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Finishing Strong at Time Warner Cable

The pace at any company in the cable industry can be breakneck, but Rob Marcus can safely say that his post as chairman and CEO of Time Warner Cable has been downright tumultuous. After suffering through a rough operating year in 2013, Marcus had to contend with a hostile pursuit from Charter Communications later that year that put the second-largest U.S. cable operator in the country in play, ending with a $67 billion offer from Comcast in February 2014.

After a year of racing to the goal of closing that deal, Comcast pulled the plug after it became clear regulators wouldn’t approve the combination. In May, TWC entertained another offer from Charter, this one valued at $78.7 billion. Through all of this, Marcus and his team kept a laser focus on operations, despite the distraction of two major deals and a rapidly transforming cable business.

Marcus, who along with several other Time Warner Cable executives will leave with a lucrative exit package — his is valued at about $100 million — after the sale is completed, has kept his eye on the corporate ball instead of the beach. Today, TWC has reported some of its best subscriber growth in years. In the second quarter, it posted its best results for residential video and high-speed data subscribers since 2008, and its best second-quarter voice performance ever. Its TWC Maxx initiative, including the all-digital conversion of its plant, has added new markets, and investments in customer service have resulted in 530,000 fewer repair calls to TWC call centers; a 15% reduction in repair-related truck rolls per customer relationship; 98% on-time percentage for customer appointments within its industry-leading one-hour appointment window; and a 10% improvement in first-visit problem resolution.

Not bad for a company that just two years ago was said to be on its deathbed. Multichannel News editorial director Mark Robichaux and senior finance editor Mike Farrell sat down earlier this month with Marcus to talk about the turnaround, the new company’s prospects and what lies ahead.

MCN: You’ve come a long way in a short time. How is the three-year turnaround progressing?

RM: If you follow the thread, in my view, dating back to the first quarter of 2014, we really started to turn the company around.

In the early quarters, the improvement was slow and the bar was low because 2013 was kind of messy, but as the quarters passed, if you look back in hindsight, you really can see a lot of the improvements taking hold, with the last two quarters being the most obvious examples of just how much stronger we are.

Admittedly, that is taking the form of a massive improvement in subscribers, and early positive improvements in some of the metrics that the Street doesn’t pay a lot of attention to, which relate to improved customer experience. But the theory of the case here — and I think it’s a pretty solid theory — is that those are the leading indicators and, in the not-too-distant future, we’ll start to see those translate into improved financial results.

MCN: What do you attribute that to?

RM: I attribute that first and foremost to prioritization. If you go back to September 2013, we described to you how we prepared for the transition from [former chairman and CEO] Glenn [Britt] to me and [chief operating officer] Dinni [Jain]. I brought together the senior management team, the top 10 to 15 folks. We all acknowledged the fact that while we’ve done a lot of good things over the years, we were not the best at prioritizing, sticking to our priorities, and making sure everyone in the organization understands what the priorities were. As a result, we would jump from exciting thing to exciting thing, but not necessarily complete a lot of stuff.

It was pretty obvious coming out of that series of meetings that we needed to focus our attention on reliability and customer service over everything else. The root of almost all of the negative feelings toward cable was a function not of inadequate products, not because we hadn’t innovated fast enough, but because things just didn’t work the way they were supposed to and when they didn’t, the interactions customers had with us were less than positive. That sounds like the most obvious thing in the world, but the entire cable industry has danced around this issue since the beginning of time and has never really gotten it right.

MCN: You can directly point to that for the subscriber improvements each quarter?

RM: They are related. There are other things going on as well. We have tightened up our customer-acquisition machine, there’s a better correlation between what’s going on in the call centers and the offerings that we’re advertising, so our sales people are more effective — we’re generating more calls, we’re converting more calls into connects.

Similarly, on the retention side, we’re just tighter. Over time, because ideally the way you grow your subscriber base is you lose none and keep adding, that’s what you want to do. The losing none part has a lot to do with having much better experiences than we’ve had in the past, then word of mouth makes the acquisition side easier and works from there.

It doesn’t mean you throw product development out the window, it just takes somewhat of a back seat to ensure that the stuff we’re already delivering works as it’s supposed to.

MCN: Until then, you leaned more on financial engineering than operations. True?

RM: I’ve heard it before, but I don’t necessarily buy it. I believe there’s a role for what you’re really referring to, managing the balance sheet. I think, in a perfect world, the way you create value is through operational excellence and effectively managing the balance sheet. Interestingly enough, one of the things over the last two years Charter has been rewarded for has nothing whatsoever to do with operational excellence, but rather the fact that they’re a more leveraged pure-play cable company than either [TWC] or Comcast was. And that is something shareholders appreciated. They like the equity and enhanced returns that come with leverage. I don’t think there is anything wrong with that.

