Staying Ahead of the Game

Time Warner's Glenn Britt says cable's challenge is answering the question "What's next?"
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Glenn Britt knows the perils of new technology. A shelf in the Time Warner Cable chairman's Stamford, Conn., office holds a set-top box from the company's "full-service network" launched in 1994 in Orlando, Fla. The device was hugely expensive: $5,000 for each of the 4,000 homes that ever actually got one. When Time Warner shut the $100 million project down in 1997, it was considered an embarrassing failure.

Except that much of the promise of Orlando has come true. Virtually all of Britt's 10 million cable subscribers—clustered in Manhattan, Houston, North Carolina and upstate New York—can now hook up for video-on-demand and high-speed-data services. Time Warner executives figure the FSN experience has kept them a year or more ahead of other cable operators in rolling out new products. And, as the growth of basic-cable video slows to a crawl, the future of Time Warner Cable is entirely dependent on the descendents of the full-service network.

As the last Western Show was about to begin Anaheim, Calif., Britt, who currently is also chairman of the National Cable & Telecommunications Association, sat down with BROADCASTING & CABLE Deputy Editor John M. Higgins to talk about those new businesses and other industry issues, such the escalating friction between cable operators and cable networks. An edited transcript follows.

I've heard your boss, Don Logan, say that, with Time Warner Cable so dependent on new businesses, the biggest challenge for a cable operator is marketing the proliferation of new products. How do you cope with that?

I agree with that. If you go back not very many years, our business was mainly selling more channels. And we all assumed that, within our franchise areas, virtually everybody was a candidate to buy that product.

That's no longer true. Now we have high-speed data, we have SVOD, VOD, high-definition—this whole litany of products. And not every one of those products will necessarily appeal to everybody in the franchise area. So our ability to understand who's going to buy these things, what marketing campaigns to send different people. That's a whole new level of sophisticated marketing.

So how do you juggle it all? I see the fate of the entire cable industry in the hands of a 19-year-old customer-service rep, and she can only sell two, maybe three things per call.

It turns out that other industries have solved this problem. We are spending, actually, a large amount of money building the tools so we'll have a much more sophisticated database of our customers. We are going to know what they're likely to buy and what they're not. CSRs will have everything there is to know about customers, including which direct-mail campaign they just got and what old campaign they may have responded to. Those are the tools that haven't existed.

And still don't exist even though you and other MSOs been talking about them for seven years.

Well, we're putting them in here.

Are you stuffing the channel with too many products?

Competitively, we need to make sure that we're ahead of all of our competitors in terms of products. I don't think we're going too fast in that regard. There is a risk with our employees, that we go so fast that we get ahead of our ability to train people.

And there's even a risk for the consumers that we don't tell our story well enough. For example, our company has deployed a two-tuner DVR that lets you record one thing and watch another thing. My guess is we haven't done a very good job of marketing and explaining it. It's a great feature.

So you've got the same thing DirecTV has, but you don't promote it well.

Yes. And we haven't promoted VOD and SVOD [subscription video-on-demand] as vigorously as we could have. But they're doing quite well despite that.

Is VOD really a business, a material source of cash flow? It doesn't seem to be taking off.

VOD and SVOD are different. VOD and SVOD haven't been fully deployed by the industry. We are fully deployed but not everyone else is. That's one issue. So you don't have a critical mass of people writing about it, talking about it.

The pay-per-view form of VOD—theatrical movies—is not a huge business. I am much more interested in SVOD. It's a more familiar, easier way for people to pay for things. As it gets deployed, it needs to go beyond where it is today, which is just the pay-cable services. [When] most, if not all, of the linear, basic and broadcast networks have companion SVOD services, then it gets interesting. We have a lot more work to do with the content people. We're just beginning.

What do you need from the programmers to make SVOD work?

Together, we need to be creative. We're at a point in time where, in the model we have, the cable industry and programmers are reaching the point of maturity. For the whole history of this industry, we've sold more channels, more television. Every time we had more capacity, they would invent more channels, and the American public kept wanting that.

