News

Profit Potential

9/24/2012 9:13 AM Eastern

Tom Rutledge helped write the book on how to sell cable’s triple play — at Cablevision Systems, where he worked from 2002 to 2011, he helped develop the $90 bundle with CEO James Dolan — and along the way schooled the rest of the industry on how to manage a top cable operator to the front of the line in every operating metric.

So it was a bit of a surprise when Rutledge, a nearly 40-year veteran of the cable industry, abruptly resigned as Cablevision’s chief operating officer last December, taking on the top job at Charter Communications, the St. Louis-based operator that could be called Cablevision’s polar opposite.

Charter has undergone a stark transformation over the past year. With its stock up more than 60% in the past 12 months, the new management team and an aggressive new stance in attracting any and all subscribers, the MSO quickly shed the mantle of a debt-laden, low-growth operator and is gaining a reputation as one of the savviest in the cable space.

Charter already has had some early success: it added 20,000 basic-video customers in the first quarter, the first positive growth in that segment in five years. It has also realigned its product packages and offerings while renewing its focus on attracting data-only customers. But its greatest value lies in what could be: At 34% video penetration and low exposure to telco competition, Charter has more runway for basic-subscriber growth than any other cable operator. For these reasons and more, Charter has been named Multichannel News’ 2012 Operator of the Year.

From the start, Rutledge has said he sees vast potential in Charter. He spoke with senior finance editor Mike Farrell earlier this month about his vision for the nation’s fifth largest MSO. An edited transcript follows.

MCN: You left Cablevision last year after a very successful run and then surprised a lot of people by joining Charter. What made you decide to make this change, and what attracted you to Charter in the first place?

Tom Rutledge: I had actually been looking at Charter for years and thought that it could be an opportunity to take advantage of its unique set of circumstances and create a lot of value. Charter was in a difficult situation because of its capital structure and ultimately went through bankruptcy, but the assets, I thought, were really a diamond in the rough. Charter came out of bankruptcy in a brand new position, with a good balance sheet, and has the ability with its new capital structure to take advantage of its unique place in the market.

So, I thought for a long time that Charter had enormous potential. It is the lowest penetrated of the major cable companies in the country. To me, that means it has the most upside; but it means you have to run a good company and take care of your customers; you have to have good products that resonate in the marketplace. That’s our mission.

MCN: Cablevision is a mature company that basically had done what it set out to do. Here you have a chance to almost start all over again.

TR: I really don’t want to talk about Cablevision other than to say it is a great company and it has great prospects, too. I think the whole cable industry has great prospects. I think Charter was an opportunity for me to be a CEO of a large, publicly traded cable company and I think my background lends itself to Charter to be successful. I have a lot of operating experience and Charter can create a lot of value by being a really good operator.

MCN: You mentioned the potential you see in Charter’s low penetration rates. Others have tried to exploit that potential in the past and did not necessarily succeed. What’s different now? Is it the capital structure?

TR: Yes. I do think the capital structure makes a huge difference, because it doesn’t handicap management. Management can do what it needs to do to be successful; it can spend money where it needs to spend money and it can spend money to make money. That wasn’t always the case in the past.

But I also think we’ve put together a good approach to the marketplace. We’ve made our data speeds — our slowest data speed is faster than [what] our competitors can do — and we have a really good voice product. When you put it all together, we can create a lot of value in the home for our customers.

MCN: You’ve already made changes — repackaging a lot of offerings, eliminating lower high-speed data tiers and beefing up HD channel offerings. What’s next?

TR: Our strategy is to be a really good service organization. Our first objective was to get our value proposition correct and to make sure all of our products — video, data and voice — were equal to or better than our competitors and offered to the consumer in a more valuable way. There is more to cable television than just the products; there is the service infrastructure of the business itself — service is a product, and it is actually a lot more complicated to fix your service and make it world-class than it is to change your product sets. We want to continue to develop ourselves as a customer-service organization.

We have made dramatic improvements, by the way, last year and this year, and we have continued objectives in terms of that continued improvement. From a technological perspective, our plant is highly capable — we have two master headends in the country that are redundant, our entire backbone is in IP, and we have the capability to be state of the art, in terms of the cable products we provide.

We’re working on a cloud-based user interface and a streaming video service, which we hope to launch early next year that will be a complement to our existing video products.

MCN: You mentioned customer service, and that seems to be the buzzword again in the industry, with a lot of operators compressing appointment windows and pushing a lot of functionality to the Web. Is that what Charter is doing, or are you looking beyond that?

TR: I wouldn’t say [we’re] looking beyond that, but it’s a fundamental part of the business and you forget it at your peril. We need to continuously get better and be state of the art, and that is a moving target.

