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If 76ers Win NBA Title, Will Comcast Get Credit?

Philadelphia— On May 23, Philadelphia 76ers coach Larry Brown accepted National Basketball Association coach of the year honors. Quietly attending the event, telecast by Comcast SportsNet, was Comcast Corp. president Brian Roberts, whose MSO is the team's majority owner. Roberts — who's happy for the team, but says he only goes to about five regular-season games a year at the Comcast-owned First Union Center — just the day before had celebrated a deal in which Comcast bought more equity in cable networks The Golf Channel and Outdoor Life Network. Earlier in May, his 8.5-million-subscriber MSO took possession of about 600,000 cable customers in six states from AT&T Broadband and signed a deal to buy AT&T's 110,000-subscriber Baltimore system — remnants of Comcast's settlement with AT&T over MediaOne Group Inc.'s takeover. Roberts was in good spirits for a sit-down with Multichannel News editor Kent Gibbons and finance editor Mike Farrell, pushed back a bit for Brown's press conference. Topics included sports-rights costs, MSO-network relations, cable rates and reports that Comcast and friends might try to gang-buy AT&T Broadband. An edited transcript follows:

MCN: First of all, there's the fact that your team is the last one still in the NBA or NHL playoffs among the teams owned by MSO guys. Does that give you bragging points with your MSO buddies?

Brian Roberts:
We are just counting our lucky stars. But it's very exciting for Philadelphia. It's been a while since there's been this much enthusiasm in the city. Last summer, it was the Republican Convention, and Comcast was involved in that. This summer, as I just mentioned, I think the ratings for the last Sixers game were over 15 with a 20 share. You don't see that in local TV anymore. So we're very excited.

MCN: You do see big games at playoff time.

Roberts:
Not on a national basis anymore. Maybe football, but not in basketball. These numbers have all come down. There's just so much cable competition in programming. And it'll go up from here if we stay in the playoffs. That was the whole theory of getting involved — not to have too much focus on the teams, but really the television side, the ability to have a Comcast-branded channel that has really consistently been either the No. 1- or No. 2-rated premium cable service in Philadelphia. And then to be able to advertise our products, promote the company, have all the excitement — the most exciting thing going on is happening on Comcast.

That is not the traditional cable-marketing approach.

MCN: When you want to complain about rising programming costs because of sports rights — do you grimace at yourself in the mirror?

Roberts:
No, I am first and foremost a cable guy. And the sports costs for Philadelphia are — and probably will always be — in the middle of the pack, compared to New York or L.A. and then other markets. So we're going to be by no means leading the issue. In fact, we've done several things that are an anomaly. When we bought the 76ers, 100 percent of their games had been moved to cable. At the time the previous owner did that, five years prior, I publicly issued a statement saying that as a cable company, one of the cable companies in Philadelphia, we were against that move. It was not in the long-term interest of the game, the team or the cable company to have every game on cable. So when we had the opportunity to change that, we actually took a financial haircut and put, I think, 25 percent of the games or a third of the games back on broadcast television after we bought the team. We changed the relationship on the theory that in the city of Philadelphia, half the young kids don't buy cable. That's about the penetration in urban markets. They're tomorrow's Sixers fans — you ought to make sure that they can see some games on broadcast television. And I think it's good public policy.

We really look at it from a cable set of eyes. This sports investment is really a tiny fraction of the company. Rising sports costs are a problem. We'd be happy to be engaged in how to fix it, given that we're on all sides of the issue.

MCN: That leads to a question about cable rates, which are still a public-policy concern. What's your sense of the state of relations between programmers and operators? Is there any chance of working together to try to hold down costs and hold down rates?

