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Rising above the pack

Fri, 11/30/2001 - 7:00pm
Leslie Ellis, Technology Analyst


Insight’s Willner zeros in on advanced services

While the rest of the industry spent the last five years clumping together through consolidation, Midwestern-oriented and Manhattan-based Insight Communications went through a similar size quintupling, organizing itself to serve 1.4 million subscribers in Illinois, Indiana, Kentucky and Ohio. Somehow, though, Insight managed to stay razor-focused on advanced services bundles that are yielding it appreciable new revenues. The somehow is someone: Michael Willner, Insight's president. This is a guy who doesn't mind answering his own phone–and his easy, talk-to-me style has made him a respected and well-liked industry leader. From a windowed wall in his Seventh Avenue office, Willner looked out at an altered downtown skyline and mused with CED analyst Leslie Ellis about cable's technological and strategic future.

CED: Have you ever seen a time when the intersection of business strategy and technology was as critical as it is now?

Willner
Willner: The two always go hand in hand. Sure, the world is more complicated today than ever, in options and technologies and services. But this all seemed pretty tricky to us in 1977, too, when we were trying to pick up the first satellite signals. The cost! We were basically mortgaging the cable systems for a business we knew nothing about: Pay TV. We did it and hoped. This is an industry of risk-takers and entrepreneurs, and that's precisely what's made it so strong. It'll always be complicated.

CED: Yet most MSOs have quintupled in size over the last five years. It's like going from 100 pounds to 500 pounds in five years, but still viewing yourself as an athlete. Is the industry getting too big to be entrepreneurial?

Willner: Interesting analogy. The 500-pound marathon runner. (laughs) We grew from 170,000 subscribers to 1.5 million subscribers over that kind of timeframe. Proportionally, that's pretty significant.

Our approach is to avoid layers upon layers of management. It's very common for us to ignore regular reporting lines, and talk directly to the people responsible for a particular situation or project. I think companies operate better that way–with straight lines of communication.

CED: You've mentioned software integration on digital set-tops as a key technological concern. Still the case?

Willner: Yes. Every time you add a new interactive application, you've got to get everybody in the room. That much we knew. What we didn't expect was that every tiny little tweak of any piece of software on the box–going to version 1.002 from 1.001–may have implications, too. As a result, we've gotten way more focused on the testing process.

CED: Internally?

Willner: Primarily, we rely on Motorola's Acadia lab, up in Massachusetts, for the final signoff. But we have to look at things ourselves, too. We know that Liberate is central for middleware, and Motorola for hardware, and everyone else as applications. We all have to stay together to make sure there are no unintended circumstances.

CED: You've expressed some fairly serious concerns about HDTV, and how cable needs to be more vocal about its efforts. Would you mind restating that?

Willner: It goes beyond HDTV. It's the whole digital transition, which the broadcasters are trying to lay off on cable. It's political, more so than technological.

CED: Still, how should CED's readers–the technologists–be thinking about it?

Willner: It goes like this: The fact is, cable is the only industry that has fulfilled the government's mandate. Cable spent $50 billion to create the infrastructure, with another $25 billion to go, to complete it, so that most of the country will have digital television.

CED: You're talking plant upgrade and rebuild costs.

Willner: Right. And the broadcasters–who had spent a grand total of $1 billion on it, as of when I testified before Congress last summer–are saying that even though they got $70 billion of new frequencies on loan, that gift from the U.S. government wasn't quite enough to motivate them to do broadcast digital video. In addition, (broadcasters) want to abscond with our assets–our frequencies–which we built for $75 billion.

CED: From their perspective, it's a matter of a missing business model. Can you see one? A business model that would engage the broadcasters?

Willner: It's not my job to write that plan. But broadcasters would be much better off if they'd stop making excuses about why they aren't delivering digital, and start coming up with a plan that would make digital attractive to consumers. Once they do that, they should come to the cable industry and make distribution deals in addition to their new broadcast frequencies. One good example was when the CBS affiliate in Indianapolis simulcast all of the early games of the NCAA basketball tournament last spring. Every cable operator in the market carried their four-channel package.

CED: How does it get resolved, then?

Willner: It's difficult. I understand everyone's desire to create digital broadcast television, but it isn't going to happen unless there's an economic model behind it. I was on the board of a broadcast station. I know they have to spend $2 million to $3 million to go digital. Compared to what cable spends to go digital and interactive? I'm not crying too hard for them.

CED: How should CED's readers be proactive about the digital transition issue, as you have?

Willner: Anyone in the systems who has relationships with the local community should start getting the word out. Meet with local leaders, political leaders. Talk to editorial boards, newspapers, community leaders. We should be proactively reflecting the blame that's been unfairly put upon us, just because they (the broadcasters) can't find a workable business model. Explain that we are already delivering digital television, that we are the leaders, and that we'll continue to be.

CED: Let's talk about the money side of iTV. You've achieved some pretty interesting incremental interactive revenues per subscriber. Run through them?