First, the vast majority of the homes in America have bought multichannel television either from cable or satellite. There aren't a huge number of homes left. Consumers are pushing back, saying, "We don't simply want more channels at higher rates. We have enough channels."

That means cable and, potentially, satellite revenue will not grow as quickly. And what you see starting to happen on, let's say, ESPN is cable companies saying, "Our revenue isn't growing as it used so we can't pay you more every year." So you're going to see tension in cable programmers. Everybody has a five-year plan. Nobody wants to say the revenue growth isn't there.

If we look at the new technologies, that's where we grow. Rather than beating each other up about getting more money from the channels we already have, we ought to be trying to look at new things for the customer, better ways to get programming. SVOD is that.

But that's exactly what you just said you don't want. It's more programming, more of the same stuff. Instead of getting HGTV as a network, I use SVOD to pick and choose from its shows, and I pay extra for it. It's Hamburger Helper, stretching the networks' libraries.

It's more choice. Customers don't want more channels; they do want more choice, the ability to watch stuff when they want to watch it.

How much are you willing to pay your networks extra for this product?

I don't know, because we've got to figure out how much the consumers will pay for this. We would pay something.

So you don't share Comcast CEO Brian Roberts's view that he doesn't want to pay networks twice for the same product, once on a linear channel and once on SVOD.

No, because people spend a great deal of money to create copyrighted material, and they actually take a lot of risk. The way they repay that money is by exploiting it in multiple windows. So SVOD seems to be yet another window. If SVOD is only the same programming that's on the linear channel this week, there's a point to saying, "Well, gee, we're already paying for that." But I'm talking about potentially much richer SVOD offering.

Do you agree with Cox President Jim Robbins's fight against ESPN and Fox Sports?

There's a dynamic that's difficult to deal with. Some of the network operators feel like they've got to have certain sports to compete. The price of the rights get lit up. All the money ends up going to the players, which is either good or bad, depending on your viewpoint.

There's an assumption that somehow you can get that money through the cable operator, essentially from the consumer. But consumers are saying, "Don't keep charging me more for more channels." Somehow that's got to be dealt with. And since we don't deal directly with the team owners or the players, there's this idea of "If we're going to pay more for it, let's put sports on a tier so only people who actually want to pay for it." Jim is right about that.

Where it gets a little troublesome is if people think that model ought to be carried to the rest of our programming. On the programmers' side and the operators' side, our business is built on having these large packages. Quite honestly, we'd be better off if sports costs were lower and growing less rapidly and we didn't have to put them on a tier. But if they are going to grow that rapidly, we probably need to create a separate tier—just as we've done for the pay services. HBO started out as a separate tier, and it was always very expensive.

I totally understand the math. But, if TNT or MTV or Food Network can't make a living that way, then why do you think ESPN or YES Network can?

There is a possibility that sports, as with movies, can be sold as a separate tier because there are people who are so devoted to watching that product that they'll pay a much higher price. They, in turn, will be unable to control their underlying costs, which is what got us to this point. If those networks could be much more reasonably priced, we'd be better off not having them on a tier.

So if ESPN were 80¢ monthly per sub instead of $2.65, we wouldn't be having be having this conversation?

Well, I don't know what the right number is, but it's gotten to a point where cost is such that it should be on a tier.

Let's talk about AMC. They're suing for $250 million because you've threatened to drop them. The dispute isn't unique. Weak networks sometimes transform programming formats and increase their ratings and revenue. TNN became Spike; Bravo is certainly something other than an artsy film channel. You have a problem with that?

I won't talk about any specific network. The cable or satellite operator is a retailer. And we buy things wholesale—in this case, networks—package them together and sell them. Let's say we're making a deal to carry a channel about Coca-Cola cans. That's our bargain. Later, you may have an idea for a different channel than that. Then you should come and talk to me. But our relationship isn't
that you've bought 6 MHz of bandwidth to do whatever you decide you want to do with it.

But they're usually upgrading a marginally viewed channel that they can't sell much advertising on so they don't have to raise license fees. What's the problem?

