DirecTV’s Director

DirecTV’s Director
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Since signing on as CEO of DirecTV in January 2010 — he added chairman to his title six months later — Mike White has steered the satellite-TV giant through some turbulent air space. White’s arrival coincided with U.S. subscriber growth maturing in a TV market ferociously competitive with cable giants. But the former PepsiCo executive showed he knew more than just how to sell soda.

White has retooled and refocused DirecTV’s U.S. division, honing in on improved customer service, new products and more profitable subscribers. The reward has been robust financial growth — cash flow in the U.S. has risen at a 7% clip over the first nine months of the year — and a 21% lift in its stock price. Investors will tell you the real story is south of the border, with the company’s explosive Latin American growth.

White has not been shy about speaking his mind. He’s been a vocal critic of rapidly rising programming costs, and was involved in a high-profile dispute with Viacom earlier this year, in which the programming giant’s 26 networks went dark for nine days.

A former goalie who played intramural ice hockey in the 1970s while a student at Boston College, White has taken his fair share of shots to the body, but has managed to keep DirecTV at the top of its game. For these reasons and more, White has been named Multichannel News’ 2012 Executive of the Year.

White sat down in DirecTV’s El Segundo, Calif., offices on Nov. 29 with Multichannel News senior finance editor Mike Farrell. An edited transcript follows.

MCN: When you came to DirecTV, it was a company in transition. Do you think that transition is nearing an end?

Mike White: When I got here I don’t think the transition had started in many ways, and I wasn’t that smart. (Laughs.) When I got here, there was speculation that we might be sold, there was some speculation that we should spin off Latin America, and yet we had a very successful run.

I would say it was a year ago September when I took my team offsite and started sharing what I saw coming at us over the next several years. We’re going to have to be responsible in passing cost increases and higher prices to our consumers — and that was going to have implications. We’re going to have to get smarter about productivity and how we manage costs. We were probably going to have to rebalance a bit [from] pushing gross adds versus retaining customers. And I really thought that we had an opportunity to take a fresh look at the customer experience.

MCN: So what are you doing to achieve those goals?

MW: I remember starting the year saying, “Can you land the plane safely?”

My experience in the consumer business is any time you start to try to adjust your promotional and discounting plans, there is always a risk that you do it too fast and too hard and the consumer leaves you. We worked really hard to stay true to what we said we were going to do, but not do it in a way where we lost a lot of customers.

I feel very good about our fourth quarter, so for the year, we’re going to be positive. I said that at the beginning of the year and now I can guarantee it, sitting here at almost the first of December. As I look going forward, frankly, the strategies we’re putting in place today for 2013 and 2014 are very similar to the strategies we pursued in 2012.

There is some stuff that we’ve done here that we haven’t talked a lot about externally because we’ve been piloting them. We’ve got a learning laboratory. One of the things we’ve been working on is how to better on-board new customers. One of the biggest pain points is getting their rebate redeemed. In the past we made it difficult. Now we’ve got things in place to make it instant.

Next year, we’ve got an architecture for a whole new bill, to simplify it. We think we have an obligation to be transparent.

We’re finding we’ve reduced unnecessary truck rolls. We think we can take 25 million calls out of the system, a huge cost savings and it also reduces frustration on the part of our customers — fewer transfers.

The challenge is, it is a lot of nitty-gritty operating work to try to do root cause analysis of problems, get our workforce trained and continue to improve. I think we’ve just scratched the surface on that opportunity. And I think we will begin to see it. Next year, in 2013 and 2014, we’ll really begin to see the payback in lower churn, but also lower costs and a better customer experience all the way around.

We’re continuing to advance our TV Everywhere offering, so we’ll be streaming 65 channels by the end of the year live on the iPad in the home. We rolled out HBO Go this past year. We really increased our on-demand offerings. We’re doing a lot of work in the digital entertainment space. We created a whole digital entertainment team reporting to me to take that to a whole other level.

MCN: Do you see a point where net new subscribers go negative?

MW: We’re not planning it. I want to be optimistic that you’re going to see some improvement in housing, and that is going to help the industry as a whole. That is going to be good for our whole industry and we hope to get our fair share of that business. We’re managing our business to be sustainable. We’re not trying to not grow. I want to grow as aggressively as I can. But it needs to be responsible growth. To me, it’s just the world has changed and we are trying to adapt our business models to the new realities.

