Room To Zoom

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<p>Cablevision at a Glance</p><p>As of first quarter 2004</p>

Basic Subs:

3,000,000

Digital Subs:

1,100,000

High-Speed Data Subs:

1,130,000

Voice Subs:

70,800

Homes Passed:

4,400,000

2003 Revenue:

$4.2 billion

2003 Adjusted Operating Cash Flow:

$1.1 billion

Tom Rutledge has made a mark since joining Cablevision Systems Corp. in January 2002 from Time Warner Cable to head the New York cable systems. On Rutledge’s watch, Cablevision has accelerated the rollout of its digital cable product, completed its system-wide upgrade, maintained its leadership in high-speed data penetration and has overseen the rollout of the third leg in a triple-play, voice-over-Internet protocol service. As Cablevision nears its planned split into two different companies — Cablevision Systems and Rainbow Media Enterprises — Rutledge was rewarded for his hard work in April with a promotion to chief operating officer of Cablevision. Taking his place as president of cable and communications is another Time Warner Cable alum, former executive vice president John Bickham. Rutledge and Bickham responded to questions via e-mail submitted by Multichannel News senior finance editor Mike Farrell through Cablevision’s corporate communications office. An edited transcript follows:

MCN: Everyone was criticizing Cablevision for being late to the digital game a few years ago, and despite a few early glitches, it has been a pretty successful transition. What do you attribute that to? Do you see digital growth leveling off or is there still substantial room to grow?

Tom Rutledge: Unlike many MSOs, Cablevision had ample analog network capacity to support a rich offering, which allowed the company to stem defections to satellite competitors and be more strategic in terms of launching a digital cable service. We were thus, as we had planned, able to launch a more sophisticated digital offering than the satellite and cable companies that went earlier.

We certainly see substantial room to grow, which is not to say that the growth we’ve already experienced has not been extraordinary. We have the highest broadband penetration in the industry — nearly 26% at the end of the first quarter of this year. But in some mature areas where the service has been available longer, we’re seeing penetrations of 50% or better, which means there is still plenty of opportunity in areas where we’re essentially just getting started.

We added nearly 700,000 digital cable customers last year, and at the end of the first quarter nearly 36% of all of our cable customers were digital customers. Of course supplementing that success has been the terrific market response to our digital voice-over-cable service, Optimum Voice, which has already attracted more than 100,000 customers. The favorable market response to Optimum Voice certainly bodes well for the company and will lead to additional growth opportunities.

MCN: Cablevision was quick to move into VoIP and has grown subscribers pretty quickly. Was part of the reason to jump headfirst into that technology a result of your experience with digital — you didn’t want to be a late-comer to that game?

Rutledge: We jumped in because we were ready, for a few key reasons. No. 1, we completed our network upgrade at the end of last year. Second, reliable soft-switch technology necessary to support the broad deployment of a VoIP service using our upgraded network became available around the same time. So the combination of the network; the arrival of reliable soft-switch technology, and our perception of a pretty broad demand for this kind of affordable and highly-reliable competitive voice service encouraged us to move ahead with the deployment of Optimum Voice.

We rolled out the service across our footprint over about six weeks late last year, and have already generated a base of more than 100,000 customers. We had also curtailed marketing of our circuit-switched business for two years in anticipation of the less expensive and superior VoIP technology.

MCN: Cablevision also has been concentrating on bundling. What more, if anything, can we expect on that front? Wireless telephone service?

Rutledge: We’ve been concentrating on exploiting the capabilities of our fully-upgraded network and delivering new digital services to our customers. There’s nothing to prevent us from expanding that portfolio in the future. But at the moment we’re focused on continuing to develop our three core consumer services — video, data and voice — and also looking for ways to further integrate those services with our advertising businesses.

We just introduced a new online portal that allows our Optimum Voice VoIP customers to direct voicemail messages and manage various aspects of their account over the Web, which makes sense because all of our voice customers are also high-speed data customers.

We’re now selling broadband through a special channel on our digital cable service — customers push a few buttons on their TV remote control and are shipped modems and self-install kits. These are good examples of how our services are converging, but they’re really just the beginning. We have DOCSIS [Data Over Cable Service Interface Specifications] modems in our digital set-top boxes, so moving elements of our voice service like Caller ID and voicemail onto the television platform is technologically possible today.

MCN: You recently packaged digital, high-speed data and telephone service in a bundle to new customers for $89.85 a month, a discounting strategy that worried investors. Were you surprised by the reaction?

Rutledge: Cablevision and the cable industry have a long history of aggressive and successful marketing and promotional activities, and this offer is consistent with that history. We think it’s a particularly compelling offer. You know, we pass about 4.4 million homes, and we serve about 3 million cable customers. So this offer is intended to produce new video customers and encourage existing video customers to purchase voice and data services from us as well.

MCN: What would you say is your biggest challenge going forward?

Rutledge: In cable, our key focus is to continue to develop, brand and market our services to existing and especially new customers. We have an enormous technological advantage over our competitors. But we need to make those advantages as clear and compelling as possible. We can put 1,000 titles of [video-on-demand] content in every home, but if no one knows it’s there we haven’t accomplished anything.

As our services become increasingly integrated, the marketing and communications challenges in making sure customers understand the value of our services — individually and as part of an integrated set — are going to be significant. I think Cablevision has done an extraordinary job positioning itself for the future.

MCN: How are you dealing with satellite competition? And how do you feel about Voom, a Cablevision-owned company, becoming a competitor in your own back yard?

John Bickham: While the competitive presence of satellite providers over the past decade or so has undeniably made cable operators better, I don’t think the reverse is true. If anything, the consumer services offered by today’s cable providers have marginalized and diminished legacy satellite offerings to a degree that is really starting to be recognized by customers.

Voom is a national service, which competes in our backyard and across the rest of the country. We feel very well positioned to compete with Voom and any other competitors in our market. The success of our iO digital service validates that confidence.

MCN: You have the highest data penetration in the industry. Do you see that beginning to level off? Can VoIP take up the slack?

Bickham: VoIP is a pretty healthy business, with margins of between 40% and 45% and a payback period of about 10 months per customer. I think we’re very happy with the prospects for a highly penetrated and very profitable voice service.

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