It's been a busy year for Time Warner Cable chairman and CEO Glenn Britt, who assumed his current position in August after serving about two years as president. Britt, who started with Time Inc. in 1972, replaced long-time TWC chairman Joe Collins, who was made chairman of AOL Time Warner Interactive Video. Britt presides over TWC at a controversial time. Analysts who once praised the merger that created AOL Time Warner Inc. are now having second thoughts, especially as the AOL online service is showing slower growth. On April 17, Britt met with Multichannel News finance editor Mike Farrell to talk about his first months on the job and his view of the ever-changing cable industry. An edited transcript follows:
MCN: How would you assess your performance so far? Is this job what you thought it was going to be?
Glenn Britt: First of all, I'm having a lot of fun. The job is pretty much what I expected. I was mentored by Joe Collins for a long time, so I had a pretty good idea of what it was going to be about.
MCN: Any surprises so far? Or has it pretty much gone the way you thought it would?
Britt: It's pretty much gone the way I thought it would go. I think — as I've said in some other forums — the business is a lot more competitive than it was four or five years ago. I think that changes what we all need to do as operators, not just Time Warner Cable.
We've got to focus on our competition. I think we have to use this platform that we've built, this rebuilt cable platform, and use it to launch all of the new products that it can make possible, so that we can be more competitive than we've been.
But it's not just about technology and products. It's about how we package them and how we interact with the consumer. But that's how we're going to compete and be successful.
MCN: Can you give me any ideas as to what is on the agenda as far as marketing cable services and modem services and the rest?
Britt: I can tell you a lot about the new products we're talking about. We actually engaged in a pretty intensive effort through research to better understand the right way to position our company and how to package these products and what kind of relationship we should really have with the consumer. Which will be different than the one we have now, by the way.
But it's premature to really talk much about that. Let me talk about the new things we have coming in the near term. I don't mean the list to be all-inclusive because I think there's many things we'll do down the road.
The first thing is video-on-demand. Video-on-demand is something that, in a way, it seems like we've been talking about forever. And maybe we have been. I think if you go back to the Full Service Network, which we did in Orlando [Fla.] seven or eight years ago — and the press likes to skewer us and make fun of us for that — but that really was a very valuable R&D effort.
What's interesting for VOD is, what's the right business model? We all know that VOD is the ability for consumers to call our product in some video programming that's on the server, and independent of their neighbor, they can watch something. They can fast-forward it, pause it and all those kinds of things.
That's the technological proposition. But what is it that the consumer [wants], why does the consumer want to do this? How are we going to sell it? I think there are really three models. We're going to sell and use all of them, but we'll see how this develops.
One model is the one that people most often think of, which I call traditional video-on-demand. That is, people think about selling movies on a pay-per-view basis.
We think that's an interesting business and we certainly are going to offer that. And obviously it doesn't have to be just movies, it could be other television programming, too.
There's also the notion of offering some product for free, or at least for no extra charge, and we're going to do that too. Once we launch this, if you're a digital customer, you will have access to some VOD product for no extra charge.
We think that'll be an interesting offering and for some programmers, it'll be viewed as a promotional kind of thing. It's a way to get people familiar with what's on the network. It also gives the consumer a way to start using this technology without paying extra, so it's not quite as scary.
MCN: So how would that work out? Would it be time-shifted programming on some networks?
Britt: Oh, it might be music videos, it could be some news, it could be any number of things. You access it on an on-demand basis, but you're not paying per view or you're not paying extra for it.
The third model, which is one that quite frankly intrigues me, is to sell television programming and/or movies using the video-on-demand technology, but selling it in the subscription. And the reason that intrigues me is I think that selling things in subscription format is something that the cable industry knows how to do and we know how to bill it.
But the consumer also likes to buy things that way. Usually the example I give is that most consumers don't participate in what's known as appointment viewing. Most consumers don't plan ahead for what they're going to watch on TV. They might do it to some limited extent, they may have a really favorite program that they plan viewing around.
But more often, they sit down at some point in their day and say, 'OK, now I'm going to relax and watch television.' At that point in time, they say, 'Well, what's on?' And really the beauty of the cable business to date has been that people will pay extra money to maximize the choice at that point in time.
