Cox Communications has long been the gold standard in the cable industry, reaching the top of the list of cable operators in J.D. Power customer-satisfaction surveys and as one of the first pioneering operators to introduce telephone services way back in 1997. Lately, though, Atlanta-based Cox has been more known as a target. Altice NV chairman Patrick Drahi made his desire for the family-owned cable operator well-known as he made plays for, first, Time Warner Cable and then Suddenlink Communications and Cablevision Systems. Cox made it clear it had no intention of selling, and it maintains that position today.
And why would Cox sell out? As one of the last remaining independently owned cable operators — controlled by the Cox family, it is part of Cox Enterprises and is the largest private telecom company in the U.S. — the MSO has thrived. Like its larger peers, Cox has reduced video customer losses over the past several years while consistently growing broadband subscribers: it has about 6 million residential and commercial customers. Commercial revenue is expected to reach $2 billion this year and president Patrick Esser believes $3 billion in annual sales in that category is not that far away.
Cox also continues to innovate. It has licensed Comcast’s X1 operating platform for a new version of its multiscreen Contour offering; launched a mobile-first, app-based offering aimed at millennials called Contour Flex Watch; and is trialing a Spanish-language video streaming service called Glosi. Efforts to convert Cox’s network to all-digital are expected to be completed this year and other projects, like an in-home gateway, Internet protocol- based voice service and DOCSIS 3.1-based Gigabit broadband are all on the way.
Esser says execution, not consolidation, drives Cox and its management team, led by chairman James Kennedy and himself; executive vice president and chief operating officer Jill Campbell; EVP and chief financial officer Mark Bowser; EVP and chief technology officer Kevin Hart; EVP and chief marketing and sales officer Mark Greatrex; and EVP of product development and management Steve Necessary. For stability and innovation amid the industry’s constant change, Cox Communications has earned the title of 2016 Multichannel News Distributor of the Year. Esser — the top executive at Cox since 2006 and an employee since signing on as director of programming in Hampton Roads, Va., in 1979 — spoke with senior finance editor Mike Farrell about Cox’s present and future positioning in the multichannel universe.
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MCN:Cox is one of the last sizable, independent family-owned cable operators left. Given how consolidation continues to transform the landscape, how do you maintain that independence in the new order?
Patrick Esser: When you look at the industry in general, we all talk about how much change we’re going through. I would probably use the word metamorphosis. I think it’s more of a step change than just change. You have to think about things differently today than you did five to 10 years ago, especially as it relates to the products we put out for our customers to use; the capabilities we have, what it is going to take to compete and grow.
The three things that I think about a lot are the pace of change that’s going on with technology; the pace of change going on with consumer behavior; and what’s going on with competition and consumers’ ability to choose. Those are all moving at such a rapid pace. That is really driving a lot of the change that is going on in the business.
That being said, our networks are faster today and smarter than they’ve ever been. The devices we’re putting in businesses and people’s homes and the experience they’re having is faster and smarter. The bottom line is this: Our customers are just more connected. You have to think about the business as a connected world.
Our mantra, which comes from the employees that deal with customers every day, is we connect people to the things in life they care most about. That drives a lot of our decision-making.
We have a very highly capable network. From the 1996 Telecom Act to this year, we’ve invested over $25 billion. We continue to spend at least 15% of our revenue every year on capital, most of that going into our network, to keep our network highly competitive and capable of delivering today’s products and services and ones we want to put into the market in the future. We’re very committed to our local communities. We believe this is a local business and so do our employees. That’s part of what makes Cox, Cox.
Our products are competitive. But you have to have those moments where you’re willing to pioneer some things, even before the product is fully baked, to keep yourself on your toes, leaning forward and moving at the kind of pace that the market is and your customers are.
But even talking about those things, in reference to Cox, I think it’s our people. I think it’s the values we all live by and our people’s commitment to take care of our customers that makes us such a special company. And none of this would be possible without the leadership and tone that is set by the Cox family. They are incredible stewards of this asset and their values have transcended generations for over 100 years, and they care about the businesses they own, the markets they do business in and the people that come to work here every day. So our values are very intact, and it gives us the ability to talk to [the family] and think long-term about the business.
MCN:You mentioned consolidation. Obviously, that has been a big issue over the past few years. Does having 4 million video customers have the same clout it did five years ago? How do you feel about scale?