It’s true that the Web allows you to do things that you couldn’t do in the past. But at its core, the biggest part of customer service is trying to make appointments with people where you and they both meet at their home, which is difficult for customers to do with dual-income families. If it doesn’t work, you’ve created a really negative situation.

If you can move customer service out of having a physical appointment so that customers can self manage their accounts and their relationship with you through a Web-based portal, that’s a great opportunity. Charter has been a leader in that area — it has the ability to take orders and self-provision orders from the Web without any human intervention. I don’t think any of the other MSOs can actually do that yet. It’s been on the forefront of that kind of care. That was done prior to my arrival and I found it quite impressive. I think we can build on that capability.

MCN: You’re starting to show some early success. In the first quarter — although you’re not taking credit for it — Charter showed positive basic-video subscriber growth for the first time in five years. And in the second quarter, basic losses returned, but they were down from the previous year.

TR: Charter has a good business, and that’s reflected in the first and second quarters of growth. I think it can have an even greater business going forward. What we’re doing now is changing the way we go to market, we are changing the way we’re organized, and those are all big changes and they’re complicated and they are disruptive. But we are going to have better packages, prices and products than we had in the past, even when what we had in the past was successful, as you saw at the beginning of this year.

MCN: One of the things that analysts like most about Charter is that it has limited exposure to telcos and that its main competition is satellite, which only has one product. Do you think that broadband and phone are going to be the main drivers of this growth you’re anticipating? What do you see as Charter’s edge?

TR: I actually think we want to have an edge in all three products. You’re right, satellite is a big competitor for us in the video space and, because of the history of Charter, they are more highly penetrated against us than they are with other MSOs, so I look at that as an opportunity.

I think we can provide a better product than satellite can, with our two-way, interactive all-digital product, and I think we can win in the marketplace. But it takes a long time to be successful and to change customers’ perceptions about your business. Our telco competitors are real — we don’t have Verizon in the same proportion as some companies, but we have a lot of AT&T competition and other phone companies as well. We have taken up our base data speeds and we think the price/value [proposition] of that data package is superior to our competitors.

MCN: As far as competition goes, some have taken advantage of past company problems — most notably the 2009 bankruptcy — to lure customers away. Some believe that Charter never fully recovered from that onslaught. Is that still a problem?

TR: The residual effect of it is a problem, but it also is an opportunity. Because they sold in under those premises, and because we’re now there with a better product than satellite and also a better high-speed data package than they’re probably buying from their phone company, a better voice package than they’re getting from their phone company, we think that we can be successful in the marketplace. We’re going to have to sell our way in, we’re going to have to work our way in and we’re going to have to build our reputation so that we are successful. But we have the tools to be successful.

MCN: Charter in the past has been a big proponent of signing on data-only customers, with the idea that, down the road, you can make those homes video customers, too. Is that something you plan on continuing?

TR: We will take advantage of the data-only business, but our first approach was to make our video product superior to our competitors’.

Our video product had not kept pace. It was underinvested in, as a result of the process of bankruptcy. We had too much analog programming distribution and not enough digital, and our competitors are all-digital. That’s one of the things that I have changed personally since I got here.

I think that means the ratio of video and data and voice as we sell into the marketplace will change, but it doesn’t mean that the Charter strategy of having a superior data service has been reduced; it’s actually been enhanced. We also have a great video product. We’re going to lead with that as well.

MCN: You mentioned the ability to spend more. Capital expenditures were up 44% in the second quarter and they’re almost 25% of revenue now. Now that Charter is well past the bankruptcy and into growth mode, where is that money going?

TR: In the second quarter the biggest single change was that we pre-bought customer premises equipment in the anticipation of having a higher growth rate and a higher need for CPE going forward as a result of the changes we made to our video product. We’re not going to have a massive capital expenditure against infrastructure.

MCN: Part of Cablevision’s success was due to being in a concentrated area that was also one of the most affluent in the country. At Charter, you’ve got more subscribers, but they’re spread out in a lot of secondary markets. Is this a big challenge for you?

TR: Yes, it’s a challenge. I think that Charter has been tied together into a single physical asset so we can project high-quality products across the vast majority of our footprint. Projecting our business into these communities, which are far apart from each other, requires a sophisticated marketing approach, and I think we have that and we are building on that.

I think there are new opportunities that are created by the Internet to market products that didn’t exist 10 years ago and I think our ability to go to market and reach customers even in places where we’re not the dominant presence in the TV marketplace is now possible in ways that weren’t contemplated when the cluster strategy was originally put together.

So, am I making a silk purse out of a sow’s ear? A little bit. To the extent that we are in a lot of markets — which we are — it creates some difficulty for us, but on the other hand, it creates a competitive environment that is probably less intense than if you’re concentrated in one highly competitive location. It is a marketing challenge, but I think it is one we can meet.

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