Interview Date: November 30, 2015
Interview Location: New York, NY
Interviewer: Seth Arenstein
Collection: Cable Center Oral History Program
Arenstein: Hi, I'm Seth Arenstein, I'm here for the Hauser Oral History Project from the Cable Center. It’s November 2015; we’re in New York City with Peter Stern, who is the EVP/Chief Product People and Strategy Officer of Time Warner Cable. Peter, welcome.
Stern: Thank you. It's a pleasure to be here, Seth.
Arenstein: You know, the first time I saw you speak at the Cable Center in Denver many, many years ago, I remember thinking, “Gosh, there are sparks flying out of this guy’s brain!” That’s how smart I thought you were.
Stern: That’s very kind of you. Thank you.
Arenstein: But I was absolutely correct because look at where you’ve come and we’re going to talk about your background, we’re going to talk about your education, we’re going to talk about your career. Then we’re going to talk a little bit about the cable industry today and maybe tomorrow. As I said, I think you're one of the great thinkers in the industry so it's really a pleasure to be here.
Stern: Maybe we should just stop now, then.
Arenstein: OK. Peter, talk about where you were born, what did you do when you were a child. Did you watch a lot of television?
Stern: So I was born in Brooklyn, New York. I lived there for all of three days and moved to New Jersey. I grew up in Freehold, New Jersey, known for being the home of Bruce Springsteen. I left there when I was five or six years old and spent the rest of my childhood growing up in Fairfield County, Westport, Connecticut. I grew up playing music. Yes, I watched television. I think Thursday nights around the TV were a rite of passage for people growing up when I did largely in the 80s, although some in the 70s. We had the Muppet Show and then we had “Cheers” and “Seinfeld” and so that was an important part of our life. And of course appointment television was the only kind of television. We were early owners, lucky, of a VHS machine and so that was a bit of an exposure to television technology in the early days around 1982 or so. And I also was very early to start using a computer. I began programming on an Apple II or II Plus in BASIC and then in machine language and really grew to enjoy that type of technology, although it was not a connected technology at the time. Every computer was an island.
Arenstein: Where did you go to high school and college?
Stern: I went to Staples High School in Westport, Connecticut, and then I went to Harvard for my undergraduate education.
Arenstein: And you studied music at Harvard.
Stern: Music and English.
Arenstein: Who did you study with at Harvard?
Stern: You know, I studied with a range of professors. I'm not sure I took a single class or had a single professor for more than one class but the reason I pursued a double major was I was interested in many different things and I really almost could have had a triple major. I took a bunch of economics classes as well. But they didn’t allow that at the time. So I took a range of classes and really spent a lot of my time enjoying extracurricular activities. I was involved with a magazine called the Harvard International Review where I was responsible for running the business of the magazine, which was an opportunity to get involved in the media industry. I wrote a book for Let’s Go, Inc., called “The Unofficial Guide to Life at Harvard.” So I did a little bit of publishing when I was there. Those were early exposures to the media industry at the same time that I was pursuing this Music and English degree.
Arenstein: And in music were you studying theory, were you studying history or performance? What was your…
Stern: So Harvard didn’t have a performance major. In fact, if you were really a great performing musician, I don’t think you would ever major in music at Harvard. If you look at the greats who actually went there, like Yo-Yo Ma, I don’t think he ever considered being a music major. The music major was really for the musical dilettante. So I studied theory and history and I performed outside of classes, largely as a member of the Harvard Glee Club where I sang in that choir and also was their piano accompanist for four years and conducted their in-house a cappella group for a couple of years.
Arenstein: Because I noticed in your background in terms of the boards that you have served on and the organizations that you’ve been with longest—besides the Cable Center, which is great. There’s also a symphony orchestra; you’ve been on their board or you were on their board for about eight years.
Stern: Yes, when Time Warner Cable was headquartered in Stamford, Connecticut, I sat on the board of the Stamford Symphony. And it was a terrific orchestra then and it still is now, but going through a real challenging time as many orchestras have been through. You're aware of that, Seth, having served on those boards yourself. Symphony orchestras have had to engage with the community in ways that they never did before. So we worked really closely as a board with the Stamford Symphony to re-define even the role of the music director and come up with a strategy that could ensure its long-term viability. And I'm very proud of the fact that we were able to accomplish this for the Stamford Symphony. I didn’t stay on the board once Time Warner Cable re-located to New York City because it was simply—there wasn’t the same connection between my company and that orchestra, but I think we had a real impact during those years.
Arenstein: And I'm sure people at the Cable Center are saying, “Is he going to stop talking about music and get onto cable?” One more question about music. Do you think that musical training and musical education has helped you in your career?
Stern: I do. I think that all of the different types of experiences that I've had have actually played some role in building a foundation for what I've done in my career. Music: first of all, people often state—and I believe this is true—has a real connection to mathematics. But for me, the really exciting part of music and its tie to everything I do in my life is that when you really understand a piece of music well and you're performing it at a high level, you're telling a story. And you're able to see a story arc at the same time you're basically able to unpack that piece of music and understand all of the details. Being able to actually in business tell a story and also have command over the details is really at the core of doing strategy. Understanding that long-term arc of how the business is going to evolve, being able to communicate that in a way that other people find compelling, but being able to actually support it by having done the work, practiced, analyzed it. All of that basically comes together as a compelling strategy that actually can help you win and differentiate yourself in the market just as a performer can differentiate a piece of music that they're performing even though someone else was the initial composer.
