CED: How would you characterize the technical differences between U.S. and international cable systems?
Werner: Every part of the world is different. The constant is the quality of the people and the networks. Take Japan as an example: Very high quality. Lots of fiber, high bandwidth, 100 percent two-way, good status monitoring.
Japanese culture requires the network to be beyond reproach. Outages are not allowed. In my early days here, I was told—and I don't know if this is true—that if there was an outage, we'd have to send a technician out to personally apologize to every impacted customer. Our churn rate in Japan is very low. On triple-play, we run about a half a percent churn a month. Digital churn is about a fifth or a sixth of U.S. churn. Bad debt is non-existent.
CED: Sounds like a good place to be a cable operator.
Werner: It's a great place to be a cable operator. And don't forget, extremely high densities. So not only are capex costs minimized, but also maintenance, marketing—everything.
CED: What about your other properties?
Werner: Chile is a similar story. Very high-quality plant. Nodes are reasonably small, with very well-built hubs, and highly skilled staff. Most of our staff has engineering degrees.
Europe you have to divide into Eastern and Western. In Western Europe, the networks are also organized into very small nodes. Fibers are often ringed to the node. We have a massive fiber network to connect all our Pan-European operations. All of our networks are running DOCSIS 2.0 today.
CED: Including BPI (Baseline Privacy Interface)?
Werner: In some locations. Then in Eastern Europe, a number of those networks haven't yet upgraded to two-way. The good news there is that the economy is starting to boom. Consumers are getting discretionary income, and they're using it to buy phones, TVs, PCs. That allows us to upgrade the network to serve them. We're upgrading on a steady basis: two-way, and DOCSIS, so we can roll out high-speed data and even VoIP. We've already launched VoIP in Hungary, with tremendous success.
CED: VoIP is a big seller?
Werner: VoIP is one of the first highly profitable services our industry has had, which also appeals to a lower demographic. Most of our other highly profitable services require at least a middle- to upper-income demographic. But with voice, countries like Puerto Rico, and areas like Eastern Europe, have a tremendous appetite. That alone can justify a network upgrade. Then you can start to bring in the other services.
CED: Puerto Rico?
Werner: Tremendous success with VoIP. We're adding about two VoIP customers for every HSD customer we put on. They have to take video, if they take phone or data, so they're all going in as at least a double-play. Close to 35 or 40 percent are taking a triple-play type of service, and the majority coming in through VoIP never had cable before. So VoIP has been a tremendous boost for Puerto Rico.
CED: What are the biggest tech ops challenges internationally?
Werner: The challenges aren't necessarily in tech ops. The real challenge is how you manage and market your high-speed pipe, to compete in the speed wars. Like in Japan, but really we're seeing it everywhere.
If you look at the speeds in South America, customers are quite happy [with] 512 kbps. Our killer service in Puerto Rico is 128 kbps, for $19.95/month. It's a dial-up replacement service, and our customers are quite happy with it.
It's quite different in Europe and Japan. Japan is the most aggressive. We offer a 30 Mbps premium tier. Some apartments have 100 Mbps, with fiber-to-the-building. We've signed contracts to deliver GigE to select apartments in 2007.
CED: How do people use that much raw bandwidth?
Werner: Whether they need it or not, they're willing to pay for it. FTTH (fiber-to-the-home) in Japan hasn't provided anything faster than what we offer in our 30 megabit tier, but it's still attracting customers, because Japanese customers like the idea of FTTH. FTTH is approaching cable modems, as far as number of customers. By year-end, FTTH may exceed cable modems, as far as how people get broadband in Japan. It's not better service or better value. It's purely the marketing power of FTTH.
So on the speed side, it's a little bit marketing, and it's a little bit people wanting to have every edge they can get, for faster file transfers, faster gaming.
The challenge is to understand exactly how you manage those pipes, so they're not totally consumed by peer-to-peer traffic. How you define the characteristics of each service, and optimize that—without eroding the economics. Today we do a lot of deep packet inspections and data pipe management, and HSD remains a highly profitable business for us. But as it goes forward, I think that'll get more tricky. It'll depend on how we implement our policies.
CED: Is available bandwidth as much of a question overseas as it is here?
Werner: Not as much. Outside of the English-speaking world, you don't have as many video programs as you do here and in the U.K. That makes the bandwidth crunch not as bad.
The other advantage is that in Europe and Japan, we have a much higher split for the return path. In Europe, it's 5–65 MHz, which gives you a lot more room.
But it's just like everywhere—you can always use more bandwidth. We're looking at all the same things going on here: Going to all-digital, reclaiming spectrum.
CED: Really? Where?
Werner: Japan is already all-digital. Meaning that basically all services you can get in analog, you can get in digital. We're simulcasting there already. So the set-tops we put in Japan are all-digital—they don't have an analog decoder or tuner.
CED: Are you seeing the big cost differences that everyone hopes for here?
Werner: Japan is unique. They have a whole bunch of specifications wrapped around the set-top box. The boxes we put in Japan have a lot of memory—128 Megabytes. Every box is HD, not SD. Because of all that, they're more expensive.
CED: You don't transmit SD programming in Japan?
Werner: We do, but every box has an HD decoder in it. So it's not like here, where you put SD boxes into homes that don't have an HD set. We just put out all HD boxes, because the HD penetration in Japan is high.
CED: How high?
Werner: A little over 35 percent of our customers in Japan have a TV that's capable of some form of HD. And it's growing rapidly.