At the same time, we’ve got a tremendous growth engine in Latin America. So we’ve got a unique portfolio and, frankly, our EBITDA multiple is so low and our free-cash-flow yield is so high that it’s hard for me to not see a very attractive share buyback strategy to continue for the next several years.

To me, I think it’s a very attractive business for shareholders where we think we can grow free cash flow per share at high teens and maybe even 20%, but certainly mid-to-high teens, for the foreseeable future.

MCN: DirecTV has always been considered as kind of the highend provider in the TV business. Does that work for or against you in this economy?

MW: I know that is the perception and it’s true that our ARPU is high in that regard, relative to some of our competitors, but we’re actually a tale of two cities. We have a great brand and we have some very highend customers who are terrific customers. But we also are a big provider in more rural states and in parts of the country and even in other areas where we are a good value. You actually have to do both. When I look at our business, I’m very concerned in ensuring there is a balance.

When you look at our customer base, it represents all of America. You can’t have 20 million households and only be serving CEOs and celebrities. And we need that scale. We need to be 20 million subs to have sufficient ability to manage our content costs. And even then it’s hard.

I very much believe that we cannot walk away from our rural customers, or from our value-oriented customers. We need to ensure that we have a balanced approach. That’s why this past year we launched the Entertainment package, where we pulled sports out in order to make it more affordable for the average person.

And it has done very well this year. We feel very strongly that in a big country that is as segmented as America is, we need to be in multiple places and playing in a balanced way.

MCN: There has been a lot of talk again about satellite broadband. How important is broadband to you now?

MW: We’ve been competing against the triple play for 10 years. As recently as the third quarter, if you look at our net subscriber results compared to cable, they’re pretty good. Now, would I like to have the ability to sell a broadband service to my customers with an 80% EBITDA margin? Sure. But the technology is not ideal. You have Hughes and WildBlue, but it’s not the ideal way to deliver a world-class broadband service, except in the most rural areas. So you have to kind of accept what the technology is good at and leverage that. I am a big believer in businesses that figure out what their strengths are. Capitalize on your strengths, be true to who you are don’t try to be who you’re not.

If anything, what the cable guys are realizing is that there is an enormous opportunity for them to sell their broadband independently of the bundle and they have some very attractive pricing for it.

MCN: Dish Network chairman Charlie Ergen has said in the past that a merger between DirecTV and his company would make sense, quickly adding that it wouldn’t pass regulatory muster. Do you think there is a way?

MW: I’m not out there talking about it; I think Charlie may be. I certainly agree that particularly with rising content costs there would be some strategic attractiveness to combining satellite companies, but I think it’s highly speculative and therefore not very productive to talk about it. And I still think while the landscape has changed significantly versus 10 years ago [when a Dish/DirecTV merger was blocked by regulators], [now you have] half the country where telcos have entered the space. There still would be some concerns on the part of the Justice Department in the other 40% or so of the country where it would be considered a three-to-two merger and therefore considered to be problematic.

MCN: Let’s change gears a bit. The growth in Latin America has been phenomenal and for a lot of people it has become a reason to own DirecTV stock. What do you attribute that performance to and is it sustainable?

MW: I think you have a combination of things. First of all [DirecTV Latin America CEO] Bruce Churchill and the Latin America team are world-class operators. I’ve been down to Brazil, I’ve been in Argentina and Venezuela, Colombia and Mexico. We have a fantastic set of emerging market operators. You couple that with I think [being in the] right time [at the] right place, where incomes have been growing as you have had a young demographic in the workforce. The opportunity for pay television — particularly with the rise of Brazil and Colombia as those economies started to grow — has also been unprecedented. I don’t think that’s finished.

I think we are at the very early stages of that opening, from a growth opportunity standpoint, as the young demographic enters the workforce [and] has disposable income. We have a once-in-a-lifetime opportunity for growth.

Latin America is structurally a very different competitive landscape. And the structural competitive advantages that the satellite technology has are significantly greater in Latin America than they are in the U.S.

In the U.S., we are a 20% market share player. In Venezuela, we’re close to 50%.

The satellite is a highly leverageable technology. I don’t have retransmission consent [in Latin America], you don’t have regional sports networks. There are a lot of other issues that the U.S. business faces that Latin America doesn’t face today.