Willner: We've launched our interactive digital product to about 800,000 subscribers, most of them in the last several months. We're on a very steep rollout curve. Where we've been up and running for longer than a year–our three original markets, in Columbus, Ohio; Evansville, Ind.; and Rockford, Ill.–our digital interactive penetration is around 27 percent.

CED: What does the digital interactive service include?

Willner: VOD, and our "LocalSource" product, and the interactive guide. On average, those subscribers are paying about $20 per month incrementally, over analog cable (fees), for those services. To put that in perspective, at 25 percent penetration, and $20 per month incremental, that's the equivalent of a $5 per month rate increase. It really helps us offset the terrible pressures this industry is under, in terms of programming costs far exceeding the rate of inflation.

CED: Speaking of VOD, what's your view on how cable gets access to fresher movies? The issue always seems to crop up when discussing why VOD buy rates aren't higher.

Willner: We're certainly seeing the impact of fewer titles, in terms of slightly reduced buy rates. But we're also seeing something else: When a studio puts a blockbuster hit on regular pay-per-view, but not on VOD, the buy rates are significantly lower. Even where we have VOD, we still run PPV, so we're covered on the new titles. But VOD just makes it so much easier to buy.

CED: Is it the convenience?

Willner: Right. On PPV, people are buying, but at a lesser rate. People buy movies on impulse. When you turn on the TV, chances are the movie you want to watch isn't at the beginning. So people find another thing to watch at 8:17 p.m. And they don't come back. Logically, with VOD, we'll have a significant and positive impact on movie buy rates.

CED: From Hollywood's point-of-view, what's the holdup? Eyeballs?

Willner: Money. Its how much of the retail price goes to whom. The model has to work for both sides. We're not suggesting that the cable industry demands the same proportion of revenues in VOD as it did in NVOD or in regular PPV. What we're saying is, we've got some overhead. VOD carries some serious costs. We'll increase buy rates, and that'll make everyone more money. But you can't take so much out of my pocket that you make me unmotivated to sell VOD.

CED: Quantify the VOD costs.

Willner: It's a big expense. Close to a million dollars per headend, when you factor in the cost of hardware, the software to run that hardware, and the cost of content. We'd have to triple buy rates to come out even, on a cash flow basis, between NVOD and VOD. But I don't even have to come out even. My motivation is a better mousetrap: With VOD, I have a better response to satellite.

CED: So how much of the retail price goes to whom, in a perfect world?

Willner: Well, I'm not willing to give 80 to 85 percent of my VOD revenues away. We'll flex for VOD, but we're not going to give it all away.

CED: What do you want to do with on-demand TV, and personal video recorders?

Willner: Time shifting is a very different product. It's a more convenient way to tape things. That's all it is. We recognize that. We also recognize that PVRs are very hard to hook up. The easier we can make it, the better off we all are. So our view is, over a couple years, to move to a high-end box with built-in PVR, and offer on-demand TV as a premium service.

CED: How's your phone service going?

Willner: We've launched the first two markets, Louisville (Ky.) and Evansville (Ind.). We'll have dial tone in Lexington (Ky.) in October, and Columbus (Ohio) in November. We think it's an important retention tool, to have customers buying multiple services. The more we can offer–that's glue. And people really do get it.

CED: You're using circuit switched now–any plans for VoIP?

Willner: Circuit switched is the only way to do phone as a commercial application today. We can experiment with IP phone, but we can't yet deliver it as a reliable service.

CED: How are the incumbent telcos responding?

Willner: Like bullies. Given their size and sophistication, I do find surprising their willingness to break rules and regulations, and to put up roadblocks. They consistently discourage customers, in underhanded ways, to switch over. But as soon as we get wind of it, we're the first to file complaints. And we'll continue to do so. Aggressively.

CED: What types of things do they do?

Willner: Oh, they'll schedule a removal of dial tone from an existing customer, on a particular day, at a particular time–that's any number of days before we install our service. So the customer is left without dial tone. That kind of stuff. You can't have that. There has to be a smooth switchover from one carrier to the other, on the day of the install. The phone companies should be embracing us, believe it or not.

CED: How's that?

Willner: We'll help them into the long distance business. Which is where they want to be anyway.

CED: How is being a leader different now than a year, two years, 10 years ago?

Willner: It's a lot harder now. The world is more complicated today, certainly, than a year or two ago. But remember, again, 30 years ago, we were betting the ranch. So that was no less scary than today. Today's bets are very different. In 1977, we were betting our companies on new technologies. We were going to make it or break it on additional programming, and we had no idea if it would take off.

Today, we may make some technological mistakes along the way, but when you find you're in a dead end, you back out. Start over. We've all done that. Advanced analog boxes are perhaps an example of that. But the companies that went that route, they're OK now.

CED: Any words of advice to cable's technical community?

Willner: Tolerate your senior management. They're trying hard to navigate this world. They know, more than you think they do, about the burdens they're putting on you. And they're grateful.

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