To call this a year of change for Adelphia Communications
Corp. is an understatement. Nestled in picturesque Coudersport, Pa., Adelphia has emerged
as a major player in the cable industry.
Pending acquisitions of MSOs such as Century
Communications Corp. and FrontierVision Partners L.P. will effectively double its
subscriber base to 5 million.
Last month, Multichannel News news editor Kent
Gibbons and finance editor Mike Farrell spent a day with the Rigases and vice president of
finance Jim Brown in Coudersport, where they talked about cable, past and present, and
Adelphia's role in the changing cable landscape. An edited transcript follows:
MCN: The cable industry has changed dramatically since you
first became involved in it about 50 years ago. What are some of the more significant
events over the past few years that you believe have transformed the industry most?
John Rigas: The Microsoft [Corp.] infusion. [Microsoft
invested $1 billion in Comcast Corp. in 1997 -- the first significant outside investment
in the cable industry, and the event that many believe spurred investor interest in cable
stocks.] It was a huge leap of faith. It made a statement, and that was a great thing that
happened to all of us.
Then, I think you look at the last couple of years, like
when we got regulated in 1992. Regulation is a terrible thing, obviously. It gave a lot of
uncertainty. It took us about two years to begin to understand the rules and regulations
and to work through all of those problems.
But at the same time, there was the uncertainty of
[telephone competition]. The telephone companies were still advocating that there was
going to be a rapid overbuild. And there were a lot of questions as to what the satellite
services would do to us when they came on board. But over a period of time, I think a lot
of those questions have begun to be answered.
And then there was the recognition that the simple little
thing that we all believed in early on, in the early days, was the coaxial cable. It's a
broadband pipe, and we extended that with a fiber. But I think that for those of us who
have been in this business for a lot of years, it's always that broad pipe that was going
to make the ultimate difference.
MCN: You mentioned the phone companies. Adelphia was up
close and personal with Bell Atlantic Corp. in Toms River, N.J., and you outlasted them
when a lot of folks figured that was going to be the beginning of the end. Do you feel
like you've conquered them, or are they going to come back? Are you getting overconfident
about the phone company?
JR: Would you reach back there and get that big sword
there?
MCN: You've got a sword to slay them with?
JR [Holding a heavy sword]: [National Cable Television
Association president] Decker Anstrom came to one of our meetings with all of our
managers, and he presented it to me as the giant-slayer. I thought that was kind of funny,
but actually, it was a good test. I don't think it would hold true today because the
system that they implemented was pretty obsolete to begin with.
On the other hand, I think we had already started our
building with 750 megahertz, so we had the channel capacity to compete with them. And
there's a lot to be said about loyalty -- we were pretty well represented in and around
Toms River, and people respected that loyalty. I think having the presence in local
origination with our own studio, which [Bell Atlantic] didn't offer, also gave us some
additional points that we could sell.
So I guess that the bottom line is that I think Bell
Atlantic wasn't prepared. They thought it was going to be a lot easier to take us on and
to cut prices.
They had made an offer that they were always going to be 20
percent lower than Adelphia. We were asking our customers to pay $24.50 [per month], and
they came in at $19.50. We debated it and debated it in-house. We went down to $18.50, and
they went down to $14.95.
After much discussion and agonizing, we decided to just
stay firm. It was the right thing for us to do, instead of trying to fight their fight. We
just felt that we had value, we had service and we could compete.
MCN: Do you think that for the most part, the telephone
companies are out of the video business for good, except for Ameritech Corp.?
JR: I'm not sure yet. They change so quickly. They're in
and out. A lot will depend on what happens at Ameritech. I suspect that probably, [the
Bells will] be doing what AT&T [Corp.] has been doing lately -- looking to try to get
a cable system to do a merger with outside of their area. I wouldn't say that they're out
forever.
MCN: Well, they're touted as big competition for cable with
this digital-subscriber-line product that they are going to have. Do you think that will
be a bigger thing than their video efforts?
JR: I think so. It's just extraordinary what's happening
with information, two-way communication and computers. That's why I think as we go down
our road and we look at our future, there's a lot of value left out there if Adelphia does
its job well, and I think we will.
That's why I'm not concerned that we're not being fair with
all of our stockholders. Sure, we control [Adelphia]. But I think there's just
extraordinary value out there, more than people realize, and as we go down this road and
offer all of these services, we position ourselves to do that.
MCN: You make a pretty persuasive case that you're in it
for the long haul and that you are looking to stay in the business. But you must also
think that this is a historic moment, and that there could possibly never be a better time
to sell.
JR: Well, I suppose we talk a little bit about it in the
family. But it's never been a serious discussion in the family. I think the commitment and
the goals are to continue in this business, and I suppose you could make a case and say:
What would you do with all of the money anyway? We live reasonably comfortably, and we
like what we're doing: It's a challenge.