Arenstein: Sure. And when you have a little bit of downtime—I mean, you have so much responsibility. Your title is so long and the people you oversee are huge.
Stern: We talked about that. The longer your title, the less important you are, so let's just be clear about that.
Arenstein: OK. I'm not sure that’s true here, but when you have a little bit of downtime, what kind of music, what composers do you listen to?
Stern: So for me a little bit of downtime for music is a chance to actually accompany one of my kids. I'm the pianist and I have a flutist and cellist and a violinist/singer. In terms of actually listening, it ranges from pretty heavy neo-romantic-type composers like Rachmaninoff or the romantics like Chopin to some jazz. So that’s pretty much the range for me. Nothing much past 1940, 1950.
Arenstein: OK. And you're here in New York City. Are you based in New York?
Stern: I work in New York City and I live in Connecticut.
Arenstein: So you have plenty of opportunity to hear great music here.
Stern: I do.
Arenstein: OK, so after undergraduate you were at Yale Law School. And then you move on to McKinsey and Company. What did you do there and how did that lead you to the cable industry?
Stern: So at McKinsey—my very first project. We don’t usually talk about our clients but it's twenty years and I worked for that company afterwards so I’ll take the liberty in this case of doing that. My very first project after having graduated from law school was working at Warner Music Group out in Los Angeles. I was living in Connecticut and working in Los Angeles, commuting every single week. We actually had a very successful project. It worked out well. I learned a tremendous amount. I came back just exhausted at the end of that experience. And the person who was responsible for staffing in our office said, “You know what? I owe you one. So for the next few months you don’t have to travel. You can work with local clients because we've never done that to somebody on their first project where you have to do the bi-coastal thing every week.” So I wound up staying with Time Warner to some extent doing work with them but also picking up a large technology client that I will not name that was nearby our office. And I would up basically doing mostly work with those two clients for the nearly four years that I was at McKinsey.
So my whole career basically started and has continued at the intersection of media and technology. I helped run the technology practice at McKinsey from a pretty junior stage at the firm, but my heart was with the media side of the business. And to this day I find that absolutely fascinating. The ability to actually match technology with customer needs with the consumption of media, which the average customer or consumer is actually doing for many, many hours a day, I think is a uniquely exciting place to be. So that really shaped what I became passionate about in the industry. So a lot of it is just the luck that I was assigned that client and had to travel so much at the beginning but it turned out to be a wonderful thing.
Arenstein: And you know you mentioned music or the music industry. I know I've read many things that you’ve written about the decline of the music industry and how technology has hurt the music industry. Can you talk a little bit about that and then transition over to what a lot of people say, “Well, cable is doing the same thing that the music industry did. It's content that’s all over the place; it's free in many cases.” Talk to us about that.
Stern: Music—it was uniquely shareable in that the amount of bits associated with the music, with a piece of music, are actually 1/100th the number of bits you would actually find in a video of equivalent duration. It's just the nature of not having images, let alone moving images going along with your sound. Then the nature of music is also such that people will actually get a piece of music and they will listen to that same piece of music in many cases over and over and over again. Television is very different. We do have a situation where people in many cases are buying more than they would like to actually consume, but people actually consume a very large number of networks when you look across an entire household. And if you look across a multi-month time horizon, people are actually consuming television much more than they are consuming music. It requires 100 times the number of bits and by the way growing as we get to things like HD, 4K, ultimately virtual reality, you start to see orders of magnitude increases in the bandwidth requirements. Whereas music has been pretty much stable since the advent of the CD. In fact, due to compression it's taken less and less. But I think more important than any of those, most television shows people watch once, maybe twice. And they watch very large numbers of them. So with music you have a favorite song, you listen to it over and over again, you can buy it once and you're done. Or share it once and you're done. Television, we have a continuous appetite for variety. For new experiences out of television and so it actually supports a business where you can produce far more content and monetize that content more frequently because people want to consume it once and then move on and buy another piece of content and so on and so forth.
Arenstein: And what about the music industry today that—are there lessons from the music industry’s experience that you took to cable?
Stern: The music industry tried to turn inward. Their focus was on combating piracy, so preventing customers from getting content the way they wanted it. But they eventually were forced through Apple and having to be on iTunes to embrace a new model of monetizing their content. But they really resisted it as long as they possibly could. The consequence of that, of not giving customers what they want when they wanted it, where they wanted it, was that customers stole it, devalued the industry and now they're basically trying to recover from that. Revenues have been in decline year after year after year. The television business is actually not experiencing that. What we’re doing, I think—some kicking and screaming, some very willingly—is to recognize that customers want to watch what they want, when they want, where they want, on the device that they want. And figure out ways to actually deliver that.
The industry continues to evolve so you need to look at it as a whole. You’ve got the traditional multichannel video industry, you’ve got players like Netflix that offer over-the-top subscription video on demand, and you’ve got a variety of transactional on demand models. When you add all those up, the TV business is still incredibly healthy and growing. And the reason for that is we’re meeting customers’ needs in ways that we can legally at a time when it's still difficult and prohibitively risky and time-consuming to actually steal video content. So we've got this window where, although Internet speeds have increased dramatically, they haven’t increased quite enough to make video the equivalent of what music was even ten or fifteen years ago. I think the TV industry is moving there; I hope fast enough.
Arenstein: Does this concern you? I know it concerns me. When I hear people, say college-age people whose parents have bought cable for them and have no experience paying a cable bill, are talking casually and saying things like, “Oh, well, yeah, I use my parents’ HBO code, etc., etc. I haven’t paid for cable…” Does that bother you? Does this sort of next generation, I don’t know if I would say “millennials” maybe…maybe on the outer edge of millennials coming in with not so much an attitude but just sort of a mindset that television is free. “I've never paid for it." Does that bother you?
