Time Warner Cable CEO Glenn Britt’s popularly seen as a cerebral numbers guy. But he showed his heart as well this morning in his company’s Q3 earnings call with analysts. It’s his last, as he plans to retire at year end, turning the top job over to COO Rob Marcus. Britt also disclosed this week that he has cancer. He used the opportunity today to say farewell to the investment community and reflect on some lessons he has learned in his 41 years in the cable business. He covered a lot of ground; I’ve posted his entire remarks below. He says that he was attracted to cable after graduating from business school in 1972 because “I thought it represented a new industry with new technology that had a chance to challenge old incumbent ways and transform the media and communications industries by adding to entertainment choices and the diversity of voices in the public policy debates that are so important to our form of government.” Although “the odds of pulling it off were slim” he says that he was ”young and like many others took a chance.” And “by any measure, this industry has fulfilled those dreams.” Several of Wall Street’s toughest analysts were clearly choked up as they pressed on with their questions about TWC’s income statement, and strategy. I was too, having covered Britt since Time and Warner were separate companies. Whatever you think about the company or cable — they’re controversial, I know — Britt is the industry’s statesman. He’s a straight-shooter who loves what he does, stands up for his beliefs, feels a sense of public mission, and never seemed bothered by tough questions. I wish him well.
Here are Britt’s reflections:
Good morning and thanks for joining us.
Many of you have reached out after hearing of my health issues. I want to thank you – it means a lot.
As you know, I will be retiring at the end of the year, so this will be my last quarterly earnings call. We are far into our long-planned and well thought out transition, so I will leave the details of the Third Quarter to Rob and Artie, but I would like to take a few minutes to take a look at ourindustry from a broader perspective and perhaps to philosophize a little.
When I graduated from business school in 1972, I was attracted to the cable industry because I thought it represented a new industry with new technology that had a chance to challenge old incumbent ways and transform the media and communications industries by adding to entertainment choices and the diversity of voices in the public policy debates that are so important to our form of government. I also recognized that these were daunting aspirations and that the odds of pulling it off were slim. But I was young and like many others took a chance.
I think that, by any measure, this industry has fulfilled those dreams. The media and communications landscape is immeasurably different than it was 41 years ago; and if you think that more choice, more voices and more transparency are good then we have really accomplished something.
But why are these nice sentiments relevant? They are relevant because what we do every day is important to people. We have a physical and human infrastructure that provides services that people really want. And that means we have – and will continue to have – a very good business as long as we continue to satisfy our various constituencies. In that context, I thought I would talk about the handful of things that really matter over time in this business. They have been consistent over my 41 years, but they aren’t always the things that you focus on quarter to quarter:
They are, in no special order: 1. Products and competition, 2. Technology choices, timing of capital spending and sourcing of capital, 3. Public policy and regulation and 4. Perhaps as a fall-out from the others, M&A.
First, products and competition: The products we have offered over the years have changed dramatically. When I first got involved in the industry, no one could figure out what to do with plant capacity for 12 channels of television. Well guess what? The industry financed the creation of new networks and new content to fill those channels because the public had an insatiable appetite for more. Even in those early days, we dreamed of all sorts of things- including things we now do on the internet. In 1993 most people thought that consumer broadband was a pipedream – assuming they had even heard of the internet in the first place – and most hadn’t. But we brought consumer broadband to the United States and led the way for the world. We also brought real competition to the voice market for the first time, and now we are revolutionizing B2B and moving into home automation. The point of all this is that we should not think of our world as a static place or attempt to turn the clock back twenty years.
Regarding competition, well duh, we have competition. I say that because when I first got this job 12 years ago, I think the cable industry as a whole – including our company – was in denial that we had real, viable competition. I still hear some of my peers saying dismissive things about our competitors, and certainly each of them have strengths and weakness just as we do. However, they are around to stay and we need to keep getting better at competing.
The current form of competition in this entire sector is essentially focused on promotional pricing, which allows customers who jump from provider to provider to get the best deal. All of us need to wake up and learn more sophisticated marketing techniques. Anyone can gainshare by starting a price war – profits and happy consumers over the long run are something else.