The one thing that I tell people is that if it wasn't for
the children -- they've had a lot of experience, they do the job exceptionally well, they
know the business and they're committed -- then I would probably have been a candidate [to
sell] and do what others did.
But the torch has passed very carefully, very well, from
one generation to another, so the strength of Adelphia, I think, is that its leadership is
in place. And that's why it's never been a really big discussion in our family.
We have other issues now, too, that come into play. We have
a lot of loyalty to this area. We grew up in it. It's our roots. We have a dramatic input
on the economy in this area. Should we sell, then you have to say to yourself: What is
going to happen here with the infrastructure that we've begun to put in place, with new
buildings and new offices and all of the people who we brought in, and their hopes and
aspirations? That comes into play, too.
MCN: Do you think that your sons will have the same feeling
for the community and will want to carry that on?
JR: Not only think: I can say positively that they do. I
think that's a factor, although I suppose anything can happen. And yes, I'm not dismissing
that as something that couldn't happen. You know, we always listen.
And I jokingly said this because somebody asked Tim when he
was on a panel, 'Well, Tim, last year, you thought you would consider selling at 14 times
cash flow. We're here now. Are you a candidate?' Tim finessed it very well, as I recall.
We have six members in our family, and I think that if you
were to interview all six of us, you would get six different answers on that question, and
it's your job to figure out which one is the right one.
We're one of the few companies -- I can't think of any
others now, Alan Gerry [of Liberty, N.Y.-based Cablevision Industries Inc., which sold out
to Time Warner Inc.] was around at one time -- that are still where it all started, where
it all began. We're kind of unique.
MCN: Actually, 14 times cash flow is a low sale price now.
JR: No, it's nothing. Now you're looking at 22 times, 24
times. Isn't that unbelievable?
MCN: You have a time now when you have some big buyers
coming in. And those times are few and far between. It looked for a while like maybe the
phone companies might be in that position -- and they were for a while in wireless cable.
But now, you have AT&T and Microsoft cofounder Paul Allen. Suppose they decide in five
years that cable really wasn't the place for them, they start to sell and values crash?
JR: It's a risk that we all take, I think, and we're aware
of it. I guess that's where you have to make a business judgment. If you guess right,
you're a hero. And if you guess wrong, you're not.
We've got a huge investment -- personally, all of us -- and
we certainly don't want anything to destroy our value. So I guess the bottom line is, yes,
we always listen, and we're looking at consolidations and mergers that would make sense,
no question about it.
We're actively looking at acquisitions along with that. But
nothing is for sure, and maybe someday, if there was enough money put out there, it just
wouldn't make any sense not to exit. But at this point in time, it's not really on the
front burner with us.
MCN: It seems like most companies are either growing or
selling. Adelphia has been growing, but it must be getting harder and harder to do that.
JR: It is. It's just coming down to a few of us. It's a
wonderful place to be -- in many aspects, on a personal basis, to have watched where our
values have gone. I always believed that someday -- it may have taken lot of years -- but
someday, the investment world and investors would recognize the value, and we're there.
That's a great feeling, and it's just kind of a sense of fulfillment that you made the
right bet and you believed in it all of these years.
On the other hand, it is very bittersweet for me to watch
so many of the people who I've grown up with in this business exit. You establish great
friendships and relationships, and you perhaps sometimes question: Well, if they are
getting out, why am I staying in? Are they doing the right thing, and am I doing the wrong
thing? There's always that uncertainty.
But besides that, it is kind of a passing of a time and
period. This industry will not look the same. Nor is it the same as it was just three
years ago and two years ago. So I have mixed feelings. I went through that in '92 when
regulation came on board. A couple of years ago, you saw people like Newhouse and Hauser
Communications and some of those guys sell out. And now, we're going through another round
of consolidation.
MCN: Maybe it's time to, in a sense, hand the business over
to an AT&T or a Microsoft or Microsoft-made billionaires to fully exploit the
potential of the business. On the other hand, maybe it's not such a good thing that
AT&T and Microsoft end up controlling the cable industry. What are your thoughts along
this line?
JR: Well, my thoughts are that there's still a lot of room
for all of us. It's a big industry, and it's growing. I'm sure that AT&T has their own
culture and their own way of doing things. But having grown up in the business, one of the
things that I think Adelphia does very well is that it has never lost its roots.
We've grown up from a company that had one customer and two
customers, and then 100 customers, and we feel a relationship with our customers, our
municipalities and our employees, who have been very close to us.
So maybe we do things somewhat differently, but I think
that we can compete and we can do it well because of what we believe in. There's a spirit
of our entrepreneurship that has always existed in the cable operators. A lot of us are
still there, and we believe in it. I certainly do. And I think that's a distinguishing
factor.
