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Cable Operators

Preparing for a Whole New Com-Cast of Customers

9/22/2006 8:00 PM Eastern

Former Adelphia Communications Corp. customers in Florida, Virginia, New England, Pennsylvania and Colorado, get ready to be “Comcast-ized.”

That’s the somewhat colorful term that Comcast executive vice president of operations Dave Watson recently coined to characterize his integration plan for the nearly 2 million former Adelphia and Time Warner Cable subscribers that joined the Comcast Corp. ranks after the joint acquisition of Adelphia (with Time Warner Inc.) closed on July 31.

Watson has been through difficult integration projects before — he took the lead in assimilating AT&T Broadband’s 13 million subscribers into Comcast in 2003. And while he said that the Adelphia integration wouldn’t exactly be a cakewalk, it will be considerably easier than AT&T Broadband.

LESS TO SWALLOW

The AT&T Broadband integration was a textbook example of how to combine two very disparate cable companies. At the time, Comcast had 8 million subscribers, was rolling out digital video and high-speed Internet services and had just completed its system upgrade. AT&T, which had 13 million subscribers, was struggling to complete its rebuild and was suffocating under razor-thin cash-flow margins (cash flow as a percentage of revenue) that were about half the industry average of 40%.

Comcast turned around the AT&T operations quickly — it raised cash-flow margins from 21.2% to 32.3% by the second quarter of 2003 — and completed the upgrade. The integration of AT&T, once expected to take three years, took only 18 months.

It is because of that track record that most analysts believe integration of the Adelphia systems will go smoothly.

Comcast’s part of the Adelphia deal, for one, is roughly one-sixth the size of AT&T Broadband. Secondly, the Adelphia systems are about 80% upgraded, something that was not the case with AT&T.

Janco Partners cable and satellite analyst Matt Harrigan said Adelphia’s size relative to Comcast is an advantage in that even if the integration does hit a few glitches, it would have a minimal effect on the overall company.

“Adelphia is pretty small relative to the overall footprint,” Harrigan said. “There is no way Adelphia appreciably affects the numbers.”

Comcast chairman and CEO Brian Roberts wouldn’t make any predictions on the speed of the integration process, but said that Comcast is well-prepared — and is taking the task of melding the Adelphia and Time Warner properties with its own very seriously.

“We’re treating this with the same intensity that we treated AT&T Broadband,” Roberts said. “We’ve told Wall Street we’re going to invest in these markets. These are keepers.”

In a conference call with analysts to discuss second quarter results on July 27, Comcast chief operating officer Steve Burke estimated that the Adelphia transaction will generate about $600 million in additional operating cash flow and add between $300 million and $350 million to Comcast’s capital expenditure budget in 2006.

Burke added that the Adelphia systems, because they are already nearby existing Comcast markets, should fit easily into the Comcast fold.

“We’ve had business plans in place for months and management teams assigned and ready to hit the ground running, just as we did with AT&T Broadband several years ago,” Burke said. “Longer-term, as we add CDV [Comcast Digital Voice] and our version of VOD to these systems, we would expect them to increasingly look just like ours. These are great properties and we see no reason why we can’t integrate them very smoothly into our operations.”

Watson’s main job will be to ensure that new subscribers will get the full product suite that existing Comcast customers have come to enjoy. That means significantly expanding video-on-demand offerings; increasing high-speed Internet output and lastly, rolling out Comcast Digital Voice — Comcast’s branded voice-over-Internet Protocol telephony product — across the footprint.

“I think the first thing to do is to 'Comcast-ize’ — to continue the theme of taking our brand and turning it into something else — the products,” Watson said in an interview last month. “We want to make sure that the VOD experience, the high-speed data experience [is good] and then you get prepared for telephony. We want to get the products in place to compete.”

Adelphia, which has been in bankruptcy since June 2002, has been hit hard by customer defections. The company shrunk from 5.4 million subscribers when the deal was first announced to about 4.9 million customers when it closed.

