Cox’s Robbins Champions Service Bundling, Tiering

Sep 1, 2003  •  Post A Comment

Jim Robbins, Cox Communications’ mild-mannered CEO, has become an unlikely superhero.
For cable system operators under siege by satellite rivals, he has come to be a champion of the tiering of bottom line-busting premium sports programming as well as the digital video, data and voice bundle. The latter is the cable industry’s best chance to keep subscribers from defecting to satellite or DSL, at the same time upgrading them to what has rapidly become a $100 monthly cable bill for bundled subscribers, rooted in new services with very high profit margins.
Mr. Robbins, 61, calls himself a “reluctant warrior” who has answered the call partly because of timing and availability, but also because this is a career battle he can’t resist.
“The only reason we are doing as well as we are is that we made a more than $10 billion investment in our systems over the last five years to give us the opportunity to sell high-speed data service and telephone to our customers in a bundle we believe in, and that has so far proven profitable,” Mr. Robbins said. “We’re going to protect that.”
As a result, Mr. Robbins could soon bump up his newfound notoriety a notch by becoming the first man ever to pull the plug on ESPN-an option Cox, like any cable operator, has if its licensing contract with the sports programmer expires early next year without an economically feasible extension.
“It would be irresponsible to say what we will or won’t do. But at some point we all have to be willing to take a service off the air, if that’s what it takes,” Mr. Robbins said.
For years, Mr. Robbins, who is not prone to giving interviews or taking his case to the press, has quietly but firmly guided Cox Cable to an industry-leading return on investment, revenues, cash flow and even customer satisfaction. In the most recent quarter Cox was the only cable operator to make across-the-board gains in nearly every subscriber category, and it has the only bona fide telephony business.
Cox most likely will be the only MSO generating long-promised free cash flow in 2003, a year of transition as cable operators seek returns on their $70 billion cable system upgrades and as they fend off telephone DSL, direct broadcast satellite and other rivals.
Morgan Stanley analyst Richard Bilotti calls 2003 an inflection point for the $21 billion cable giant, whose entrenched bundled services should ensure an average annual 12 percent-plus in overall revenue growth through 2005. Cox has shifted its balance sheet dependence away from the core video business to high-speed data and voice because it is “competing with the quality of its products rather than on price,” Mr. Bilotti said.
“Two years ago, 91 percent of our revenues came from video product. Today it’s 73 percent, and our long-range five-year plan calls for video to generate 53 percent of our overall revenues by 2007, with the rest coming from voice and data,” Mr. Robbins said.
The bundling of at least two services (usually video and data or video and voice) is the “silver bullet” already supported by more than 2 million of Cox’s total subscriber base of 6.3 million-more than any other cable operator. “It’s the best antidote there is for DBS erosion and the best growth catalyst there is,” Mr. Robbins said.
But these days, it’s also lonely at the top for other reasons.
Comcast Chief Executive Brian Roberts has maintained a low profile since his company acquired the AT&T Broadband systems in November. Cablevision Systems CEO Jim Dolan is already locked in a highly publicized sports tiering fight with the YES Network. Time Warner Cable is lying low until it can be liberated in a planned public spinoff, and Charter Communications-like so many peers-is sacked with debt and accounting probes.
Cox appears unencumbered by the cable industry’s major plights. At a time when the industry is so often its own worst enemy, the understated Mr. Robbins and Cox have become examples of what it can be.
Mr. Robbins’ cable peers seem to agree. “Cox was perfecting the bundle before all the other cable operators were to square one. Now it’s what everyone else aspires to,” a rival cable executive conceded.
ESPN License Fees
But Cox’s early commitment to the video-data-voice bundle that already is paying dividends may not be Mr. Robbins’ only claim to fame. Taking ESPN off the air on Cox systems, much the way Cablevision took Yankees baseball games off the air last season on its East Coast systems, is clearly an option next year if there is no progress in its tepid talks with ESPN.
Cox is seeking to reduce ESPN’s estimated $2.50 monthly per-subscriber license fee, which recently has escalated by an unprecedented 20 percent annually, or bump ESPN to a pay tier voluntarily supported by subscribers. Analysts say the latter would dramatically compromise ESPN’s $1 billion profit contributions to corporate parent Walt Disney Co. at a time when Disney’s struggling theme parks and ABC broadcast network are offset only by a burst of filmed box office hits.
What Cox seeks is the ability to push a premium-priced program service to a special pay tier when the wholesale price of that service to distributors exceeds $1 per subscriber. “At that point, our contract with suppliers should allow us to offer their service on an optional basis to the consumer. That is a very consumer-friendly strategy consistent with the way we always have done business,” Mr. Robbins said. It also mirrors the initial first-year arrangement Cablevision has with YES.
“Tiering is the right answer. It is pro-consumer and it makes a lot of sense. There is not universal agreement inside the industry on it. But there seems to be more cable operators coming over to our point of view on this. In a 1 percent-inflation world, the notion that somebody can come in and charge 20 times that for their pricing adjustments really seems out of step,” Mr. Robbins said.
While such high-profile posturing has never been Mr. Robbins’ style, Cablevision’s scuffle with YES over tiering and sports license fees has pushed the make-or-break cable issue into the public spotlight.