I'm not saying that's, from their viewpoint, a bad thing. I'm just saying our agreement was, we bought this other thing so, if you now want to change it to something else, come and talk to us. I'm not saying that we won't carry it. But it's a new channel; it's not what we bought. It's fundamental to us and our rights as First Amendment speakers. ... So, if somebody wants to change that, we should have a conversation.

You're the second-largest cable operator. Surely they consult you.

This goes a little bit back to the public dispute between Cox and ESPN. The industry has lost a bit of the partnership, the relationship between operators and programmers. So there's a view today that, if you purchase a program network, that you're literally buying that channel capacity on cable systems to do with whatever you want. But it's my real estate.

They obviously inform you. Do they not seek for your sign-off?

We have different programmers approach this differently. They should actually, in a sense, show the courtesy to the operators to come talk to us about what they want to do ahead of time rather than just saying we're doing this. And some people do that.

You're more aggressive than other operators in offering HD and DVR set-tops.

I shouldn't really comment on the others. My view is that we need to be on the forefront of technology in products and that, whatever comes along that has to do with what the consumers might want, they need to see us in a place where that's available. There was a time when our industry lost that perception to satellite; people thought to some extent, and still think, DBS was a little better, newer technology to cable. We actually have a much more sophisticated platform than satellite.

What do you see in HD right now?

The HD audience is obviously smaller. We're carrying a lot of HD signals, pretty much all we can get our hands on. We're on the verge of HD starting to take off. It's a very good product, particularly sports and movies. The sets have obviously been very expensive, and there aren't many of them; they're having a chicken-and-egg problem. The sets are starting to get much more reasonable in cost. I think, once that happens, then a lot more people will buy them, and there will be more programming.

Is HD primarily a DBS-repellant, betting that you can carry more than DirecTV and EchoStar have the bandwidth to carry?

You can use those words. We're in the beginning of the transition of television. It's sort of like black-and-white to color. At some point in the future, most TV will be high-def. It's competitive to have more today. NBC was the Peacock Network based on having more color first. I don't see it as something we can charge extra for.

We may be launching some product that does have a charge for HD. We have the new InDemand service we're putting together. We don't have a deal with Disney's ESPN, but, if we had one, they want to charge for that, so we charge.

Are you willing to pay networks for an HD feed?

If the programmer insists on charging, we're happy to sort of carry that on consignment and see if customers want to pay. But not to guarantee any numbers. My firm belief is this is going to all be free at the end of the day.

So an 80¢-per-sub ESPN channel, you'll charge for that but won't guarantee delivery numbers?

That's what we want to do. We may mark it up. But the point is, we carry on consignment as opposed to a guarantee.

And you don't have a deal with ESPN for its high-definition channel, so I guess that answers the question of what ESPN thinks. Do
you see DVRs as a significant revenue source, or is it just gluing your subscribers to you?

DVR is something more. It's another aspect of consumers' getting control over their schedule and watching things when they want to watch it. And that does appear to be something they will pay for.

That puts you in the consumer-electronics business, one you really haven't been in.

I don't think that our being in the set-top business is a particularly wonderful thing in general. It's not that high of a return business. So I'd be delighted if we weren't in that business at all.

And the other thing is, if you've got to have a separate device, consumers seem to like the model we have, where, in effect, they rent it and, if it breaks, we'll come and repair it or give them a new one, so that they don't have the risk of buying it and having it break.

But in my view, we've done this plug-and-play agreement with the CE industry. The more that you get built into devices, the better off we all are.

Are you going provide a 30-second skip button like TiVo does?

That's a very interesting question. The legal underpinnings of this technology is quite narrow. It goes back to the Sony Betamax case. I'm not a lawyer, but that case was quite limited, people copying for their own use, time-shifting. DVRs are different.

For example, if hard drives get too large and people are actually using them to create libraries, that may go beyond what the Betamax case allowed. So our view as a company is that many DVR features are not legal and that they will be tried in the courts and found to be illegal. So the short answer is we think the 30-second skip button is not legal.

A cynic would say it's because Time Warner also owns cable networks.

