months free service with upgrade to whole-house DVR

• 3 months free broadband upgrade

• Two premium channels for a year but pay for only one for 3 months

• Add Phone service for 15.99/6

• Free installation and 3 months off service for whole-home 2DVR

• Order 2 sports passes and get 10% off

• 50% off data plans for 3 months when ordering internet-on-the-go

• Access to signature solutions advisor for 4 months

• Wideband for a year, first 6 months 79.99

Note: specific benefits and potential increased CLV can be referred to in index

Rewards Examples

PAUL ORION

A busy MBA student who works full time, has no time to watch TV. Single

product tier with broadband is something he's very happy with

Another part time student with currently digital cable. But cable

service is something he's debating…

Current Service: 29.99 broadband Current Service: Digital Television

REWARD/PROMOTION

AC/Cost of reward to TWC

Potential added CLV (If service kept)

REWARD/PROMOTION

AC/Cost of

reward to TWC

Potential added CLV (If service kept)

3 month free upgrade

30 $176.90

Upgrade to HD DVR, 3 months of service + added

phone for 15.99/mo for 6

month

57$1566.2

1

2 month free upgrade from

turbo to extreme40 $373.79

Sign up for broadband turbo and get 3 months

half off

60$1078.2

4

Rewards – “much obliged”

The real benefit goes to TWC

• Reward costs are minimal compared to the increased CLV when the promoted services are kept.

• Promoted services are kept because of PSYCHOLOGY and INFLUENCEo Reciprocationo Consistency and commitmento Foot-in-the-door o Social Proofo Value of time and effort

A Proposed New Positioning

Statement“For the consumer who demands premium

video, high-speed data, and voice services, Time Warner Cable separates itself from all competitors by offering the best overall customer experience as exemplified by the finest customer loyalty program in the industry.”

Appendix

CLV CalculationsGiven: Churn rates are based on the Case write up data which gives a range of 3%-5% churn for single digital service. 2-product bundles reduces churn by 33%, 3 product bundle by 66%.Acquisition cost = $200Assumption: based on a 4% single product churn.

Given: ARPUs of services are found in the Oct. 2011 quarterly report, as well as Average Cost of Video ServicesAssumptions: Single product ARPU may not be cable, we use “primary service unit” ARPU = 54.08Double Play assumes cable ARPU + weighted average ARPU of data and voice subscribers = 104.62Triple play assumes ARPU Cable + ARPU data + ARPU voice = 147.93Average Cost is only given for video. Assuming minimal costs for voice and data, we estimate cost of 29.65 for all

CLV Formula used is the simplified version: (Margin – monthly costs)/((1-churn)+discount rate) -

Acquisition Cost

Other assumptions: monthly costs are included in average cost above, so = 0. Yearly Discount rate assumed

as 10%

ARPU Ave. Cost

Margin/Month AC Churn CLV

One service 54.08 29.65 24.43 200 0.04 305.45

Double Play 104.62 29.65 74.97 200 0.0268 1933.87

Triple Play 147.93 29.65 118.28 200 0.0136 5192.71

Loyalty Program Detail –

Economics

Tier REWARDOffer

Value/Lost Revenue

Benefits, possible

increased CLV**

Single One free VOD 5.99increase VOD

purchases

Single two free VOD movies 12increase VOD

purchases

Single An Additional premium tier for a year, 2 months free 12 112.14

Single 3 months free upgrade from Digital Basic to Digital 30 176.89

Single free broandband upgrade for 3 months 30 176.89 minimum

SingleOrder phone service and get the five flick movie pack for free, OR 3

months of free service charge on dvr, or free broadband upgrade for 3 months

30 820.60 -1108.12

Single Upgrade to HD DVR and get 3 months off HD Box service 33 587.48

Double the five flick Movie pack: 5 VOD movies for 19.95 10increase VOD

purchases

Doubleorder two premium channels for a year and pay for only one the first

three months36 305.56

Double Upgrade to whole house HD DVR with 4 months off service 44 496.22 - 1349.83

Double All 4 premium tiers for a year, 2 months free 48 122.78 - 468.33

Double add phone service for 15.99/6 months 24 1143.32

Double/Triple Wideband for a year, first 6 months 79.99 180

1243.14 - 2096.48

Triple 10% off the sports passes when both ordered 28.6 257.8

Triple whole home, 2HD with FREE installation and 3 months off service 83823.39 - 2605.14

Triple Access to a signature solutions advisor for 4 months N/Aincrease chance

of upgrade

TripleSign up for a two-year contract for Internet on the go and we'll give you

half off all your data plans for 3 months30+

881.85 - 3607.41 (3

devices)**CLV = (M -C)/((1 - R) + D) - AC

M = Margin, C = monthly cost, R = monthly retention rate, D = discount rate, AC = Acquisition Cost

assumptions: margin and monthly costs remain the same, yearly discount rate = 10%, AC = revenue lost on offer. Additionally, the churn rates are assumed to be Single Product: 4%, Double: 2.68%, Triple: 1.36%

TWC’s Current Customer Service

Policy

“TWC continues to upgrade its customer care processes and infrastructure. The introduction of SignatureServiceTM as part of TWC'sSignatureHome offering is a departure from its traditional "one size fits all" customer service. At the same time, TWC is upgrading its call center platforms to allow customer calls to be routed more efficiently and utilizing online approaches, such as eCare and MyService at www.timewarnercable.com, to give customers another alternative for engaging with the Company. The Company also continues to focus on improving reliability and the technical quality of its plant to avoid repeat trouble calls, which should lower customers' need to contact the Company. “– Time Warner Cable 10K 2.18.11

Current Costs of Improved

Service

Implementation Economics

POTENTIAL IMPLEMENTATION BUDGETTotal Cost Employees Training Cost Per Employee

Net Promoter Model Consulting Training (One Time Expense) 8,759,975$ 50,057 175.00$ Customers Cost Per Customer

Technician Tracker (One Time Expense) 7,350,000$ 14,700,000 0.50$

Text Message Service (One Time Expense) 7,350,000$ 14,700,000 0.50$

Employees Cost Per New EmployeeSocial Media Presence 350,000$ 7 50,000.00$ Customer Loyalty Program Implementation 3,500,000$ Customer Loyalty Program Staff 3,750,000$ 50 75,000.00$

Total Cost Employees Cost Per EmployeeExpanded Call Center Employees 67,500,000$ 1500 45,000.00$ Increased Service Techs. Labor Costs 95,000,000$ 1000 95,000.00$ Increased Service Tech. Equipment 17,500,000$ 1000 17,500.00$ Change in Direct Operating Costs - First Year 211,059,975$

One Time Costs 26,959,975$

Recurring Annual Costs 184,100,000$

Available Balance for Awards Program Incentives 126,148,000$

TWC 10Q From 10.27.11 note a net increase in double play customers due to acquisition of competing cable systems. 18,000 figure is attrition of double play customers from March 30 to June 30

Date Q2 Q3 Date Lost Customers CLV/ customer

Lost CLV Revenue per customer

Est. Quart. Loss in CLV

Loss in Single Play Subscribers 6.30.11 5788 5776 9.30.11 (12,000) $305 ($3,660,000)Loss in Double Play Subscribers* 3.30.11 4883 4865 6.30.11 (18,000) $1,933 $1,628 ($34,794,000)Loss in Triple Play Subscribers 6.30.11 3801 3789 9.30.11 (12,000) $5,192 $3,259 ($39,108,000)

Max. Possible Expenditure From Lost CLV($77,562,000) $310,248,000

Estimated Annual Loss of Customer Lifetime Value

Net Promoter Economics

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