Stern: OK, cable theft is no laughing matter. Let’s start with that.
Arenstein: Right, right. Agreed.
Stern: But the fact is that young people have actually still grown up consuming television in their parents’ households where they were paying lawfully. Then they go through this stage in college where I think everybody experiments. In some cases, the university actually provides cable television for students and they think that nobody’s paying but somebody is. Or they may be password sharing. But at least they're habituating to the product. And they’re seeing the value in a cable service. This, by the way, is just focusing on television for the moment. I'm not terribly bothered by it so long as they don’t leave let's say the college environment and move into a home and think they can still steal cable. I think at that point you're a grownup, whether you're renting, you're buying, it's time to actually start paying for the content you consume and I think if we can deliver content that’s relevant to people at that age in their low to mid-20s, then I think we have a bright future ahead of us on the television side. Underneath all of that, of course, is the Internet subscription that those customers are using throughout to get a great video experience. And to deliver a fantastic video experience, in general you're really not talking about cellular wireless. You're talking about a wired connection into whether it's a dorm or an apartment or into a home. So I think we as an industry have a very important role to play in delivering that. And then giving customers a video experience that’s relevant to them.
One of the things we've been experimenting with at Time Warner Cable recently has been reaching out to our 3+ million—and we’re starting by the way in New York City, so it's a subset of the 3 million—but our 3+ million broadband-only households, many of whom are not paying anyone for multichannel video, and offering them a $10 video package. That is a way of us saying to them, “Hey, you can get into this video business and experience at least what’s on broadcast television without having to pay a lot of money.” And show them the value that’s available in that service and our belief is that over time is that as their ability and willingness to pay increases and the value that they see from that service grows, and as they have perhaps a growing family with different needs perhaps for children’s programming, for movies, that they’ll subscribe to more and more. I think that’s a natural way for us to track with their growing maturity and ability to pay.
Arenstein: Sure. And for that $10, what do they get? Do they get just broadcast?
Stern: They get broadcast television and if they're in New York, they’ll get our NY1 station. They’ll get a series of other services that are available on that basic service tier that’s available on TV. But it does not include the cable networks that we think of: the ESPNs, the CNNs, and others like that, but we try to provide attractive upsell opportunities for those customers so they can get more over time and grow into a more full video experience.
Arenstein: So one of the reasons to get that package is to get better reception basically on broadcast.
Stern: Well, it may be the case that young people actually have a digital antenna and they could get pretty good reception if they do, but let's say you're living in an apartment in New York City. It's hard to put an antenna in and there's interference of a different sort depending on where you're located. But there's also a limit to the functionality that you're actually going to get with that digital antenna. So what we’re doing is delivering our service, for example, on a Roku streaming box right alongside a Netflix app. So you can choose Netflix for $9 or $10 a month but you could get all the broadcast stations which, when you look at the ratings of households that have both the broadcast stations have far more usage than Netflix does today. You can get both of those and over time, as we introduce, for example, cloud DVR functionality, then customers will have more and more control over that experience in ways that you can't when you just take a digital broadcast antenna and plug it into an input on the back of your television. So all of those are, I think, ways that we can bring technology to customers in a way that meets their needs and encourages them to see the value in what we deliver and ultimately pay for our video package.
Arenstein: What about Netflix? Is it additive? I heard you say, I guess it's three or four years ago, that Netflix would be additive, it would not spell the end of cable television. Is that still the case?
Stern: I think all new technologies tend, in the television business, tend to have some element of displacement of the technologies that came before them, but they are largely additive. I started earlier talking about the VHS and people thought the VHS would spell the end of television. And it did not. It simply increased the flexibility that people had around how they could record television or they could watch movies. So yes there was some substitution of traditional linear television but linear television grew dramatically long after the VHS era. And I think Netflix is in some ways much the same thing. It actually makes TV even more enjoyable for people who like TV a lot. But it is possible to take Netflix and combine it with Hulu and maybe combine it with an antenna and piece together a substitute for a traditional multichannel video package, but it's hard to do. And when you start to add up the cost of doing all those sorts of things, you don’t actually save very much money. So you're trading off some convenience and you're trading off some choice and some of the control you have over your video experience with the cable package which I think is designed to be really easy for people. And that’s appropriate for some people but not for all.
So yes, we’re seeing some of what we call “cord cutting,” but it's in the range of a percent or so a year. Of course household creation continues to take place since we've come out of the great recession a few years ago and so we’re actually seeing maybe a slight reduction in television households but not for us at Time Warner Cable. We in Q1 added video subscribers for the first time in a long, long while. In Q3 we nearly did it again. Fewer than 10,000 subscribers lost on a base of 11 or so million. And we’re hopeful for the year as a whole. [NB: Time Warner Cable added video subscribers for the full year 2015.] So I do think the video business has a whole lot of life left in it.
Arenstein: And people are watching more television than ever, it seems.
Stern: That’s true, especially if you count all the different ways they can consume it. If you just focus on live linear television where the customer basically is passively sitting on a couch and viewing whatever we happen to dish out to them at that moment, then you’ll see a business in decline. But if you add on top of that the consumption on the digital video recorder and the consumption on video on demand, and then the consumption of subscription video on demand services on top of that, what you see is actually still a growing industry consuming more of people’s time, which is remarkable because it was already consuming over eight hours for the average household and over five hours for the average individual in any given day. So it's still growing. Absolutely.