Being able to offer a full three-product bundle of voice, video and Internet access should help stem those losses and recapture customers that have left the fold.

“They have been losing more video subscribers than we would like. So I think that addressing the product side of things will help on that front,” Watson said.

According to Watson, Comcast should begin rolling out its phone service in Adelphia markets early next year, with full deployment by the end of the third quarter of 2007.

CURING THE RIGAS HANGOVER

Another focus in the integration will be boosting employee morale. Most of Adelphia’s existing employees had to weather a debilitating accounting scandal. Its former two top executives — founder and former chairman John Rigas and former chief financial officer Timothy Rigas — were convicted on 18 counts of fraud and conspiracy and sentenced to 15 years and 20 years in prison, respectively, last year. Both are appealing their conviction.

In addition, Adelphia has been in virtual limbo for more than a year, as it waited for the Time Warner/Comcast joint purchase to close and settle its bankruptcy case. Watson said that while Adelphia employees have had to endure an unusual working environment, he believes the solution is relatively simple.

“I think people want two things: They want to be with an organization that is committed to winning, and they want to have a clear roadmap to how to win. Those are the two things we found with AT&T, Jones [Intercable], the Lenfest [Communications] organization — all fine outfits — but they want a long-term winning game plan.”

Comcast intends to do that by giving employees what they need to compete locally — tools as simple as new trucks, upgraded facilities and more technicians — committing capital investment to those operations and providing training for employees, Watson said.

“I think they [Adelphia employees] know that we’re long-term owners,” Watson said. “I think that is very comforting to people.”

Watson said that in winning over the former Adelphia employees and getting them to enthusiastically embrace the strategy, actions speak louder than words.

“People want to win, and they want to be part of an organization that takes care of customers, that is responsive to local communities …” Watson said. “I think once they get a sense with Comcast that they’re part of an organization that’s committed for the long-haul, and they see it by our actions, not just by our words, that we are going to invest in them, then over time, we’ll win them over.”

SOWING THE SEEDS

While Comcast had to wait more than a year since announcing its plan to acquire Adelphia with Time Warner until the Philadelphia-based cable operator actually took control of those markets, it had already laid the groundwork for the integration.

Back in December 2005, Comcast restructured its field operations into five divisions, creating one new division, eliminating its Atlantic division and expanding four others. The new structure consists of:

  • New England: This newly created division includes parts of the existing Eastern division (New Hampshire, Massachusetts and Connecticut) and the western Pennsylvania area that was once part of the Atlantic division. Headed by Kevin Casey, formerly regional senior vice president for New England, the division has about 3.5 million customers.

  • Eastern division: Expanded to include some of the Atlantic unit (Maryland, District of Columbia, Delaware and Virginia), while retaining existing systems in Metro Philadelphia, central Pennsylvania and New Jersey. Headed by president Michael Doyle, the division has about 5.3 million customers.

  • Midwest division, consisting of Michigan, Illinois, Indiana, Minnesota and Missouri and with about 4.1 million subscribers. Headed by William Connors.

  • Southern division: Georgia, Florida, Alabama, Louisiana, Kentucky, Arkansas, Mississippi, Tennessee and South Carolina, with 4.7 million customers. Headed by John Ridall.

  • Western division: Including systems in Colorado, Oregon, Washington, California, New Mexico (formerly part of Atlantic) and Utah with 5.4 million customers. Headed by Brad Dusto.

All five divisions report to Watson.

While Comcast was awaiting federal regulatory approval of the Adelphia deal, those five division presidents were working hard developing strategies and getting teams together to hit the ground running once they officially took control of the properties.

Harrigan added that just changing the name from Adelphia to Comcast should go a long way in improving the public’s as well as employee perception of their cable company.

“The rebranding process in and of itself should help. Before they sounded like 'Rigas Cable’ or 'Dennis Kozlowski Cable’ in terms of perception,” Harrigan said, referring to the former CEO of Tyco International, who was sentenced to up to 25 years in prison last year after an accounting scandal rocked that company.

