Marching to Its Own Drummer

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Cable One Inc. has never tried to lead the cable pack in offering new services. Its strategy has been to lay back and learn from everyone else's successes and failures. The MSO has eschewed video-on-demand, and is instead deploying digital video recorder boxes. And contrarian Cable One has made its own way on the programming front, too. Multichannel News editor-at-large Linda Moss went to Cable One's Phoenix headquarters to interview CEO Tom Might; vice president of strategic marketing, Jerry McKenna; vice president, Central division Tom Basinger, and vice president of digital services and information technology Steve Fox. An edited transcript follows.

MCN: There has been quite a bit written about your company. And every story says you are the mavericks: When everyone’s doing one thing you’re doing another.

Tom Might: Yes. Guilty.

MCN: What does that reflect?

Might: You have to go back to a decision in 1994, when we decided to be in big towns or small cities only.

We sold off our very small systems, and we’ve traded away seven urban systems or near-urban systems for other big towns and small cities. And in each of those deals, our big-town/small-city mix got richer; our average headend size improved, etc.

That set up a whole host of follow-on strategies. You can have different channel lineups; you have different capital structure; wage economics are different.

MCN: How about in terms of the new services? You took your time rolling out digital.

Might: Again, [that’s] because of the kind of markets we were in. Rarely are we in an adjacency to another MSO. Because we’re in a town that’s out by itself, we don’t have the pressure as early as you do in an urban/suburban market to be the first — or one of the first — to launch [a] new product before its capital costs have come down and before the quality of the service has been verified.

As an example of a very direct benefit: We were the only cable company [among the Top 10 MSOs], I believe, that launched Internet service without a third-party vendor like @Home or Road Runner. Our version of digital was pretty expensive per headend, but very original and very creative with lots of flexibility.

Steve Fox: And that maximized the life of the analog bandwidth we have.

MCN: Because it was so robust?

Fox: Well, we kind of adopted statistical multiplexing before that was a common term for what a lot of the bigger MSOs are doing today.

Might: You either went HITS [Headend in the Sky], if you were going to go early, or you led with rate-muxing the way we did. We did 100% rate-muxing instead. We could not have done that had we launched digital right when everybody [else did]. We waited a couple of years, and it played right into our hands.

Tom Basinger: When we are considering new services like these, we don’t start out by saying to ourselves, 'Oh, let’s be a maverick.’ We start out by saying, 'What’s the best way for us to do this in our systems? How long should we wait? What should we learn from other people? Should we have third-party relationships?’ And so we just try to do it the best way we can as opposed to saying, 'Oh, let’s just do it different from everybody else.’

MCN: But your markets make that possible, right?

Might: All these benefits come from being able to lag a year or so behind in the adoption of new technologies without our customer satisfaction suffering.

MCN: People in these smaller markets, they’re just not as eager to have these services?

Jerry McKenna: They’re not quite as trendy, I would say. Consequently, we can wait for the product category to develop a little bit. Our strategy has been to let it develop and then come in with the second or third generation of equipment, which is more robust than the initial equipment available. And it seems to work and serve us pretty well.

MCN: Do you do clustering on your own scale in these small markets?

Might: Our attempt at clustering was to get as many subs into as few states as possible and to get the average headend size higher. We now have 75% of our subs in five states. Twenty percent of them are in just two locations. And our average headend size has more than doubled, so we’ve accomplished a lot of what we wanted to. But it’s very different than what other MSOs have considered [to be] clustering.

MCN: What is your average headend size?

Might: Seventeen thousand. The other oddity in our approach — I mentioned 20% of our subs are in two locations — but we run them as five totally separate systems. We believe in keeping systems small: 40,000 is about as big as we like under one general manager with his or her own home tech force and CSSRs [customer sales and service representatives], and marketing.

MCN: Your company does lots of things differently. Why was there that decision to just go to a [limited] standard lineup of channels?

McKenna: We have 35 or 36 that we carry MSO-wide. Then we have five that each system can decide on locally. We were all doing budgets one year — I’d say around 1997, in that timeframe, '98 — and programming costs were beginning to skyrocket. So we felt as a small company, we could do two things. We could limit the total number of satellite networks that we carry in the system. So therefore instead of having 70, we would have 40. And then secondly, we could leverage that distribution MSO-wide to try to get the best deals with the programmers.