Arenstein: You were at Time Warner and you went to Time Warner Cable and what year was that and what happened? Tell us.
Stern: So my first exposure to Time Warner Cable was in 1998 or 1999 where I worked on a strategy for Time Warner Cable when I was at McKinsey. And my client at the time was Glenn Britt who was not yet the CEO of Time Warner Cable and at the time cable was just a video business, the broadband business was just at the very earliest stages. There was no video on demand, there was no digital video recorder, digital TV was consuming all the resources basically deploying set-top boxes. I joined Time Warner, Inc., in 2001 after the very famous—notorious—AOL-Time Warner merger and spent three years there and came to Time Warner Cable in 2004. At that time, I joined as a department of one, as Time Warner Cable’s first strategic planning person. You know, it was a much smaller company at that time. At that time still 90% or so of the revenues were derived from the cable TV business. There was a broadband business with a couple million subscribers. Internet speeds were somewhere between 3 and 5 megabits per second. We should come back to it and talk about the phone business. We were just actually experimenting with the phone business, doing a trial in 2003, doing a trial in Portland, Maine, of the phone business. We were in the business services space delivering broadband and television, but really just where, let's say, somebody who owned a restaurant or a bar would call us up and say, “I would like the same service I've got at home. Can you deliver that to me at my business?” And we would say, “Well, if we happen to be nearby, sure, why not.” By the way, it was a very healthy business and that was part of what attracted me to it. It was dynamic; you could see that it had at least ten years of healthy growth in front of it. It's hard to see past ten years. It turns out I think we’ve got another ten years now.
So it seemed like a really good place for me to get closer to the customer than sitting at Time Warner Corporate and really understand what consumers want. Because the cable business is really the retail arm of the media industry. The cable companies are the ones who actually touch customers. Everybody else is a wholesaler, right? You’ve got studios that wholesale to networks and networks that wholesale to cable companies. So that was part of what attracted me to it. Not to mention that it was near my house in Connecticut.
Arenstein: It was in Connecticut.
Stern: That plan didn’t work so well when we moved in 2009 back to New York City.
So I joined the company at the time—we had really good people, strong operators, people who had a lot of experience growing up in the cable business. But at Time Warner Cable we’re committed to evolving our technology to drive growth. There was a real product orientation at the company. And I found that incredibly exciting.
Arenstein: And who were some of those people?
Stern: Well, Glenn Britt was the CEO at the time and was an immensely exciting person to work for. But we also had terrific people. At that time John Billock was our vice-chairman, who had been president of HBO. We had—I’d interacted a couple years earlier with some great technologists who came from Time Warner Cable like Jim Chiddix, but at the time Mike LaJoie was our CTO and had amazingly exciting ideas. There were people like Louis Williamson, Mike Hayashi, people who really defined the hybrid-fiber coaxial cable network, were the first people to experiment with digital video recorders. People who invented video on demand. They were behind the creation of DOCSIS, the creation of packet cable which enabled phone service. A lot of those innovations really started with a group of technologists who came out of Time Warner Cable. So it was a very exciting place for me to be at that stage in my career.
Arenstein: I meant to ask you earlier, you said you're interested in so many things. Was it hard to take the first step into a career, being so interested in so many things? How did you decide to take even the step to McKinsey? I mean, McKinsey is a place where they do a lot of different things but then you said at some point, “Oh, I'm going to go in the direction of cable.” Was that hard for you to do?
Stern: I would view most of the decisions I had made until that point as essentially stalling tactics on making the important decisions. So even McKinsey was just a continuation of a generalist education—in that case, in business. Time Warner, I had a unique opportunity to take a pretty senior strategy role at the age of 29 in the largest media company in the world; admittedly one that was troubled, having gone through a merger that destroyed $100 billion of shareholder value, but still the largest media company in the world with significant problems and opportunities to solve. But it really was a decision to come to Time Warner Cable and narrow my scope. Little did I know that I wasn’t narrowing my scope at all. Because the cable business—I found that I'm in the TV business, the Internet business, the phone business, the advertising business. We’re a little bit in the wireless business. We do business-to-consumer and we do business-to-business. We’re in the middle of everything. So you can open the business section of the newspaper and unless you're reading about oil and gas or health care, pretty much every other article you're reading is relevant to what you do in the cable industry. So that’s immensely exciting: the ability to actually shape the way that our economy evolves, the way people consume content, the way people connect with others, the way people learn about their world and connect to others outside their homes. That’s incredibly fertile ground and to me does not represent a tradeoff in terms of scope at all.
Arenstein: OK. So tell me about your first years at Time Warner Cable. What were you doing and how did it evolve and now you were talking about all these different businesses you're in. You're also in charge of HR now. But that’s way down the road but you can open up any magazine and be interested in the articles. What were the first few years at Time Warner Cable like? What were some of the important things you did there?
Stern: Well, starting in about 2003 even though I was still working for Time Warner Inc., all my work was with Time Warner Cable. So 2003 and 2004 were immensely exciting
years for me where I got to know this business. The main projects I worked on at that time were the entry into the phone business and experimenting with IPTV. I’ll talk about both of those. The first one is the phone business. So in 2003 as I mentioned earlier, we at Time Warner Cable had been experimenting with phone up in Portland, Maine. And it looked like we could technologically deliver a phone service over a cable system using DOCSIS and PacketCable technologies. But we had a real question about whether this was a business we wanted to get into. There were a few reasons why we weren’t sure. One, we weren’t sure if we could actually support—the economics would make sense. We used to do a lot of modeling to figure what was the right amount to charge for a phone service and what would our cost structure look like for that business. And how would the telephone companies react to our entry into the business.