MCN: Any possibility that you may spin off Latin America in the future?

MW: They rely on the U.S. for technology. The technology roadmap is shared. It’s the same engineering department, the same broadcast center that is run up here out of our engineering organization. We share talent back and forth and they’re leveraging our cash flow as well.

I don’t think any CEO can say never on anything in today’s world, but I don’t think this is the time to think of spinning that asset off . I think it’s a teenager right now in a sense. It’s just blossoming. I think we’re going to see it reach scale over the next three, four, or fi ve years and it’s going to be a terrific asset.

MCN: Let’s talk about programming costs. You have been pretty outspoken on the issue and DirecTV has recently been involved in some high-profile disputes, particularly with Viacom. Why jump into this now?

MW: I think it goes with the territory. When Chase [Carey] was here, I think content costs, our ACPU (average cost per unit), was growing 4% a year. So there was no reason to have a big fight. I’m here, and we pay about $10 billion a year in rights fees and they are growing $1 billion a year. That’s not sustainable. I can’t even pass it on through to consumers.

Because of the lack of transparency in the industry, it’s also never clear whether DirecTV customers are getting a fair deal or if folks are trying to set a new market using DirecTV as an example. All we’re trying to do is to ensure that some kind of free market works, where our customers are rewarded for our size and scale and get a fair deal. I don’t particularly enjoy these disputes.

I am in favor of freedom of choice. I don’t think it is right for one network or one sports network or whatever to say I want to be in a bundle and make everybody pay for it, even those customers that don’t want it or don’t want to pay for it. Content providers are entitled to charge whatever they want for their content, whatever the market will bear, provided it’s subject to a true market test. The problem is that a lot of it is not.

MCN: Other people have pointed to sports and retransmission consent as the main culprits in this. Are you in a bit of a conflict because sports have been DirecTV’s bread and butter almost from the beginning?

MW: We’re practical. We recognize that not everything I would wish [for] I can have. Personally I believe the industry made a mistake in not having the regional sports networks be an a la carte service 10 years ago. But am I going to be able to force that to happen? I don’t know. I’m pretty realistic about that.

We’re planning high single-digit increases in content costs for the foreseeable future. That’s $1 billion a year. All I’m trying to do is make sure it doesn’t get even worse than that because that is difficult for the average consumer to handle when their incomes aren’t growing at those rates.

At some point we’re all going to have to look at if it’s all a la carte options, whether it is surcharges on a consumer’s bill for certain services, because there is no other way to start passing it through. When you start doing that, some of those consumers are going to start going to Washington and say, “I want a la carte on everything.” I’m not sure a la carte on everything is in the industry’s best interest.

MCN: Your satellite competitor has taken a different stance on regional sports networks, refusing to carry some big ones in big markets — YES Network and SNY in New York and Time Warner Cable SportsNet in Los Angeles, for example. Is that a tack that you might take in the future?

MW: We don’t carry every regional sports network in some geographies. I think Charlie has a different customer. And there are some customers who don’t care about sports, there are others that love sports. Our point is horses for courses. It’s not one thing or another. The content cost challenge is probably a third retrans, a third sports and a third everything else. My concern is for the consumer and the bill that consumer has to pay in a challenging economy.

MCN: One of the more successful sports packages that you have is “NFL Sunday Ticket,” and you recently expanded the out-of-market package’s reach by offering it free to new customers for one year. Do you see a time when Sunday Ticket is no longer exclusive to DirecTV?

MW: It’s the NFL’s contract and we have a great relationship with the NFL. You’re right, NFL Sunday Ticket has been great for the DirecTV brand. I think by the way the quality of advertising has also been good for the NFL. We’ve both benefited from that partnership.

I think it’s the NFL that has to look at what considerations they would have about exclusivity. We’re happy with the relationship and we want to continue to build on the relationship in the future.

Because it is an a la carte product, we felt we needed to [exploit] it promotionally to expand the base. And it’s been successful in doing that. We’re pleased with that. We’ve added more paying subscribers than we have in several years. But it’s also an expensive product.

MCN: Is this a decision you’re going to have to make soon, or do you still have several years left on your deal?

MW: I think we’ve got a little time left, but we’re in constant discussions with the NFL and we’ll see where we go over the next year. We value the relationship and we want to continue the relationship, but it has to be somewhat sensible economics for the product as it is, unless they choose they want to change the product to something nonexclusive. If they did, we’d still be interested in carrying it.

