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Steering DirecTV Right: Q&A with Mike White

Chairman, CEO Discusses Domestic Growth, Washington Issues, Latin America, Technology 12/21/2012 6:30 PM Eastern

Since signing on as CEO of DirecTV in January 2010 – he added chairman to his title six months later – Mike White has steered the satellite TV giant through some rough economic waters. And though U.S. subscriber growth has matured, its Latin American business has soared. White has retooled and refocused the U.S. division, honing in on improved customer service, new products and more profitable customers, while continuing to fuel the Latin American growth engine. The reward has been robust financial growth – cash flow in the U.S. has risen at a 7% clip in the first nine months of the year – and a 24% lift in its stock price. White has also been a vocal critic of rapidly rising programming costs, and was involved in a high-profile dispute with Viacom earlier this year, where the programming giant’s 26 networks were dark for nine days. A former goalie – he played intramural ice hockey in the 1970s while a student at Boston College – White has taken his fair share of shots to the body, but has managed to keep DirecTV at the top of its game. For these reasons and more, White has been named Multichannel News’ 2012 Executive of the Year.

White recently sat down in DirecTV’s Los Angeles offices with Multichannel’s senior finance editor Mike Farrell. An edited transcript follows.   

 

Multichannel News: When you came to DirecTV, it was a company in transition. Do you think that transition is nearing an end?

Mike White: When I got here I don’t think the transition had started in many ways, and I wasn’t that smart. (Laughs). When I got here there was speculation that we might be sold, there was some speculation that we should spin off Latin America, and yet we had a very successful run. The first year I was here were mostly the strategies that were put in place by (former CEO) Chase Carey and the team.

But what became increasingly clear to me as I was here in that first year is that any strategy for a company sooner or later runs out of gas, it needs to be rethought. It was pretty clear to me that these strategies were either running out of gas or just the external world was changing so radically – particularly rising content costs – that we were going to have to change the way we ran the company.

I would say it was a year ago September when I took my team offsite and started sharing what I saw coming at us over the next several years. We’re going to have to be responsible in passing cost increases and higher prices to our consumers – and that was going to have implications. We’re going to have to get smarter about productivity and how we manage costs. We were probably going to have to rebalance a bit [from] pushing gross adds versus retaining customers. And I really thought that we had an opportunity to really take a fresh look at the customer experience; how we work with our customers. While we have always been rated highly in the industry, I think everybody knows our industry isn’t highly regarded when it comes to customer service. I thought there was a significant opportunity for DirecTV to really transform that experience and take it to another level.

 

MCN: So what are you doing to achieve those goals?

Mike White: Lots of things have happened that we didn’t plan, but some way or another we ended up pretty much bang-on with our gross add plan. Our gross add plan, which was somewhere a little less than 4 million, we’re almost right on the plan.

I remember starting the year saying, “Can you land the plane safely?”

My experience in the consumer business is anytime you start to try to adjust your promotional and discounting plans, there is always a risk that you do it too fast and too hard and the consumer leaves you. We worked really hard to stay true to what we said we were going to do, but not do it in a way where we lost a lot of customers.

I feel very good about our fourth quarter, so for the year we’re going to be positive. I said that at the beginning of the year and now I can guarantee it, sitting here at almost the first of December. As I look going forward, frankly the strategies we’re putting in place today for 2013 and 2014, are very similar to the strategies we pursued in 2012.

There is some stuff that we’ve done here that we haven’t talked a lot about externally because we’ve been piloting them. We’ve got a learning laboratory. One of the things we’ve been working on is how to better on-board new customers. One of the biggest pain points is getting their rebate redeemed. In the past we made it difficult. Now we’ve got things in place to make it instant.

Next year, we’ve got an architecture for a whole new bill, to simplify it. We think we have an obligation to be transparent.

[We’re developing a] whole new process for our call centers and our technicians to work collaboratively communicate in a way that when a technician goes into the home instead of having to go over it three times, which has been a complaint, they will know more going in about what the customer’s needs are and they’ll take extra time to educate the customer on how the service works. The interesting thing is what we’re learning.