Roberts:
Well, I'm always optimistic that there's an understanding between operators and programmers that we mutually need each other, and that when any side forgets that, it tends to be a failure for both. Almost every programmer out there has a new channel that they are trying to invest in. Every operator has more capacity for digital than it ever had before. The programming is what has sold so many subscriptions, but the investment, the up-front investment and the risk taken by the operator to take on so much debt, creates a very healthy tension. Some companies view that opportunity one way, and others do it another. We saw in '92, the disappointing results that everybody experienced, postregulation — not just the operators. When the spigot shuts down, it shuts down for everybody. And I don't think we're anywhere near that situation, and people are, I think, cognizant of that. Obviously, we have to work together. And I think the operators have to understand that a lot of the costs of the programmers are going up because there's more competition. So it's a self-fulfilling prophecy. We create more channels. Now there are more bidders for reruns, and sitcoms and stars and sporting events.

MCN: Yet there have been so many showdowns over the last couple of years. In the past, you have been outspoken about those programmers that are trying to get their extra channels on.

Roberts:
Well, I think we've always tried to negotiate privately. I can say that we manage to reach long-term relationships with most people. And in a couple of instances, we've had problems. But if you think about the number of successful negotiations, probably 10,000 out of all the operators, all the channels, all the extensions, all the renewals in the last five years … and you can count the number of serious showdowns on one hand. I would say the cooperation is there, because it's in everybody's mutual interest.

As the stakes get raised and the consolidation has occurred, the showdowns are bigger, they are more visible. But I don't think they're more frequent.

MCN: Are you happy with the way things worked out with Disney, for example? [Comcast and The Walt Disney Co., after months of talks, signed a comprehensive deal covering ABC owned-and-operated television stations and Disney cable networks.]

Roberts:
Oh, any hard-fought compromise, nobody is ever happy. But that's usually the sign of a fair deal. If we couldn't live with it, we wouldn't have signed it, and at the same time, there are aspects of it that are hard-fought. But we've never negotiated publicly and therefore, to do a postmortem publicly would not be appropriate.

MCN: Ah, go on.

Roberts:
No thanks.

MCN: Do you think there has to come a time when cable can't just keep raising rates 5 percent, 6 percent, whatever, per year, and to try to make that money back from other services?

Roberts:
I think we've made absolutely great progress. It used to be 10 percent — now it's 5. Maybe it'll be a different number a couple of years from now. The reality is, our growth in Comcast is coming from digital and from modems. Our future product development, like VOD and interactive television and IP [Internet-protocol] phone, t-commerce [television commerce], are critical to the future of the business. Because the reason we are enjoying the relative success we are, both from Wall Street and in Washington, I believe, is the much more consumer friendly business model that we have right now. Which is, if you want some extra products, take them, but it's not one-size-fits-all. For 15 years, we had one-size-fits-all, expanded-basic cable. Now we've got levels of digital; we are soon going to have levels of cable-modem service where there are different speeds offered. There's going to be levels of phone products, whether its LEC replacement or IP, cheap long distance. That is a much better model.

I think back to whether it was [Cablevision Systems Corp. chairman] Chuck Dolan or [former Tele-Communications Inc. chairman and CEO] John Malone who once said we should have a Chinese menu and let the consumer pick. But the programmers hated that. So we couldn't do it for expanded basic. But we've been able to get there for all the new offerings, and that is such a big part of where the extra revenues come from.

Basically, increases are the lowest they've ever been historically, as a percentage of our revenue growth, and yet the revenue growth is staying consistent. So we are taking less and less basic increases every year. Now, if programming costs continue to go one direction only, hopefully those two will begin to level off. It's hard to predict the future, but the idea of having new products to take the pressure off rate increases is clear.

MCN: But you still have occasions where rates go up, a sports channel gets put onto basic, a congressman like [Rep.] Barney Frank [D-Mass.] will reintroduce rate reregulation.

Roberts:
That could happen again, and that is why I think it is critical that sports be identified as the driver of so much of that turmoil. Because it is usually a sports product that is driving that discussion, nationally or locally.

MCN: So what can you do about the ESPN 20 percent problem?

