Execs Move Quickly To Revitalize AT&T - Broadcasting & Cable

Execs Move Quickly To Revitalize AT&T

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As Comcast CEO Brian Roberts and Cable Division President Steve Burke prepared to assume control of AT&T Broadband, they sought out other CEOs who had bought dozens of companies, the likes of former General Electric chief Jack Welsh and former Citigroup head Jamie Diamon. " 'What would you do differently?'" Roberts says he asked the executives. "Everyone had the same answer: 'I wish I had moved faster. I wish I moved more decisively.'"

That exercise is setting the tone for Comcast's $57.4 billion takeover of AT&T Broadband, which was consummated last Monday and which will nearly triple Comcast's subscriber rolls to 21.6 million.

On an Amtrak ride last Wednesday from New York, where the new Comcast board met for the first time, to Philadelphia, where Comcast makes its headquarters, Roberts and Burke told BROADCASTING & CABLE that speed is of the essence. "There is a sense of urgency," said Roberts.

In the 11 months since cutting the deal, Comcast executives gradually discovered that AT&T's systems were in much worse shape than they initially expected, losing basic subscribers at an unheard-of rate in the business. The cable veterans AT&T had hired to revive the properties weren't going to turn things around by closing.

That's why 2,200 AT&T headquarters employees have gotten the ax. That's why Comcast got into the AT&T systems months earlier than usual to hammer out budgets. That's why squads of operations executives started parachuting into AT&T's 16 markets last week.

"The downside of moving fast is that there could be some qualified people that don't quite get the job today and end up being let go," said Burke. "It's a very painful transition."

So why not move more gradually? "The size of the opportunity," Burke explained, "the size of the challenge."

Burke has already sent each AT&T's system a budget from a comparably sized (but more efficient) Comcast system. Managers have to justify line-by-line why the AT&T system performs worse or spends more in each area. One of the first moves: Each system has a 100-day plan to boost basic-sub counts.

AT&T last month told 1,700 Denver headquarters employees that they were getting the ax, on top of the 500 let go last February. Few jobs are being added in Philadelphia.

"We've done half a dozen acquisitions over the past five years," Burke said. "We have never been more prepared. We need to go much more quickly."

The opportunity is indeed great. The combination of AT&T and Comcast makes Roberts the nation's No. 1 cable operator with a far larger footprint than cable power baron John Malone at his prime, before he agreed to sell Tele-Communications Inc. to AT&T four years ago.
Typically, cable takeovers give the buyer a few great metropolitan clusters and a hodgepodge of little systems spread across a dozen states. But since acquiring TCI and MediaOne, AT&T pretty much sold or traded away systems outside major markets. So Comcast gets tightly clustered systems that cover 75%-95% of markets like Chicago, San Francisco, Seattle, Portland, Denver and Miami. Burke is particularly interested in galvanizing local ad sales, making Comcast cable systems as powerful as TV stations.

And there's lots of room for improvement. Two years into a promised turnaround, AT&T Broadband's operating-cash-flow margins are 20 percentage points less than the 40%-45% industry average.

Here's the downside. Many of these systems have been poorly managed for years, first under TCI and then under AT&T. Unlike Cox or Time Warner, TCI was stingy on paying for system upgrades needed to launch new digital, data and telephone services.

But AT&T made some other missteps. Armstrong—now chairman of Comcast's board —was riveted on using cable systems to immediately enter the local phone business, a game in which Roberts doesn't see the right financial returns yet. So AT&T poured money into telephone upgrades and marketing (five months free service at one point), securing up to 25% penetration in some markets but badly depressing cash flow.

Armstrong axed cable chief Dan Somers a year ago and brought in ex-Continental Cablevision President Bill Schleyer to turn things around. But Comcast executives' initial hopes that caretaker Schleyer would revive the cable division fizzled. AT&T Broadband will probably wind up losing 500,000 basic subscribers by year-end, the equivalent of a top-10 cable operator. Cash-flow margins are still a meager 21%.

Industry executives say Roberts and Burke privately express astonishment that AT&T Broadband continued to focus heavily on selling telephone services, even though Comcast executives clearly planned to slow—though not stop—deployment. For example, AT&T has continued to offer customer-service reps commissions and bonuses for adding telephone customers but nothing for adding basic subscribers.

The system rebuild was going slower than expected. Systems with a mid-level capacity of 550 MHz were being upgraded to 750-860 MHz even though lower-capacity systems were untouched.

Burke offers no public criticism. "Bill did a good job of getting the phones answered, getting the rebuild going," Burke said. "What we need to do is finish the job."

The executives are striving to be equally conciliatory over the industry's hottest button: programming costs. Comcast's size gives Roberts tremendous clout over programmers, who face being dark or stuck on ch. 246 if they can't come to terms.

Reducing programming costs "is not the reason we did this transaction," Roberts said. "It's not going to be on Steve's plate for the next year."

Burke, however, added, "Size should make a difference, though."

Some network executives say they're not particularly worried, largely because they've had good relationships with Comcast over the years. "Big companies get big for reasons: so they can aspire to be ballbusters," said the president of one major cable programmer that's a subsidiary of a giant media conglomerate. "But that's the pot calling the kettle black. They're not the guys I lay awake about being unfair or being clout-mongers."

That said, the first thing Comcast did when closing the deal was to sue pay movie channel Starz! Encore to extinguish AT&T's unfathomably expensive $360 million deal that required the MSO to cover cost overruns on Starz's deals with Hollywood studios.

The 25-year deal was cut back when TCI was still a half-owner of Starz and sought to sell the whole thing to affiliate Liberty Media. Comcast contends that its less expensive contract with Starz should apply.

But Roberts isn't dwelling on the inevitable battles to come. He is simply determined to continue what his father, Comcast founder Ralph, calls a 30-year track record of 22% compounded annual returns. "I feel great," he said. "I feel more optimistic and enthusiastic than the day we signed the contract."

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