So it’s worked out fairly well, although it’s getting harder.

Basinger: A side benefit of this approach to our analog lineup has been that it has allowed us to stick with 550 Megahertz systems a little bit longer. Given the heavy digital lineup, we can accomplish an awful lot in a 550 Megahertz system.

MCN: The new ESPN deals, is that the end of programmer-operator tension or not?

McKenna: No.

MCN: Are you heartened by Cox’s and Charter’s recent announcements of deals with ESPN, and the National Cable Television Cooperative’s deal?

Basinger: Oh, the names change but the game remains the same.

McKenna: A lot of programmers are looking for close-to or double-digit rate increases. We simply cannot operate under that parameter. So we fight very aggressively as our contracts expire to keep these rates at [consumer price index] levels. We’ve had some success and in other instances, we’ve had to step back and say, 'Do we want to continue carrying this programming?’

MCN: You have dropped networks, right?

McKenna: Yes, we have.

MCN: Who?

McKenna: We don’t go into the specifics, but I can tell you that when we look at them, there are four we moved to digital. There were a number of them, several, that we dropped or that we had significant reductions in the amount of carriage.

Might: They get very upset with Jerry when they get mentioned publicly by name.

MCN: In retrospect, what did the rate freeze gain you?

Might: Subscribers. There were only three of us [MSOs] that did grow last year. We were the third-highest of the three.

MCN: So you really attribute that to the freeze?

McKenna: One of many factors. You know, we had a good year last year, and it’s hard to say if it was just the rate increase [or] any one thing, because we had a good year with digital, an extremely good year with high speed, and our basic sub count was up. And our non-pays decreased significantly. So there were a combination of factors that came to play.

MCN: Your version of bundling is high-speed data and digital?

McKenna: Our fastest high speed and our complete digital package, excluding premiums. And then we also give a second digital receiver so you can connect a second TV.

MCN: I would assume you are big believers in bundling now, even though you came to it later.

Multiple voices: Yes.

MCN: Once again, late to the party.

McKenna: Late to the party, but we approached it with gusto.

Might: Yes, we did.

McKenna: Bundling is working very well for us because it brings in a higher-revenue customer, and you have better retention than, for example, you have with digital.

MCN: Could you talk a little bit about digital and your success with digital? What is the penetration
now?

Might: We just hit 32% again.

MCN: And you’ve only been doing digital for how long?

Might: We launched it free everywhere for one year in 2001. It’s shot to 32% penetration in just a year and then, as people started to churn off, they had to start paying for it, we fell as low as 29%, and now it’s on a tear. We are adding thousands and thousands a month without any particular promotions or incentives. It’s just the additional product we added is helping and the fact that our CSSRs are just terrific.

Basinger: The bundling again is helping. Every bundled customer is a digital customer and a high-speed data customer. It’s helping both of those products as well.

McKenna: The other thing we’re seeing is less churn with digital. Our churn is down one full percentage point over the past 12 months. We run about 5.2% churn with digital.

MCN: Did you actually start rolling out DVRs last year?

Might: No.

MCN: What happened then?

McKenna: We are in the process of — Steve can speak to the technical side — but we have put the initial quantities down, what I call friendlies, to the systems, to some of our associates, some of our best customers with DVRs, with the Motorola HD DVR. And we will begin getting much larger quantities come the first of April.

But we have learned with new digital products, you need to kind of debug them relative to your headend and to make sure they’re working right, [that] the guides interface correctly, [so that] we don’t have issues with analog-quality pictures when you’re going through an HD DVR. So we are moving to a one-box solution for HD and DVR. It’ll all be in one box.

Might: But we’re very frustrated, because we were ready to go with DVRs two years ago. In fact, we don’t do VOD because we believe so much in DVRs. But we’re 100% Motorola so we were captive to Motorola’s very late rollout of the DVR, even though we were early believers in that product.

Fox: And their skipping of the standard-definition DVR product altogether.

Might: That was the mistake.

Fox: That was the painful realization that there would be no standard definition DVR from Motorola, only an HD version.

