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CABLE WORLD STAFF
AT&T Broadband's CEO speaks his mind about technology, interactive TV and the big breakup
When Dan Somers took over from Leo Hindery at the helm of AT&T Broadband in October 1999, he inherited a raft of problems. Those mostly seem like halcyon days to him now, considering the beating AT&T has taken in the media and the stock market in the intervening months. Pressured on many fronts, such as opening up his high-speed networks to competitors, meeting his goal of distributing cable telephony to more than 500,000 homes and coping with the breakup of AT&T, Somers insists his company is on track to deliver the goods. `Cable World' editorial director Andy Grossman and Denver bureau chief K.C. Neel talked to Somers about how he has tackled the challenges facing AT&T Broadband. An edited transcript from that conversation follows.
CW: How is the breakup of AT&T going to affect the AT&T Broadband unit?
Other than the fact we will become a public entity, it doesn't really affect our direction or strategy or change.
CW: Does this downgrade (earlier in November) of AT&T by S&P affect how you will be able to move ahead?
Nope. When the companies are set up by separate entities, they will be capitalized relative to their peer groups, so we're not borrowing today. We may be in the future, but we'll do it under a credit rating at the time equivalent of our peers. That's the right way to do it.
CW: How much debt can the broadband unit feasibly carry?
It will carry as much as necessary for it to look like its peer group.
CW: That could go up seven times (debt-to-cash flow) if you want to compare it to Adelphia.
Well, I don't want that to be the comparator, would you?
CW: Well, they're on the high end.
I think we're a little different than them.
CW: On a per-subscriber basis, how much revenue do you expect to get out of ancillary services?
We haven't done it that way. What we've said is our data products today market for $39.95 a month (for those who lease a modem) and $29.95 a month (to those who bought their modem) and for our phone product, our local all-distance telephony product, we average about $55 in revenues. Digital, we said, is incremental about $15, and the only public number we've disclosed is year-over-year our average revenue per basic cable customer, because of the mix of the services, has risen to greater than $50 per month, and it was $42 a year ago.
CW: Which of the ancillary services do you think will bear the most fruit?
I think all of them.
CW: What are your plans for VOD? How quickly will you get into VOD next year?
Where we are today, we are in testing and we're doing that in a couple of markets (Atlanta is first, and Los Angeles, San Francisco and Pittsburgh will follow), and until we come out of testing I couldn't tell you.
CW: What are you testing for? Are there issues of scalability?
Absolutely. Before we intervene in our network against our customers, I want to make sure it works. We test everything (to determine) which is the right way to go.
CW: What are the issues you're looking for?
Scalability. Can the customer walk up and turn the set on, click, move, order, pay, bill? How does it all work? Does it function properly? What's the customer satisfaction level? Pricing, buy-rates. We need all that information to understand the cost dynamics, the roll of it out across 16 million homes.
CW: Assuming the tests go reasonably well, how long would it take to roll VOD out to all your customers? Two, three years?
At least that. For one, you need digital boxes. It's a product that goes through an evolutionary product development cycle just like digital did, just like high-speed data did, just like telephony is doing.
CW: And you need at least (Motorola) DCT-2000 set-tops, so all these DCT-1000s and 1200s have to be changed out?
That's what we're testing, as to whether you can even drop it down to the 1200. Most of our boxes are DCT-2000s.
CW: Do you think there's a killer app in the interactive TV play?
It's very hard to define a "killer app." They're all positive.
CW: How quickly will it take to rollout interactive TV?
If you look at our business, digital is going to be our principal video product in the long run, and the industry is now scaling it big-time. That's good. Our second biggest principal product as an industry is going to be data, because we're all going to be doing it. That's going to be a very important product, and so is telephony for those of us who are doing it; it's going to be a significant source of revenue profitability.
Interactive is going to be the next phase, and that's going to be developed over the next three to five years.
CW: Will Microsoft's delay in being able to supply software for the DCT-5000 boxes hurt?
A pilot is a pilot, and we're going to do those to learn all about the business. That has nothing to do with the three to five years. That never has. We've never built in revenue projections in the near term for interactivity.
CW: Are you disappointed in the delay?
It's not a matter of disappointment. It's a matter of let's do it, let's get it right and let's work together, and that's where I am with them.