So it does not concern me that perhaps we can't compete, or
it's a new world, or we have to do things completely different. I think the basic
philosophies of taking care of the customer and staying with the state of the art will
still prevail.
MCN: Are you concerned that as these corporations get
bigger and bigger, and as companies like AT&T come in, some of that entrepreneurship
will be gone?
JR: It is a concern. But at this point in time, as long as
some of us are still around -- and I think you know who they are -- I think we'll never
lose that. That's just part of our makeup. That's what really helped to sustain us through
all of these years -- that strong entrepreneurship, that feeling and vision that we're
builders and we take some risks, and we're not the big corporate giant.
Now that will change in time, and I'm sure that Adelphia is
changing, but not rapidly. But I've noticed in the company, as we've gotten bigger, one of
the things that's very difficult for me is that I used to know all of our employees, and I
could visit all of our offices. I truly miss that. It was a lot more fun for me.
And I'm still trying to accomplish that, but I must tell
you that I don't do it. As I get a little older and maybe not as active as I was with some
of those things, I hope that I can make it a point just to get around and meet the
employees. And I do enjoy, believe it or not, picking up an occasional customer complaint
and talking with them. At the end of that conversation, I have a friend.
MCN: Do you still put your home phone number on customer
bills?
JR: Not as often as I used do. But I'm going to go back to
some of that. It was a great catharsis, that exercise, because what I found out is that
the systems that were well managed and that perhaps stayed to the discipline that we had
set up didn't get too many complaints.
But the ones that had strayed -- and perhaps abused the
customers, in many cases -- you got a lot of complaints. That was a real wake-up call.
That was a wonderful thing.
And I guess one of my favorite conversations that I had --
you probably heard it, but I thought it was great -- was when a guy called me up and said,
'Am I talking to Mr. Rigas?' And I said, 'Yes.' He says, 'Are you the president?' I said,
'Yes, I'm the president.' And he says, 'The real president?' And I said, 'Yes, I'm the
real president. Is there anything I can help you with? Do you have a problem or a
suggestion?' He says, 'No, I just never talked to a president. I'm honored that you would
talk to me.'
MCN: So you recommend this to CEOs? Give out your e-mail
address, or try to keep in touch with the customers?
JR: It isn't for everybody. If you enjoy people, which I
do, it's great. But some people don't have that same feeling.
MCN: How do you like being a sports-team owner?
JR: Most of the time, I enjoy it. It's really been a great
diversion. I really enjoy it, especially when you're winning and you have a good team. I
haven't experienced too much of the other aspects, when everybody's on you for not having
a good product on the ice. But right now, I'm enjoying it a lot.
It's a family endeavor. It isn't part of Adelphia, because
there are some losses out there, and we didn't want to put that on the backs of the
company. Someday, we hope that as we go down this road, and we get some help from the
state and the local governments -- we have a terrible contract with the [Marine Midland]
Arena, and we're working on reworking that.
But I think that we're also recognized through [regional
sports network] Empire Sports [Network]. And our subscribers, you know, there's a synergy
there that we can optimize and, in the long run, it will work for us. It gives us the
contact that's very important, and Empire Sports is growing and doing well, so we'll bring
it all together.
MCN: Do you think you might consolidate the Sabres into the
company over time?
JR: We hope to. I would hope to, but not now.
MCN: It would be like a mini-Cablevision Systems Corp.
JR: Yeah, I think that's pretty much the direction we're
looking at.
MCN: Would you look to buy any other sports franchises?
JR: It's not an easy road to travel, particularly in a
small market like Buffalo, N.Y. At one time, we had a real interest and came within a
gnat's eyelash of acquiring the Pittsburgh Pirates [Major League Baseball team], because I
was a strong believer that this had a synergy because we had a big presence in the
product.
But we didn't have the sports network. However, who knows
what the future would bring? If it makes some sense, we would look at it.
MCN: Was it in last year's playoffs that you were Sabres
left winger Miroslav Satan's lucky charm? You had to keep going back to touch his hockey
stick for good luck.
JR: This year I've used a new gimmick. I gave everybody on
the team and the coaching staff a lucky tie. So they've been wearing their ties to the
game.
MCN: All the same tie, or an individual tie for each team
member?
JR: All individual. Very expensive ties
MCN: You picked them out yourself?
JR: No, Mrs. Rigas did. And I think they cost me close to
$125 [each].
MCN: What part of the cable business gets you most excited
these days?
JR: I think the digital aspect of it. I'm excited because
that one really dovetails into what we're doing now, from analog, and our customer-service
people have an easy time explaining it, and people have an easy time understanding it.