The other piece, just putting aside the phone business, was what would be the broader reaction of telephone companies if we entered their core business. Would they basically see themselves as having no choice but to go after our video business? So we pursued two paths. One was developing the detailed business plan for the phone business. The second was actually going through a role playing exercise and it was literally a role playing exercise where Glenn Britt, CEO Time Warner Cable, agreed to pretend for a few months—whenever we got together for this exercise—to be Ivan Seidenberg, the CEO of Verizon. Ivan Seidenberg I'm sure has no idea to this day that this is what happened.
Arenstein: So we’re breaking news here.
Stern: And my job was to be the management consultant to Ivan Seidenberg, helping him figure out what to do about the cable companies’ entry into the phone business. Let me just back up to the business model. What we saw was an opportunity in the phone business to really disrupt the way phone had been priced. It's hard to remember, even 11 years later, or 11 or 12 years later, but people couldn’t buy an unlimited phone service at the time or if they did, it was really expensive. You could buy unlimited local calling but long distance was a separate plan and you had to worry about where you were calling and for how long when you bought phone service. And we thought, well, that doesn’t make any sense. It's a regulatory, antique construct and one that we can basically disrupt if we come into this business and we have some time because the phone companies are likely to play this as incumbents and not chase us down on price for some time. So our model basically said let’s offer for one price unlimited calling throughout the United States and just eliminate those boundaries that had held people back at that time.
We thought we could actually charge enough and still have a cost structure that would make sense that phone would be a really good business for us to get into. The only players you were really up against were the incumbent telephone companies of which there was typically one in any given market, so we had a whole lot of share that we could gain in the phone business. So the business model looked like it made sense. But then we had this broader question of yes, but what happens. As we progressed through this role playing exercise, what became clear was that the management consultants and Ivan Seidenberg—fake Ivan—realized that it wasn’t just a question of what Time Warner Cable was going to do in the phone business. Cox Communications was offering a not-IP phone service. They were offering a copper-based phone service but it was clear they were bent on delivering more and more phone growth and Cablevision was also making noise about getting into the phone business. So we realized that Verizon was actually going to, we thought, make a decision sometime in the next couple of years to get into the full Triple Play in order to combat what the cable companies were doing. And we believed therefore we had a couple of years where we could deploy phone really fast, we would have a Triple Play and the telephone companies wouldn’t have it because it would take them longer to react than us. So we made this strategic decision. Instead of taking it slow, to go as fast as we possibly could and get into the phone business throughout our footprint. So we actually completed the deployment of phone across the entire Time Warner footprint in the year 2004, which was remarkably fast across many, many states. And it's proven to be a great business for us with somewhere over 6 million phone subscribers at this point—it's a couple billion dollars in revenue. And I think even more important than just its stand-alone economics, what it's done is allowed us to get the telephone company out of the house in many cases, have a complete customer relationship and one where they see a lot of value from us in different ways. So phone was really, I think, an important and gratifying project for me to engage with the cable company on.
But the next thing I did was actually even more fun and that was—we had this vision that was informed by others—I think you’ll probably be talking with Mike LaJoie soon. And his colleagues, I think, are really responsible for this vision. We wanted to be able to deliver to customers what we call the “4 Any’s:” “Any content, anytime, anywhere, on any device.” In order to get to any device, to get off a set-top box we were going to have to embrace IPTV. So in 2003, 2004, I think way ahead of any other cable company or telephone company, we decided to try to deliver our cable television lineup on a PC, on a computer. So we partnered with Real Networks at the time. You don’t hear very much about Real Networks anymore but at the time they were a real leader in media players, a lot of it coming out of the music business. We partnered with them to basically take our 80 channels of analog television and deliver those to a PC. We did that in San Diego.
That was really formative for us because we established not just the technology could be made to do it—because it worked, we delivered it to about 10,000 customers in San Diego—but we also established that cable as an industry could not be confined to just be delivering over a set-top box to a television set. That it was our destiny to be able to deliver any content to any device, anytime, anywhere. And so I think that even though it was a relatively small trial, the technology was not the most scalable technology, today we now have that scalable technology. It established the foundation for a lot of the things that we've done in the future. So that was also an immensely exciting project and made me know that I was in the right place by joining the cable business.
Arenstein: I mean, I can remember those days and thinking or telling people, I remember maybe even at a Thanksgiving—we just celebrated Thanksgiving—maybe at a Thanksgiving meal, “Oh, yes, the cable industry wants to be your phone company and wants to be your Internet provider.” And that was a radical thing that I was saying. People said, “Really?” So what you're describing here now seems, well, yes of course, but you're right, that was an exciting time, a different time and Time Warner Cable was mostly a lot due to Glenn Britt’s insight and foresight. It's funny because when Glenn was portrayed as a very conservative guy and everything and then you look at the things that he did and you realize, oh, no, no, no! He was ahead of the curve on so many technological things. He made so many—as it turns out—very good bets.
