Online Extra: Q&A With Carl Vogel

An expanded interview with Charter's president and CEO.

By John P. Ourand

We picked Charter Long Beach to be our System of the Year for 2004. Company president and CEO Carl Vogel spoke with us at length about the launch of the all-digital platform--cable's first--in Long Beach, Calif., his HD strategy and Charter's basic sub losses, among other topics.

CableWORLD: We picked your Long Beach system as our System of the Year.

Carl Vogel: Thank you.

CW: What made that a good system for you to go all-digital?

Vogel: It began with capacity. It's a 750-860 plant throughout Long Beach. It had a single ad zone. It had high digital penetration. It had a management team that was capable of executing this. It had the characteristics that would allow us to implement this all-digital solution in fairly short order without a lot of operation distractions.

CW: Take us through the play-by-play for that. What were you surprised by?

Vogel: The best people to ask are the people locally because they can give you more details than I. It is a relatively straightforward process. I'm sure the guys in the field you talk to say something differently (laughs). It essentially required us to make modifications to our head-end. It required us to go to all the programmers and tell them exactly what we were doing. We did a number of demonstrations for the programming community to demonstrate to them that their signal was not going to be degraded during the process. In fact, it was going to be enhanced through the process. It required our local people doing what was necessary to get the head-ends ready. It required our programming people and our local people getting all the programming agreements in line to do this. And then just making that available in the head-end and making sure we could test it throughout the plant. Through that process we got to a point where we had a consumer launch in July. And we're testing various scenarios in various nodes to get various pieces researched that can help us think about how we can do this better going forward.

CW: With the success of Long Beach, I'm certain you have other systems in mind for going all-digital. When can we expect that?

Vogel: After we approve our 2005 plan, which will be later this year. We've looked at other markets where this makes sense. The reasons we did this is we felt this was good for the consumer to have an all-digital signal. A hybrid-fiber coax digitally delivered signal, you can't see the difference between that and satellite. So it's really based on a consumer opportunity. Where we need support and where we have the capacity I described and where we can manage the advertising zones [because we don't want to give up the advertising revenue in this kind of environment] and where we have good digital penetration are the likely areas where we will look to deploy an all-digital solution in 2005, 2006 and beyond.

CW: What part of the Long Beach experience surprised you?

Vogel: We're a little too early in on surprises. Some of the surprise was the reticence of the programmers to go through the process because this is improving their signal as well as giving us a competitive advantage--or, certainly, minimizing competitive advantages of satellite. That process took a little bit longer than I thought. Especially given my background in satellite. In satellite, you basically take a signal that comes off of a satellite, you bring it in to your satellite uplink facility, you process it throughout that facility and you put it back up on a satellite. In some cases, inside the plant, it's analog or inside the plant it's digital. But this is not a big stretch. I was surprised at the time it took to deal with that particular issue, when it improves the picture quality in your experience considerably and it didn't impact advertising at all.

CW: That shouldn't still be an issue anymore, now that programmers have seen what's be going on in Long Beach, should it?

Vogel: I hope not. It shouldn't be. You'll see others in the industry also look at digital solutions, which is good for everybody.

CW: Are you surprised that you're still the only all-digital system out there, after six or seven months?

Vogel: I don't know that we're the only all-digital system out there. There may be others out there that are doing things and testing things beyond us. We may be further along from what we want to do from a consumer standpoint and how we want to use this as a competitive and retention tool, but it wouldn't surprise me if others had fairly robust digital activity going on.

CW: What's your corporate strategy in dealing with systems? More power with corporate or more power in the systems?

Vogel: We're somewhere in between. We look at our divisional leadership to deliver our Key Market Area (KMA) results, which requires good, constant interaction between our division VPs, SVPs and our KMA leaders. Those four KMA leaders report directly to Mike Lovett. We are looking for our people that run our markets to make decisions that affect their markets. It's different for different segments of the business. We had a centralized marketing approach when we came back into the market a year ago. As we went through the past four quarters, we pushed more of that activity back out to the division and the KMA leadership. From a day-to-day standpoint, we're definitely looking at our GMs in the KMAs, plus the divisional leadership, to deliver the operating plan. In terms of strategy, we certainly want to do that at a central level. That's the all-digital strategy: Our programming, pricing and packaging strategies within certain guidelines and boundaries are done at the corporate level, but they have to be adjusted and managed locally as well. Most of our policies are generally set at the corporate level. But we're looking for our leadership in the field to deliver our business plan.

