WIRED

K.C. NEEL

Jerry Kent of Charter Communications says emerging technologies, such as interactive TV and video-on-demand, will transform Paul Allen's $7 billion investment in cable

Charter Communications' CEO Jerry Kent is hard at work helping expand and realize Paul Allen's vision of a wired world, and Charter is an integral part of that vision. Cable World pinned Kent down long enough to conduct an e-mail interview. Here's what he has to say about Charter, the communications industry and the wired world.

CW: What's it like to be the anchor of Paul Allen's wired world?

When an individual entrusts a management team with a $7 billion investment, combined with the then third-largest IPO in U.S. history, it means we have an awesome responsibility to execute and perform.

This applies not only to our core video business, but charting a course to successfully navigate through emerging technologies that can be delivered over our broadband pipe. It means I have a lot of sleepless nights, but seeing this management team meet every challenge is a great motivator.

CW: Charter has gone from being a successful classic cable operator to a major MSO on the cutting edge of technologies and services. How has the transition gone?

The transition has gone very well, but it isn't over. In 1998 we served 1.3 million customers with about 2,000 employees, and today we serve more than 6.3 million customers with 13,000 employees.

As a smaller company we followed the industry leaders. I had to shift our culture and our employees' mind sets to encourage innovation and get in front of the parade. In a short period of time we have become the leader in deploying digital services, going from 165,000 digital customers in January to about 1 million by year's end.

We are out in front deploying interactive TV services; we are the furthest along in deploying video-on-demand, and we are on the cusp of deploying a vibrant broadband portal to our customers.

We have other initiatives under way, including DVRs, IP telephony and home networking. My team has done a heroic job in making this transition, as we still haven't lost sight of hitting our numbers and taking care of our customers. But we must continually regenerate ourselves to remain successful in an increasingly competitive environment.

CW: There are significant synergies among many of Paul Allen's investments. Tell us about a few you're involved in.

The relationship with Vulcan Ventures provides a unique advantage in that Charter has access to an array of companies that are maintained off our balance sheet - that is, we did not provide initial capital or equity.

Win and HSA, both related companies, have been very good partners in rolling out interactive TV and data services. We work closely with Digeo and have formed a joint venture with Vulcan, ReplayTV and Motorola to develop digital video recording capability in the set-top.

Digeo is focused on creating the ultimate PC and TV Internet portal experience. The DVR venture is exciting, too. Initially, its value will be in the VCR capabilities of DVR, for example pause, rewind, recording and fast-forwarding programming.

However, once you've integrated the hard drive in the set-top terminal, you can host other applications that create opportunities for us and for others in our industry.

CW: Wall Street has been pushing the cable industry to offer new services for years, and now that you're actually doing it, investors are punishing the entire sector because of the costs to deliver them. Why the negative reaction?

I'm not sure I would characterize it as a negative reaction. Certainly the market has become more discriminating, and we've tried to distinguish ourselves by combining new services with operating results that lead the industry.

As a result, our stock is actually up more than 12% since our IPO almost exactly one year ago at a time in which the NASDAQ has declined 4%. I think there is uncertainty about the effect of competition in video and data, but I'm seeing the tide turn as we capitalize on our competitive advantage - the best last mile delivery system through our broadband pipe - and as I talk with our friends in the industry, such as Comcast and Cox, I'm very confident the market will recognize the industry is flourishing and will continue to generate double-digit cash flow growth for the foreseeable future. The market, which is very efficient, can't overlook this for very long.

CW: What do you do to change it?

We're especially proactive in our communication with all existing and potential investors. We seize every opportunity to tell the industry and Charter story at investment conferences, and I've been on CNBC and Bloomberg TV several times this year.

We look for further opportunities to tell what we've accomplished and to showcase our locations like Los Angeles, where we've made VOD available to the largest digital customer base ever. The best way to get the industry story across is to lead by example, and 20% cash flow growth in our latest quarter did get some attention.

CW: How long will it take to turn the stock situation around?

It is already happening, and I believe 2001 will bring full market recognition that a rejuvenated cable industry has a distinct competitive advantage over all rivals.

CW: Which ancillary service do you think has the most potential going forward?

Digital is the launch pad for all advanced interactive services. It is our industry's Trojan Horse. But, I have to say VOD is the next hurrah for this industry. It's just one more service we can provide our customers to simplify their busy lives. It offers our customers control over their viewing times and preferences, and it is something our satellite competitors cannot duplicate.

