Here's What I Learned at CTAM University

I used to think I had a pretty good handle on what makes a successful cable player: Cash flow. Subscriber counts. Nielsen ratings. Digital-cable and modem penetration. These are the benchmarks that we rely on to gauge a company's success.

Three weeks ago, I joined about 60 cable executives who participated in CTAM University, the Cable & Telecommunications Association for Marketing's executive-management program at Harvard Business School. And I'm now beginning to see not only cable companies — but the way any business is run — in a new light.

Leadership and customer and employee loyalty — traits that are difficult to calculate — are just as important, and may even supersede spreadsheets, we learned.

HBS relies on the case-study method of teaching. When I received the course agenda about six weeks ago, there were several sessions scheduled on familiar industry players, including the former Tele- Communications Inc., and Canadian MSO Rogers Communications. But I was puzzled by some of the non-industry companies we were to study, including Southwest Airlines, Black & Decker Corp. and Callaway Golf Co.

The industry-specific cases, especially the TCI study, were enlightening. But the cases on players from outside cable, like Southwest and Black & Decker, really taught us something new, and undoubtedly left my classmates with tools they'll try when they go back to their own companies.

We learned that Southwest generates less revenue than any major airline, yet it is the only profitable carrier today. While it takes most airlines one hour and eight employees to clean a plane and turn it around for the next flight, Southwest does it in 15 minutes with just two employees. It's also ranked consistently as the most on-time airline.

How does Southwest pull it off? Avoiding congested airports and not serving meals helps. But 32-year HBS veteran professor Earl Sasser taught us that the true ingredients to Southwest's success are the leadership of its founding CEO Herb Kelleher and a work force of loyal, motivated and well-paid employees.

Every Southwest employee is a stockholder, and has a personal stake in seeing the company succeed. The airline also gives its gate agents the discretion to do whatever it takes to satisfy the customer.

Another factor was the corporate culture that Kelleher instilled. Once a quarter, he went out to the front lines, working as a baggage handler, flight attendant or ticket agent. He would belt out Elvis tunes at company parties, and once settled a lawsuit with another airline by arm-wrestling that company's CEO. He lost a case he knew he would lose, but profited from the publicity.

Of course, cable has its Southwest stories. Former Lifetime CEO Doug McCormick was known to sing a painful version of Mustang Sally
at company parties. And the National Cable & Telecommunications Association has sponsored "In the Trenches Week" activities, where cable CEOs and system GMs donned hardhats and did installs. But that was a publicity stunt for the community — not something that changed corporate cultures.

A key Southwest lesson: You don't have to be the biggest company to be the best and most profitable industry player.

The importance of leadership, and the ability to operate with a top-down management approach, were driven home in the TCI case studies. Most of the class was familiar with the TCI saga.

But the studies — written by Harvard professor Thomas Eisenmann, who interviewed 18 cable CEOs for his thesis on industry consolidation — gave us a new perspective on TCI and the way its former CEO, John Malone, thinks.

Most big companies, such as General Electric Co., operate from the bottom up. Low-level managers recommend changes that are approved further up the chain. Malone's top-down approach was largely successful, but there were some drawbacks.

In the 1990s, Malone spun the company's assets into three publicly traded companies: Liberty Media, TCI Satellite Entertainment and TCI International.

Malone gave each company CEO 1 or 2 percent of their equity to distribute as they saw fit, and the capital markets provided more discipline than he could offer, he told Eisenmann.

"Getting a CEO in front of a bunch of securities analysts, all throwing rocks, wondering why the stock isn't performing, that's therapeutic. That focuses strategy!" Malone said.

A hitch in the top-down approach was shown in late 1996, when Malone, after seeing TCI's stock price, credit ratings and margins fall, replaced several cable channels nationwide with networks like Animal Planet, which were offering cash for carriage.

Former TCI senior vice president Bob Thomson described the backlash that occurred when TCI's Evansville, Ill., system, responding to Malone's directive, dropped local Chicago-based superstation WGN from its system.

"People need to have been around [Malone] long enough to recognize that if he says, 'Launch Animal Planet,' and you end up deleting a whole bunch of popular programming services to do that, then you're not using your head. If someone went back and asked him, 'Should we drop WGN in our Evanston, Ill., system to launch Animal Planet?' he'd say, 'Of course not!' But you can't require the CEO to get down into the nitty gritty of every decision.

"He must rely on his lieutenants to interpret his requests in a reasonable way, and take the risks for doing so," Thomson said.

Malone also showed his willingness to make broad strategy changes in 1996. TCI and the rest of the industry had planned to deploy telephony and high-speed data services, but Malone dropped that idea, and instead moved up the rollout of digital set-tops that could run on existing plant in order to stave off satellite competition.

"My peers all say, 'What's John Malone doing, changing the game?' But what if we all decided that Orlando [site of Time Warner Cable's defunct Full Service Network] was the way to go, spending every nickel we could raise? Or if I had loved Bill Gates' first-generation servers so much that I had decided to deploy them all over? Katie, bar the door! 'Faith,' my peers say, 'You have to have faith that the business will build after the deployment.' See, I'm just not willing to do that!"

After laying off 2,500 employees in 1996, Malone hired former Intermedia Partners CEO Leo Hindery in early 1997. Malone and Hindery saw TCI as too centralized, and one response was Hindery's "summer of love" — spinning off several cable systems into joint ventures with MSOs that owned adjoining clusters.

Hindery also restored TCI's industry leadership position, which had withered, he explained to Eisenmann.

"We'd long been the industry's leader, but we weren't acting like one. For example, we'd become inattentive to trade associations."

The rest is history. Hindery rallied TCI and the industry. The company also gave front-line employees incentives, offering them $500 if their systems met targets in periods of six months.

"That's a nice check for someone making $12 an hour. It's one of many moves we've made to show employees that we value them and view them as professionals," former TCI executive vice president of employee relations Grace de Latour told Eisenmann.

TCI thrived under Hindery's leadership. Since its sale to AT&T, and the departure of Malone and Hindery, margins have plummeted. With AT&T Broadband CEO Dan Somers unable to definitively say who will be running the unit after it is spun off later this year, a leadership vacuum surely must be having an impact on both morale and profit margins.

Most of the major MSOs sent several employees to the CTAM University program. Many of them were young — their employers are obviously looking to develop them for the long term. AT&T Broadband, the nation's largest operator, sent no one to Harvard.

CTAM U was invaluable. Fifty-eight industry executives and one lowly reporter spent more than 12 hours a day analyzing and debating how and why companies succeed and fail. We were taught by seven highly respected HBS professors — the best in their field — led by Eisenmann, who understands the cable business and its history better than anyone I've ever met.

Filling in the blanks for Harvard were a group of industry executives brought in to teach us more about their side of the business. Comcast Corp. vice chairman Julian Brodsky, The Weather Channel CEO Decker Anstrom, Starz Encore Group LLC chairman John Sie and Credit Suisse First Boston analyst Laura Martin offered great perspective. And of course Sie — always looking for a deal — squeezed in a pitch for his subscription video-on-demand product.

I'm a bit of a cynic, and can usually find something negative in any story. But I can't fault this program, which will return to Harvard next summer. My only complaint is that I can't go again.