We’re finding we’ve reduced unnecessary truck rolls. We think we can take 25 million calls out of the system, a huge cost savings and it also reduces frustration on the part of our customers – fewer transfers.

The challenge is it is a lot of nitty-gritty operating work to try to do root cause analysis of problems, get our workforce trained and continue to improve. I think we’ve just scratched the surface on that opportunity. And I think we will begin to see it, Next year in 2013 and 2014 we’ll really begin to see the payback in lower churn, but also lower costs and a better customer experience all the way around.

We’re continuing to advance our TV Everywhere offering, so we’ll be streaming 65 channels by the end of the year live on the IPad in the home. We rolled out HBO Go this past year.  We really increased our on demand offerings. We’re doing a lot of work in the digital entertainment space.  We created a whole digital entertainment team reporting to me to take that to a whole other level.

MCN: Do you see a point where net new subscribers go negative?

MW: We’re not planning it. I want to be optimistic that you’re going to see some improvement in housing, and that is going to help the industry as a whole. That is going to be good for our whole industry and we hope to get our fair share of that business. We’re managing our business to be sustainable. We’re not trying to not grow. I want to grow as aggressively as I can. But it needs to be responsible growth. It’s just [that] the world has changed and we are trying to adapt our business models to the new realities.

At the same time we’ve got a tremendous growth engine in Latin America. So we’ve got a unique portfolio and frankly our EBITDA multiple is so low and our free cash flow yield is so high, that it’s hard for me to not see a very attractive share buyback strategy to continue for the next several years.

To me I think it’s a very attractive business for shareholders where we think we can grow free cash flow per share at high teens and maybe even 20%, but certainly mid-to-high teens, for the foreseeable future.

 

MCN: DirecTV has always been considered as kind of the high-end provider in the TV business. Does that work for or against you in this economy?

MW:  I know that is the perception and it’s true that our ARPU is high in that regard, relative to some of our competitors, but we’re actually a tale of two cities. We have a great brand and we have some very high-end customers who are terrific customers. But we also are big provider in more rural states and in parts of the country and even in other areas where we are a good value. You actually have to do both. When I look at our business, I’m very concerned in ensuring there is a balance.

When you look at our customer base, it represents all of America. You can’t have 20 million households and only be serving CEOs and celebrities. And we need that scale. We need to be 20 million subs to have sufficient ability to manage our content costs. And even then it’s hard.

I very much believe that we cannot walk away from our rural customers, or from our value-oriented customers. We need to ensure that we have a balanced approach. That’s why this past year we launched the Entertainment package, where we pulled sports out in order to make it more affordable for the average person.

And it has done very well this year. We feel very strongly that in a big country that is as segmented as America is, we need to be in multiple places and playing in a balanced way.

MCN: There has been a lot of talk again about satellite broadband. How important is broadband to you now?

MW: We’ve been competing against the Triple Play for 10 years. As recently as the third quarter, if you look at our net subscriber results compared to cable, they’re pretty good. Now, would I like to have the ability to sell a broadband service to my customers with an 80% EBITDA margin? Sure. But the technology is not ideal. You have Hughes and WildBlue, but it’s not the ideal way to deliver a world class broadband service, except in the most rural areas. So you have to kind of accept what the technology is good at and leverage that. I am a big believer in businesses that figure out what their strengths are. Capitalize on your strengths, be true to who you are, don’t try and be who you’re not.

If anything what the cable guys are realizing is that there is an enormous opportunity for them to sell their broadband independently of the bundle and they have some very attractive pricing for it.

Look, we have had to compete as a pure play video company since we were born. We’re not afraid of competition. I think we are very focused. It’s not an accident that when we launched we came out with the best customer service with the best user interface and with the most HD channels and the most sports. We work hard on it every day because it’s our life, it’s who we are.

