All's Quiet on the Cutting Edge

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Time Warner Cable didn't abandon new technology after its failed experiment with the Full Service Network in the early 1990s in Orlando, Fla. It's just been a little more quiet about it.

But the Stamford, Conn.-based MSO — the second-largest in the country at 10.9 million subscribers — is getting ready to shout from the rooftops. It launched voice-over-Internet protocol services in Portland, Maine late last year (with plans to deploy it across the entire footprint), and it already leads the industry in the rollout of digital video recorders and video-on-demand.

As of Dec. 31, Time Warner Cable had 369,000 DVR boxes in the field — with plans to double that penetration this year — as well as 950,000 subscription VOD customers and 200,000 HDTV customers.

Time Warner Cable chairman and CEO Glenn Britt said that for more than two years, he's been setting the stage within the organization to make new services easier to manage.

"Most of what I've been trying to do reflects the world around us," Britt said. "Our business has gotten a lot more competitive than it was a few years ago. The old cable business of selling multichannel television is mature, and we're having to launch lots of new products."

Shortly after he was named chairman of the cable unit in August 2001, Britt initiated a sweeping restructuring of management to beef up marketing expertise. Key moves included the appointments of John Billock (who had been at Home Box Office Inc. since 1978, most recently as president of the U.S. Network Group) as vice chairman and chief operating officer, and former Comcast Corp. cable division president Tom Baxter to head up the cable operations.

In August 2002, vice president of corporate development Mike LaJoie was promoted to executive vice president of advanced technology. (Now he's chief technology officer; see related story).

Executive vice president of operations Chuck Ellis was promoted to executive vice president and chief marketing officer.

DECENTRALIZED

"One of the really good things we've had is that we're quite decentralized in our day to day execution of the business," Britt added. "That means that if you're in one of our cable divisions — that's where the business really happens — it's got to be managed and done locally. There is no way we can sit in Stamford and try to manage all of that."

Britt added that he's tried to instill a strong consumer focus on the cable operations during his tenure.

"That's not just words and it's not just customer service," Britt said. "It's thinking about how we operate, thinking about our products and thinking about the way we behave, getting everyone to think about what are we doing for the consumer, what consumer needs are we meeting, why is this attractive, how is this going to further our relationship with the consumer?

"That's a very important change. We're not all the way there, by the way. It's a refocusing."

With the introduction of so many new products, Ellis added, Time Warner is stepping up its marketing efforts.

"Given the competitive backdrop that we're operating in now, and have been for the past several years, it is clear to us we need to ratchet up every interface we have with the customer from customer care to marketing," he said, adding that the first step was in deploying the new services.

"The other two legs of the stool have to do with ratcheting up and putting more focus and investing a tremendous amount of incremental resources in our customer-care operation," he added.

Those new services have also been a benefit to Time Warner's equipment vendors. The MSO buys its digital and DVR set-tops from Scientific-Atlanta Inc., Motorola Inc. (it's waiting on a DVR box from Motorola) and Pace Micro Technologies plc (digital boxes).

VOD servers come from Concurrent Computer Corp., SeaChange International Inc. and nCUBE Corp.

VoIP equipment in Portland is coming from a number of vendors, including Motorola and Cisco Systems Inc. Other key vendors are Convergys Corp. and CSG Systems International Inc. for billing; Selectron for call-center support and JLodge for quality monitoring.

In the past year, Time Warner has invested from $40 million to $50 million in system infrastructure, software and hardware tools for call centers. It's also developed an enterprise-level Web presence, so customers can buy products and self-install them, which is coming later this year.

'ADVANCED AGENTS'

In addition, starting this year, service representatives will have advanced-agent desktop technology that provides them with information and tools, including profiles of customer contact history, and data on which products subscribers have or don't have.

"It's a way to fill in service more effectively for our folks on the front lines," Ellis said.

Data warehousing — or giving reps more detailed information about customers and noncustomers — is also a big initiative. Such an initiative will allow call-center employees to be more effective at target marketing, direct marketing or database marketing.

Ellis said the new additions are all part of a Customer Value Creation (CVC) initiative. "The notion is if we can create value for our customers, it creates value for us," Ellis said.

With 60 million to 70 million inbound calls a year, the opportunities are many.

Ellis discussed the combining of digital services into three packages — DIGIPiC 1000, DIGIPiC 2000 and DIGIPiC 4000. The DIGIPiC 2000 and 4000 packages include two pay services and four pay services, respectively, as well as SVOD.