In the ideal world, you get your operations firing on all cylinders, generate a whole lot of cash flow and manage your balance sheet in a smart way, and if you can figure out value-creating M&A you do that, too. The characterization of us being either-or — because we were the first cable company and, in fact, the first MVPD to emphasize buybacks and focus on aggressive management of the balance sheet — we somehow got pigeonholed as the financial-engineering guys.

In fact, we did something that was longa-waited, because the story on cable for years was free cash flow is coming later. We said, it’s here now and we’re going to highlight the fact that it’s here by committing to both paying a dividend and buying back shares. I think it’s an unfortunate characterization.

It turned out that shortly after our becoming a separately traded public company and our institution of the dividend and our aggressive buybacks, we hit a speed bump on the operations side. I really don’t think they were directly linked. That said, look, we were clearly conscious of our free-cash-flow generating capability, which makes you very disciplined about capex. Whether or not there was some capital we should have spent a little earlier, I think there is some argument to be made there.

MCN: And now you’re spending it.

RM: We’re spending aggressively now, but with a very specific objective in mind. There is clearly an overriding interest in reliability, but there’s also a desire to deliver a truly compelling set of products, mostly faster speeds in high-speed data, and that requires the dedication of more bandwidth to high-speed data, and the dedication of more bandwidth requires us to rid the plant of analog video, which consumes a whole lot of bandwidth in an inefficient way. That’s more or less what many in the industry have done. The knock that we didn’t invest enough comes from a misunderstanding of what we did do.

We invested heavily in implementing switched digital video, which enabled us to have the most high-definition channels of anybody for a long period of time. It was a much faster, cheaper way to get to more high-def channels. Others, for various reasons, which include quality of plant and architecture, chose to go immediately to all-digital. We didn’t feel that was a cost-effective way of accomplishing our mission.

Now, having had the HD channels for a long time, we have another motivation, which is delivering faster speeds in broadband. Now, we’re going through the process of going all-digital.

MCN: Sen. Bernie Sanders (I-Vt.) has sent a letter to the Federal Communications Commission to ask about fairness in pricing for broadband. Is an inquiry like that warranted?

RM: There continues to be this perception that it is not a competitive market; that the market is not somehow working. Living in the world we do every day, competing for customers, that couldn’t be further from the truth. The best governor of pricing is an effective marketplace and we live in that world every day.

Affordability is always going to be an issue for our products and for other products. That’s why we try to be creative about having offerings that are designed for folks who are on a tighter budget. But it can’t be the case that you can get for the really low price all of the great attributes in the products that you can at the higher-end prices. There is always going to be the Hyundai and the Mercedes.

MCN: On the broadband side, are you concerned at all that Title II is essentially a price regulatory framework? There have been inquiries about your relationships with peering companies.

RM: As you know, various parties that deliver broadband or that are lobbying bodies for people who deliver broadband like the [National Cable & Telecommunications Association] have filed a lawsuit challenging the Title II reclassification. It concerns us that the tool that was used to effectuate a relatively noncontroversial set of open Internet principles was overly broad in that it could authorize the FCC to do a whole bunch of other stuff, including regulating prices. Our preference would have been that we had very tailored legislation creating this set of rules and not depending on a 1930s-era statute to do what they have done. For now, we’re continuing to invest on the premise that the FCC is going to live by its word and has no intention to regulate rates. Different administrations could take different positions over time. But for now, we’re operating on the assumption that their intent was to do exactly what they said, which is ensuring that the open Internet principles were abided by.

MCN: Do their inquiries into the edge providers concern you?

RM: The presumption that we have this gatekeeper position and that we’re incentivized to [abuse] that position … I would argue that we don’t have that position. The marketplace is effective. Even if we did have it, the things they are suggesting we would do are totally against our interests. The second we start interfering with that in any way, customers are going to choose somebody else.

MCN: If programming continues to be challenged with more competition from smaller over-the-top players, and broadband emerges as the main core product, the only leverage the cable industry has is on the price of that broadband. And the second prices go up too high, we’ve already got the law in place.

RM: It’s not a new phenomenon. Video profitability has been declining for some time, not based on upstart OTT guys, but that our programming providers have been able to take a bigger share of the pie. They’ve negotiated prices that we pay them that exceed the rate at which our revenues from that product are growing. That’s been happening for a long time and that means we’ve been far more dependent for many years on broadband as a source of profitability, not just on revenue. I think that is likely to continue.

MCN: You mentioned affordability earlier and now “skinny bundles” is the new buzzword in the industry. Where do you see that going?