The reason we've grown from three channels to 12 channels to 36 channels and so on is that people have been willing to pay more money to maximize their choice of channels.
They like to pay for it at the beginning of the month when they pay their bills. So it's already paid for, they don't have to think any further and sit down and say what's on. So if we apply that dynamic to the video-on-demand technology, it's really the ultimate television choice, sort of the ultimate of what we've been selling for 40 or 50 years of the cable business. Because you literally can sit down and say what's on, you can access whatever material we can put together on a server, and you've already paid for it. I think it'll be very powerful.
MCN: A lot of people also see VOD as a big retention tool for premium services, and AOL Time Warner owns premium services.
Britt: Well, we do. But it won't be limited to that. Right now, the people who are in the market with a subscription VOD product are HBO [Home Box Office] and Showtime [Networks Inc.]. Starz [Encore Group LLC], I believe, either has it or they're about to have one. We've been price-testing HBO on demand and I think it's a very interesting product. I'll give you some facts about it in a minute, but I think that this business model will go far beyond the pay services, the premium services.
You could take any television programming you have the rights to and package it in this format. So we actually are encouraging all of the cable programmers and the studios to start thinking about this as a new way to sell television — and one that's going to be very powerful, I think.
But specifically back to HBO, we've been testing that in three markets — Columbia, S.C., Cincinnati, Ohio and Austin, Texas — at different price points. It's been pretty interesting. In a couple of those markets, we're up to about half of the digital HBO customers who are also buying HBO subscription on-demand product.
There's evidence it's driven more HBO digital subscription than we had before. And I think most significant, in Columbia, S.C., where we've been doing this the longest, the pay households have actually gone up by, I think, 5 percent. And it's been years and years since pay households have changed materially in the industry. I think if we have a product that can drive that, that's pretty significant.
In my mind, it's just a glimmering of what the subscription video-on-demand product can become. But I think it's really going to change our business and the television business over the next 10 or 15 years.
MCN: Do you envision a day where somebody can pay $25 a month for an SVOD service that encompasses pretty much everything that's on television?
Britt: There's no reason why that couldn't happen. If you're — I don't mean to pick any particular network — but let's say you were the Discovery networks. It may turn out that 20 years from now, instead of programming linear channels where you order what's on Tuesday night, Wednesday night and so on — you may still do that — but a very important part of your business might be just packaging programming that's in your genre and making it available on a subscription-on-demand basis.
It's different than what exists today, but it may prove to be more popular.
MCN: It's happening to an extent with digital video recorders and things like that. What do you think that'll do to the programming industry?
Britt: I think that nothing happens overnight because there's a great deal of inertia in consumer behavior. But I think over a long enough time period, it has potential to really change how the television business works. If you go upstream from the networks to how TV programming is financed and produced, it has the potential to change that, too.
MCN: On to the online world. It seems to me that AOL gets an advantage from being connected to Time Warner Cable by being able to sell its service over your Road Runner service. But what does AOL do that helps Time Warner as far as driving new subscribers or driving new services?
Britt: Well, think about packaging AOL with our video services. In fact, the best way to sell the products that the cable industry has — whether it's us or anybody else — is in a package. Make it simple for the consumer.
AOL has a very large percentage of the narrowband [Internet-service provider] business. So if we — and they're moving into broadband — so if we package that with our video product, presumably we're going to get more customers than we're getting just selling television. That's just an example — it works both ways.
MCN: Are you getting more customers as a result of that?
Britt: We're really just starting to do that. And the answer is yes. But maybe I should move to the multiple ISP subject, because it relates, I think, the same as the other groups. But I was one of the original architects of Road Runner. I wasn't singularly the person, but I was one of a small group.
When we were designing the business, I always thought that choice would be a good thing, because choice is what we know about in the television business. What happened was — for both Road Runner and Excite@Home [Corp.] — outside investors got involved, those outside the cable industry.
In both cases, they insisted on exclusivity. It really was okay — it was unfortunate in hindsight — but it was okay at the time because there weren't a lot of ISPs anyway. The ones that were there really weren't too interested in doing anything with cable, they were busy with the narrowband business, including AOL. They were growing so quickly in narrowband that diverting effort to speculative cable modems just wasn't really a priority.