CW: Is that why you've put it on the back burner, that the technology has proven more difficult than expected?
I don't think anyone has put it on the back burner. It's just it's going to get it right the way we both want, and we're working together to ensure that. It doesn't affect our views and attitudes about our relationship with Microsoft or the long run.
CW: AT&T has taken a different tack than the industry. You've lined up behind the DCT-5000 thick client platform.
I don't think it's a thin versus a thick client. I think it's delivering and getting the capabilities to play, and I'm a believer, and I think others within the industry are, that you've got to partner.
We can get mad about rates; we can get mad about costs and whatever else, but this industry took off when Showtime, HBO, ESPN and other services were developed, and people put time and investment and money in front of them. We had much more content to give to our consumers. That's what they want.
I want systems that work, that are simplistic and flexible and give content, and that means we've got to work with people, and anyone who thinks you can develop this as a small group or do it all internally, it's impossible.
CW: Middleware companies and content providers are trying to promote many interactive services on the DCT-2000 level.
We're doing that now. We're doing something with Worldgate. We've talked about VOD.
CW: What about e-commerce and e-mail?
With Worldgate, you can do limited applications like that, but we're talking scale. Hype is one thing; scale is another. We're rolling 4,000-plus digital customers a day. We're going to add almost 800,000 new digital customers this year. I call that a product. Far more important to me today and far more important to the industry today than interactive is and interactive is, a subset in a feature of that. But you've got to get the boxes out.
CW: How long will it take to get the boxes out?
I'll end the year with 2.8 million to 3 million, so it's a good start.
CW: On the Gemstar-TV Guide subject, the industry has rebelled against Gemstar. There are issues of control that some MSOs have about Gemstar and who will control what the customer sees. How do they view that whole fight?
That's a tough question. Open, closed, walled garden, unwalled gardens - really when the macho comes out about those, one thing most people have forgotten is the customer.
These are emotional disagreements where wisdom prevails, and they get ironed out. I hope they would because we have a great opportunity and a capability that puts us in the forefront of communications into our households, and we ought to treasure that and make it what it should be. Fighting with each other doesn't accomplish anything but wasting time.
CW: Some are saying - even within the middleware vendors - there's a debate over what people really want to do with their TV set, and the operators are being very cautious. Is there a feeling that you're still not sure how people will interact with their sets and what you should offer?
Absolutely, because none of us have it out there. That's why we're going to do several pilots to determine what the customer wants.
CW: Do you have your own hunches?
You go back to any new product that you launch that's of a technological nature. One, they want simplicity and ease. They want it to be price-effective for the services you're going to deliver. Because it deals with the TV, it has to be more entertaining than the Internet, and it has to be focused in terms of its service offerings. I don't think if you put a big complex out there that people will wildly endorse it.
They're going to have to use their remote to order a movie, order a pizza, pop into the Internet, scroll, come back, read an e-mail. Do those types of things with relative simplicity. That's the basic nature of the product, and it will evolve. Every once in a while everyone wants to write the end story long before the movie's played. This is a movie; we're learning lots of things about our pipe, what it can do, how it can interact, what it can deliver to the customer, and that's part of what the business is all about. It's going to take time.
CW: With the FTC possibly on the verge of approving the AOL Time Warner merger, with the things that have been released so far, the rumors they have to open up their networks and they're going to have to do all kinds of caveats, how will the FTC's decision affect the cable industry?
From my vantage point, all the discussion has dealt with the impact to AOL.
Certainly whatever the FTC decides will roll over to the rest of the industry. I don't think that authority exists there for them to do that. We have already undertaken and made commitments vis a vis open platforms.
CW: One of the things AT&T fought so voraciously this year was that `open access' was technically almost all but impossible.
That's not true at all. We never thought it wasn't technically possible. Our position has been very consistent on open access. One, we did not want it mandated locally, which is why we fought Portland and why we fought cases in Virginia and Massachusetts, and that was because we thought the jurisdiction of that decision was not a local jurisdiction but rather federal if at all. Clearly it was not local and was not part of the responsibility local franchising authorities had.
As far as technical, we've said you can't forge forward with mandating until we go in technical trials. We were the first to announce, we were the first to be in market and we're going to learn from that.