But I don't have one in my mind that is more important than
the other. We decided to stay in this business because all of those collectively are what
produce value. I think that if it was just one, and we stayed in that mode of just having
one service, I don't think we could compete.
I'm a strong believer that the high-speed [cable] modem may
be the biggest winner of them all in the final analysis. And time will tell, but we're now
carefully, cautiously offering long-distance service. We're doing an awful lot with our
CLEC [competitive local-exchange carrier Hyperion Telecommunications Inc.]. We have a big,
wide footprint through the eastern part of the United States. I'm sure that there will be
more growth and acquisitions in that department.
[On the residential phone front], we've just begun some
preliminary discussions with AT&T. We don't completely understand their offer, but
we'll be evaluating it. We don't have an agreement at this point with Road Runner or @Home
[Network]. We're waiting to see what's the best direction for us to take.
MCN: AT&T chairman and CEO C. Michael Armstrong said as
he announced the MediaOne Group Inc. deal that those telephony joint ventures are just
getting harder and harder to negotiate. They're not as simple to do as he thought they
would be. They've run into issues of who has control of which parts of the business.
JR: It's a very serious matter. First of all, I think that
for a lot of us, there's always some concern -- and a little bit of, perhaps, paranoia --
after having dealt with AT&T over many, many years and having many discussions. It
wasn't always a level playing field.
Now I have never met Mr. Armstrong, but I think he's done
an extraordinary job, and certainly, he has done an exceptional job for the cable
industry. What TCI [Tele-Communications Inc., now AT&T Broadband & Internet
Services] did with joint partnerships and unraveling made a great statement and propelled
stocks upward.
The main issue is that we've always had that relationship
with our customer. When we begin to give part of that to somebody else, and we become a
conduit and almost, in some sense, a common carrier for somebody else, what's left for us?
It's something that's a very serious matter, and we have to
be very careful that we don't give up something that is important to us in that
relationship with our customer.
MCN: On the other hand, those are lines of business that
are new to cable operators, so maybe it's better to have a partner.
JR: That's correct. And that's one of the strong arguments
for going in that direction. I think that maybe Time Warner got to that point much quicker
than we did. We haven't been as close to that situation.
Now we're just starting to get more involved with it. But
obviously they made, I think, the safe decision. They made the determination that
[building a residential phone business] was not what they would care to do, or would
understand, or would like to invest a lot of money in.
MCN: Generally speaking, do you figure that you will
eventually partner up, probably with AT&T?
JR: It's still early to tell. I can't answer that. I think
it's a good possibility that it could happen.
MCN: Or do you go it alone? Or will you do residential
phone service on your own and continue doing the 'Power Link' data service on your own?
JR: We've always managed to do a lot of things on our own,
and that's being [taken] under consideration now. When my sons James, Tim and Mike and all
of us meet, we're starting to get more information and thinking about what is the right
way to go.
Very honestly, in a family -- and the family's more of a
partnership -- it certainly isn't one of the typical arrangements where you have a CEO. We
all try to do it together as a group and a consensus. At this point, I think that we
wouldn't get consensus [on] how to move forward.
MCN: What about rates in this new world of deregulated
cable? The industry has been conservative the past couple of years while waiting for
regulation to go away. You'll always have some political pressure going forward. What
would you say the environment for rate increases is going to be like over the next few
years?
JR: I can't speak for everybody. Certainly, from Adelphia's
viewpoint, we're trying to adhere to the suggested guidelines of 5 percent [average annual
increases] or less. I think it's a very, very sensitive matter that we don't attract
attention to rates with all of the things that are happening. I think that will be our
guideline, and that's where we are.
My sense is, talking to other operators, they all know how
important it is that we keep the rates in check in this environment where it doesn't
create the political problems that we brought on ourselves to some degree.
I think that we're very sensitive, and very honestly, I
think that hopefully, with the additional revenues that are coming in from other products,
we'll begin to take the pressure off video.
MCN: Is the possibility of reregulation the biggest
potential threat to the industry?
JR: I certainly feel that way -- that reregulation of any
kind would be a very negative thing. So we'll do everything we can to keep our house in
order. Certainly we're all sensitive to that and aware of the consequences.
We went through a horrible period of regulation. I went
through that when the FCC [Federal Communications Commission] put us in a freeze in '69.
That's probably the biggest concern, that wild card that we have out there. On the other
hand, you never know: High interest rates would certainly be a factor.
MCN: Adelphia has always had the problem in the past of
being highly leveraged, which you worked hard to get down.
JR: We're finally getting our leverage down where it's more
respectable and not such an issue with a lot of people. It's going to take a lot of
getting used to, if we get it down, that every time people write about Adelphia, they
won't always use the phrase, 'highly leveraged Adelphia.' I'm going to have to take a
Valium to get used to it.
