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Cable Operators

Plotting The Growth

9/23/2005 8:00 PM Eastern

Cablevision Systems Corp. chief operating officer Tom Rutledge came to the Bethpage, N.Y.-based MSO in January 2002, charged with turning around a tarnished customer service reputation and getting the infrastructure ready for advanced services. Rutledge’s track record has been stellar — Cablevision has the highest penetration rates for video, voice and data in the country and is poised to leverage that position into additional services. Rutledge and cable division president John Bickham sat down with Multichannel News senior finance editor Mike Farrell to talk about Cablevision’s success and the opportunity ahead. An edited transcript follows:

MCN: Let’s talk about your unique position. You’re concentrated in one market — New York — and you’re pretty much offering service through one headend.

Tom Rutledge: From a digital perspective we have a single headend. We’re operating the business as though it were [one] headend. We still have analog hubs where we have different must-carry arrangements and different local-channel configurations as a result of the way the law requires you to carry signals. But from an operating perspective and from a digital perspective we’re a single entity.

MCN: What kind of advantage does that give you over other operators who are spending a lot of time trying to tie everything together?

Rutledge: The actual tying it together is a challenge. In fact over the last several years, putting what was originally 52 cable systems into a single operation has been a big challenge, and yet in order to grow fast, to rapidly roll out products, you need a consistent platform. That has been what John [Bickham] and I have been working on for the last several years. I think by and large we’ve accomplished that. [But] getting from here to there has been a huge challenge.

MCN: What was your impression of what you saw when you first came here from Time Warner Cable three years ago? What were your priorities?

Rutledge: When I came here the company had a strategic vision that [Cablevision CEO James] Dolan had put together. The company had traded its assets in other places and concentrated in a single DMA. And the circumstances presented themselves that that was the right strategy.

That was Jim’s strategy. We’d obviously acquired other assets in New York, including the [Madison Square] Garden, Radio City Music Hall, [and] the New York sports teams to enhance our New York metropolitan approach to business.

When I came here we had the capital structure to go ahead and finish the upgrade; we had acquired all of the properties, and we had already developed a product line of very sophisticated digital television products.

But we still had a lot of localism in the systems, because they weren’t fully integrated. And the upgrade wasn’t done. My priority was to complete the upgrade and to get the company in a position operationally where it could execute its strategy. At the same time to have an aggressive product-development group that was integrated into the operation and capable of developing products that would work on the integrated operational platform.

MCN: You’re showing basic-subscriber growth when no one else is. And this year, the projection is for 1.5% to 2% growth?

Rutledge: Yes, that’s our guidance. If you look at second-quarter 2005 against second-quarter 2004, it’s up 1.8%. So we’re growing. We’re growing basic; we’re the highest-penetrated cable MSO in basic; we’re the highest digital; we’re the highest high-speed access and the highest voice. And we’re the fastest-growing.

MCN: Do you attribute that to the bundle?

Rutledge: A lot of it has to do with the team here at Cablevision and the operational excellence that allows marketing to work. As John says, churn is the ultimate arbitrator of customer service; it’s your customers voting with their feet and with their wallets. If you can improve that, it means that you have more customers.

We have been successful at doing that. There are a lot of reasons why that’s so: our products are good; our strategy is good, but we have a really good team of operating people in the company, throughout the organization that are trying to improve the way they work and the way they deal with customers. That’s translating into higher customer satisfaction, lower churn and growth.

John Bickham: One thing that is different about this company that I found when I came here, is that the senior management is involved in developing strategies and big tactics and how to attack the market and grow, and they’re also involved in the execution of the business. That’s fairly unique in the cable industry, because so many corporate offices are not integrated into the business.

I have seven people who work for me, and they have years of experience in the cable business. They rose through the organization, so they understand the business from the bottom up. When they sit down and develop strategies and tactics, they understand the implications to the operations of the business, and they are engaged in how that impacts the business.

MCN: How close is your relationship with Jim and [Cablevision chairman] Charles Dolan? Are they involved in day-to-day as well as the big picture, or do they basically allow you to run the systems the way you want to?

Rutledge: I meet with Jim regularly. He is very involved in what we are doing in terms of strategy. And he has strong views about where to take the company. He has strong views about this whole idea of simplifying the transaction process for the customers. So the self-installation model is Jim Dolan’s model. He’s very involved in the product-development side of the business and the vision about where this company is going, in terms of its relationships with its consumers and its product development.

That said, he does let us run the company. And I hope I let John run the company. I’m responsible for Rainbow [Media Holdings Inc.] and Clearview Cinemas and our CLEC [competitive local-exchange carrier] business as well as the cable company. Although when I came here I came as the president of the cable company, and John joined us 18 months ago and I assumed the current role I’m in. John and I talk a lot about the business, and at the same time he has the authority and responsibility of making it work.

MCN: I wanted to get into the voice product. You were the first with self-installs; you did a fantastic job with digital — but it didn’t seem like you were getting any credit for it until the voice product took off.

Rutledge: That’s right.

MCN: And in typical Cablevision fashion, it was a pretty risky move to launch voice the way you did. So when you first decided to launch voice and the discounted bundle, how long of a process was that to get there. Did you mull this over for a while or just say, “Let’s pull the trigger?”

Rutledge: In the cable business, because it’s a capital-intensive business and a very strategic business, we know what we’re doing years ahead of time. We’ve been thinking about voice since the mid-1990s as a serious business. We looked at our whole architecture and we had a general view of how we were going to end up, which has pretty much come to pass.

It’s interesting that the visions we had in the industry in the 1990s about building an HFC architecture, building an interactive cable system, an [Internet protocol]-based interactive network and all of the things that would allow, all of those things have pretty much worked out. Cablevision historically has been an aggressive marketer; it’s been a sophisticated packager, way back in the analog days with pay TV.

I think Chuck Dolan is regarded in the industry as the premier marketing mind. That culture exists at Cablevision, so when you looked at our strategic vision and our culture, our behavior towards voice was very much in line with who we are and the way we’ve always operated.

And we weren’t worried about it. We didn’t think it was particularly aggressive, or particularly controversial. I had every confidence that it would work, as did everyone else that I was aware of at the time that we did it.

MCN: One thing that surprised me about the voice product was how quickly it caught on with customers. At one point you were signing on 1,000 customers per day.

Rutledge: And now we’re growing faster than that. We’re growing at about 1% of homes passed per month. Which is huge — 12% per year of market share, more than that. The interesting thing about voice is that almost everyone has a telephone, and our product is better than what they currently have and costs way less.

Bickham: We’re finding similar acceptance in the business environment with a bundle of voice and data. We’ve been in the data business in the small-business environment for a number of years. We’re just now adding to that a voice product, and today we’re selling up to four lines, and on the roadmap we have a strategy to get us up to 20 lines in a small-business environment of voice and data. The key to being successful is to have the ability to go fast; that means having lots of provisioning systems that can handle small businesses.

MCN: How big a part of your revenue going forward do you think interactive is going to be?

Rutledge: There are two parts to that. The games are a little different strategy than the interactive advertising. On the games side, we think there is an opportunity to create on television a business where people play games, and particularly multiplayer games. In our product roadmap, we’re planning on launching games that can be played by all of our customers against each other, and we think that will create a whole new opportunity.

September