But I always thought we would end up with choice. I view it as unfortunate that it became a political issue. But when we announced our merger with AOL, we announced immediately we were going to offer multiple ISPs. Even prior to entering into any consent decree.
I look at the business and say today, we're selling a service that has two attributes. It has speed and it is always on. When customers buy a cable-modem service, that's essentially why they're buying it — one of those two things, or both. We and the rest of the industry are growing that business very rapidly.
I think it's safe to assume that at some point, we will reach a penetration level where all the people who want those features will have bought them. None of us know what that level is at this point. But there's going to be some level, something short of 100 percent, I think.
So then the question is, well, what are we going to sell next? How do we get more customers than that? It's got to be by offering different features. Just like we've sold television subscriptions by having more programming services. I think the idea of having ISPs that have different characteristics will push the penetration higher.
So here's what we've done so far. We are launching EarthLink and AOL in addition to Road Runner in all of our divisions. We have 39 operating divisions and one of those consists of our smaller systems, we call it our national division. But the other 38 are these city clusters, you know, if you're in New York City or Memphis [Tenn.] or Raleigh [N.C.], that sort of thing.
By the middle of this year, we will have EarthLink and AOL launched in all those big-city clusters.
We started last September. By the end of last year, we had it in our 20 biggest cities. It's pretty interesting what's happened. We still are very much working through the operational issues and I would say in fairness, that neither EarthLink nor AOL really turned on their full marketing machine.
But in those 20 cities in the first quarter, Road Runner grew as quickly as it grew in last year's first quarter. Which is pretty impressive if you go back and look at the numbers — it was growing very rapidly. On top of that, we've grown 20 [percent] to 30 percent more than we'd have grown with just Road Runner, from those other two ISPs. With very little extra marketing, that's a pretty good performance. Because getting more customers is usually a good thing, very profitable.
MCN: Is that more EarthLink than AOL?
Britt: Actually, I'm not at liberty to give you the proportions, but I'll only say if you look at the percentage and market share they each have in narrowband, that'd probably drive you to a conclusion about what's happening.
MCN: There's been a lot of talk that not many customers keep AOL when they do go to broadband.
Britt: Well, it's interesting. I'll address that quickly in a second. But the reason I gave you the numbers I just gave you is that we were worried that AOL and EarthLink would be so strong that Road Runner growth would slow down dramatically.
We thought we might end up with no more customers, just different customers for an ISP. So from a cable operator viewpoint, that wouldn't have done much for us.
It's actually very significant that Road Runner is growing as quickly as ever and that we're getting customers on top of it. We've been watching something we call spin, which is the idea of going from Road Runner to AOL or from Road Runner to EarthLink and back and forth. The spin has actually been so low, it's been hard to measure.
It turns out there actually is quite a bit of brand loyalty in the ISP space. And it turns out that the people who buy Road Runner are different than the people who buy AOL, and they're different than the people who buy EarthLink. So I view this a little bit like [Proctor & Gamble Co.] having different brands of soap that may actually be the same thing, but one is blue and one is pink.
MCN: Because it's essentially over the same network.
Britt: It is over the same network, but they have different features and they seem to appeal to different people. So far, I'm pretty optimistic about this. We have signed some additional deals with additional ISPs. We're going to start rolling them out the next couple of months. We'll continue to do additional deals.
There's another phenomenon: it actually turns out that of the existing Road Runner customers — which are about 2.2 million now — around 15 percent to 20 percent of them also buy AOL and keep AOL.
Interestingly enough, they buy the full-priced AOL [for $23.90 per month]. We're not sure we fully understand that phenomenon yet, but that has existed ever since we launched Road Runner and we've been doing research. Yes, there are some people who have AOL and drop it when they get broadband. But not all of them. And that's a pretty significant number.
My own theory, which is not fully validated, is we're seeing the beginnings of two-ISP households, where there's somebody in the house who wants AOL. It might be the teenager whose buddies are on it and wants to chat with them on it. I'm thinking of somebody else in the household who wants to go through Road Runner but doesn't want to use AOL. So I think that's why we get people buying both. I think we're going to see households that buy two or three ISPs down the road.