RM: My point is that you’ve got to meet customer preferences and giving customers’ choice is a good thing. That’s why we have five or six tiers of HSD service — our goal is to have a good match between what customers want, the value they ascribe to something and the price they are willing to pay. That’s true on the video side as well. On the HSD side, we have complete latitude to do whatever we think customers want and will pay for. On the programing side that is not the case. We have partners in the form of our programming providers and we can only do what our programming agreements permit us to do. We’ve tried to negotiate as much flexibility as we can over the years, but we don’t have complete flexibility, and as a result putting together the packages is tricky. My view is I want to give customers choice if we can within the confines of our programming agreements.

Our experience has been on video that most customers, even when we offer skinnier bundles, tend to take the whole package because it’s a very compelling value proposition. While everybody complains about the cost of cable, at the same time you get an awful lot of entertainment value for what you pay. We were ahead of the curve on this whole concept of skinny bundles; we offered something called TV Essentials four-plus years ago. I think it was 20 of the top 40 networks, but no sports programming. We took all of the really expensive stuff out, which allowed us to offer it at a low price. We promoted it and the vast majority of customers who responded to the offer took the big bundle. It just never had any traction. We’ll see if any of the other guys who have been playing around with new skinny bundles have any success and if they do we’ll pay attention to it and try to offer something comparable.

MCN: It seems to me that skinny bundles and things like Sling TV, which were supposed to be the savior of at least some kind of pay TV, aren’t going to be able to do it alone.

RM: I don’t know if pay TV needs a savior. There are two things going on, and there is a tendency to conflate the two — we’re increasingly making video consumable in IP, which in turn means it is consumable by devices that could never have received it before. The second thing is purely about packaging. We can have skinny bundles on the set-top box or skinny bundles that are delivered by a new technology. It so happens that programmers seem to be more lenient in terms of packaging requirements when you’re using a nontraditional technology to deliver the video bundle. That shouldn’t be the case.

MCN: Won’t that just accelerate the disintegration of the traditional business model?

RM: Not necessarily. If we find ways to attract customers, if we deliver products that are attractive to customers, then I’m not sure that there is a disintegration at all. When we did our original skinny bundle, TV Essentials, our goal was to offer a cheaper, more-targeted product but maintain our video margin. It can be done if you structure it correctly.

MCN: In terms of the bigger picture of the cable-industry efforts on TV Everywhere, that you have to come through our door to get it in every platform, versus these smaller, more nimble competitors …

RM: And yet no one has delivered remotely close to what the cable video offering is.

MCN: And yet the programmers seem to be intoxicated by this idea of, “We’ve got to fill this gap, ratings are down, ad revenues are down, let’s get some of this quick money from OTT.”

RM: It’s kind of circular. I would posit that one of the primary reasons that ratings are going down is that programmers have made product available to OTT or SVOD providers who are then in turn making the product consumable on a more attractive basis — read, advertising-free. So the reason customers’ eyeballs are going to SVOD is they like watching stuff without ads. So, it shouldn’t be a great surprise then that that’s the way they watch it.

MCN: So where does that end up?

RM: I think it is something that various programmers have now …

MCN: Rethought?

RM: Yeah, I think they understand it. It’s always hard when you have a traditional, established business that is generating really nice financial returns, there’s always a temptation to take the dollar that’s viewed as extra money, thinking that it’s too small to have an impact on the legacy, until it’s not.

MCN: How much of this is generational? When a millennial gets to be 40, married with two kids — four different demographics — now, are they going to buy a TV subscription?

RM: On CNBC, there was a back and forth between [BTIG media analyst Rich] Greenfield and Joe Kernen, debating that exact thinking that kids are watching things differently and on small screens and Kernen finally said, “I don’t know, I don’t like what I’m hearing.” The old guy lamenting that the world is changing and we can’t keep up. And we feel a little bit of that. We don’t understand what’s going to happen and until we have that, it’s less a generational thing and more a life-stage question. Do people behave differently in different life stages independent of what demographic they’re in? We don’t know yet. These guys will be the first IP generation.

MCN: What’s next for Rob Marcus?

RM: How many times have you guys asked me that question? [Laughter.]

When we announced the Comcast deal, people were immediately asking me because it was obvious that [Comcast chairman and CEO] Brian [Roberts] wasn’t going anywhere. I made clear that my 100% focus was on running Time Warner Cable until I got tapped on the shoulder and was told to move aside. That turned out to be critical.

It’s critical because, as a leader, you have to be emotionally all-in or else you are not going to do your job well. More importantly, it sends an important message to the team. If there is a perception that I’m thinking about something else, they quickly abandon ship. How could they be with the program if they think the boss is not really with the program? So my strategy from the get-go has been, it’s all about Time Warner Cable until it’s not.