CW: How important will interactive TV services be to Charter, and what kind of services do you envision offering customers?

Interactive services are the core of our vision, whether we're delivering those services through the computer or the television. Digeo is designing a portal service that blends the power of the Internet with the convenience of the television.

We can provide our customers with news, sports and entertainment on-demand using Internet technologies in the home with the push of a button, and I'm very excited about using Webcams for video conferencing. I've mentioned VOD, and we have Wink, a powerful mechanism that not only enhances the program, but also allows for advertising revenues and e-commerce. Today, it's available to more than 200,000 of our customers.

CW: Is local telephony a business for Charter?

We're conducting IP telephony tests in Wisconsin, and we'll initiate a trial in the St. Louis market as well. We're especially pleased with the results of our family and friends test in Wisconsin, but we're not ready for a commercial rollout.

Progress is being made on the IP technology front, and IP telephony is an integral part of our strategy going forward. I believe it will begin to have a major impact in 2002.

CW: How expensive and successful has your dish-buyback program been?

We call it our dish win-back program, and it's been very successful on an ad hoc basis. We target customers and demonstrate why they should switch to digital cable. We make them a monetary offer for their dish - depending on the service area - from $75 to roughly $200 for their dish, free installation and a month of free digital cable based on the customer signing a 12-month contract.

The economics are great. We spend about $500 to $600 all-in per customer and have an 18- to 24-month payback. Most importantly, we have a customer who is satisfied and will never have a reason to leave.

CW: You've always managed to have one of the highest internal growth rates in the industry. How do you do it time and again?

Culture, focus and a decentralized management philosophy that empowers our managers to respond to local market conditions. We incent every employee with equity, which retains our entrepreneurial culture. And I'm constantly monitoring and experimenting with new programs to attract customers.

Our culture focuses on building our core video business and guarding our customer base as jealously as we guard our children.

CW: Tell us about Digeo Broadband.

As I said earlier, Digeo Broadband Partners is a great example of the synergies being realized by working with other Paul Allen companies. This will be our broadband portal that will blend text, audio, streaming media and Internet access with the TV.

With this portal, a customer will be able to access a wealth of information through his/her TV. Let's say you're watching a sporting event and would like to see or find out about other events. Push a button; our menu will surround the television screen.

The customer can then access a menu of sports information that's available in a streaming video format or as text. A person can customize this service to his or her individual preferences ... and can also send and receive e-mail from the portal. Of course, a customer will also have an opportunity to shop, as e-commerce is an important part of our portal strategy.

Right now, our middleware provider for this service is off schedule. As a result, we're not able to move forward at the pace we had originally hoped, but it's coming.

CW: How soon will we begin hearing that systems are at capacity and more upgrades will be necessary? Every time the industry thinks it's upgraded for the long-haul, new technology and services seem to eat the bandwidth faster than a swarm of locusts eats a field of corn.

Charter has the most robust architecture in the business. Our maximum node size is 500 homes, and we're averaging 380 homes per node and have the ability to segment down to 60 home nodes. We're provisioning our network with six fibers and only activating two strands, so four are dark. As a result, we can serve the most optimistic projections of voice, video and data without degrading customer service levels. Your question is a good one, and we are making sure we do it right the first time.

In addition, with digital technology we can effectively increase our capacity without rebuilding again.

CW: You've managed to increase your revenue per subscriber from $37.50 a month to $42.63 simply with the addition of digital. Where do you see that number going in the future?

Well, digital isn't the only reason, but I see significant upside potential as we deploy new services. Monthly revenues from our "same-store" systems we owned for the third quarters of 1999 and 2000 actually increased 10% to $46.49 for the third quarter of 2000.

The 3.6 million customers we acquired in 1999, that we've managed for less than one year, averaged monthly revenues of $42.98 - about the same level of revenues generated by our "same store" systems in 1999.

Obviously, there is room for growth here. I can't go into projections, but we have seen the industry grow revenue per subscriber rather consistently, and I see that continuing.

CW: What are your thoughts on bundling? Do customers want bundled packages and bills?

For some customers, bundling provides the convenience of one bill, but others prefer to manage paycheck to paycheck. Most importantly, bundling allows us to provide significant discounts to customers who take multiple services.

This gives us a competitive advantage and provides a terrific price/value relationship for the customer. And this drives customer satisfaction.

CW: Your debt-to-cash flow ratio at 7.05 is among the highest in the cable sector. How much has that hurt the stock price, and is it hampering the things you want to do?