I could make an argument that for some consumers, on the high end they are relatively indifferent. If they want DirecTV they want DirecTV and they will buy their broadband from whomever because they can afford to. On the low-end, I think increasingly you may find customers may cord-cut and use their wireless contract and their IPhone or Android and not have fixed broadband in the home. And then there will be some in the middle.

We’re in a fiercely competitive industry. I’ve got some terrific competitors. Every morning when we get up we’ve got to run fast.

We’re not afraid of competition at DirecTV. We’re the original over-the-top disruptor and we want to continue to do that.

MCN: Dish chairman Charlie Ergen has said in the past that a merger between DirecTV and Dish would make sense, quickly adding that it wouldn’t pass regulatory muster. Do you think there is a way?

MW: I’m not out there talking about it; I think Charlie may be. I certainly agree that particularly with rising content costs there would be some strategic attractiveness to combining satellite companies, but I think it’s highly speculative and therefore not very productive to talk about it. And I still think while the landscape has changed significantly versus 10 years ago [when a Dish/DirecTV merger was blocked by regulators], [now you have] half the country where telcos have entered the space. There still would be some concerns on the part of the Justice Department in the other 40% or so of the country where it would be considered a three-to-two merger and therefore considered to be problematic.

MCN: Someone once told me that one way to do a merger would be if both sides contributed spectrum to a third party, effectively creating a competitor, especially in rural areas. Given the current Administration’s focus on rural broadband, do you think that would fly today?

MW: I don’t know. I expect Charlie’s spectrum to be approved. And then, presumably we’ll all hear what his plan is for building it out. You know, until I know what the heck that is, it’s hard for me to comment on whether that would be a factor or not a factor from a regulatory standpoint. It’s not particularly productive for me to talk about it. I’ll state the obvious: sure there would be some synergies in combining the two businesses. Beyond that Charlie has his own strategy and his own goals and we’re here working for our shareholders. We’re not planning on it. We’re trying to run our business to be better. That’s our focus. You never say never in today’s world. I think the landscape has changed somewhat, but there are lots of regulatory challenges it might face.

MCN: Let’s change gears a bit. The growth in Latin America has been phenomenal and for a lot of people it has become a reason to own DirecTV stock. What do you attribute that performance to and is it sustainable?

MW: I think you have a combination of things. First of all (DirecTV Latin America CEO) Bruce Churchill and the Latin America team are world class operators. I’ve been down to Brazil, I’ve been in Argentina and Venezuela, Colombia, and Mexico. We have a fantastic set of emerging market operators. You couple that with I think [being in the] right time [at the] right place, where incomes have been growing as you have had a young demographic in the workforce. The opportunity for pay television – particularly with the rise of Brazil and Colombia as those economies started to grow – has also been unprecedented. I don’t think that’s finished.

I think we are at the very early stages of that opening, from a growth opportunity standpoint as the young demographic enters the workforce [and] has disposable income.

We’ve done a great job with our brand down there with Sky, building a fantastic brand with a world class operating team. I understand emerging markets and what it takes to operate in these kind of complex environments and we have a terrific, savvy set of operators. We have a once-in-a-lifetime opportunity for growth.

Latin America is structurally a very different competitive landscape. And the structural competitive advantages that the satellite technology has are significantly greater in Latin America than they are in the US.

In the U.S. we are a 20% market share player. In Venezuela, we’re close to 50%.

The satellite is a highly leverageable technology. I don’t have retransmission consent [in Latin America], you don’t have regional sports networks. There are a lot of other issues that the U.S. business faces that Latin America doesn’t face today.

MCN: Is your main competition in Latin America the over-the-air broadcasters?

MW: There are cable companies, good cable companies in all of the countries in Latin America. And there are satellite companies. A lot of the telcos down there have satellite operations. There is a lot of competition down there. We don’t ever take competition for granted anywhere. I’m saying relative to the investment made in cable with DOCSIS in the U.S. and fiber optics with FiOS in the U.S., when you look at building out that infrastructure in Latin America it’s a lot more challenging. And the satellite technology is more leverageable once you’ve built your broadcast center and have satellites in the sky and have call centers. I feel strongly that it’s still a wonderful asset and still has growth potential even after the last couple of years of growing aggressively.