MCN: On a personal level, how are you feeling? How active
are you at the company? And are you starting to look ahead and maybe think about
retirement?
JR: I really have the luxury of doing the things that I
want to do, being that it's a very easy commute from my house to the office. It's a
three-minute drive -- a five-minute drive if I want to slow down.
But I don't have any real thoughts of retiring. I enjoy
what I'm doing tremendously. I like the challenge. I like the camaraderie and the
associations that have been part of this great industry. And I'm just fortunate to be
around.
As I've gotten older, it seems like people are giving me a
lot more respect. So I'm getting a lot of the perks. I'm going to hang around and take
advantage of all of that.
MCN: How are you feeling?
JR: I'm feeling very good, getting stronger every day. I
can only say this: I didn't have a heart attack. On the other hand, I'd say that by
exercising every day, it was brought to my attention that something was remiss when my
shoulders were getting a little heavier. That led me to take a stress test. So I was very
lucky that I was doing the exercises on a regular basis. I went through it pretty well.
MCN: I have read that there is no real succession plan in
place. Is that true?
JR: That's true.
MCN: The Rigas children can work it out among themselves?
JR: I believe that that will be the scenario. I certainly
don't intend to pick one over the other. People have asked me that. But it's working so
well. I know the relationships they have -- it really is a partnership.
(In an office next to his father's, Michael Rigas wrapped
up a meeting about cable-rate increases in a mid-Atlantic state to field a few questions.)
MCN: What stage are you in with integrating the new MSO
acquisitions?
Michael Rigas: We obviously can't do many changes until the
closing. We are in the process of meeting the new employees; getting the franchises
transferred; comparing our benefits with the companies' coming in; explaining our benefit
package to the new employees; and thinking about how everything should be structured.
At the corporate office, we're trying to get feedback from
the various department heads as to what level they'll have to expand -- those types of
things.
MCN: With the systems you already have, what are your key
deployment tactics?
MR: Upgrading our plant to 750-MHz, fiber optics, two-way.
Launching our Power Link product. We're about ready to have a major launch of DOCSIS [Data
Over Cable Service Interface Specification] products throughout the company. We're
transitioning to digital converters, and we've launched both the [General Instrument
Corp.] 'DCT-1000' and the [Scientific-Atlanta Inc.] 'Explorer 2000.'
We're starting to talk about telephony, residential
telephony. We have several small experiments going on with switched [circuit telephony].
We're going to probably take look at IP [Internet protocol] telephony, and at getting our
call centers structured so that they do a better job of delivering customer service, as
well as deciding where additional call centers should go.
MCN: Have you been consolidating the centers?
MR: We have. We've kind of been taking it very slowly, but
we do have four good-sized call centers. Gradually, we'll develop some others, as well.
It's a challenge to market some of these new services, particularly the Power Link
product. It's really all new, and that's a big challenge in itself, even from an operating
standpoint. Just hiring people in certain markets is a big challenge because the labor
market is so tight.
MCN: Is it a big restricting factor at this point, getting
skilled people to install the new equipment?
MR: Yes. What we tried to do is rather than going out and
trying to hire people to do it -- obviously, we're using contractors -- we have a learning
center for our techs, a number of structures. We're trying to train our own people so that
they're able to do the Power Link installs, so that rather than having two people and
having to coordinate with a PC [personal computer] contractor, you have our own people to
do it.
MCN: And hopefully, you get self-installed products at some
point.
MR: With DOCSIS, that should be easier, too. From an
operations standpoint, that's kind of what we're up to, as well as the integration stuff
-- just planning to keep everyone busy.
MCN: Dealing with little brushfires that break out in
places like Vermont, where state regulators want to fine Adelphia up to $5.26 million over
customer-service issues?
MR: Yes: employee brushfires, regulatory brushfires, and
you have your usual franchise renewals that take time -- a lot of things in operations.
People say, 'Well, can't you kind of plan ahead so these things don't happen?' But to some
extent, it's just part of the nature of the game when you're in operations.
MCN: How many franchises do you have to get transferred
with the acquisitions?
MR: Close to 900.
MCN: Are you going to run into what AT&T ran into with
TCI transfers -- with franchise authorities wanting to force you to provide system access
to other data-service providers?
MR: In Vermont, it's already come up. They're going to do
it in the context of renewal. I don't know if we'll get it in terms of a transfer. Maybe
if someone like Vermont could do it. Maybe a city like [Los Angeles] would do it.
FrontierVision has fairly small communities, but I could see it in L.A. It is a big issue
out there, so it's possible.
MCN: How big is the threat going ahead that as AT&T
continues to consolidate, it will become more of an issue for the FCC?
MR: Just looking at the size?
MCN: Like making Adelphia a common carrier?
