Ops Love L.A.

K.C. NEEL

MSOs Find Fun and Reward In Fragmented, Savvy Market In an era when cable operators have worked overtime and spent millions of dollars to control entire markets, the Los Angeles area stands out as one of the last fragmented cities in the nation.

No less than six major operators are wired into the city's 20 million residents. Adelphia Communications, Charter Communications, Cox Communications, AT&T Broadband, Time Warner Cable and Comcast (which is selling its Southern California operations to Adelphia) serve the majority of households in Los Angeles today.

While that's a far cry from the 40 or so operators that were originally awarded franchises in the area, it's still quite a handful.

"Los Angeles is one of only a handful of Balkanized markets in the nation," says Tom Feige, president of Time Warner Cable's Los Angeles operations. "But the one thing you have to consider here is that the Los Angeles market is 140 miles north and south, and 130 miles east and west. That's a tremendously large area."

Further consolidation could occur in the market, but most operators say they're happy with the way things are now.

"It's hard to say whether we'd buy up other properties in this market," says Teresa Elder, president of AT&T Broadband - West. "We're happy with the system we have in place, and we don't need to change our scale to be a viable player here."

To be sure, all the major MSOs operate systems in Los Angeles that are larger than many total markets.

For instance, contrast AT&T's 362,000 customers in the Los Angeles market with its roughly 238,000 subscribers in Atlanta, about 100,000 customers in Pittsburgh and a base of about 200,000 in Portland, Ore., where the MSO serves entire DMAs.

Similarly, Time Warner counts about 360,000 customers in the Los Angeles market, while the nation's second largest MSO has 295,000 customers in Houston, 337,000 in Tampa, Fla., and 305,000 in San Antonio, where it serves all those markets' residents.

"Of the top 20 clusters in the country today," says Kip Simonson, VP-marketing/sales for Cox Communications' Orange County system, "about five of them are in Southern California, north of San Diego."

It's not all sunshine, beach parties and Hollywood glamour in the City of Angels. Marketing and advertising can prove to be nightmarish in such a fractional environment, although the operators sometimes band together for joint campaigns.

That's become crucial in a market where competition is also stiff - especially for new services.

Increased competition DirecTV's headquarters are in Los Angeles, and the DBS provider is aggressively selling its services in the L.A. Basin.

AT&T, Time Warner and Adelphia, meanwhile, are buying back dishes from DBS subscribers to lure them into the cable fold. Although exact numbers haven't been released, the MSOs say the program has been very successful in reducing churn and adding new customers.

In Cox's Orange County territory, DBS providers sport about a 6% to 7% penetration rate, Simonson says. That's below the national average of more than 10%, and he credits the system's delivery of advanced services as the reason. AT&T's Elder agrees, saying that the introduction of digital services has stemmed DBS defections significantly in her service areas.

"We've grown 2% each year since satellite services were introduced in our market," Simonson says.

Research at the system has found that, as Cox introduced new services to its product lineup, the system has managed to lure more "nevers" - consumers who have eschewed cable service altogether in the past. That has helped the operator increase the size of the pie, enabling both DBS and cable to increase penetration in the market.

In addition to DBS, Los Angeles operators are preparing for increased wireline competition from RCN, which is entering the market as well. The Princeton, N.J.-based overbuilder already has franchises in Beverly Hills and Gardenia, Calif., according to a company spokesman, with talks now under way for a franchise in Los Angeles County. The company isn't offering any services as yet, but will sell local phone service, digital video and high-speed data services in a bundled package when it commences a door-to-door sales campaign in the new year.

What makes this market particularly tough? Without question, the average consumer in Southern California is a sophisticated one. In Orange County, the average household has four TV sets, and PC penetration is well above the national average. As a result, operators selling new services can't keep up with the demand.

Interactive TV services, such as video-on-demand, are in high demand. Time Warner Cable plans to launch VOD in Los Angeles soon and is already experimenting with interactive TV services using technology from Power TV. Replay TV and Time Warner are installing boxes in homes that already have digital boxes to test the VOD buy rates among customers.

"Obviously, that test will be very interesting for us," Feige says, noting that the Replay TV technology gives customers the same experience VOD does with the ability to pause, stop, fast forward and rewind like a VCR.