MCN: Do you think that the stock price is reflecting that value?

MW: I don’t know any CEO who doesn’t think his company is undervalued so I won’t disappoint you in that regard. I think we are trying very hard to be very transparent in communicating to our investors the importance of our Latin American asset and its potential. We’re not where we would like to be yet, but we’re way better than we were three years ago in terms of getting credit for our Latin America asset. I certainly get my fair share of questions on Latin America on our earnings calls, where the first couple that I was on I didn’t get any questions on Latin America. I think investors are looking at that asset.

MCN: Any possibility that you may spin-off Latin America in the future?

MW: They rely on the U.S. for technology. The technology roadmap is shared. It’s the same engineering department, the same broadcast center that is run up here out of our engineering organization. We share talent back and forth and they’re leveraging our cash flow as well. I don’t think any CEO can say never on anything in today’s world, but I don’t think this is the time to think of spinning that asset off. I think it’s a teenager right now in a sense. It’s just blossoming. I think we’re going to see it reach scale over the next three, four, or five years and it’s going to be a terrific asset.

MCN: Let’s talk about programming costs. You have been pretty outspoken on the issue and DirecTV has recently been involved in some high-profile disputes, particularly with Viacom. Why jump into this now?

MW: I think it goes with the territory. When Chase [Carey] was here, I think content costs, our ACPU (average cost per unit), was growing 4% a year. So there was no reason to have a big fight. I’m here, and we pay about $10 billion a year in rights fees and they are growing $1 billion a year. That’s not sustainable. I can’t even pass it on through to consumers.

Because of the lack of transparency in the industry, it’s also never clear whether DirecTV customers are getting a fair deal, or if folks are trying to set a new market using DirecTV as an example. All we’re trying to do is to ensure that some kind of free market works, where our customers are rewarded for our size and scale and get a fair deal. I don’t particularly enjoy these disputes.

I am in favor of freedom of choice. I don’t think it is right for one network or one sports network or whatever to say I want to be in a bundle and make everybody pay for it, even those customers that don’t want it or don’t want to pay for it. Content providers are entitled to charge whatever they want for their content, whatever the market will bear, provided it’s subject to a true market test. The problem is that a lot of it is not.

MCN:  Other people have pointed to sports and retrans as the main culprit in this. Are you in a bit of a conflict because sports have been DirecTV’s bread and butter almost from the beginning?

MW: We’re practical. We recognize that not everything I would wish [for] I can have. Personally I believe the industry made a mistake in not having the regional sports networks be an a la carte service 10 years ago. But am I going to be able to force that to happen? I don’t know. I’m pretty realistic about that.

We’re planning high single-digit increases in content costs for the foreseeable future. That’s $1 billion a year. All I’m trying to do is make sure it doesn’t get even worse than that because that is difficult for the average consumer to handle when their incomes aren’t growing at those rates.

At some point we’re all going to have to look at if it’s all a la carte options, whether it is surcharges on a consumer’s bill for certain services, because there is no other way to start passing it through. When you start doing that, some of those consumers are going to start going to Washington and say, “I want a la carte on everything.” I’m not sure a la carte on everything is in the industry’s best interest.

MCN: You mentioned Washington. Not too long ago John Malone said that’s where this may have to end up being resolved. Do you think Congress is going to be the one to solve this issue? Would that create more problems?

MW:  I’m not sure it’s in the best interest of our industry to have Congress or Washington get in on this, but I think what John has said is correct that at some point, Washington may say some of these services may have to be priced a la carte. I don’t expect that anytime soon. John shared that idea with me two years ago when he hired me at DirecTV. I don’t disagree with him that there are certain services at a certain price that should be a la carte. But when you kill the goose that lays the golden eggs by pricing too fast in a way that the consumer can’t afford, you run the risk of undermining the entire ecosystem. And it’s a great ecosystem that serves everybody well today.