CW: Take HD for example. Explain how you take a corporate HD strategy and send it out to your systems when some of your systems can't even deliver HD.

Vogel: Originally, we tried to get HD into our top markets where we had scale--where we could get economies of scale on the head-end equipment. That's how we started the process. We have subsequently pushed HD to about 78% of our footprint. We generally have taken the approach where we will go as deep as we can, where we can get scale economies at the headend level. That's the technology side of the equation. From a marketing side of the equation, we want to make sure that we can get the right retail relationships--some of those we've done nationally, many of those we've done locally. And then from a programming standpoint, Sue Hamilton's programming group has done all they can to get as much HD content available in the market. Those deals are generally cut at the corporate level with some KMA assistance, if necessary. The technical strategy was put together where we could get scale originally. We pushed that deeper as we saw success. Now, it's available to 78% of our footprint. The programming strategy, executed by Sue Hamilton and her group, generally we were in a position that we weren't going to launch HD unless we had two broadcasters. We've changed our thinking there. We think the market opportunity is greater.

All of our premium services are available in HD. We did our ESPN deal, which gave us ESPN in HD. We have Mark Cuban's product in HD. We have plenty of product, therefore we've been more aggressive in rolling it out. The engineering has been thought about centrally and executed locally. And the marketing and the various offers depends if it's a national or local offer. They are done for the most part locally. Certainly, the fulfillment and execution has been done locally and the marketing message has been done locally and the content acquisition has been done centrally.

CW: How do you make your decisions with HD versus VOD versus telephony versus HSD? Do you have an official ranking of services you want to deploy?

Vogel: It's based on a return analysis, for the most part. Starting with HSD, that's obviously a profitable product for everybody in the business. Most of that plant readiness has been in place for a long time with respect to two-way capability. That's certainly top of mind and has been our revenue engine all year long. In terms of HD, that's a competitive necessity. Therefore, we've looked at that and think that's top table stakes--you've got to be in the game with HD. Same with PVR. With video on demand, we've got [it] rolled out to about half our digital base. That's a more complicated process. When we look at the process, we look at return on investment and then what is necessary to enable the product. Obviously with HD, it's head-end modifications and having the inventory, the set-top box and content. That's a little bit easier than video on demand where you've got to do billing system integration, you've got to do integration in the head-end, you've got to do content acquisition, you've got to pitch, you've got to catch, you've got to do all sorts of things. Generally, we've determined where we're going to spend our money based on how fast we can get a return and what impact it's going to have on the operating side of the business. Voice over IP is a perfect example. This year, by the end of the year, we'll have approximately 1 million of our 12 million homes enabled with voice over IP. Well, voice over IP is complicated. [It] requires some modification to the CMTS. Certainly, it requires the billing platform, whereas obviously HD tiers and box rental for PVRs is a little simpler. So those kinds of things take a little more time and require a little bit more investment. There's also regulatory aspects. If you look at Charter, we've gone pretty fast on data. We were out of the gate quick with video on demand, but now we're being a little bit more rational and making sure we've got the right operational elements in place before we go any further. As we talk HD and PVR, we're going as fast as we can. And voice over IP, we will go to the extent we can given the availability of product we have and the ability for us to execute locally. All of it is done on a return on investment basis. Obviously, there's competitive aspects you're going to put in there, depending on a market, as well. You may accelerate something in a certain market that you might not otherwise do because of competitive issues.

CW: How different are the smaller markets from the bigger markets?

Vogel: For us generally, the larger markets have a full complement of services because they've got the scale economies where you can roll that out. In some of our smaller markets, we don't have the full complement of products. We don't have video on demand, in some cases. We don't have hi-def in some cases, although we're obviously in 78% of our plant. We're rolling out PVR. Those smaller systems are probably a bit further down on the list for our own facilities-based voice over IP program. But that doesn't mean that we won't go ahead with somebody else as a prospect for voice over IP. If you look at the mix of our systems, we have a fair number of systems that do extremely well, and we have a fair number of systems that are challenged because of the size of the market, the demographics, the spread-out nature of some of our operations. We're looking at doing what we can in those markets. And in some cases, we may look to divest in some of those markets.