CED: Do you worry differently now than when you were in charge of U.S. cable systems (with TCI and AT&T Broadband)?
Werner: The thing you always worry about is regulation. And making sure you're in a country with stable currencies, stable governments. From a technical perspective it's pretty much all the same worries.
One thing I don't need to worry about, thankfully, is staff. In every area, we have someone great. Sudhir Ispahani, CTO of UGC/Europe. He has a very solid staff managing all of the major technology initiatives we're launching in Europe. Yamaguchi-san, in Japan. Dale Bassen in Chile. Al Valez in Puerto Rico. I'm surrounded by a very solid technical staff, and that's a huge benefit.
Liberty has “major” holdings in a range of cable MSOs that operate in various
countries around the globe (represented in color). Liberty has minority
stakes in some operators not represented here.
Werner: They're pretty similar to U.S. technology priorities, really. Again, they vary by region. VoIP is a priority that is ubiquitous across all of our properties. So is figuring out the evolution of HSD. And digital.
Werner: Of sorts. Digital video started more slowly outside the U.S., because we didn't need the capacity. Again, because there wasn't so much analog video taking up room. So digital video is just now really starting to find its business model, outside the U.S. and the U.K. Japan we launched earlier this year, and it's growing at a tremendous clip. We've also introduced VOD in Japan, almost simultaneous with the launch of digital. We're doing several VOD trials throughout Europe.
CED: Will you launch simulcast anywhere other than Japan?
Werner: Sudhir and his team are leading a digital mass-market project in the Netherlands. We'll put digital boxes in all homes. We'll keep a tier of channels that will be simulcast on analog, but we're going all-digital there. We're all on open DVB standards there, and also we've found pretty cost-effective boxes. All are under 100 Euros. And we have some that are in the mid-50 Euros price range.
CED: What's your latest thinking on why cable modems lag relative to DSL, internationally?
Werner: The reason has very little to do with the technology, and very much to do with the ubiquity of copper. Outside the U.S., the unbundling of copper is much more effective. Take Japan, for instance. There were 2.8 million cable modem customers at the end of last year's third quarter, versus 12.8 million DSL customers. But the bulk of the DSL customers aren't served by the incumbent phone provider. They're served by people who rent or lease the dry copper, and re-sell it.
In Japan, and in most of Europe, we'll have from two to six competitors, all selling DSL, all with different strategies and pricing. One guy will put up a very high-speed service—30, 40, 50 Mbps. Another will offer a 256 kbps service, for a small price. It forces us to respond very quickly to what the marketplace is doing. In some areas, we'll have several tiers just to meet the competition. A low-speed value tier, a high-speed tier. In our footprints where we're fully upgraded and we compete hard, typically we share the market, give or take, fifty-fifty. Even though we're up against several competitors, all selling over DSL.
Even though the competition is brisk, and the speeds are brisk, our churn rates continue to decline, even in competitive markets. In Europe, churn is very low—close to half that of the U.S. And in Japan, even our triple play churn is down at about a half a percent a month.
CED: Do international telcos have the loop length issues you've mentioned to me as an issue for state-side telcos?
Werner: The telephone plants in most of the world are better than they are here. They're shorter. Japan has very short loop lengths. A thousand feet, give or take. They didn't use twisted pair there. They used a copper wire that's flat. So it doesn't have quite as good propagation for DSL as in the U.S., but still, they have a better DSL platform in Japan. They're offering higher speed services over copper in Japan, but they do have some reach issues. Not all customers can get those speeds. But definitely they have an advantage over U.S. DSL providers.
Europe is the same. Loop lengths are shorter—a half to a third the length of U.S. loops.
CED: So 3,000 or so feet?
Werner: Suffice it to say that they don't have any of the 12,000- to 18,000-feet loops like we have here. In general, the loops are shorter, the plant quality is better, and as a result, they can offer higher speeds. But the nature of DSL is still the same, even in the best plants. There will be places where IP video won't reach.
CED: Speaking of IP video...what are you seeing there?
Werner: It's still mostly trials. France Telecom could be the exception—I don't know exactly where they are with things, but probably in the tens of thousands of customers, not the hundreds of thousands. As far as threats go, the set-tops are starting to sell. There's a lot of R&D going into IP video. Microsoft is all over it. To date, it hasn't been a big competitor. Time will tell.
CED: What does Rupert Murdoch have in store for DirecTV, and iTV, this year?
Werner: I think you'll see some red button activity. He's introducing new hardware platforms. He'll introduce a variety of forms of interactivity in the U.S. He'll put a lot of emphasis on DVRs. And he'll put them out with a great thrust.
CED: How does wireless fit into your plans?
Werner: We're looking at a number of areas. It's not too different from what the U.S. operators are thinking. There are areas where we're in negotiations to do MVNO (mobile virtual network operator) deals, on the cellular side. We're also intrigued with the idea of dual-mode phones.
On the wireless data side, we've been buying licenses in the 2.5 GHz and 3.5 GHz spectrum. We've secured licenses in countries throughout Europe.
CED: What products are you still looking for that don't exist or haven't found you yet?
Werner: The area I'm most fixated on is DOCSIS 3.0. I think that has a lot of play for residential and business applications. So that, plus the CPE side. I'm starting to look at innovative features in the CPE, including HomePlug A/V, MoCA (Multimedia over Coax Alliance), wireless access points, and things that become media extenders for the rest of the house. I think those are products that have a lot of play as we go forward.