Roberts:
It's not just ESPN. To your point, it's also some of the regionals, some of the leagues. Is there a perfect answer to it? No. But I think we are very pleased we've been able to find a way to at least, for now, make it work without having been … involved … with any of this discussion.

MCN: For better or worse, since [former AT&T Broadband CEO] Leo Hindery left the business and since John Malone got out of the domestic-cable operating business, there's not one front man, one leader, who speaks for the industry on some of these issues. Is that something that is needed?

Roberts:
Well, usually it was because there was one company that was much larger than others. And so, in addition to John's amazing business and technological mind and Leo's energetic and successful ability to move an agenda, the industry in the last few years has had quite a bit of turnover, with AT&T, with AOL, with Paul Allen. Before that, with MediaOne [Group Inc.]. So I used to use the phrase, 'everyone is finding their sea legs.' And I don't know that that process is totally complete. Therefore, you could say there is a bit of a lack of one visible person speaking for the industry.

But part of it is, even if somebody would stand up and start making great pronouncements, they don't speak for all those other companies, and until those companies speak some sort of consensus on what the future holds, I'm not sure it's a bad thing right now.

There's a diversity of views that's happening on some issues. That has created some tensions. But nothing so radical. I think NCTA is functioning well. CableLabs [Cable Television Laboratories Inc.] is functioning well, some of the cooperative ventures. But the players are all different, in some cases, and it's taken awhile for everyone to get used to the new philosophy.

MCN: So you'd have to buy out Cox before you'd be able to be the front man?

Roberts:
That's not a question I think I'd touch. [Laughter]

MCN: You have expressed a desire to get bigger.

Roberts:
For 30 years. So it's not a new desire.

MCN: You have been able to do it for the last few years, but that has slowed down.

Roberts:
Well, I think you can never speculate on the future. But the history of the business is that there's always some talk about a turnover of cable systems. Right now, in the last few months or last year, there's been a very quiet period in the deal business. And I personally don't think that's going to change anytime soon.

MCN: Even with AT&T's prospective initial public offering?

Roberts:
I don't see any reason at this point to feel any different.

MCN: I'm sure you heard all the talk about Comcast and others stepping in, carving AT&T up…

Roberts:
I don't think there's any reason to think that things are changing from what AT&T said they're going to do at this point.

MCN: So no split-up?

Roberts:
Well, some publication suggested that people were working on something like that. I listen to something like that, and reflect that, A, it's not true, and B, it's nonsensical. Because our understanding is that the only time that was done — people say, 'Oh, Group W.' Well, Group W, there were different tax laws back then. [In 1986, Comcast and four other operators teamed up to buy MSO Group W Cable.]

MCN: So it's not something that you're working on?

Roberts:
Absolutely not.

MCN: Comcast has assembled what has been called a 'war chest.'

Roberts:
Listen, with the cost of deals in this industry, all we were doing was taking advantage of a capital-market window. When it got so tight for some of the companies, like Winstar and Teligent and some of the CLECs and the triple-play overbuilders, where capital had dried up, it flowed over to our industry. So we were able to raise money at 1 and 2 percent. We were able to lower our borrowing costs by over $50 million a year with some financial transactions. There is no war chest. That's just good, conservative, financial planning, which is my father's hallmark, Julian Brodsky's hallmark. John Alchin and Larry Smith are doing a great job of now taking advantage of Comcast's solid investment-grade rating, which really allows us to access capital markets in a way we never had for 30 years.

MCN: And you'd be able to get the money to go out and do deals like, say, buy Fox Family Channel?

Roberts:
We have not shown a strong history of buying programming services once they are developed. We really have purchased things in their infancy and incubated them. I don't want to comment specifically on any one potential transaction. But Outdoor Life is only in 30 million homes. Golf — we were already founding investors in that. E! Entertainment had 40 million when we bought into it. QVC, we're founding investors.