Basinger: Their DVR is still a single tuner, and the dual-tuner is not out until later this year.

MCN: So you’re not marketing, you’re not selling them yet?

McKenna: We will in the second quarter.

Might: Thousands are arriving this month, Steve told us earlier today.

MCN: Your market research made you believe that DVRs were the product to go with?

McKenna: We did a fair amount of consumer research and actually did some for Motorola, the researcher we used. What he found was — kind of an interesting observation — is that people don’t understand what a DVR is. But if you tell them a couple of the features — it’s just like a VCR but easier; you can pause live TV — they really like it. So it’s a question of getting people to understand what it is, to experience it, and it’ll sell like hotcakes.

MCN: In light of that, you still haven’t changed your feelings on VOD? Will you ever launch it?

Might: We haven’t seen any convincing evidence of the profit-making opportunity or the sales-retention opportunity. You want one or both of those reasons to do it. We’re hoping that when first-run movies or earlier releases become available, or whatever, that it proves to be a home run. And we’ll be right there at a price point we can afford.

MCN: What are your concerns about it?

Might: Have you seen anybody reporting a profit potential yet for VOD? I haven’t. I see lots of models. Once we’re out of the free stage, it might make some money. But a lot of those theories, like prior pay-per-view profit theories, never really pan out.

It’s very enticing, but it’s all a speculative model at this point, and we’re cheering for it. But we can’t afford to launch it until we know it’s for sure, because of our headend sizes.

McKenna: I would just add, I don’t think the content’s there yet. I mean, 200 hours of library content is not going to attract the heavy users of video-on-demand over a long period.

MCN: Telephony this year?

McKenna: Ring, ring, ring.

Might: Our target for mass marketing is 2006. Mechanically launching it throughout the company in 2005. Maybe testing later this year.

Fox: Possibly dabbling in that in the last quarter of this year.

MCN: Again, why wait on that, and what’s the potential with telephony?

McKenna: Well, it’s Internet telephony for us.

MCN: Why go direct to VoIP?

Fox: The same reasons from a VOD standpoint: you can’t do circuit switch in our market sizes. You just can’t. We don’t have the interconnection; we don’t have the scale. You just don’t have that kind of volume to warrant that kind of a significant capital expenditure. So a VoIP is the only one that makes sense for us. We can now get scale because we use the Internet as our backbone.

Might: When we launch a new product, we launch 99.9% of the company to the month, usually. HDTV, we launched everybody in the same week, the entire company. We probably spent maybe six to nine months max, less than a year, rolling out the entire company for digital and high-speed data at the same time.

MCN: How were you able to do that so quickly?

Might: Part of our success is based on using the cookie-cutter approach. Taking our time, figuring out what works best by not being first and analyzing other people’s successes or failures — and then designing it one time and then rolling out the exact same headend equipment and prices and rates and all the details exactly the same in each system. Once we do it once, we can just replicate that.

MCN: Your HDTV package, what’s the pricing on it? I don’t think you have ESPN HD yet or a Discovery HD.

McKenna: We’re getting close [on ESPN HD]. If you’re a digital customer, it’s $10 more, and you’re going to get an HD DVR from us. Our strategy with high-definition was to provide the pay services. We think customers like sports and movies. We launched [Home Box Office] and Showtime immediately and then the division vice presidents have been working very hard to get the affiliates — ABC, CBS, NBC and Fox affiliates to give us high-definition feeds in our markets. That has proven to be much more difficult than we thought. Then what we would like to do, our next step would be, to get some sports programming. We’re working, negotiating, with ESPN literally as we speak.

Basinger: The road to high definition has been more confusing, longer and more challenging than we thought. We chose to focus beyond HBO and Showtime and the broadcast stations.

But we’ve found that finding high-definition feeds from the broadcasters in our markets has been a tougher job than we expected. Because we tend to be in many smaller markets, of course we tend to have smaller-group broadcasters, and they’re not quite as quick to put high definition on.

Might: We naively assumed that the government had required them — in exchange for an additional 6 Megahertz — [to meet] deadlines to launch high-definition TV, including in our markets, and they’re not doing it. Well, in many cases, they’re not doing it.

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