Although Watson said he has not yet set out to rally the new troops personally — that will probably come late this year or early next year — the division heads have all met with the employees in their respective regions.

“Probably, the first pass, what we wanted to do is to complete the financial plans for next year,” Watson said. “So we’ll spend a lot of time just making sure that all of that is put to bed and then more than likely it’ll be the end of the year, the first part of next year that we’ll plan some of the visits. That will probably coincide with the brand change.

“But job one is to give them the tools, make sure we have a solid business plan for next year, then we’ll be out there meeting everybody by the end of year, early part of next year.”

A key part of the integration will be maintaining the consistency of the product rollout, added Watson — Comcast won’t have 100 different ways of approaching high-speed Internet, telephone or digital cable.

“Once we reach a common agreement on what do our products look like, what the experience should be, then it’s a commitment towards just rolling it out the right way,” Watson said. “We feel that we have the right experience — we’ve shown it with AT&T. The new wrinkle, quite frankly, has been phone.”

But Comcast also has at least three quarters of experience under its belt in the phone rollout in its other systems, which will help with deployment in the Adelphia markets.

“By the time this transaction has come around, we’ve had a lot of experience in a very short period of time,” Watson said. “We’re rolling out phones. So I think we’re more than ready for the Adelphia phone launches. They’ll be happening the early part of next year.”

Watson wouldn’t commit to a time frame as to when the Adelphia systems will begin to meet Comcast standards, adding that it will happen system by system.

He added that the Time Warner systems Comcast will get as part of the deal — in Minneapolis, Memphis, Jackson, Miss., and part of Louisiana — are further along than the Adelphia properties and thus should be integrated sooner. At the Adelphia properties, Comcast expects VOD and high-speed data services — which Adelphia already offers — will likely switch over first followed by telephone service.

SERVICE PROBLEMS

While no one is expecting a huge problem in the Adelphia integration, the switch-over also comes at a time when Comcast is trying hard to repair its own slightly tarnished customer service image.

In the most recent JD Power Customer Satisfaction Survey, Comcast finished below average in all regions surveyed.

Watson is not just paying lip service to improved customer service. He said the cable company’s “Think Customer First” program, first implemented about four years ago, is geared toward rectifying that problem.

Comcast conducts about 15,000 individual surveys of individual systems each year, said Watson, monitoring such metrics as whether a service problem was resolved on the first call. Employees and managers receive financial incentives for meeting pre-set improvement goals in customer service.

Watson added that the JD Power ranking also should be put in perspective of the sheer volume of service calls that Comcast receives. Last year, the cable operator’s call centers processed 200 million phone calls and made 35 million truck rolls.

“To me, and to our management team, this is an opportunity, but it’s a big one, and we have to stay committed to 'Think Customer First,’ ” Watson said.

Watson also realizes that customer-satisfaction indexes are largely a product of perception, something the cable industry as a whole has been trying to improve for years. And one weapon the company has in its arsenal to change that perception is its recent “Comcastic” advertising campaign. (For more on Comcast’s campaign and customer service, see page 30A.)

Although Watson said he was initially uncomfortable with the ad campaign when it was first launched a year ago — he was nervous about tinkering with the brand — the effort is beginning to reverse customer perception of cable, he said.

In past internal surveys, according to Watson, customers praised Comcast products, but not the company.

“The one piece of information that kept coming back to us, [was] that customers really liked our products,” Watson said. “They’re using them quite a bit, video-on-demand, high-speed data, but they kept telling us, 'I like your products. I’m not necessarily crazy about you.’ ”

Watson said the desire to bridge that gap — to find a more effective way for Comcast’s message of better products and improved service to break through to customers — was the genesis of the “Comcastic” campaign.

“That [campaign] really began to talk about our brand very differently and put our brand really on the front line so to speak in terms of making sure that people understood that our products will be different, our commitment toward service will be different,” Watson said.

That, Watson said, is what it means to be “Comcast-ized.”

September