So, I know within the cable business, as a cable guy, I know there's a theory that if you hang in there with your own ISP that you don't need to have other ISPs and that eventually you get all the market. I think that's wrong. I think that consumers do like choice and different consumers like different things. I think that we're proving it and that people who don't add additional ISPs are going to leave money on the table and customers that are unserved.
MCN: You're currently in negotiations with Advance/Newhouse Corp. Can you talk about that at all as far as what happens with the TWE-Advance Newhouse partnership?
Britt: No, I won't really say anything beyond the disclosure that we made in the 10-K [annual report]. I can't legally. There is opportunity for them to renegotiate our relationship. There have been those before and all we've done is disclose that that exists. Whether there will be any change in our relationship or not is something I can't really comment on.
MCN: If Newhouse decides to end the partnership by taking subscribers — around 2 million — is that something that Time Warner is willing to let happen?
Britt: Again, I won't really comment beyond what we've disclosed. I think that there have been a lot of analysts writing about this. The financial reality is that their interest is in coming forward as a minority interest. So we look at our net income line — whether they remain in the partnership or whether they took some subscribers and exited the partnership, it would not affect our net income. In effect, they own those subscribers now, in a way.
MCN: Let's talk about programming costs. Do you see that as one of your biggest issues this year?
Britt: Yes. I really think there are two dimensions to it. I think you'll see this pretty much across the industry.
One is, we've launched quite a few new networks in the last couple of years and there's obviously a cost to each andevery network. I think that we have competition, and if the networks are good and people want to see them, then we need to launch them.
So yes, if I just look at costs, I'm unhappy that we need to pay more money. But I think if we can get product that customers want, then that's part of our business. Presumably there's revenues that go with that. So that's one dimension I think you'll see — everybody having higher costs because we've launched new services.
The second thing is there are networks that have been able to contractually arrange for fairly large increases — and just so you don't read me wrong, I know everyone always talks about sports and ESPN, but I don't mean just to pick on ESPN. There are actually a lot of the networks who have gotten accustomed to getting increases in their subscription fees that were perhaps based or premised on a much higher rate of inflation than we have today.
I think that as an industry that's going to have to be addressed. I think that consumers clearly don't want to pay rate increases that are too big and we have competition to enforce that in our behavior. Obviously, we had Senator [John] McCain asking questions about that in Washington yesterday [April 16].
I think through all the program networks, who are all doing long-range plans and budgets and things like that, if I were running one of them I would put into my expectations that these fees can't keep going up forever at a rate much faster than the rate of inflation. I think everybody needs to recalibrate themselves that way.
I think that sports are obviously a whole other category and there's a whole series of issues in the supply chain for sports.
It really isn't doing anybody much good, other than, I guess, the players. But I think there's a limit to the amount fans want to pay for these events. And quite honestly, you read it in the paper, I think there's actually growing disenchantment with professional sports by the fans, because they see these huge payments to players. And these are very talented people playing.
But I just think the whole mechanism is broken and it's creating and aiding a backlash amongst the consumer and the fans. Again, we're all in this together — the cable industry, the broadcasters, the networks, the sports teams — and I think if consumers see the whole thing as characterized by excessive greed, then there ultimately will be some reaction. So I think it behooves all of us to try to figure out a way to tamp that down.
MCN: You have a deal with the Yankees Entertainment Sports Network, which a lot of people have complained is one of the most expensive. Was your decision to do a deal with them influenced at all by the problem you had with ABC a few years ago? Did you want to avoid another public battle?
Britt: I guess the only comment I would make about that [ABC] situation was that we were at the middle of a merger with AOL, in the middle of regulatory review. I think that was a very particular point in time. I certainly hope we don't repeat that with any other programmer, but whether the outcome would have been the same at a different point in time, who knows? Mergers of that size don't happen every day.
In regard to YES, I think I'd go back to the comments I made about sports. I think YES is an example of that. I think we made the decision that in the post-[Sept. 11] environment that having a big fight with the YES network and depriving New Yorkers of [Major League Baseball's New York] Yankees for part or all of the season wasn't the right thing to do. We certainly aren't happy about the price of the network, because that's very expensive.
Cablevision [Systems Corp.] has obviously chosen a different route and we'll see how that turns out. But I think the whole thing is symptomatic of that there is a problem in sports generally — that somehow these costs and prices need to get under control.