MCN: You have been making some moves into content yourself, buying programming like Damages and Friday Night Lights for your Audience Network, and even investing in original shows. Where do you see the network going forward?

MW: We see it as a differentiator.

MCN: Like a local cable news channel?

MW: We’re not trying to compete with our programming partners, nor is it our core competence. There are programming partners that we have that are better at picking winners than I’ll ever be.

MCN: So if you’re not going to buy a bigger network, what about something like Netflix?

MW: They put in place a poison pill and I have tremendous respect for [Netflix CEO] Reed [Hastings]. He’s put together a tremendous culture; it’s a very different business.

We’re busy investing. We’ll invest $75 million plus next year on our own digital strategies in terms of the infrastructure and the capability to stream and to download. So we’re very focused on building more entertainment options for our customers. We’re primarily a today’s newspaper business and they’re primarily a library business for last year’s or the year before’s stuff. There is a place for each. I would say right now that we’re focused on building out our own TV Everywhere capability and we’ll see. I have tremendous respect for Reed. And it’s a great brand.

MCN: Instead of buying Netflix, could you instead just become them, in the sense that you already have VOD capability and content libraries?

MW: I think that you’ve seen all of us do a lot of on-demand over the last year and I think you will see us do even more. We’re focused on building our company and when we buy back stock, we have a very high bar, because of the return we get from buying back shares. I have tremendous respect for Netflix but it’s a different business. There wouldn’t be any synergies, but it’s certainly an interesting business opportunity.

MCN: How important is mobility and TV Everywhere to you? Does it shine a light on not having a broadband play?

MW: I don’t think so. I think all of us on the distributor side are working hard to enable our customers to watch what they want, when they want and where they want to watch it. The content rights are lagging but they are getting there. But it’s evolving and I think over the next couple of years you’re going to see it accelerate as those rights get built into every negotiation that each one of us has.

I still personally don’t think that the small screen replaces the big screen when you’re in the home, because the big screen is just a much better experience. But outside the home — it’s a country on the go, people are busy — I think people want the option to be able to access it.

We certainly think we have to be competitive to provide the same experience, but let’s all be clear: Today, it’s less about the technology and more about the content rights landscape and the pacing at which that evolves. We can do a lot more technologically today if we were allowed to, but we can’t because of the limits of the content rights.

MCN: DirecTV has always been on the cutting edge of technology — you were heavy into HD early on and were a pioneer in whole-home DVRs. About a month ago, you released the next generation of whole-home DVRs, Genie. How has acceptance of that been so far?

MW: Reception has been great. But I think it will be better when you see our new ad around the BCS [college football’s Bowl Championship Series], so stay tuned. I think we have a terrific engineering organization that is out there trying to see what is new and different and trying to innovate. I think any company in today’s world has to continue to innovate every day and we’re no exception. We can never sit on our laurels.

As we look at into the future, whether 4K [Ultra HD] becomes mainstream-able, I don’t know, but we’re going to be there when it does. We have a bunch of things we’re working on for next year to take our search and discovery and user interface to a whole other level for customers and well have more to say about that next year. I don’t think we can ever stop running.

AT A GLANCE

Michael White

Title: Chairman, President and CEO, DirecTV Group

Age: 60

Background: Vice chairman of PepsiCo (2006-2009); chairman and CEO of PepsiCo International (2003-2009); President and CEO Frito-Lay Europe/ Africa/Middle East division (1998- 2000); Senior vice president and chief financial officer PepsiCo (1998-2000); various senior management positions at PepsiCo, Frito-Lay and Avon Products

Education: B.A., Boston College; M.A., International Relations, Johns Hopkins University

SOURCE: DirecTV, published reports

COMPANY SNAPSHOT

DirecTV Group

Headquarters: El Segundo, Calif.

Employees:

U.S: 16,000

Latin America: 12,600

Founded: 1990

Launched Service: June 1994

Subscribers:

U.S.: 19.98 million

Latin America: 14.5 million

2011 Revenue:

U.S.: $21.9 billion

Latin America: $5.1 billion

2011 OPBDA:

U.S.: $5.3 billion

Latin America: $1.7 billion

SOURCE: DirecTV

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