Actually, it hasn't hampered us at all. One thing this management team has exhibited is an ability to attract capital. We just recently successfully raised $750 million of convertible notes, more than the original offering, in one day.

Leverage enhances the rate of return on equity, and as long as we continue to execute, leverage is actually a benefit.

Furthermore, we have a goal of gradually reducing leverage until our bonds become investment grade. We are on track with that plan.

CW: How hard was it melding seven companies into one in such a short time?

Actually, it's 13 companies in 19 months. I'm really pleased with the integration process so far. Integration is an art, not a science, and if not done properly, can result in disaster.

However, this company has a history of assimilating acquisitions in a rapid-growth environment. Our management team has 29 deals announced since 1994. I think the results speak for themselves.

The biggest challenge is instilling the Charter culture in all our acquisitions, and we rely heavily on our field personnel to implement change. We also quickly assess whether the people in our acquisitions will fit into our entrepreneurial culture, and we are upfront with all of them.

While it is hard to integrate so much so rapidly, it is one of the most fun things about my job. And it is really gratifying to see my managers step it up a level and really excel.

CW: Who is Charter's largest competitor?

We've never found it productive to bury our head in the sand. We acknowledge there is competition, and it's DBS and DSL. The fact of the matter is, they're chasing us.

We have a competitive advantage with the best delivery system to consumers. As long as we continue to provide a quality product for a reasonable price, with proven technology, backed by world class customer care, our customers will have no reason to leave us. We'll also continue to attract new customers. The bottom line is that if you take care of the customer better than anyone else, you win.

CW: Tell us about what's happening in LaGrange, Ga.

LaGrange is a wonderful example of a partnership between government and private enterprise. Two years ago, Charter and the City of LaGrange went into business together to build a state-of-the-art broadband network for that community.

This year, we joined the city in an unprecedented initiative to offer Internet access over cable television to all the city's customers at no charge. LaGrange is a very progressive community, located in the shadow of Atlanta. With this latest initiative, they were looking for a way to attract commerce and industry to their marketplace. As a result, LaGrange is now a leading second-tier telecommunications community. We were pleased that LaGrange was named "Intelligent City of the Year" by the World Teleport Association in recognition of their preparation of residents for the Broadband Age in partnership with us.

CW: How involved are Bill Savoy and Paul Allen in Charter's operations?

I have full responsibility for the day-to-day running of the company. Paul gets involved in the technology side of the business, which is certainly welcome. Bill serves as an active director of the company and helps monitor progress for Paul. Since our merger, my team has been responsible for all acquisitions, financings and operations.

CW: Will the TV and PC merge into one device? If so, how long will it take to make that happen, and how will content change to reflect that melding?

There will be a blurring of lines separating the TV from the PC. That merger is at the heart of the Wired World. I talked about Digeo Broadband earlier as an integrated TV and PC portal. It will allow for aggregation of content. Charter will be the first to market with home-based entertainment, communications and commerce, all by way of broadband, whether a thick or thin client approach. It is in testing now, and 2001 will bring it's full roll-out.

CW: Do you ever see yourselves getting into the content business?

Our access to Vulcan investments, including TechTV, Dreamworks, Go2Net, The Sporting News and others, provide us with terrific access and at the "right" price. For now, we are focused on being a pure play cable operator.

CW: What are your thoughts on the Time Warner AOL merger?

Broadband fueled the merger. For me, it confirms Charter is headed in the right direction. I believe AOL saw a future in which millions of its customers shunned its service for the faster and interactive rich connections offered by cable companies.

It bought into the broadband business so it could serve its customers enriched content that would allow it to remain competitive. I also think their timing was good.

CW: Conversely, what do you think about the breakup of AT&T? Some people see it as confirmation that the bundling of voice, video and data is doomed to fail. Do you agree?

AT&T has a sound strategy that with the right execution could really enrich their shareholders. Unfortunately, Wall Street is impatient, and clearly the pieces are worth more separately than where "T" is trading today.

They didn't have a lot of choice. But I think a big part of their problem, a rapidly declining core long-distance business, has nothing to do with cable's potential in bundling of voice, video and data.

CW: What will a typical customer be able to subscribe to from Charter a year from now? Five years from now?

Our goal is for customers to have a host of technologies and services that help make busy people more productive, less stressed and to make their lives easier. My mission is to serve customers preferences over my broadband pipe better than anyone else.