MR: I think it is a possibility, certainly. And I think, at
least on the surface, that it probably has somewhat of an attractive argument for the
average person and the average regulator that cable should open up its network. We don't
like it much, but I suspect that it's going to be a tough argument to fend off. What do
you hear? You probably hear that.
MCN: It is a big local issue in many places. And I imagine
that it's going to just get worse, unless America Online Inc. gets bought off at some
point.
MR: Maybe some deals will be made privately with AT&T,
which maybe will take some of the pressure off. But I guess it's not just AOL. It's not
like in Vermont, with claims of other companies. They have a couple of their own Vermont
companies that are going to come up to them and say that they think this is a good idea.
MCN: How is the modem deployment going so far?
MR: Pretty good. There are a lot more challenges with that
than there are with a digital converter in terms of reliability, in terms of having an
assistance center and a help desk to take the calls, getting up on the curve as far as
installations and doing the marketing.
It's going well. I think we would all like to see it go
quicker, though, to be honest with you. But particularly where we have the two-way modem,
we've achieved some pretty good penetration rates up to this point, in keeping pretty much
with what the industry average is.
MCN: As you guys get bigger, and with programming costs
being such a hot button, do you expect to have a lot more clout in dealing with
programmers?
MR: Yes, definitely. I think that negotiating with it will
make a big difference. And that's obviously one of the reasons why we want to become
larger, to be able to deal with the programmers and the vendors.
MCN: Some operators are starting to say that something
really needs to be done about tiering.
MR: I think that certainly, we would like to have at least
the flexibility in doing it. Obviously, offering it digitally is kind of a form of a tier.
People who want these services get them by getting digital boxes. I think that it is going
to increasingly become an issue that has some appeal.
People who are sports fans, it seems like they have an
insatiable desire for sports programming. I just wonder how much they are willing to
[pay]. They don't seem to care how much it costs. The other 60 percent of your customer
base, they don't care that much about sports, so there's a certain logic to having a
sports tier. The biggest share of the pressure really does come from sports services.
Of course, with us now being on the hockey side and on the
sports-ownership side, you can kind of see where the pressure comes from: salaries and
everything else.
MCN: With integration, you face a situation where you end
up with popular programming that you may not want to air, like adult channels. Any comment
on that?
MR: Traditionally, historically, we have chosen not to
carry the adult channels, and I would expect us to continue that. There are a few systems
where we still have adult programming, like Florida. But with that exception, we pretty
much decided not to carry it. I'm pretty sure we would continue that.
During a lunch break at a local restaurant, John Rigas
spotted two Adelphia dealmakers -- Tim Rigas and vice president of finance Jim Brown -- at
a nearby table. At Mr. Rigas' request, they interrupted their meal to answer a few
questions.
MCN: It must have been interesting to be juggling those
three big transactions more or less at the same time -- Harron Communications Corp.,
Century and FrontierVision.
TR: To a certain extent, once you gear up and do your
analysis, it's almost easier to do multiple transactions. Plus, we did literally spend
close to a year on FrontierVision. It seemed rapid-fire, but we spent [almost] a year
getting FrontierVision where it was, and then the other ones kind of happened.
MCN: FrontierVision was the most sensible fit.
TR (joking): Well, I think Coudersport-L.A. is a pretty
natural connection.
Jim Brown: I think I could argue that the subsequent ones
are easier that the first one. But I'm not sure that doing more of them at once is
necessarily easier [laughs].
MCN: There are only so many all-nighters that you can pull
in one night.
JB: The Harron systems probably fit in just as well as the
FrontierVision systems. The only ones that don't really cluster right in would be the
Century systems.
But that was a real opportunity to amass the L.A. market,
which, with 775,000 customers on its own, doesn't really have to be adjacent to anything
else to be a pretty good clustered management opportunity.
When you take our whole 5 million subscribers, when all is
said and done, there are only about 300,000 customers that really don't sit either in the
L.A. market or in our major East Coast footprint -- which is a pretty small amount
compared with anybody else of similar size. Any surprises for you?
MCN: Do you feel like you still need to grow? I mean, I
guess you need to grow to the right size.
TR: I don't think we really felt compelled one way or the
other. We're not still driven by if we see value there. And some probably have more
strategic value to us than others. But as for sheer size, I don't think we're driven by
that.
MCN: Is 5 million subscribers a good number for you right
now? There's no burning desire or burning need to get to 6 million or 7 million?
TR: We never really put a number out. I still can't get a
good reason why you need a number, why 10 [million] is that much better than 5 [million].
People would argue that you're going to get a better seat
at the table [if you're larger], stuff like that. But most of the value that has been
created has been through the cable operation. Financial markets love it. They've been
conditioned, I think, that 10 million is a good number. I don't know. Jim, can you see any
real reason?