CW: Have you gotten a lot of heat from other cable operators because you went ahead on open access?
Nope. Those were reports out a year ago, but not recently. Subsequent to that, Time Warner has announced a test to that in Columbus (Ohio). Comcast has publicly stated their intent to provide open access. I think the industry has been very clear, and we've been together on it, that open access is something that should be decided commercially between us and other ISPs and not mandated by the federal government or the locals. And we are in a full-scale with eight ISPs in Boulder.
CW: The cable industry's attitude had been a year ago that the cable industry built the networks and spent billions on the infrastructure, and `We shouldn't have to open these networks -'
No, it's not that. That's where I think you're wrong. It was, `We spent billions of dollars, and we should not be forced by law to open up these networks,' not that we didn't believe that open access was something that ought to happen because we've been very consistent about that from day one. But it should not be mandated by law and we still hold to that as does the NCTA.
CW: Has the technology changed at all that makes it easier for you to open up your networks?
No, that's why we're doing the test in Boulder, to understand the technology. Remember, we have eight ISPs; we have 500+ customers; we have a fully open network. Customers can go in and choose their ISP. They can choose on the fly; that's what we're testing, what the customer experience is, what the ISP experience is, how it operates, how it functions.
CW: How are you billing everyone? Is that part of the trial to figure out how to do that?
It will be. We'll discuss that; we'll work with them. I can't say anything about that today.
CW: The ISPs have objected to some of the business models presented by operators for ISPs.
I have no idea about that. I just know we have a group of ISPs, eight, that are part and parcel of our test.
CW: And you'll figure out business issues later?
Absolutely.
CW: What happened with the telephony deals with Time Warner and Cablevision?
That's not my focus, and I've been very clear, our direction and the way we do it is: We do it, we're doing it internally, we're working with Insight. What the others decide to do, they decide to do.
It's not a number one priority today. Nothing's changed. We're trying to roll telephony ourselves, and I think our experience will roll over, and they may decide eventually it will make sense, but we're not going to force them.
Mike (Armstrong) said it: they wanted us to put up all the capital, and they'd keep the customer. If they want to talk something different that's fine. Our focus at AT&T Broadband is to roll the product ourselves. The success Cox is having with it, the success we're having with it; Insight is getting ready to go into their next phase of getting it available to their customers.
At some point, people will wake up and say, "We're losing a revenue stream that others have." And they'll go for it. But we're not going to force them and do something that's not economically right.
CW: You've said you'll be on schedule to get your local telephony customers. Are you still thinking of between 500,000 and 600,000?
Absolutely. We had 400,000 at the end of October. With two months left, you're damn right.
CW: What kind of churn are you planning for in January when all these people have to start paying their bills?
We do not think there will be any significant difference in the churn.
CW: You don't think that, despite the history of premium networks and long-distance companies, that when these deals end, people just churn in and out of the service?
This is different. When you churn out of this one, you're going to increase your cost by 25% on average, and you're going to have to pay the local phone company to reinstall, so it's going to cost you money to churn, so I don't anticipate any churn more than normal, just basically moves.
CW: Who are the likely bidders for the assets the company is reportedly ready to sell?
I have no idea.
CW: If you lose your stakes in Comcast ...
Comcast was an equity interest that came out of the swap. That was always intended to be monetized. It's purely a non-voting equity stake. That has nothing to do with any relationship with Comcast and never has.
CW: What about Cablevision and Time Warner?
It's great speculation. Some newspapers can't go a week without writing a story about AT&T. I'm not going to comment on any of that. It's not appropriate.
We're going to be doing an IPO of our company. We're going to look at all our assets. Those we feel are non-strategic and we don't feel will be valued properly in the realm of an IPO, it probably makes sense to divest of, and we'll do those over time.
CW: What kind of changes can we expect to see at Excite now that you actually have real control of the company?
I don't think anything other than where we are today. We've always had control of it.
CW: What do you hope to accomplish next year, and how can you help get the stock price back up?
More of what I think we've done this year, which is to have stabilized our business and start to accelerate its growth. And at the same time improve our profitability. If you do both of that it usually gets reevaluated positively by the external market and that's the only thing you can do.
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