PE: Scale really occurs at two levels: nationally and locally. Locally, we believe we have the scale in the markets we do business in. We can do the marketing and sales and service activities we need to do to compete and we’re willing to make investments in those markets. There are a couple of places where scale plays out, and that is in innovative platforms and services that you want to roll out and also with the supply chain work going on — in other words, the money you spend to buy products and services. We have a pretty close handle on what the difference is because of our size, in terms of what we pay for some of the products and services and content. That is always a tradeoff that we make.
To be able to 100% control a company — and don’t forget, no individual, no family is making a bigger bet on this industry than the Cox family — all of this company is owned by them and it is a large bet for them. So they think about it that way. The second thing about the markets you do business in, we can do the marketing, we can do the sales, we can do the execution we want to, but we have to be cognizant of the platforms. That’s why things like working with Comcast on the X1 platform as the foundational platform for our video product called Contour, was an important move for us to get the kind of innovation scale we wanted to get. The industry’s broadband platform is DOCSIS, we all share that same platform. That was important to us.
Our Homelife product [uses] a company called iControl; we all use that same platform. So it is important that you don’t do one-offs to the point that you lose innovation; that you are still swimming in the same direction that our peers are swimming. And that gives us some of the scale that we need.
MCN:But Cox really hasn’t been in the deal market since TCA Cable [in 1999].
PE: We’ve been doing deals. We’ve just been investing in other spaces, especially adjacent spaces.
MCN:In keeping with the industry trend of pigeonholing its participants, are you a buyer? A seller? Neither? Both?
PE: We have this total flexibility as a private company, and our balance sheet is in really good shape, to do whatever we want to do, whether it be in adjacent spaces or core business. But execution is where most of our time has been focused. And because we take such a long-term view on the business, we can be patient or we can [make moves] depending on the moment in time. I have had numerous conversations with Cox Enterprises and members of the Cox family that are very, very happy with this asset and where they stand today. We are right in the middle of our budgeting and long-range planning and we like what our plan says to us. There’s not been any lack of commitment by the Cox family or Cox Enterprises in the business. I don’t see any of that changing.
MCN:You touched on being a private company. It would seem that would be a big advantage because there isn’t a large group of outsiders pressuring the company to do something it might not want to do.
PE: I agree. You nailed it. That’s it. We have a different set of criteria and decision makers who plan to be here and to pass this on to their children or the next generation, so they think about it very differently.
MCN:Cable video has picked up, broadband is going strong and others are focusing on mobile and online. Where do you see the growth happening in this business going forward?
PE: There is more video being consumed today than ever in the history of the country. Now, it’s being done on different platforms, it’s been aggregated in different ways and we have to adapt to meet the customer where they want to consume it. But we are still bullish about the video business. The broadband business has been an incredible business for us, all the way back to 1997 when we launched it. We continue to add a lot of broadband customers every year. I think they buy the service because the product continues to perform extremely well, we continue to invest heavily in that space, we continue to raise our speeds [and] we offer customers a lot of choice. I think we have a lot of wind left in our sails with broadband.
Business services have done very well for us. We will hit $2 billion in annualized revenue for business services this year. Compare that to the size we are, that’s pretty impressive. Per business passed, per homes passed, per [fiber] mile laid, whatever term you want to use, we have performed extremely well in that space. I’m going to share a secret with you. We had a 10-year plan to build that business to $2 billion and this was the year we thought we could do it in, and we’re right on schedule. I think it could be a $3 billion business for us. There are some things we have to do and some investments we have to make in adjacent spaces to make it a $3 billion business, but with the team we have and the relationships we have in our communities and the customers we serve, they all want us to do more and more and more. Working with the other cable operators in the industry, we have just scratched the surface on enterprise revenue. Most of the stuff we’re doing is local and regional. But there are solutions and products that we can bring to the market that can make large nationwide, larger footprint customers very happy. I think that is the next phase of growth.
MCN:Have you made a lot of inroads into large enterprise business?
PE: Large regionals and small local business is our bread and butter today. Large regionals are city government, schools, military and banking. Those are large regionals we do very well with. I consider the Las Vegas Convention and Visitors Authority a large regional; they’ve been a very big customer for us. At the same time if you drive down the street, you can see business after business after business with 20 or fewer employees. We have done extremely well in that space. Our market share is getting to pretty impressive levels. It’s just a matter of the industry getting to a place where we have a standardized set of products that we can go to large enterprise customers [with], and serve them nationwide working together as an industry.
MCN:Cox has also made some moves with new products like a Spanish-language OTT service Glosi. What was the strategy behind that?