JB: Well, I think that more important than size, you have
to be able to deliver the technology, because I don't think many marketplaces in the next
five to 10 years are going to be really excited about a cable operator that doesn't have
the wherewithal to deliver the technology.
There are a number of ways to get there. Certainly, having
a certain size seems to be a pretty important component to be able to afford that. But I
personally think [the required size] is quite a bit smaller than 5 million customers. At
10 [million subscribers], you gain the critical mass to roll out a new service on your own
without having to assume that anybody else is going to be involved in your product.
But then, when you listen to pure video programmers,
they'll tell you that a launch with 30 million customers is a disaster. It seems to me
that at 10 million, you ought to be able to do some things like that. That's not
unimportant, but that's not really where the value of the cable properties is. You don't
see AT&T launching new video programming: It's launching residential telephone and
Internet services.
TR: We will continue to look, and I would assume that over
the next few years, we would grow to 6 million to 8 million, because we've always been a
strong consolidator.
Going back 18 years ago, we had 40,000 customers. Now,
we're at 5 million. I've sort of picked out different markets that will probably come up
for sale in the next five years. We'll get our fair share, and that's going to take us to
6 million to 8 million anyway.
MCN: Do you see yourself going into a deal like Cox
Communications Inc. did with TCA Cable TV Inc., acquiring an out-of-market, midsized
company that would serve as an acquisition vehicle for smaller companies?
TR: No. [TCA president] Fred [Nichols] and those guys have
been in the business for a long time, and they've been putting together some decent
stand-alone-type properties.
The hot topic this month is, 'Is the Midwest going to be
consolidated?' They didn't really have something else to talk about, stuff that's really
fairly small.
There's some value. It's not a great desire for us to jump
into that type of situation. There's some potential, but cable can be very
labor-intensive. There's probably a strategy out there -- you know, Rocco [Commisso,
president of Mediacom LLC] is following it -- but I think somebody's got to have a lot of
time and effort to put into that.
That's why it seems out of character for Cox to step up and
do this -- it's a little out of nature to step up and consolidate that entire area.
MCN: Do you think AT&T is going to end up doing
widespread phone-affiliation deals?
TR: Yes, I think AT&T will be successful with that.
We're looking at it. In that particular case, I think you're attacking a specific market,
the residential telephony market. Time Warner was more focused on entertainment and things
like that, and not as much on residential telephony. I would have taken more of a sure
bet, leaving a lot more on the upside for AT&T.
MCN: Comcast didn't want to do it on its own, either.
TR: I would argue that Comcast got a really nice deal with
the properties, and it felt that getting larger clusters was well worth entering a joint
venture. As an outsider taking a look at it, I'd say that.
JB: Look at the number of telephone ventures Comcast has
been in -- cellular, Teleport [Communications Group] -- and then subsequently got out of.
They never really got into the telephone business well enough to stay. So I don't think
it's completely out of character for them to do that
MCN: Are you still waiting for the right offer to come from
Road Runner or @Home?
TR: We were talking. We just need to get back into those
discussions. We put a few things on hold when we were getting close on these other deals
at the end of last year.
But it was pretty much on the horizon: We thought we could
double in size, so it seemed to make a lot of sense then to say, 'Hey, we've got to wait a
few minutes to show you what we're going to look like, and then see what the deal is.'
The deal is a bit of a static deal -- once you enter into
it, you're committed to all of your subscribers. We're going to do some of these things,
but it just didn't make sense to go through with that until we did some of our
acquisitions.
MCN: How do you guys feel about the modem in the set-top
box? Pro or con?
TR: I think it's going to be a little bit broader spectrum
of the marketplace, and I'm sure people are going to want more speed, more access. Other
people are going to say they really want a stripped-down version for $20 [per month], $25.
Some people are going to be paying $60, $70. I don't think anyone has really worked that
market down in those segments at this point in time.
Fortunately, right now, everybody is sort of a high-end
user, sort of chasing the trucks, trying to get the equipment as quickly as they can.
MCN: Are you guys stepping into retail distribution of
modems or boxes?
TR: Not in a big way. It's not like it's a huge plan of
ours. We'll have to see how it goes.
MCN: Adelphia has been really aggressive with upgrades --
modems are available basically everywhere, and long-distance resale is probably
everywhere.
TR: It's probably 60 percent or so. You want to make it so
that early adapters aren't frustrated, and so that they can get to the product. Hit it
fast and let it sort of settle, then go back after it. A lot of people will end up with
different theories and strategies, but it always tends to be about the same as far as
penetration.
MCN: So is 2000 going to be a big numbers year for modem
customers?
TR: I think 2000 really relates to our picking up and
accelerating with DOCSIS, and everything coming out and being a little bit more prevalent.