My last point on competition should be obvious but it often isn’t. For the most part, cable companies don’t compete with each other in the customer marketplace. None of ushas a national footprint, even though some of us are very large companies. We do compete with companies that are much larger and, in some cases, they do have a national or even a global footprint. As a result, the cable industry tends to cooperate on things like technology and public policy. There also is a regular cross flow of employees who move among the companies in order to maximize their career opportunities, and they bring ideas and operational techniques with them. In addition, we all use pretty much the same vendors and the same consultants. So, having watched this for many years, I can say that the history will tell you that the larger, geographically diverse cable operators tend to perform similarly and gravitate toward the same technologies over time. Why bother saying that? Well, we do compete for investment dollars, and there are not many public vehicles to invest in, so managements try to tell you that they each have some secret operational formula or some magical technology that will make them better. But the reality is that there is no secret formula or secret technology. Instead, there are lots of details. This doesn’t mean that we all look identical at each moment. Sometimes a company has performed very well, and then others catch up, so their second derivative numbers look better – but at the end if you go back and look over time you will see very similar performance – and with few exceptions that performance has been very good.
Moving on to technology- We are a business driven by technology. There are many examples over my 41 years where we used new technology in ways that had not been envisioned to provide new services or enhance existing ones. There is a tradition in the industry of people trying new things—some of them work very well and are then adopted by everyone else. Some fail. That is a good and healthy process. Again, I would urge caution before you get enamored by some solemn statement that someone has some new secret technology that will propel them to the top of the heap. Ask a few questions- like “How do you know this will work?”, “Has it actually worked in deployment?”, “Will it scale?”, “If it works why won’t all of the other cable companies also use it?” And, “What will you do if it doesn’t work?”
With technology it’s also important to get the timing right. For many years the industry went through cycles of intense capital investment, followed by relatively low capital spending until the next new thing came along. Once the initial heavy investment was made, the investment storywas alluring in the following lower CapEx years. There are two problems with this strategy. First, smart investors figured out that it was really important to predict the timing of the next investment cycle. Second, the pressure from the first problem tends to cause managements to postpone investments and perhaps cling too long to old technology. This can be a real problem in a competitive world.
We at Time Warner Cable have pursued a different strategy,which has been to invest in the latest technology on a steady and regular basis. This is a more sensible engineering solution, and I think it actually makes us more predictable for you as investors. However, we frequently get questions because we always seem to be running either higher or lower capital spending than those who spend in a more lumpy way. Our slow and steady approach is the right way, I think, but it does create communications challenges. Do we get this right all of the time? No. But, over time, I think we get it right.
Regulation: We are a heavily regulated business, and all of the businesses in and around our sector are either directly subject to regulation or deeply affected by it. This thicket of laws, regulations, and rules was formed over several decades. In today’s policy circles, incumbent industries and companies are generally thought to be bad, and the role of government is to help challengers to the established order. That’s the complete opposite of what the policy world was like for the first 15 years of my career. In those days, the communications and broadcast sectors were highly regulated, and much of the rest of the media sector was also pretty tightly controlled. The policy establishment and incumbent companies actually thought this all worked pretty nicely, and the whole system worked to discourage new entrants and challengers to the established order.
This is important because the vast majority of the laws, regulations, and rules that we live under were put in place when cable was seen as an undesired upstart, despite obvious consumer demand for our products. Probably the best example of this is the 1992 Communications Act,which passed near the end of this intrusive protective era;but it is still the law of the land. Although the Telecom Act was updated in 1996, it is safe to say that the today’s entire television business and perhaps the entire entertainment business structure came out of this legislation and its consequences – both intended and unintended.
The problem with this is that an awful lot has changed since 1992 and, over time, there have become parts of the industry that have been clearly advantaged and parts that have been disadvantaged in ways that could not have been foreseen at the time. Naturally, those who find themselves at an advantage claim that this is the free market at work,and those who are disadvantaged point to the legislation. It is worth spending some time to understand this stuff because it is an artificial construct of the policy process. It has changed in the past, and it will undoubtedly change in the future – although probably not the near future.