MCN: Do you think the fact that the entire industry seems to be together on this issue – satellite, cable and telcos are all putting out the same message – could give it more traction?

MW: I think it’s an industry challenge. I do think that we collectively as an industry need to realize that this is a problem and it is not sustainable and we’re going to have to work at it. If not you do run the risk of driving the car over the cliff.

MCN: Your satellite competitor has taken a different stance on regional sports networks, refusing to carry some big ones in big markets – YES and SNY in New York and Time Warner Cable SportsNet in Los Angeles, for example. Is that a tack that you might take in the future?

MW: We don’t carry every regional sports network in some geographies. I think Charlie has a different customer. And there are some customers who don’t care about sports. There are others that love sports. Our point is horses for courses. It’s not one thing or another. The content cost challenge is probably a third retrans, a third sports and a third everything else. My concern is for the consumer and the bill that consumer has to pay in a challenging economy.

MCN: One of the more successful sports packages that you have is NFL Sunday Ticket, and recently you expanded its reach by offering it free to new customers for one year. Do you see a time when Sunday Ticket is no longer exclusive to DirecTV?

MW: It’s the NFL’s contract and we have a great relationship with the NFL. You’re right, NFL Sunday Ticket has been great for the DirecTV brand. I think by the way the quality of advertising has also been good for the NFL. We’ve both benefited from that partnership. I think it’s the NFL that has to look at what considerations they would have abut exclusivity. We’re happy with the relationship and we want to continue to build on the relationship in the future.

Because it is an al carte product, we felt we needed to [exploit] it promotionally to expand the base. And it’s been successful in doing that. We’re pleased with that. We’ve added more paying subscribers than we have in several years. But it’s also an expensive product.

MCN: Is this a decision you’re going to have to make soon, or do you still have several years left on your deal?

MW: I think we’ve got a little time left, but we’re in constant discussions with the NFL and we’ll see where we go over the next year. We value the relationship and we want to continue the relationship, but it has to be somewhat sensible economics for the product as it is, unless they choose they want to change the product to something non exclusive. If they did we’d still be interested in carrying it.

MCN: You have been making some moves into content yourself, buying programming like Damages and Friday Night Lights for your Audience Network, and even investing in original shows. Where do you see the network going forward?

MW: We see it as a differentiator.

MCN: Like a local cable news channel?

MW: We’re not trying to compete with our programming partners, nor is it our core competence. I saw something the other day that FX’s programming budget alone is something like $750 million and I forget what the budget is for Time Warner but it’s in the billions. Ours is peanuts. We see it as a differentiator and an opportunity where we can piggy back and find unique content from outside the United States, or piggy back as we did with Damages or Friday Night Lights to offer real quality programming for our customers. We’re going to continue to look for those opportunities to do that, but we’re very selective. I don’t see it as a mainstream strategy. There are programming partners that we have that are better at picking winners than I’ll ever be.

MCN: So if you’re not going to buy a bigger network, what about something like Netflix? 

MW: They put in place a poison pill and I have tremendous respect for [Netflix CEO] Reed [Hastings]. He’s put together a tremendous culture it’s a very different business. We’re busy investing; we’ll invest $75 million plus next year on our own digital strategies in terms of the infrastructure and the capability to stream and to download. So we’re very focused on building more entertainment options for our customers. We’re primarily a today’s newspaper business and they’re primarily a library business for last year’s or the year before’s stuff. There is a place for each. I would say right now that we’re focused on building out our own TV Everywhere capability and we’ll see. I have tremendous respect for Reed. And it’s a great brand.

MW: Instead of buying Netflix, could you instead just become them, in the sense that you already have VOD capability and content libraries?

MW: I think that you’ve seen all of us do a lot of on demand over the last year and I think you will see us do even more. We’re focused on building our company and when we buy back stock we have a very high bar because of the return we get from buying back shares. I have tremendous respect for Netflix but it’s a different business. There wouldn’t be any synergies, but it’s certainly an interesting business opportunity.