Despite the polish of most consumers, the old tried-and-true selling method of going door-to-door is among the most successful for operators in Los Angeles. They say it's a good way of controlling installation timetables and schedules while enabling them to sell specific services in certain areas rather than blanketing an entire community where all the services may not yet be available.

Operators must also vie for high-speed data customers with heavyweights Pacific Bell and Verizon, both of which have been heavily marketing their DSL products to customers.

"The noise level in terms of ads from DSL providers is very loud right now," AT&T's Elder says. "But we see the true competitor for data as ourselves and how fast we can keep up with the demand, which has been phenomenal."

Customers come first Cable is at a bit of a disadvantage in Los Angeles because of some unhappy history. Adelphia will own the largest cluster in the L.A. Basin after it acquires Comcast's Orange County operations. With 1.3 million customers, it's also one of the largest in the country. Adelphia got into the market by acquiring Century Communications' systems last year. Century had been the city's largest provider and, for a while, one of the city's biggest headaches. Service problems have plagued the operation for years, to the point where last year the operator agreed to pay more than $12 million in fines to rectify its poor service record.

Of course, Adelphia isn't the only operator with some service problems. City officials in Tustin, Calif., are considering yanking AT&T's franchise in the area if it doesn't address service problems at the 9,000-subscriber system AT&T inherited from MediaOne last year. The city is also up in arms over proposed rate increases that could balloon 26% for some customers, once the cost of new set-tops are added to bills.

Adelphia's regional VP Bill Rosendahl, who has spent his entire 20-year cable career working for four different MSOs in the same system, says his system's service problems are behind it now.

"When (Adelphia chairman) John Rigas bought Century, the first thing he told me was that the customer comes first," Rosendahl says. "It took us about five or six months, but we finally created a service department that offers two-hour windows, 24 hours a day, seven days a week. That has created a much more positive relationship with our customers."

The system tackled its employees next. Century had been paying its staffers up to 40% less than other operators in the area for comparable jobs.

"That meant we trained people who then left to go to other jobs," he says. "Before long, all employees had paychecks that retroed back to the day Adelphia took control of the system with increases in wages and salaries."

The MSO is now in the process of upgrading 12,000 miles of plant in Los Angeles to 860 MHz. The project won't be done until 2002, but Adelphia is offering its own brand of high-speed data services in some areas and has launched digital video services by stealing analog bandwidth until the systems are fully upgraded.

"We felt digital deployment was so important that it was worth taking the analog channels to make it happen," Rosendahl says.

Adelphia is deploying between 7,000 and 8,000 Motorola DCT-2000 boxes each week. By year's end, Rosendahl estimates the system will count 200,000 digital customers. By 2002, he predicts the L.A. system - sans the Comcast properties - will be 100% digital.

Adelphia is also looking at ways to take advantage of the market's unparalleled diversity.

"Los Angeles is the most diverse city in the country," Roesendahl says, "with more than 199 nations represented and more than 140 languages spoken here. There are more Vietnamese here than anywhere except in Vietnam. There are more Hispanics here - 40% of our population is Hispanic - than anywhere except Mexico. And there are more people of the Jewish faith than anywhere except New York and Israel. It's incredible and very invigorating."

Adelphia is tackling the diversity issue by crafting several specialized digital-programming tiers. Today, the operator offers a Spanish-language tier of channels, but the system is in the process of putting together other specialty tiers, such as a package aimed at the community's Asian and Armenian population, among others.

The diversity is another argument against advertising through media that reaches the entire market at once.

"The community is so diverse," says Elder, "I don't think I would do much marketwide marketing even if AT&T served the entire market. Los Angeles is an incredibly diverse place. We do several small targeted campaigns and have had huge success."

AT&T officials insist these micro-marketing campaigns are more successful than marketwide efforts.

For instance, Elder says, AT&T serves a significant number of Latinos in its Los Angeles system, so the MSO has designed monthly marketing campaigns aimed strictly at that demographic.

"We grew our basic footprint 10% with Hispanics last year using that marketing strategy," Elder says.

The system's marketing team generally puts together between eight and 10 unique campaigns each month targeting different audiences, she adds.

"The targeted campaigns get a higher response rate, and the acquisition costs are lower," Elder says. "As the campaigns come down in size, there is less waste, and they become more efficient. A direct-mail campaign that goes to 400,000 homes can generate a 1% to 2% response rate. With targeted campaigns you can double and triple that rate."