Cablevision and dominant satellite provider DirecTV also have ESPN contracts that expire soon. Behind the scenes, Comcast has been in tense negotiations with ESPN, using its newfound clout to negotiate reductions in the license fees it pays to ESPN.
Such tiering is prohibited under the terms of ESPN’s existing licensing agreements with all cable operators.
But sources say Cox ideally would seek to establish a tier and a monthly rate card that at the high end would be $4 per subscriber, if only 25 percent of its customers wanted ESPN, and that would drop to $2.62 per subscriber per month if as much as 90 percent of its customer base signed up. That kind of a pay-for-play system would go a long away in “sobering up certain people about rights,” a company executive said.
The proposed tiering of premium sports services has become a serious economic matter for Cox, which stands to pay an additional $29 million annually as a result of ESPN’s most recent rate hike. Although ESPN constitutes 18 percent of Cox’s cable programming costs, it accounts for only about 3 percent of its overall viewership.
Sports programming overall consumes about 40 percent of Cox’s overall programming budget. As goes ESPN, so go other national and regional sports networks, such as Fox Sports.
“Cox’s goal is to try and force ESPN into a tier where it is bought only by cable subscribers who want it [or an estimated 25 percent of Cox’s base]. Disney’s goal is to maintain its position on broadly distributed `basic’ cable, where it gains the most subscriber fees and the most from advertising,” said Tom Wolzien, analyst at Sanford Bernstein.
Given News Corp.’s pending acquisition of a controlling 34 percent stake in DirecTV, which will be managed and owned by its Fox Entertainment Group subsidiary, there may be better odds for getting Fox’s regional sports networks on a tier and forcing ESPN to similarly comply, Mr. Wolzien said.
“It could be a one-time opportunity to extract a tieri
ng solution as a remedy for the potential abuse of vertical market power in the merger,” Mr. Wolzien said.
Firestorms and Change
Further complicating matters is the fact that Cox needs to have a continuing retransmission consent agreement in order for its systems to carry local television stations, including those of Disney’s ABC. The one major market in which Cox needs Disney’s permission is Los Angeles.
Retransmission consent is another looming firestorm. Local broadcasters and station group owners are pressing hard for cash payments of their digital signal carriage to offset declines in advertising revenues.
“We have various discussions going on with various broadcasters in various markets. We’re going to take a very tough stance,” Mr. Robbins said. “We haven’t made any decisions yet. The soup isn’t cooked yet.”
Mr. Robbins and his peers argue that they no longer have the spectrum space or interest in providing initial carriage and sampling to new cable networks in exchange for access to their much sought-after national and local broadcast signals-as was the case with Fox News and Disney’s ABC Family channels.
“We are in a different place than we once were on this. We don’t want to set any precedents we can’t live with,” Mr. Robbins said. “But we don’t have any answers or solutions yet.”
Many of the major broadcast groups are negotiating short-lived extensions of 90 days or less to force the issue of cable operators compensating them for their signals with cash or some other in-kind payments.
“I think this is an unintended consequence of the 1992 Telecom Act, and the fact the FCC is looking at it as a place to start. I think you do what we have with program sports costs and try to educate constituents to what the truth is,” Mr. Robbins said.
“It is a policy issue gone awry [that] we have to get back on track.”
Although Mr. Robbins declines to quantify the potential hit, broadcast retransmission could pose a clear bandwidth and financial threat to Cox and other operators. The only relief in sight would be converting to a completely digital platform, which would open up bandwidth. Mr. Robbins said he believes all-digital is more than three years away and dependent upon the availability of a less expensive digital box. Such a conversion could cost Cox $1 billion, analysts said.
Content Control
The ESPN and broadcast retransmission dilemmas beg the question of whether Cox needs to own and control more key content or expand its scale to improve and protect its competitive edge. Comcast recently considered making a bid for the Vivendi Universal Entertainment assets, conceding that more content ownership and control under the right circumstances could be a good thing.
In fact, Cox owns a 25 percent stake in Discovery Communications, valued at about $2.2 billion. John Malone’s Liberty Media Co. is expected to offer to buy Cox’s stake as a means of increasing its own 50 percent ownership to bolster its profile as a media operating company, having lost the bidding for VUE.
“We look at Discovery today as a financial investment for ourselves. We love what they are doing and we love the management. There are no plans to do anything different,” Mr. Robbins said. “We are just happy where we are.”
While a growing number of industry experts insist Cox will need to make a major system and content acquisition if it wants to stay in the game, Mr. Robbins is adamant.
“There are very few companies in the world that can be large both in distribution and in content. We are not one of those companies. Our expertise lies in distribution, where we intend to remain focused,” he said. “Our future lies in the distribution area,” so you won’t see Cox bidding on the likes of VUE.
Cox recently topped a J.D. Power survey on customer satisfaction, which analysts insist has a direct correlation to subscriber growth and which it has consistently led in recent years.
In fact, as bundling becomes more commonplace, Bear Stearns analyst Ray Katz contends that “customer relationships, or customer accounts,” will be a more accurate and fair way to measure cable economics and growth.
Mr. Robbins contends it is too easy for businesses to write off the importance of customer relations, since it can be difficult to quantify or translate into profits.
“It sounds old-fashioned in its approach, but that is the part of us that will not change,” he said, “because it works.”