Tracking the Perfect Storm
A Talk With Tom Rutledge and John Bickham
By Mike Farrell -- Multichannel News, 9/23/2007 8:00:00 PM
Cablevision Systems has weathered the approaching storm that is Verizon Communications’ FiOS service quite well over the past year, fueled by a vision hatched in 2000 by CEO Jim Dolan to centralize its operations around the New York City area and aggressively launch telephony. Now, with advanced-product penetration levels that lead the industry, new products like business telephone and interactive advertising loom on the horizon. Multichannel News senior finance editor Mike Farrell sat down recently with the two men responsible for executing that strategy, chief operating officer Tom Rutledge and cable and communications president John Bickham. An edited transcript follows.
MCN: Let’s talk about Verizon. What kind of impact do they have on you right now? On Verizon’s last conference call they said FiOS had about 515,000 video subscribers.
Tom Rutledge: Well, that’s nationwide.
MCN: Is it safe to assume that the bulk of their video operations are smack-dab in your territory?
TR: No, I don’t think that’s true. I don’t think that the majority by any means are in our service area. We may have the largest exposure to them as a percentage of our footprint.
MCN: On the second-quarter conference call, you mentioned that you have stepped up the marketing spend against Verizon. I think you mentioned that they were spending $100 million? Can you quantify any of that?
TR: No. We don’t publicly disclose our marketing spend.
John Bickham: The thing you’ve got to remember is that we communicate pretty easily with our own customers on television through cross-channel. That’s a strategy that they [Verizon] can’t avail themselves of. So they can go buy broadcast television, radio and newspaper [ads]. We do that as well. But the piece of the equation that probably makes a huge difference, I would argue, is our ability to talk to our own customers and deliver our message pretty efficiently.
MCN: You recently added the Voom HD channels to your HD lineup. What took so long? Voom is part of your Rainbow Media Holdings unit and [the channels] have been available for about two years.
TR:We needed to get our distribution capabilities with switched digital and digital penetration up to the point where we could do it in a way that was customer friendly. And, as you know, we have 81% digital penetration, which I think is the highest in the industry. I’m sure it is.
That allows us to implement channel reclamation and switched digital in a way that’s consumer friendly, and we have the capacity to launch Voom as a result of that. When you think about it, when we made the decision to do Voom, we wanted to have the most HD channels; we wanted to make our HD product as valuable as possible, which is part of our core product; and there just weren’t that many channels out there. Voom was the biggest way to get the most.
MCN: I know you can’t talk about the future, but you’ve at least said in the past that the new growth engines are going to be business phone and e-commerce. Where are you are right now with those two products?
JB: I’ll talk about business-client services first. We’ve never divulged how many customers we have and [we] may never. But you’ve probably heard us trying to dimension the marketplace, roughly 600,000 businesses that are buying data or services in our footprint with an annual spend somewhere around $5 billion.
We look at business-class services, primarily data and voice, as a unique business — so much so that we organizationally have segregated product development [and] marketing into our sales organization [and] the service organization. People have a different orientation, they understand the products better. Our business-sales people don’t sell residential services and vice versa.
So we’ve put a tremendous amount of focus on carving out a unique business here.
We go to the marketplace with a pretty simple proposition. The first proposition is that we have the best data service you can buy. Our primary competitor is [digital subscriber line]. There’s really no comparison. And we have a very reliable feature-rich voice service that’s going to save you a lot of money. We have a seven-by-24 organization that’ll be responsive to your needs.
If you do research on this class of customers and potential customers, you’ll find that they don’t have a good experience with incumbent providers. They know their rates are high and they also know that the companies are relatively unresponsive to their needs.
TR: Incumbents being [incumbent local-exchange carriers], phone companies.
JB: We try to keep it really, really, really very simple, given the fact that we’re new into this segment. We have great products, we have simple, easy-to-understand rates, and we have an extremely reliable network. We spend a lot of time branding our network as the Optimum Network, convincing business-class customers that what they can buy from us is better than they can buy from anyone else, and it’s going to cost them a hell of a lot less money. I would say we’re in the fourth inning in terms of product development, in terms of expanding the kind of things that we can do with IP and voice.
MCN: What about on the e-commerce side? I know you’ve said you see a big opportunity there.
TR: Yes, we do, and if you look at how much advertising dollars are being spent to reach our customers, it’s greater than the size of the entire cable business. In the United States, $300 billion a year is spent by businesses selling their products or informing customers about their products through broadcast television, radio, newspapers and direct mail. If you take Cablevision’s piece of that, just based on our footprint, $15 billion a year is being spent by businesses to talk to our customers.
That’s a huge number.
How do we translate that $15 billion that’s being spent to talk to our customers into an opportunity for us? I think the way you do that is by creating new forms of advertising inventory on the television and data screen, and potentially interconnected with the phone company, and create forms of interactive advertising and personalized advertising, like direct mail, which can be segmented into very small subgroups based on whatever behavior or characteristic you want to define. I think if we develop those products that, over a long period of time, we’ll have an opportunity to share in some of that revenue; I think it could be substantial.
The other opportunity beyond just capturing advertising dollars is to actually capture orders for businesses to do what I call fulfillment. Some people call it e-commerce, but the difference between e-commerce and fulfillment is we have a subscriber relationship. If we can take our customers’ — through their voluntary choice — billing relationship and allow that customer through a remote control to actually make a purchase, an order will be shipped from a company directly to your house. That opportunity of creating a sale and taking an order and having a valid order is fulfillment.