AT&T has one sales force that sells to the entire market, but the system has created about 12 language queues customers can tap into when they call customer service.

"We have the capability to go up to 40 languages, but we have currently limited the specific queues to the most common dozen," Elder says.

Marketing together? All that diversity and fragmentation means old tried-and-true marketing techniques such as direct mail, direct sales and telemarketing work best for operators in Los Angeles. That doesn't mean MSOs can get away with spending less money.

"We're spending more on marketing, but we're making more money because we're offering more services," Feige says. "On a percentage of revenue, though, we're probably spending about the same as when we offered one service."

All of the area's major operators are members of Adlink, the nation's first advertising interconnect, founded in 1988. Before Adlink, advertisers who wanted to air commercials on cable television in Los Angeles had to deal with literally dozens of different entities, each with its own billing systems, ad formats and policies. Adlink was created to "interconnect" those sales and technological efforts. Today, the interconnect sells avails on 40 cable networks, reaching more than 3 million viewers in Los Angeles area - 100% of the cable TV audience in the market. In 1999, the interconnect posted revenues of $103.3 million.

Advertisers provide one tape, sign one contract and receive one invoice to reach 3.4 million cable households in the entire Southern California cable market. More than 400 national and regional advertisers, including General Motors/Chevrolet, Kraft, Macy's, McDonald's, Mercedes-Benz and Walt Disney, use Adlink to reach their current and prospective customers.

Collectively advertising cable services hasn't been as smooth a process for the area's operators. Several years ago, a number of Los Angeles operators formed the Los Angeles Cable Co-op to jointly buy advertising on a marketwide basis. The co-op fell apart when the operators' competing agendas and marketing priorities conflicted. Feige and Rosendahl are confident a newly reformed co-op can put several campaigns together in the future. Yet it may not be as easy as it sounds.

For one thing, each operator offers different packages in different areas. Some MSOs in the area, such as Time Warner, have more than one operating cluster. And some operators are still in the process of upgrading or phasing in new product launches. The differing product lines make it difficult to come up with one uniform marketing message. The co-op ad campaign is taking a "feel-good" approach pushing the idea of cable, Rosendahl says. The ads poke fun at the DBS providers but don't promote specific deals, plans or packages. The co-op launched a suite of television ads that are running for six weeks beginning Nov. 13. Another four weeks of radio ads will get under way after that, Rosendahl says.

Also complicating the advertising issue is the fact that there are also 21 broadcasters in the Los Angeles market.

"You've got to buy a lot of time to get your message across," Feige says.

That's expensive and not very efficient. Joint marketing is also tricky, because each operator offers different services now.

Not only do the operators sell different packages in different markets, but each operator has different product and product lines to hawk. For instance, Cox is offering voice, video (analog and digital) services as well as data in the form of to its customers in Orange County. Adelphia is offering analog and digital services and its own brand of high-speed Internet access. Time Warner Cable is offering digital in all but one of its areas and sells Road Runner, the high-speed data service owned by parent Time Warner. It's selling local phone service to multiple dwelling units only. AT&T is offering digital, and local phone service.

However, if operators want to push their distinct products, they're on their own. Most take a conservative approach to selling services to make sure they can control the installation flow and minimize customers who can't receive certain products from calling the system, which clogs the CSR lines and prevents potential paying customers from reaching the company.

Cox, for instance, is marketing its services in batches to keep a better control on installation and service calls. The MSO has also come up with a different approach in sales transitioning into a sales-based model.

"Before we launched our new services," Simonson says, "about 85% of our sales came from customer service representatives. Now, if you want to buy a service from us, you are routed to a salesperson."

An automatic response unit will route customers to the appropriate queue, he says. For instance, customers wanting to reach sales can press 1 on their touch-tone phones. Billing questions? Press 2. For service problems, press 3.

"Now," Simonson says, "85% of our sales come through sales people, and it's been very successful."

Or take data. Cox is selling its service in about 30 retail outlets in Orange County, according to Simonson.

"Data is clearly a `show me' product," he says. "Everyone says high-speed data is fast. But when they actually see the difference, it makes all the difference in the world and helps convince them to buy the service."

Which goes to show that, at the end of the day, L.A.'s operators aren't that different from most other service providers in the country, and, for the city's finicky customers, seeing is believing.