So our history would suggest that we're more builders than buyers of programming channels.

MCN: Back to the deal market — you don't see a scenario in which AT&T sells out?

Roberts:
I don't think it's appropriate to comment. They said what they're doing, and I think that's all I want to say.

MCN: What about on the direct-broadcast satellite front — a couple of potential deals, the next 'Death Star'— Murdoch and DirecTV Inc. and EchoStar Communications Corp. and DirecTV?

Roberts:
Well, I think it'll come as no shock to operators and investors that satellite continues to be the principal competitor with local signals, lots of channels, interactivity, digital quality. We've been planning and thinking about this for half a decade, and everything we have been doing is an acknowledgment that this is going to be and is a competitive business. I think people had two reactions to that reality. Some sold out. And others said it's time to double down and reinvest in your rebuilds. Reinvest in your people. Start going to retail. Train people. Have a service mentality. Learn how to compete.

And our experience — having been in cellular phones, when we had Comcast Metro Phone — was what really drove us to learn that competition is not something you have to shy away from. Comcast Metro Phone competed with AT&T, Sprint, Verizon, Nextel and Omnipoint.

MCN: And you sold out.

Roberts:
I'll come back to that. We had a 50-percent market share. We were No. 1 by a lot. And we were in 2,000 retail locations in Philadelphia. So we were doing great. We took it from 100,000 customers when we bought it, and when we did finally sell, we sold it with over 800,000 customers, four years later. What happened that caused us to sell was the business started to give away free long-distance. We didn't have long distance. We had to go buy long distance to give it away for free. Free roaming.

We didn't have roaming, we didn't have other cellular properties, we had to go buy roaming to give it away for free. We were not able to remain competitive, even though we knew how to compete. So we sold the company, and insisted that the buyer let us keep all of the top management team so they could now run the cable-marketing department and the new-products department.

MCN: Here's a question from trade show panels of the past: What wakes you up in the middle of the night?

Roberts:
I think the first thing that keeps me up at night is how to keep the culture of Comcast the special place that it's been through the years, as a small company. My father used to say, 'I'd never go to work for a big corporation when I got out of college.'

I said, 'Stop saying that.' That's not going to encourage a lot of people to come to work here, because we're 35,000 employees now, across all the various parts of the company. So really it is the culture of entrepreneurs — which is sort of back to where we started the conversation, with the sports-team owners and [76ers owner] Pat Croce and [Philadelphia Flyers owner] Ed Snider making the decision. I think that's our advantage. And the question becomes, as you get bigger and you can't have total chaos in a cable company of this size — yet how can we not become too bureaucratic and too systematized and keep a special feeling of the company? I think that's really job one.

Job two is to play offense. What are the right opportunities? Is it more cable? Is it more programming? It's a question that I get asked by investors. Is it something altogether new, like QVC was at the time? That turned out to be one of the best decisions the company ever made. International content? I don't know. And I am a believer that the answer to those questions change. There is no one road. Being opportunistic means having patient investors who believe in you, and surrounding yourself with really smart people.

And the third thing, in a way, I worry about is — every PC is the size of an MIT mainframe 15 years ago. And there's 50 million of them, and they're all networked together, figuring out how to change the world. So anyone that says they understand the technology and they know exactly what the future holds is kidding themselves.

So really, it's to just make sure you're fleet and you surround yourself with people who are curious. So when the Internet comes along, we were damned fortunate that we're seeing an opportunity, through cable modems, not a scary intruder into our economic equation. Yes, you have to worry about streaming media and all the issues that might arise out of this new technology. But you start from a base that could be, by next year, $500 million of revenue and growing at 50 to 100 percent a year, more than where you were without this technology. A lot of businesses can't approach those kind of numbers.

But as we sit here today, I feel great. If we give good service and if we keep rebuilding and finishing the rebuilds and launching new products, the cable industry has got a fantastic future.