CW: You guys really got killed after your third-quarter results from the financial houses. How seriously do you pay attention to those?

Vogel: I pay attention to all the feedback we get. If you really step back and look at Charter's results, we generated roughly 8% revenue growth on a 39% margin. Now, Comcast, Cox and Time Warner deliver 10% revenue increases with similar margins. So we're not that far off the mark, when you consider the diversity of our footprint and some of the capital constraints we've had over the past couple of years. So we take all that feedback seriously, and it's important to us. And we're doing everything we can to improve our statistics, given the constraints that we may have from time to time. Step back and look at some of the sequential growth. On a topline basis, our sequential revenue growth from the third quarter to the second quarter was greater than Comcast and Time Warner and only behind Cox. If you look at our topline 8% revenue growth, as I mentioned, Cox and Comcast and Time Warner has double digits. Well, Cox and Comcast and Time Warner are a bit further ahead certainly on PVR rollouts, certainly voice in the case of Cox and Comcast, advertising sales, there's a bit more scale in the case of Comcast and Time Warner. If you really step back and look at what we're doing with the assets that we have, we would like to do better but we're not that far off the mark.

CW: The reason for a lot of the skittishness is Charter's basic sub losses, particularly in your smaller markets.

Vogel: That's a fair criticism and that's something we need to continue to work on. Sometimes people have to peel the onion below the headline a little bit. Yeah, we've lost, in our particular case in the past year, about 160,000 basic customers. About half of those are basic-only customers. That's been offset by 130,000 data-only customers. The profitability of that customer on a data-only basis is considerably greater than a basic video loss. I'm not trying to rationalize the video loss because we don't like it any more than anybody else. We're working on ways to try and improve that. I would encourage people to peel the onion because some of the subscriber statistics may be...When the rest of the industry, well, I won't even go there. I've said enough.

CW: Really, what can smaller systems do to arrest that decline, especially given your biggest competitors' national presence?

Vogel: You've got to try and compete with price and product, and that's what we're trying to do and that's what others are trying to do. EchoStar's marketing message hasn't changed since I was the president: It's cheaper, better, faster. It's a $29 price point for an element of service. But if you want to add more than one television set, it's $4.99 for each outlet. If you want to add locals, it's $5.99. And if you've got three TVs, you're up to $45 anyway. So then there's a difference in the digital delivery, and that's the gap we're trying to close in Long Beach. What you do is continue to get your message out. You continue to try and get people, in our particular case, in the digital category so they can get access to pay-per-view, which is different. They can get access to video on demand. They can get access to digital music. They can get access to an on-screen guide. To do that, you're going to have to have some promotional pricing from time to time, and that's what we're all doing. We're managing our business to consider all the product lines that we have available and we're managing our business to maximize the topline revenue growth. That's going to be our approach. And it has been our approach. And we're going to continue to go down that path.

CW: Can you speak at all about Paul Allen's involvement? There have been calls for him to put more money into the company.

Vogel: I can't talk on that any more than we already have.

CW: I know Charter is looking into jettisoning some systems. But it's also been linked to buying other systems. As a company, where do you stand on this?

Vogel: We will always look at ways to improve our footprint. We're not actively involved in the Adelphia process. For us to do that would require participation by Paul. You can read our earnings call in terms of our view on that. We're in 37 states. I'm not so sure that we need to be in 37 states for the long term. That doesn't mean these properties are not good assets. It's just that for Charter, we may be better off swapping and trading and getting more critical mass in places where we've got scale so that we can maximize the assets we already have.

CW: Does cable have a marketing problem? If cable fixes its marketing, will the satellite threat be mitigated?

Vogel: It's never that simple, but it's certainly a good start. It's the interaction of pricing, packaging, product, customer service, consistency of delivery, overcoming negative images and stereotypes. There's a lot of moving parts and pieces and I don't think there's a silver bullet out there per se. It's going to take time.