A Conversation With TWC's 'Killer B's'

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Time Warner Cable has been at the forefront of pushing out new services. It leads the industry in digital video recorder boxes deployed [369,000] and has the highest video-on-demand penetration. Late last year it announced an ambitious plan to launch voice-over-Internet protocol services in all of its markets by the end of 2004. Multichannel News finance editor Mike Farrell sat down with MSO chairman and CEO Glenn Britt, vice chairman and COO John Billock and president Tom Baxter at the MSO's Stamford, Conn., headquarters. A portion of their conversation follows.

MCN: What do you think needs to happen to make the on-demand product take off? Is the strong demand for the [digital video recorder] product in part a rejection of [video-on-demand]?

Glenn Britt: Not at all. I think they are two different aspects of the same phenomenon, which is the ability to watch what you want to watch, when you want to watch it. With VOD, you have potentially a large amount of video programming on the server that you can access. With a DVR, you actually cause something to be recorded, it may be because somehow the machine knows you like Friends
and records it. But there is some active thing happening there for later playback.

The DVR is a little bit more like the VCR, only it's obviously much more capable and easier to use. Whereas VOD, potentially in 10 years, you could have every piece of video ever shot on the server. It's a different thing; they don't necessarily compete with each other.

John Billock: They coexist well together. Our VOD buy-rates are up versus just a strict sort of linear product, if you will, pay-per-view. That's working well, SVOD is working well, that's obviously coming off the servers. So we see these things as not so much competitive but as all building to the same end benefit for our customers.

Britt: I think you have to think expansively about this too. When people think about VOD, they tend to think about pay-per-view movies. Clearly that's a piece of it. But where this is going is SVOD — and it's going far beyond [Home Box Office] and Showtime. I think you're going to see over time most if not all the basic networks will have companion VOD [and] SVOD services.

MCN: That brings into question the whole cost issue. Comcast has taken the position that they don't want to pay twice for programming that they are already paying for.

Britt: Maybe this reflects being part of a vertically integrated media company, but the way television programming and movies get financed is by the creation of windows that then get exploited financially. That's critical to the whole way the video and film entertainment business works.

To the extent that this is a new window, I think it's reasonable to assume that people want some revenue associated with it. In the deal-making, if that all gets homogenized into one fee that's cost per customer, that may be fine. I think it's unrealistic at the end of the day to assume we're going to get access to a whole new window without having some payment.

MCN: Would you be more open to a revenue split on the SVOD product than a deal similar to what you're paying for the regular channel?

Britt: I think that raises another issue. Right now in basic cable, the model by and large is that the cable operator essentially takes the inventory risk. We say we're going to pay ESPN X amount of money per customer, whether anybody ever watches it or not. It's worked very well for programmers and for us.

As we go into these new arenas, whether it's HDTV or VOD or broadband for that matter, there's an issue whether we want to extend that model or whether we want to be more in a role of carrying things on consignment. We'll pay you if the customer wants it. I don't think we should generalize about it.

I think there are cases where the demand is unknown, and we're not going to want to take that inventory risk. If you're a programmer, you're always trying to sell distribution ahead of time and avoid risk, so you want a guaranteed payment, you don't want to take the risk of whether somebody watches this program or not, so there's some tension there.

Bullock: We're all sort of working our way through this new model and new platform. We have a significant number of subscription model VOD subscribers; it just so happens it's the largest absolute number, because we rolled out the platform faster than everybody else. There is a deal where we have a relationship with our program suppliers, I don't want to give the specific business terms of it, but it is one where we both can live with the risk profiles of establishing a new category. We both entered into it. Nobody knew how popular these products would be. Thankfully, some of them have a point that there is a lot of consumer demand for it.

Britt: All of this is really the growth of the television side of our business. The old cable business, the sale of more channels of television to people, that's a very mature business.

Depending on whom you believe, something like 85% or 90% of the homes are passed by cable or satellite, and sometimes both of us. So there is not a lot left there. We can struggle for share of that with the satellite companies, but there aren't a lot of homes left that haven't bought that fundamental product.

It's very different than it was some years ago. For programmers, they've got to accept that reality, too. Your current linear channel isn't going to grow anymore by penetrating that many more homes, because they're not there. So the growth is going to be in creating content for all of these new technologies. That's the growth for us as well as for the programmers.

MCN: Let's talk about the core video product. You've continued to add channels, mostly on digital. But do you think cable is starting to reach the saturation point on linear programming?

Britt: I've been in the business a long time and when we had many fewer channels. At every juncture people have always said, "How can we ever have more channels?" And somehow there seems to be new channel ideas and consumers seem to want them, almost beyond what you would expect. I think we are at that point now.

As a consumer, we're all consumers too, we probably say, "Gee, we're looking at pretty marginal subjects now — so can we really have a channel devoted to basket weaving?" So what could there be? That would cause me to say there probably isn't a lot of room, except that every time people have said that it's been wrong. My guess is that there is more growth. I don't think there's a lot of room for big, giant general-interest channels, there's a lot of those. But I certainly wouldn't say there aren't going to be any more.

Tom Baxter: As a basket weaver, I can't wait for the Basket Weaving Channel. [Laughter.] We go to New Orleans in May [for the National Show], I guarantee you there will be 15 or 20 programming ideas being floated, some will be launched or near-launched, some will be looking for money. I don't think this year is going to be any different. There will be entrepreneurs who will start to float ideas for new channels.

Ultimately the successful ones will get, quite frankly, bought out by the big companies. I think it's going to continue to percolate and grow.

I think ultimately broadband will have as high penetration as basic cable. It's very clear to us that with downloading at faster speeds are really going to give rapid rise to lots of video content. You can see the day 10 or 15 years from now, that I think broadband penetration will be as high as basic penetration. Glenn's right, there will be a lower-speed service, but I think the growth of broadband is going to be one of the biggest things that happens in the next five or 10 years.

MCN: I wanted to talk about Mystro, which you've scaled back. Is it because of the experience you had with the Full Service Network?

Britt: No, it really is different. The original idea of Mystro was pretty simple. The idea was that DVRs look like they're going to be very popular — wouldn't it be better if that functionality was built into the network, rather than having millions of hard drives on the top of everybody's TV set?

One of the problems with these set-top boxes, or the hard drives in them, is that these hard drives are on 24 hours a day, unlike the one in your computer that may turn on when you're downloading or accessing programming. So these things are going to start failing. For people who bought one of these in the store, they're just going to be angry that it broke and they're going to try to get a warranty or something. We're going to end up rolling trucks and replacing them.

The problem with that ambition at the moment is that because of the copyright laws, when you record in your home, up to some point that seems to be legal. But if a company is recording at their headend it seems to be that you would need to get a license for that.

That ultimate vision is probably the right vision, and the programming community is very interested because of copy protection — they would much rather have this material in our headend than in all of the set-top boxes out there. That vision may happen ultimately, but in the short run it isn't going to happen because getting the rights is just insurmountable.

So we're going to take the technology, which is quite far along — we're going to take that and work with the programmers on a lot more SVOD. Where they do have the rights and the stuff they do have the rights to we'll put on the server. We'll sort of evolve toward this.

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