No, we're trying to follow the law. I think that this technology is about ease of use and choice for consumers.

Tell me about Mystro, which is essentially putting TiVo functionality in the network, letting me store my programs at the headend. You're making that a division of Time Warner Cable.

Well, it's very early, But, if you were an engineer designing all this from scratch, having this functionality inside the network is a much better design than having these hard drives out in everybody's homes. Hard drives do
fail. So that will become a maintenance issue for us and the satellite industry. But here you would have the storage in some central place. The other issue is there are a lot of copyright and copy-protection issues with this technology. If all of this happens inside a network, it's easier.

But it may not be nearly as flexible as a DVR. If Mystro doesn't clear all the programming rights from the networks, then I don't get to store my episodes of 24, right?

Yes, and that's a potential issue. Right now, the technology is still being developed. We have a test going in Green Bay, Wis., just some employees' homes.

What are you expecting Rupert Murdoch to bring to DirecTV?

As part of a big media company, it'll to be much more oriented to doing things with programming that they've done in the UK. Hughes is a technology company. For starters, I think they'll probably do a lot more interactive stuff.

Murdoch can be pretty ruthless, as CNN has found out.

He can be a fierce competitor, but he's not the only one in the world who can be fierce competitor.

I still find that, in the aggregate, cable operators still can't muster a full response to DBS.

I can just talk about my own company. But we are very aggressive, and our ads are increasingly aggressive. Look at EchoStar's "stop feeding the [cable] pig" campaign. You know, their marketing is very good so we've got to compete and be as aggressive and determined. We're doing that, and I think some of the other big cable companies are. Some others have been perhaps under financial stress; they've been slower off the mark. Clearly, this has caused some consolidation in our industry, and I suspect there will be more.

What about acquisitions? How much bigger do you need to be? You've shrunk since essentially splitting up the Newhouse partnership.

Our parent is on the record as saying that we'd like to be bigger in this business. [But] in an operational sense, we're big enough now. We get pretty good deals on programming. We can afford the overhead, particularly in the engineering area that we need to be. The reason that we would want to buy is that we don't want to be relatively smaller than we are.

It's a staple of the New York Post
business page that you're always on the cusp of buying Cablevision Systems. When was the last conversation you had with them?

Well, yeah, if you believe the New York Post. I can't answer that question. We've said for many years that we're interested in that property. The Dolan family to date hasn't decided they want to sell.

What would you sell or trade away? It seems you have no business being in Los Angeles.

I won't comment on specific places, but there are places we'll be exiting. Los Angeles is an interesting city because there's a bunch of operators and none of us really have the scale we should have out there. So somebody will consolidate that, and it may be us.

You know Adelphia is going to be on the market and big chunks of Charter. But are those the kinds of properties that would interest you, or are you only a major-market operator?

Certainly at least medium-size markets. We're not terribly interested in the very small towns, unless they fit something we have. There are still some towns in Upstate New York we don't have.

With Comcast buying AT&T and becoming a much bigger entity, how does that change your life? It's good for the industry that the biggest operator is no longer terribly managed.

Yes, that's the major change: to have those properties once again run by an operator who really knows how to run the business. Other than that, it hasn't had much effect on us. We have, I hope, a great relationship with Comcast as well as the other big operators.

What about digital must-carry?

Well, there are two issues. There's must-carry, and then there's the multicast must-carry issue. The issue is, should we be required to carry both digital and analog signals, 12 MHz of bandwidth instead of 6. The whole cable industry is against that largely because it's a huge waste of spectrum carrying the same signal twice. We collectively don't have the capacity to carry all that.

You have the capacity if want it: Just drop some pay-per-view channels.

We have capacity. I'm not sure we [have enough to] carry two times every broadcast signal. Now, we have voluntarily decided with some broadcasters to carry both signals. I want to be carrying high-def. And I want to carry as much as much as I can get.

But the difference is whether it's going to be a government mandate, vs. a private negotiation. ... It's incorrect to say these guys, because they happen to own a broadcast station, are entitled to a specific amount of spectrum on cable systems when you can carry that signal in less space.

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