Stern: His belief was that the way you grew in this industry was having a new product and a new technology and matching that with customer needs to create entirely new businesses. And that worked absolutely beautifully for years. We grew through digital cable, we grew through the broadband business, we grew through the phone business, we grew through business services. That needs to be tempered with a real emphasis on operations and I think Time Warner Cable has found that balance in the last couple of years where we've been able to bring a lot of those technology innovations together with the operational focus and prowess so that you actually are growing the underlying subscriber base that enables you to then sell those incremental services. That’s really the balance you have to strike in this business. But he was a visionary in that regard and really said, “Every few years we are going to launch a major new business. We’re going to focus on the ones that are capable of generating multi-billions of dollars in revenue and we’ll keep investing in this infrastructure that we've got to enable us to be able to deliver all of these new services. And it will pay off handsomely if we do that.” That was his vision.
Arenstein: Peter, you said earlier that in cable you're really a retailer and you are the link to the customer. You run several departments at Time Warner Cable, you oversee so many things, how do you stay in contact with the cable customer? How do you do that? Do you touch them or is it mostly digital information that you're looking at, or do you actually sit down with people periodically and sit at their kitchen table and say, “What could we do better?” How do you do it?
Stern: We do a little bit of all those things. So one of the things when I began overseeing product at Time Warner Cable, what we did was really invest in customer research. And we spent a lot of time, whether it was ethnographic-type research where you were in the customer’s home, or it was qualitative research doing focus groups, bringing customers in, having them interact with each other, or quantitative research where we were conducting surveys. We did all of those sorts of things to try to understand what was on customers’ minds. And we’re still hungry for that type of research. So that’s very valuable.
But the other thing I think is wonderful about being in a cable company is that we have tens of thousands of people who touch customers every single day. So if you talk about our employees, our customer service agents who are on the phone, you talk about our technicians who are in customers’ homes, they're having first-hand interactions with many, many customers. So we can listen to them both directly—sometimes you do that through focus groups—or indirectly through our operations leaders who also find out what customers need. So all of those provide information to us that is invaluable.
The last piece, but certainly not least, is that because we are the interface with customers, we have a tremendous amount of data about what customers are doing. We do all of this in ways that protect customers’ privacy but we know in aggregate what people are watching, how long they're watching it. We know how much of the Internet they're using. We don’t know what sites they're going to but we know how much of the Internet they're using, we know what speeds they need, we know where they're calling on the phone again. We don’t track that except for billing purposes on an individual basis. But our ability to actually mine that type of data, to deliver better and more relevant products and ensure we’re delivering value to customers is I think one of the things that makes the cable industry so interesting. These days we talk about big data and our data is bigger than just about any industry I can possibly imagine because we've got eight hours a day of television consumption, we've got a growing number of hours a day of Internet consumption. We've got still over 600 minutes a month of phone calling taking place by our customers. And all of those are expressions of intent, of interest by our customers. And as you start to do things like look at set-top boxes there, you can see not just what customers like but you can see what they tune away from. So you can also see what they don’t like. All of those, I think, allow us to make decisions about what products and services to offer and how to evolve them that are informed by what customers want in ways that are hard to imagine for almost any other industry.
Arenstein: You touched on operations. And I know that Time Warner Cable has, I think quietly, in my opinion, too quietly, done a great job in the last couple of years to sort of revolutionize and kind of re-learn operations from the ground floor. I mean, I believe—correct me if I'm wrong—I believe you basically threw out your training manuals and started from page 1 and re-wrote them. So talk a little bit about that. I think I'm right about that.
Stern: There are a lot of things that we have changed in the last few years. In the period 2011, 2012, 2013, Time Warner Cable was actually making significant investments in operational performance improvements. Everything from re-inventing the way we managed inventory in our supply chain to investing in what we call “dynamic dispatch.” So the ability to actually re-route our technicians every fifteen minutes depending on customer demand or how long another technician was taking to get a job done. To introducing much better tools and training manuals for our customer service representatives to quickly resolve customer problems the first time. While all of that was happening, we were re-organizing our company so that we were basically one big region with common methods and procedures across the company, which made it really easy and fast for us to be able to make these types of changes. But it was a lot of change taking place at once without I think the focus on reliability and reducing unnecessary calls from customers that we have subsequently attained. But in the mid-2013 timeframe, we decided as a company that if we were going to actually turn things around, we needed to focus on reliability and service first. We created a program called TWC Maxx. It was an internal brand name. There is no external name for it. But it was basically focused around re-investing in our plant to increase reliability, replace outdated equipment, increase Internet speeds by as much as six-fold, and go all-digital on the video side. Finally, also deploying Wi-Fi outside the home so that customers could access our Internet service wherever they went. And all of those things, that bundle of things we started in New York City and LA in 2014, and what you’ve seen is a dramatic turnaround in the fortunes of those markets and our performance in those areas. All that coupled with changes in our priorities, in some people changes and some real cultural changes focused on, again, reliability and service that have resulted in enormous improvements in operations and in growth.
I think Time Warner Cable can now be very proud of doing some things that nobody else in the industry does. For example, we’re the only cable operator that has one-hour service windows. And we’re posting 98% on-time arrival rates. So 49 out of 50 times our people are actually arriving within those one-hour service windows. The rest of the industry is at two, four hour windows, somewhere in that range with on-time arrival rates that are lower than ours despite the longer windows. I think you could see a time in the future where appointments could become the norm if that’s what customers want.
We’re doing great in terms of answering the phones quickly. Customers are not having to wait on hold. We've even begun now to change our marketing. To take a little bit of a whimsical look at some of the issues we've had in the past as a cable company and the reputation we have for not being on time and keeping people on hold because we feel confident enough that we’re not that company anymore. So part of it is through taking accountability and ownership of what’s happened in the past but then really demonstrating a permanent commitment to be a different kind of a company. Customers are responding. We've in the period since the beginning of 2014 where I think we began deploying TWC Maxx, we've added over half a million customer relationships. That’s without acquisitions. So we've basically grown a midsize cable company on top of what was Time Warner Cable before. We've added in the last twelve months over a million phone subscribers. Around a million high-speed data subscribers. Those are the types of numbers we’re capable of delivering when we now have this focus on the combination of service and reliability and the products and services that are relevant for customers.
