What a Difference A New MSO Can Make

BY K. C. NEEL After years of frustration and failed programs, AT&T Broadband employees in Portland, Ore., finally feel good about their jobs now that Comcast Corp. owns the system. “I’ve never been as excited as I am right now,” says Curt Henninger, the system’s SVP. “I can see myself working for Comcast for the rest of my career. I couldn’t say that with AT&T Broadband.” Why the excitement? Henninger says the answer lies in the divergent philosophies of the two companies. “The way I characterize it is this,” he says. “AT&T was a renter. Comcast is an owner. AT&T leased buildings and used outside contractors extensively. Comcast buys buildings and wants to bring more services in-house. We can’t really connect with our customers without doing that and being a local business. Comcast knows that. AT&T wasn’t as concerned about it.” Another big difference between the old regime and the new one has been in figuring out how and where to spend money. AT&T’s budgetary process, for instance, would take months to complete and would result in corporate decrees that would force unrealistic goals on the local systems. “Under AT&T’s leadership, we’d end up with plans we knew we only had a 70% chance of achieving,” Henninger says. Last fall, local systems presented their plans to Comcast Cable president Steve Burke, who then tweaked the plans with the local executives. Comcast created a final budget based on that dialogue, Henninger says, noting that the budget process was completed by November last year. Henninger compares that to the fact that his budgets were never finalized until mid-February under AT&T. “We know we cannot only achieve our budget goals, but hopefully we’ll even exceed them,” he says. “You’d think that it would be tempting for new owners to deliver edicts — ‘Do it our way. Adopt our model.’” Yet Comcast has continually shared information with Henninger and his team and has, in turn, given the local execs plenty of opportunity to weigh in on issues and topics affecting the system. “That makes you feel like an owner of the business plan and makes you want to succeed rather than have a sinking feeling the minute the plan is presented to you knowing that you can’t ever make the target,” Henninger says. “It’s refreshing.” The Portland property won’t publicly change its name to Comcast until March. That’s when Comcast chairman Ralph Roberts and Burke are scheduled to visit Portland. Henninger says he’s going to shut down the company for a day so everyone at the system can listen to what the executives have to say. “We’ll route customer care calls to Seattle for the day and not schedule any installations,” he says. “We want everyone to have a chance to have the same enthusiasm our management staff has with this new ownership change.” One way to do that is by allowing employees to handle more of the day-to-day operations. Jobs that AT&T traditionally outsourced or conducted out of market — notably customer care and installations — are now being brought in-house. Henninger expects to hire about 100 customer service reps in the next few months as the system ramps up its local call center. The organizational structure is also being tweaked, says public affairs director Dan Williams. For instance, the ad sales department, which operated as a separately run entity under AT&T, is now more closely associated with local management. VP of media services Lois Petrik now attends the system’s weekly management meetings — a change from the past when the unit was completely separate from the operations side, William says. Like other markets, the automotive category has traditionally been the strongest for local ad sales. The company declined to discuss its ad rates or revenue. One of the key goals this year in Portland will be improving the video side of the business. When the system is 100% upgraded in May, the entire market, which counts 540,000 customers from Vancouver, Wash., to Eugene, Ore., will have the same lineup and rate structure. “It took us five years and a lot of hard work to achieve, but we’re very proud of the fact that everyone will have the same service throughout our footprint,” says marketing VP Lars Lofas. “There are slight differences with the access channels and local off-airs. But ESPN and CNN and the rest of the satellite services are all the same for everyone.” That will be important as the system markets its services this year. Not only will it make it easier for customer service reps to sell products, it will make it easier for customers to understand what the system offers, and it eliminates the haves/have-nots in a market, Lofas says. It will also save money when it comes to producing lineup cards and marketing materials. Portland will focus on solidifying its analog basic business this year, a turnaround from the past four years when most of AT&T’s marketing dollars hyped its digital services and high-speed data and local telephone service. For the most part, that strategy paid off. One in three customers subscribes to a digital service, and one in four takes HSD service, Lofas says. Now it’s time to make sure the analog business stays strong. “Comcast