Let me touch on sources of capital for a moment – a subject near and dear to the hearts of everyone on this call. This is a capital intensive business, and it requires a huge ongoing capital base to support it. TWC is not a national company, yet when you compare the size of our balance sheet, our number of employees, and our revenue to many companies that are perhaps better known around the world, you willsee that we are very large – surprisingly large. The nature of our business allows us to finance a large portion of thatcapital base with debt. However, we are dealing with very large numbers and, over time, there are economic cycles, financial market cycles, and government induced dislocations in the financial markets. So we have run the company in a way that we think is prudent and that will enable it to survive these inevitable cycles. We are well aware that in the current market, high leverage seems alluring, but we also think that, on close examination,everyone (except those with a fairly short time horizon) might think twice.
Let me finish with a couple of comments on M&A. I read in the press (sometimes directly and sometimes by innuendo) that I am not interested in consolidation and that after I retire TWC might have a more enlightened attitude. The implication is that somehow I have been interested in entrenching myself and my colleagues. That is obviously absurd. We have demonstrated repeatedly that our job is to make money for our owners, and in M&A we are open to deals that do exactly that. I have a great deal of my net worth tied up in TWC stock and, after December 31, I will not be the CEO anymore. I care a lot about maximizing value. Rob and Artie can speak for themselves, but Ibelieve they share my motivation – even though they are younger than I. However, my perspective also has been shaped by two very large corporate mergers – the merger of Time Inc. with Warner Communications in 1990, and the Time Warner–AOL merger in 2000. Despite widely toutedstrategic and industry merits, both deals were very lopsided in favor of one set of shareholders. So you should not be surprised that we are focused on making money for you rather than just on some fuzzy notion of industry consolidation. Consolidation can be a good thing, but the terms really matter.
Over the many years I have been in this business, there has been a steady consolidation from many cable companies to a few. The deals that work have always been driven by one of a few reasons: for example, sometimes families decide it is time to sell because the children have no interest in the business. For smaller companies with few economies of scale, it is often possible for a larger company to pay them a price much higher than the economics they could realize by continuing on their own, yet less than the larger company’s valuation. These are true win-win deals. Othercompanies – including some large ones – that practicedlumpy capital spending and then leveraged themselves to the hilt have sometimes found that they could not finance the next capital cycle and had to sell. In some cases thosesellers were able to earn spectacular returns on their original investments, although you can always debate what would have happened if they had been more conservatively financed. There also have been a few examples of companies that got into serious financial trouble because of being overly aggressive in the acquisition market – Adelphia and Charter come to mind.
When we first spun off from Time Warner, there was an expectation that we would go on an acquisition spree and consolidate the industry so that the eventual structure would be two large cable companies. So far, I guess, we have disappointed those who believed in that particular story. Why? Well we certainly believe there are benefits to consolidation. However, we also believe they are pretty finite and easily knowable. Among the large companies that you are aware of, the managements and boards are sophisticated and are aware of these finite benefits. The reality is that they have only wanted to do deals in which they receive all of those benefits. But these win-lose deals would not be good deals. To state the obvious, win-win deals are good deals, and I expect that over time we will see some more of those. In the meantime we remain dedicated to maximizing the return for our owners – and that includes Rob, Artie and me.
I am really pleased with our succession process, which Istarted discussing with our Board a few years ago. Rob Marcus is a brilliant executive and knows how to lead. He understands business, and he understands our business. Perhaps most important in my view, he has great judgment and common sense. I am very confident that he and his team will lead Time Warner Cable very well.
And I also want to thank you.
To our investors: thank you for your support. Almost seven years ago, we set out to make this a different sort of company – one that is transparent and shareholder focused, where we had an ongoing dialog and learned from each other. Thank you for making us better.
To our customers: thank you for your business. Thank you for trusting us with services that are important to you and your families. I believe the best is yet to come.
And to our employees: Thank you for working hard every day to serve our customers and communities.