Arenstein: Peter, I'm sure you're too modest to say this, but I would assume you were very heavily involved in that kind of new thinking maybe. We could call it a re-invention of Time Warner Cable. How do you get people to respond to that internally? You're now head of Human Resources. How do you re-invent a company essentially?
Stern: Let’s go back though to your modest point. Actually I just need to be truthful here. So in early 2013 the decision was made that Rob Marcus would become our CEO. And Rob really set the direction that we would focus on: reliability and service. We made that decision as a management team collectively or at least we felt that way, but it was Rob’s call as the incoming CEO. That was what we were going to focus on. In early 2014, Time Warner Cable hired Dinni Jain, which a lot of people thought was a crazy move because we were the subject of a hostile takeover attempt at the time by Charter and within a month after that had arrived at a deal to merge with—although I think it would be more appropriate to say sell the company to—Comcast Corp. But we hired Dinni Jain in the middle of all of that and Dinni is a phenomenal operator who believes in service and reliability as the only stable foundation for success in the cable industry. So you have the combination of Rob already having set his vision and then going out and finding the very best person I think in the industry you can find to go execute on that vision in Dinni Jain. All of it comes down to leadership, right? If you have a management team that actually believes in something, and every decision they make is consistent with that vision, then you will see it realized for better or for worse. In this case it was for better. It was the right strategic decision for Time Warner Cable at the right time.
I was able to play an integral role in TWC Maxx and helping to define that, but the foundation for it absolutely came from Rob and the ability to execute it came from Dinni. And then subsequently to that, Dinni put John Keib in charge of residential operations as our COO of residential. And John has really helped us take flight.
So as an HR leader your job is to serve. It's to help realize the vision of the line of business executives who really are accountable day to day for the results. And I think we've been able to recruit good people; we've been able to train people effectively. But the credit really belongs with Rob and Dinni and John Keib.
Arenstein: Talk about some of your technical Emmys. Does Glenn Britt get an honorary Emmy for playing Ivan Seidenberg?
Stern: Unfortunately all of our Emmys are technical Emmys and have nothing to do with our abilities as actors and actresses. But Time Warner Cable I think has more technical Emmys than any cable company. And the reason for it stems from our commitment dating back at least to the 1990s to matching technology with customer needs. Some of the really cool ones are things like Start Over. Start Over is basically a feature that allows customers to start over a program from the beginning with the touch of a button on their remote control with no need to own a digital video recorder or decide to record that show in advance. And the reason that we happened upon that is we spent a lot of time actually in that situation talking to customers, understanding that they wanted to watch what they want, when they wanted. And also taking to cable networks and trying to understand why in that early stage around 2004-2005 they were putting content on the Web for free. And we realized that customers wanted to be able to catch up on shows that they missed. That was the principal reason that customers are watching stuff online because the experience had buffering, smaller screens, they’d rather watch it on TV but that was the only way they could catch up on shows they missed.
So we at Time Warner Cable had a set of technologies that nobody else in the industry had dating back to some inventions that we called Mystro TV that allowed us to basically record in real time, with a tool called Real Time Acquisition, television shows and store them in our headend in servers so that we could play them back on demand for customers who did not record them on a local hard drive in their home, a digital video recorder. The challenge we had with Mystro TV and the reason it never took off is that the vision was too grand, it was too big. Programmers were not ready to embrace a model where customers could actually watch whatever they wanted, looking back two weeks, because it undermined the ad model that required you to actually—you could only monetize “live” content at the time—Nielsen only counted live. And at least advertisers only counted live television as worth paying for. And it messed with scheduling. And scheduling still mattered then. It still matters today in a linear world. The ability to lead in and out of different shows was really how you drove viewership on a successful network. So if you allowed customers to watch what they wanted when they wanted, it messed up the whole schedule. So what we did was we basically used our Real Time Acquisition technology in a way that was advertiser and programmer and of course customer friendly so that we could deliver a service like Start Over.
What we did was we worked with Nielsen to have them to actually count Start Over’ed shows as live. The basic idea was close enough, right? And we limited the ability to start over the show to you could only start it over until the end of that show. So it was basically within the same window.
The second thing we did was we built it so that if you started over a show, at the end of that show the next show that was scheduled to come on, you would get a prompt that would basically say, “Would you like to start over the next show?” So we actually kept the schedule intact. Then the third thing we did was we disabled fast-forward. You couldn’t fast-forward through an ad on live TV and Start Over was nothing more than the ability to start over. It was just a time travel machine, but it didn’t allow minute-to-minute time travel, just travel back to the beginning of the show. So when we combined those three things, suddenly it worked for the programmers and we were able to get rights from dozens of television programmers for thousands of shows. We still have Start Over today. I think it hasn’t realized its full vision but it still may. And other operators have also picked up on the idea of Start Over. So that was one of the ones that got a technical Emmy.
We got a technical Emmy for video on demand. A lot of that work was done I think for things that were before my time and the credit goes to folks like Mike LaJoie and Fred Dressler who acquired those programming rights and many others I'm sure you’ll spend time with. Those early investments by Time Warner Cable in video on demand have now blossomed into a whole slew of offerings. I mean, HBO On-Demand, which has grown into HBO GO, which is really HBO NOW. Even the idea of a service like Netflix—all those I think would not have been possible were it not for those early investments in video on demand technology.