PE: We just saw a consumer group that was being underserved. Sometimes you have to say, “OK, if I have a large customer opportunity, and this is the content that they want and they want it both on their TV and their screen of choice, how do I get the content? How do I put it on their screen of choice? How do I make it a reasonable value play?” Remember, I said you can’t be afraid to pioneer. You have to go to the market and trial it and see what the customers tell you. We’re in a trial now with that product.
MCN:You have another relatively new offering, the app-delivered Flex Watch product. Is that your answer to younger viewers who want mobility and skinny bundles?
PE: It is mobile-first. We recognize the point that they may or may not consider the television their primary screen. That’s not my decision, that’s the consumer’s decision, it’s just accepting that. What is the aggregated set of content they want and what price point makes sense for them and allows me flexibility to do that? Whether they’re younger or it just meets their lifestyle — because not everybody’s 25 years old — it gives us another product that fits a lifestyle, and we’re trying to be responsive to the market within the constructs of what our content agreements allow us to do.
MCN:Everyone seems to be struggling to figure out a mobile strategy and video seems to be driving that. People are watching a lot of content on their phone.
PE: They’re watching a lot of content period. A lot of journalists have written that video is dead; they’re missing the point. It’s just showing up in more places than it ever has before. So content aggregators like ourselves have to adjust and adapt to what consumers are telling us. At the same time, we have the majority of our customers who love the video experience on a large screen TV in their front room. And we cannot leave them behind in terms of investments, and we’re not.
MCN:What about the next level — having an OTT product that goes outside the footprint? Has that tempted you at all?
PE: It hasn’t because it doesn’t fit with our core competency. That core competency of the local market has been really important to us. That competency of leveraging the network we’ve built; our service and billing organizations are all built around geographic regions. So no, we have no intention to work in that space.
MCN:Not even down the road, as the market becomes more saturated?
PE: Who knows in five years, but right now there is no energy being spent on that.
MCN:You were the first U.S. company to license Comcast’s X1 platform. What made you decide to go that route, rather than develop one yourself?
PE: Comcast has done a wonderful job developing that product. We got an opportunity to look into their road map and out further and there was a situation where they were willing to license it and its capabilities to us for about what we were spending a year on our video products. They’ve been a wonderful partner, by the way. They have something like 1,500 engineers working on this every day. I will never have 1,500 engineers working on it, but it creates a national platform that is extremely powerful and everything they said in their road map, they have done it.
We looked at the market; we looked at all of our options, even what we were doing ourselves, and we couldn’t think of a better scenario than the X1 platform. It made sense to us financially; it gave us, we thought, the most competitive product in the market and a product that continues to evolve. Fortunately they’ve got about 25 million reasons to get it right. They’re as motivated to get it right and keep it innovative as anybody, and we benefit by that.
MCN:How long before this is in everyone’s hands? Is it available in all of your markets now?
PE: Any customer in any Cox market can order the product. We rolled it out across the entire company. Over the next few years, it will become a larger and larger part of our user interface. It’s not going to be a forced migration.
MCN:Cox has always been willing to take risks and to admit when it was time to cut its losses and move on. You did that with the cellular business a few years ago, perhaps a good idea at the time but when the market shifted you pulled the plug. What have you learned from those mistakes?
PE: You have to have an environment that allows people to take risks; otherwise you will not be able to keep up with the pace of change. We’re right now in the process of wrapping up going all-digital, we’re driving the next generation of DOCSIS into the market — 3.1 will be here before you know it. We’re building fiber deeper and deeper. We’re building an all-IP voice platform. We have the next-generation gateway for the home [and] we have a whole new way to think about the WiFi experience in the home.
You’ve got to constantly be pushing yourself to move. You may never be able to move faster than the market, but you have to try to keep a cadence that reflects the market. If not, competitors will show up and steal valuable customers from you, and that shouldn’t happen. You have to be willing to make the investments, you’ve got to be willing to take some chances, you have to have extremely competent leaders and people working in the company — which we do — that you bet on and that you believe in. And you’ve got to be willing, if you’re wrong, to change.
In other words, we’re going to do some things, we’re going to trial some things, we’re going to launch some things. And if we find out six months later or a year later it wasn’t exactly what we thought it would be, then stop. Nobody’s ego is involved here: stop, learn and move on. I don’t care what Cox business you’re in, whether it’s the automotive division, the media division or the telecom division, I think that entrepreneurial spirit lives in all of them.