wants us to take care of the core video business first and then branch out from there,” Lofas says. “And that makes sense. Comcast grew its customer base last year. Everyone knows that AT&T lost customers.” The Portland system showed a 2% gain in basic customers over the past two years, but Lofas admits the system lost some customers last year. “We feel we have tapped into the digital market deep enough right now,” he says. “We don’t want to chase churn all year. So we see an opportunity to sell analog basic to nonsubscribers and dish owners and then use the opportunity to up sell later.” There are plenty of nonsubscribers in town. The system’s penetration rate, according to Henninger, is around 59%, below the national average of around 70%. Scarborough Research pegs total cable penetration in the market at 61%. Henninger says the lower-than-national average penetration in Portland partly stems from the way the system calculates its multiple dwelling unit customers, yet he admits improvements are needed. Dish penetration here is also below average. Scarborough puts DBS penetration in Portland at 15%. Henninger puts it at around 13%. Still, the system will undertake a revamped and aggressive dish buy-back program this year. The company’s old dish buy-back — giving customers four $50 coupons in return for turning in their dish and signing up for cable service — garnered over 2,000 new customers in 2002, Lofas says. The new program is expected to bring in even more new customers. DBS customers will be offered $400 in $25 increments over a 16-month period if they sign up for cable. The program is designed to reduce churn and increase interest among DBS customers. The hope is to double buyback customer counts this year, Lofas says. Another major change this year will be in the system’s local phone strategy. AT&T pushed hard to expand its phone business, but Comcast wants that product to take a back seat to other offerings. The system serves phone customers in Vancouver, Wash., and in Beaverton, Ore. There are no plans to expand that service footprint at this point despite the completion of the rebuild in May. “It made sense to sell that service before,” Lofas says. “When AT&T owned the property, it had all the parts to make the local phone business profitable. But Comcast doesn’t own the backbone and switches, so we have to renegotiate all that, and it makes for a different business model. So we’ve taken our foot off the gas pedal.” Henninger and Lofas are excited about a return to an emphasis on the core video product, but they are just as enthused about new products. AT&T launched video-on-demand in 40,000 homes in the Portland area last fall, and another 40,000 homes will be activated this spring. Henninger predicts changes will be made to the service in the not-too-distant future with more product being made available on a quicker rotating schedule. Buy rates so far are strong, but without more product and more varied product, customers could get bored with the service, he says. Some kind of high-definition service will be offered before the end of this year, Henninger says. Despite the rosy picture and warm fuzzies right now, Henninger and his team must contend with some sticky issues. For one thing, the local cable franchise regulator David Olson — the architect of the failed, yet far-reaching open access debate that gripped the entire industry a few years ago — wants the city of Portland to consider overbuilding Comcast by operating its own municipal cable system. The city is negotiating with Enron to buy the power company that operates in the area, and Olson figures it’s not a far stretch to add cable services to the infrastructure should a deal be struck. “The [power company] infrastructure could be used to deliver cable services to residents relatively easily,” Olson says. “There are several factors that work in our favor. This is a highly desirable market in terms of computer and Internet usage. Our population is highly educated and they want competition. We had competition, but when the market fell apart, they had to pull back. We’ve also got some expert operating folks that are interested in working with us.” Indeed, Jim Vaughn, who ran FrontierVision before starting Western Integrated Networks, has expressed interest in partnering with the city should it decide to undertake an overbuild project, Olson says. WIN and RCN Inc. were each awarded cable franchises by Portland’s city council two years ago. WIN closed up shop before ever getting off the ground in Portland. RCN pulled the plug on its operations in the area last year when finances forced the company to rejigger its build-out strategy. But a municipal overbuild is far from being a slam dunk. Oregon is suffering from a severe recession, and some city legislators are loathe to get into a business that is not a necessity for residents. Others argue that it doesn’t make sense for the city to subsidize a business that not every resident would benefit from and has a shaky financial structure under the best of circumstances. “It makes sense from an economic development perspective,” Olson argues, because it would create jobs and provide