MCN: Of all of the deals that have gotten done, are there
any that you really wanted but didn't get?
TR: We got our fair share of them. We're happy with what
we've gotten.
MCN: Are you starting to get concerned about a regulatory
backlash from all of this consolidation? By one accounting, AT&T has access to
two-thirds of all households in the country. At some point, the government could get
serious about, for example, forcing you to make broadband capacity available to
competitors.
TR: I think there are some concerns with the
consolidations. I think the MediaOne transaction probably heightened those concerns.
On the other hand, I think you can make the argument
effectively that the competition is larger than what the cable market is. It's out there
to compete with telephony and a lot of other products. And the thing that will best help
the consumer is that if we do get to a certain size and mass, we can offer that
competition.
MCN: Is there a real threat that the government might
decide that cable should be treated like a common carrier?
JB: Not until everything is rebuilt. I think that even the
current administration understands that if you take away all of the incentives to rebuild
things, in fact, you can stop it from being rebuilt. They can force a lot of things. They
can't force the capital.
MCN: That's only a couple of years off.
JB: This current Justice Department, you know, [former U.S.
assistant attorney general and initiator of the Microsoft antitrust suit] Ann Bingaman has
a very, very aggressive anti-business posture.
The problem with the phone industry is that AT&T has
zero residential phone customers. How can you start regulating the phone monopoly at this
point? It seems kind of insane.
But how you define markets is going to be an interesting
thing. The way this industry has been kept separate for a number of years has been by
separating products -- if you're in telephone, you can't be in video; if you're in radio,
you can't be in TV.
Now that they let people bundle the products together, I
think there needs to be a new framework for what is an antitrust violation.
MCN: So is that potentially the biggest threat to the
industry?
TR: Any type of government intervention is always the
biggest, biggest threat. The other one is that we have to deliver these revenue sources
and meet expectations. We've certainly laid out the logic for it. But you still have to
deliver the product and quality service.
After lunch, John Rigas heads back to his office to return
some phone calls and get ready to head to Buffalo for game four of the Sabres' series with
the Boston Bruins (Buffalo won the game, 3-0, and took the series, four games to two). NHL
commissioner Gary Bettman was going to be in the owner's box, so there were many details
to attend to. He did take a few moments to reminisce, though.
JR: I have a lot of great memories. I've been one of the
lucky guys to have been able to be around all of these years. I've lived to be able to
celebrate my 50 years in cable. There aren't too many who can say they've spent 50 years
at anything.
Just like you think about your parents, I think about the
early pioneers and the David and Goliath battles that they fought.
MCN: Are you going to the National Show in Chicago?
JR: I don't think I've missed a National Show since '55 or
'56. They've changed so much -- they used to have them all in one room. The last thing you
wanted to do was to go to the seminars and panels -- we all wanted to socialize and talk
about our dreams: Did you fix that, and what are you keeping on the air, and what are you
bringing in? We'd just network.
MCN: In the old days, you had some wars over things as
mundane and basic as getting pole attachments for your cable.
JR: The fights we'd have -- you couldn't get on the poles.
Our second cable system, we got the franchise, we borrowed $40,000, we'd started to get
the headend built, and we'd be able to get out of the hole in three months or six months.
But we were unable to get on the poles.
The engineer would come maybe once in a while, spend 10
minutes and say he had to go somewhere else. It was deliberate, and the money was drying
up. It was terrible.
MCN: How did you resolve that?
JR: I got a lawyer who talked to somebody in power up there
at AT&T and made it very clear that [cable would] have a very serious lawsuit. So they
let us on the poles. But then, you'd have a change-out, which should only cost about $500,
and they'd come in with bills of $4,000 or $5,000.
MCN: Now you're huge, at 5 million subscribers, but you're
nowhere near AT&T with 16 million subscribers. Can you survive at your current size?
JR: It kind of reminds me of when I was a young boy,
growing up over the restaurant. I would go out to play, and the kids were always bigger
and stronger than I was -- I was a runner when we played a lot of tackle football. When
the big boys got their hands on me, they would pile on, and I would go home with swollen
ankles, black eyes and bruises -- it hurt.
Later on, I played varsity football, and I was always the
smallest guy on the field. I'd go into that huddle and I would think to myself, 'Don't
give me the ball, it hurts.' So my play would come up, and I would take the ball, no gain,
get smeared. Then my play would come up again, I would take the ball, no gain -- and,
sometimes even worse, fumble.
But every once in a while, I'd take that ball and run the
same play, and I'd see an opening in the line. I had to decide if that was the right
opening -- it closes pretty fast. So my lesson is, in life, you've got to take the ball.
It hurts, but every once in a while, if you keep looking for that opening, it'll be there.