MCN: How important is mobility and TV Everywhere to you? Does it shine a light on not having a broadband play? 

MW:  I don’t think so. I think all of us on the distributor side are working hard to enable our customers to watch what they want, when they want and where they want to watch it. The content rights are lagging but they are getting there. But it’s evolving and I think over the next couple of years you’re going to see it accelerate as those rights get built into every negotiation that each one of us has. I still personally don’t think that the small screen replaces the big screen when you’re in the home, because the big screen is just a much better experience. But outside the home -- it’s a country on the go, people are busy -- I think people want the option to be able to access it. We certainly think we have to be competitive to provide the same experience but let’s all be clear, today it’s less about the technology and more about the content rights landscape and the pacing at which that evolves. We can do a lot more technologically today if we were allowed to, but we can’t because of the limits of the content rights.

MCN: To access TV Everywhere, your customer needs a broadband connection. Does it matter where they get that connection? Is the concern over DirecTV not having its own broadband play more a Wall Street concern than a customer concern?

MW:  I don’t see that as a customer issue at all. It’s more when you bundle together you can discount your broadband service in a way that is helpful to the cable guys, I suppose. My view is some of our customers, higher-end customers, don’t mind if they have to pay a little more if they get their broadband from someone else. Other customers on the lower end can’t afford those big bundles. Some of those bundles are $250 a month. Then it’s a challenge in the middle.

MCN: How does your customer base play into this? It seems that your telco partners would have no problem bundling DirecTV with their broadband in rural areas, but in larger markets, where they have their own video product, that could be trickier.

MW:  This is a very competitive  industry and we all work hard to improve our business. For us, we’ve been able to successfully compete in tough geographies like the Northeast and in a different kind of tough geography where we compete with Dish in more rural areas. The broadband thing in and of itself, it’s not something I spend a lot of time worrying about and I don’t hear a lot about it from our customers.

MCN:  A few years ago you launched a Connected Home initiative to get more customers to access VOD content on the Internet. How is that going?

MW: I think we’ve had a dramatic increase in the number of connected homes this year. The advantage of it is when you connect to the Internet, then I can use the satellite for what it’s best for – which is the 1080p high-def bits – and I can use the Internet for what it’s best for – which is 100,000 options. A satellite is capacity constrained in terms of what it can do and our feeling is we want to make it seamless for the customers to get their content from whatever the best pipe is. If the best pipe is the satellite it should come from there. If the best pipe is the Internet it should come from there and you should be able to seamlessly move your content around in the cloud and watch it on whatever device you want. That’s our vision for the future.

MCN: Does that also solve the capacity issue for you?

MW: We’ve got more satellites that we’re going to launch in 2014 that will also enhance our capacity. It’s a different kind of capacity, the difference between being able to do 2,000 or 3,000 titles on the satellite versus 100,000 titles on the Internet. We think that is going to be an integral part of the overall ecosystem, part of the overall vision of what we want to be in 2015 and 2016, that seamless hybrid, of satellite cloud infrastructure.

MCN: DirecTV has always been on the cutting edge of technology – you were heavy into HD early on and were a pioneer in whole-home DVRs. About a month ago you released the next generation of whole-home DVRs, Genie. How has acceptance of that been so far?

MW: Reception has been great. But I think it will be better when you see our new ad around the BCS, [Bowl Championship Series] so stay tuned. I think we have a terrific engineering organization that is out there trying to see what is new and different and trying to innovate. I think any company in today’s world has to continue to innovate every day and we’re no exception. We can never sit on our laurels.

 As we look at into the future, whether 4K [Ultra HD] becomes mainstream-able, I don’t know, but we’re going to be there when it does. We have a bunch of things we’re working on for next year to take our search and discovery and user interface to a whole other level for customers and well have more to say about that next year, I don’t think we can ever stop running.

 

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April