revenue for the city. He maintains that rates, service and product offerings will improve only if Comcast has some real competition. Although service has gotten better, the system was assessed $300,000 in fines two years ago in the wake of AT&T’s dismal customer service record. Henninger admits that things were bad when he showed up in 2000. But service has improved, and the company has been answering over 90% of all its customer calls within 30 seconds for 13 consecutive months, he says. Olson says the system has passed its customer service requirements only since October but admits that things have been going well since then. “Funny how things improve when they need something like a franchise transfer,” Olson says. “But I don’t care what motivates them as long as service improves, and it has.” If there’s one thing that Olson is up in arms about, it’s rates. The MSO just implemented a $3 hike of its expanded basic service, making for a total charge of $39.04 a month. “This latest increase was very disheartening for us,” he says. “The only way to stop that is with competition, and DBS isn’t a comparable substitute to cable. They have no local presence, and in some cases they don’t offer all the local channels.” Olson feels that the area’s demographics and growth prospects make a municipally owned overbuild system an attractive proposition. However, a number of residents in the Portland/Vancouver corridor don’t watch TV or care about more choice. “I call them the ‘Kill Your TV’ set,” Lofas says. “There are a lot of people here that just don’t want to watch TV.” Lofas attributes the lower-than-average penetration rates to a number of factors. For one thing, off-air reception is good in the service territory. The population is also extremely active and outdoors-centric, which makes sense given the area’s mild climate. For instance, a significant number of residents would rather hike (30% or 111% higher than the national average), bike (35% or 36% higher than the national average) or camp (37% or 88% than the national average) than sit inside and watch the tube. Still, Henninger and his team are excited about the system’s prospects. “There’s a spirit here now that says ‘We’re all in this together,’” he says. “And Comcast is putting numerous arrows in our quiver to do a better job of serving our customers and running our business. That’s exciting.” Henninger is responsible for developing and executing the business plans of all three of the company’s lines of business — voice, video and data. He became an AT&T employee in 1999, after the company purchased MediaOne Group where he’d been VP of sales and marketing for the New England region. He headed west to run the Portland operation in 2000. Henninger also spent five years in the wireless phone industry as director of sales and distribution channels for AirTouch Cellular in Seattle. Lofas’s cable career started in Boston as a cable installer for Continental Cablevision and Cablevision Systems Corp. while attending Boston University’s School of Management. After that he spent seven years at Turner Construction Co.’s corporate headquarters in New York City overseeing strategic planning, investor relations, public relations and pension fund management. With over 30 years of experience in the cable industry, Mason started his cable career as a field technician in San Diego for Southwestern Cable. He was hired by American Television & Communications and moved to Oregon where he worked in ATC’s Baker LaGrande and Union systems. Mason joined TCI in 1986 as plant manager in northwest Montana, eventually moving into the area GM spot in 1989. Petrik spent over 30 years in the media industry, beginning in newspaper advertising then radio sales and eventually television. She joined TCI’s Portland Media Services group in 1992 when the system had a staff of 16 and sold ads on 12 networks in two zones serving 250,000 customers. Today, Petrik manages a team of 98, covering ten zones, inserting ads on 36 networks. Future challenges will be to interconnect the Portland DMA into one selling environment. Johns has 13 years of customer care experience, having come from the wireless phone and cable industries where he developed local and integrated national call centers. He earned a B.S. in communication from Oregon State University. EMPLOYEES: 1,500 MILES OF PLANT: 11,000; 2,000 fiber AREAS OF COVERAGE: Portland, Salem, Corvallis, Eugene, Beaverton, Ore., and Vancouver, Wash. SUBSCRIBERS: 540,000 HOMES PASSED: 1 million PERCENT UPGRADED: 94% (planned completion by May) BASIC RATE: $12.25 EXPANDED BASIC RATE: $26.79 DIGITAL RATES: $46.99 to $89.99 HIGH-SPEED DATA CUSTOMERS: 130,000 HIGH-SPEED DATA RATE: $52.95 ($42.95 for customers who also subscribe to a video package and $3/month optional modem lease fee) VOD: Launched to 40,000 homes in December 2002. Another 40,000 will be activated this spring. New releases: $3.99; library titles: $2.99. VOD PARTNERS: SeaChange International, Motorola, In Demand, TV Guide LOCAL PHONE CUSTOMERS: 50,000 TELEPHONY PARTNER: Tellabs AD INSERTIONS: 36 channels SOURCE: COMCAST Comparison of Comcast subscribers in Portland to the top 75 market average.