If you think about most businesses, a big hunk of the business’ G&A [general and administrative expenses] is the sales and order-taking process. If we can find a way to monetize fulfillment for businesses in an efficient way through this interactive advertising order fulfillment process, I think there’s another huge opportunity for us. And as a major mass media form, and the only mass media form that has a billing relationship, I think we can create value.
MCN: What you’re talking about is an interactive advertising channel where you can click to buy a product on the channel, not using your remote to order items while watching QVC.
TR: Not necessarily. We’re actually doing that today with Home Shopping Network. We have built all the back-office systems to do that. If you talk to Barry Diller’s company [IAC/InterActiveCorp], they will tell you sales went up significantly as a result of that capacity. Last year, we took over 600,000 subscription video-on-demand orders through the remote, where people actually became subscribers, upgraded themselves.
Now you’re going to think about advertising. I can send you an ad and call you up by name and have that be on CNN, at its most extreme. I’m not sure you’d react that well to that. But direct mail does that. We can do the same in the future, insertable video ads. That’s an interactive advertising capability called targeting.
We can also do a thing called telescoping where you’re watching a show and you’re watching an ad, and you’re actually interested in that car, and you click the remote. You can do two things, you can bookmark, so at the end of the show, you’re automatically transferred to a VOD channel and on that VOD channel is the car you were interested in with a long-form description of everything you liked about it. Or you could go right out of the show. The show could stop, if you have the network DVR, or some relationship that allowed you to do it with the programmer, if it is a copyright issue. You could stop the show, go look at the ad and come back to the show. Then, theoretically, we could deliver the car to you through an e-commerce engine. Your credit card may or may not be able to support a car, but certainly a pizza and certainly a lot of things in between. It’s an interesting opportunity when you start thinking through all the implications of what it can do to traditional advertising.
Now I think there’s a lot of inertia in the advertising business. I think it takes a long time to change the way advertising works. If you just look at what broadcasting has gone through, I mean people have been talking about the death of broadcasting for 15, 20 years, and it’s still a big business. So I don’t think the whole marketing world is going to shift in a moment, but I think there’s an opportunity through a long period of time to create a whole new set of revenue drivers that are external to the rates of a cable system.
MCN: You mentioned the network DVR and you’re still in litigation with that. I assume you can’t really say a lot about it. But operationally, technologically, product-wise, what are your big priorities right now?
JB: Well, everything we do — this is going to sound kind of boring — but everything we do is about growing our subscriber base, whether it’s video, data or voice. You were talking about triple play being offered to existing customers a while ago. In an interesting sort of way, one of the things that led us in that direction was the fact that we had so much more equity, if you want to call it that, in the triple-play advertising and what the triple play means compared to the double play.
The double play is data and voice for video customers, and we’ve had the double play for three years. And it never had the kind of equity, it never got the same kind of response rates as triple play. Another way of looking at it is we just replace the double play with the triple play, and that’s all about maintaining the growth of those products.
Operationally, I don’t think there are any big issues in front of us. We’re continually upgrading set-top box software and user-interface functionality and the look-and-feel of what it is and how it works. We’re continuing to upgrade and change our Optimum Online portal and develop new products and services that go with voice. But all those things are really small compared to the overall priority of just continuing to grow, as fast as we can, these relationships.
TR: In terms of technical strategy, the RS-DVR [remote server digital video recorder] is a copyright issue at its core. It’s a question of what’s fair use and what’s not fair use. But architecturally, we’re building a network that is an intelligent network, with the functionality built into the very network itself, so that all of the set-top boxes we’ve placed out there will be backward compatible with whatever new technological capabilities we come up with are. The core of our strategy is to have a server-based network infrastructure that is the core capability for VOD, subscription video-on-demand, switched digital and any kind of interactive user interface that goes on the set-top.
That can include things like what Time Warner does with Start Over and Look Back, which are rights-managed structures. If there’s some fair-use that comes out of RS-DVR, it could include that.
Our architecture and our technological development [are] unrelated to the outcome of RS-DVR. RS-DVR just tells you how the products that work on the network are going to be configured from a legal perspective.
We’re strong believers in copyright. We think there’s value. We’re not trying to destroy copyrights by any means. We’re a programmer as well. We think that there are opportunities for programmers to work with us — and many of them want to — to develop products that will allow their advertising models to continue to be successful and expand, where people view programming in different ways than traditional linear programming.
MCN: Cablevision basically operates in one market — New York. Has that been an advantage for you in rolling out new services?
TR: Yes, there are some advantages to that. It has its downsides, too. There’s nowhere to experiment; there’s nowhere to hide. So, it has its ups and downs. And I’ve done both in my background. There’s a scale issue, too. When we go to market, we’re in the biggest market in the country. Everybody sees what we do. It better work.
JB: All calls go to the corporate office. [Laughter.]
TR: The old rule is, you never want to be the cable operator, the system manager in the cable company’s hometown. At Cablevision, there’s no choice.
JB: I would add there are some really great people here. When I got here, there was a good organization in place [with] very talented people. People who’d been around the industry for a long time, and even down in the organization, you’ll find tenure among field technicians, customer-service representatives, at the level where the business actually occurs. Long-tenured people with serious dedication to the family and to the company, and you can’t underestimate the value of that.
When you’ve got to get something done, people can get behind big ideas this company has and you don’t have very many people working against you. Because people like this company and they like the family because the family has been good to them and the company has been good to them.
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