"As a result of that simplified packaging, we've seen a dramatic increase in pay units," Ellis said. "We're beginning to see some stabilization and a little bit of an increase in pay homes in some cases. It remains to be seen what the trend really looks like."

While Time Warner Cable has been successful selling the two-product bundle — it has about 17% high-speed data penetration and 40% digital penetration — Ellis is excited about the addition of VoIP.

"The beauty of this is it speaks to the whole brand promise we want to make to customers, which is that this is a company that is easy to do business with," Ellis said. "What they have is very clear, there's no hassle, no extra this, no extra that, no qualifications but just a very straightforward marketing communications process and one that, from a customer standpoint, looks simple and easy to understand."

LATE SLIPPAGE

Time Warner Cable did show signs of slippage in the fourth quarter: Cash-flow growth was at 8% and revenue growth at 9%, short of the double-digit performance of earlier years. That may have been mostly the result of some one-time charges for reabsorbing the unit developing networked-DVR service Mystro TV, as well as some lost revenue as advertising by vendors and new programming launches have dried up.

While digital and data growth is slower than it had been in the past, that is to be expected, said Britt, given that Time Warner is about a year ahead of its peers in the rollout of those products.

"As we approach a point where everybody has a digital box, the growth rates will begin to slow down," Britt said. "We're ahead of the other guys; we're slowing before the other guys, my prediction is that a year from now they will be where we are.

"What we're doing is adding all of these other products, so our ARPU [average revenue per unit] is growing a lot. We have a great ARPU story that goes with the fact that our penetration is higher too. The analysts who are just looking at the [subscriber] growth are missing the real story."

One reason for the slightly disappointing fourth quarter results was a decline in advertising revenue.

WANTED: AD GROWTH

Advertising revenue has been identified as a major engine for growth. Time Warner Cable advertising sales president Larry Fischer, hired last May to head up the unit, has spent the past few months restructuring the group, focusing on creating new interconnects and growing local-cable ad sales.

"Prior to 2001, we were the only MSO that had a decentralized structure," Fischer said. "About 43 different divisions reported into the cable operations. We're relatively new at this game."

Today, Time Warner Cable has interconnects established in Cleveland; Minneapolis-St. Paul, Minn.; and Hawaii. It's also in talks to develop other interconnects with Cox Communications Inc. in Texas; Comcast Corp. for Las Cruces and El Paso, Texas; and Charter Communications Inc. in Wisconsin.

Negotiations also are under way with Adelphia Communications Corp. to establish an interconnect in Cincinnati and Columbus, Ohio and in Portland, Maine.

"We are on board with this concept," Fischer said. "Now we look like broadcast and now we can compete with broadcast dollars."

Time Warner Cable also is a digital ad-insertion pioneer. It's made 12 digital channels available for the process in New York state.

Still, the advertising market was down last year versus a strong 2002.

Fischer said that 2003 was affected by political upheaval (the war in Iraq), natural disasters (flash fires in San Diego and Los Angeles, as well as the Northeast power blackout) and a struggling economy.

While the mantra on the advertising front is to increase revenue, on the programming side, the goal is to reduce costs.

"The two biggest issues that we face are how to deal with the on-demand world, both the on-demand platform, the DVR platform, how that's all going to work to make sure that we and the programmers all have businesses when this is done," executive vice president of programming Fred Dressler said. "The second critical issue is programming cost-containment in general, and specifically the impact that sports has on that, being the largest segment of the cost increases to date."

While Dressler wouldn't be specific — he said that Time Warner Cable would be doing "a lot of different experiments in the on-demand world" — he stressed that it isn't a rights issue.

"The question here is, how do we and the programmers make money by providing the customers with an offering that they enjoy and value?" Dressler said. "This year is more about figuring out what the consumer proposition is than acquiring rights."

One area in which Time Warner Cable is ahead of the game is HDTV. The MSO has been offering HD product for about eight years.

While other MSOs have been against paying for HD content — Comcast is the most high-profile operator to do so — Dressler said that's dependent on the situation.

"Our position has been that we are willing to pay for content, not for technology," Dressler said. "To the extent that a new network, call it HD Nets for example, comes along and they're offering us two new channels, we're willing to pay for two new channels just like we're willing to pay anybody else for two new channels."

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