Those are a couple of the things we can be proud of at Time Warner Cable.
Arenstein: Peter, one of the things that you were involved in and still involved in at Time Warner Cable is TV Everywhere. A lot of people have a lot of different names for it, a lot of people don’t know what we’re talking about when we say TV Everywhere. Tell us a little bit about the history of it and what it's doing today.
Stern: Let’s define what TV Everywhere is first. So TV Everywhere is the ability for customers to be able to watch the television shows they paid for inside the home outside the home. That’s all it is. So it's the last piece in what we at Time Warner Cable called the 4 Any’s. The ability to watch any content, anytime, on any device, anywhere. And the reason that it came about was that we at Time Warner Cable—one of the things we were puzzling about in the timeframe around 2005 to 2007 or so was why were programmers, why were cable networks taking their content which customers were paying for, and putting it on the Internet for free? It just didn’t seem like a rational thing to do. And it had the potential to completely undermine their business. So we started talking to programmers about that and it turns out that programmers actually at the time had digital teams that were separate from their cable/satellite and ultimately telco teams. And the job of the digital teams was to try to make sure that they stayed relevant to people who were just on the Internet. And make sure they could follow the eyeballs, which was an entirely logical thing to do. But to give it away for free was not a logical thing to do. Unfortunately, they felt like their hands were tied because they had to be on the Internet and if they were going to be on the Internet, there was really not a good subscription model at that time. So their hope was, well, they could sell some advertising and hopefully it wouldn’t cannibalize their video business too much from people who dropped the cable subscription and just consumed that way. But this happened more and more.
So at one point I found myself standing in Denver actually outside a hotel on a sensitive phone conversation with a person from Viacom named Samantha Cooper. And we were bemoaning the fact that Viacom was actually doing this. At the time they were actually making things like “The Daily Show” free, “South Park” free, on the Internet. And it was undermining their subscriptions. We said, “What can we do about that?” And it occurred to us that the answer lay in the cable company, in us, opening up our billing system to the programmers. So the idea we came up with was, what if I or Time Warner Cable were to take the information about who was paying and share that with Viacom so they could ask when somebody on the Internet was interested in watching a piece of content, “Is this a paying customer?” If they were a paying customer, which was the case 90% of the time, they could deliver them the content. If they were not a paying customer that was an opportunity to give them perhaps a taste of some of the content but then encourage them to actually get into the multichannel video ecosystem and actually become a subscriber. And because they could reach 90% of households who were paying for TV at the time, they really weren’t giving very much up. In fact, what they were doing was they were reinforcing the value of the cable subscription while still reaching people on the devices that mattered to them. So that was basically the beginning of TV Everywhere.
We had a horrible name for it at the time—I think it was called something like “Entitlements,” because the customers were entitled to the content or not entitled to it. But once we had this idea—Time Warner Cable was still part of Time Warner—a group of us came back to the Time Warner management team who absolutely embraced this. And they deserve a lot of credit for seeing how important this could be in the evolution of their business.
A group of Time Warner people led by Ed Adler, who was the head of communications at Time Warner, realized that we needed a better name. So that was when they came up with TV Everywhere. Now you know what it is, how it came to be and why it's called TV Everywhere.
Arenstein: What about TV Everywhere today?
Stern: You know, we've made tremendous progress. We at Time Warner Cable have TV Everywhere rights now from dozens of networks. When you see applications from most television networks on devices like an Apple TV or on an Amazon Fire TV or on a Roku device, all of those applications are dependent on TV Everywhere to allow customers to be able to prove that they are actually a paying customer and they only have to pay once in order to be able to watch the content the way that they want it. So that technology has actually been used inside the home on those devices. It's also used on applications like TWC TV, which is our version of an application that’s resident on those devices to allow customers to watch what they want. And it's used outside the home where typically there's a smaller grant of rights for out of home viewing. But all of those services basically grew out of the foundation that was TV Everywhere and this notion that we as cable operators could open up that information about who's a paying subscriber and therefore deserving of being able to watch any way they want, versus people who are not paying subscribers and therefore should be exposed to some amount of content as a taste but then have a chance to get into the business and hopefully we as a cable operator can make them a good offer and…
Arenstein: I want to ask you a few more questions. One is, again looking at your background, one of the groups you’ve stayed active with throughout your career is the Cable Center. Why is it so important to keep the legacy and the history of cable available to the public? Why are you so fervently a supporter of the Cable Center?
Stern: I think when we look back at—this is taking a very grand view—but when we look back at human history, there have been a few revolutions that have actually changed the course of human history. Some that we really talk about often are things like the Industrial Revolution, right, which allowed us to use mechanical engineering and later electrical engineering to free people from many of the constraints of space in particular in which they lived, and give them more leisure. You can go back to things like the invention of tools and metals and so on and so forth. The Information Revolution is the one we’re living through right now. And I think in many ways it's the most important of all because our ability to connect all of humanity into one giant brain to solve some of the most pressing problems that we have today, whether that’s solving issues associated with the climate or bringing people out of poverty. Also, though, to enlighten and inform and educate people and entertain them, too, because this life is not just about work. This Information Revolution I think is at least one of the most important changes in the course of human history and the cable industry has played a foundational role in that Information Revolution. When we got involved, for example, in the Internet business, the only thing there was a dial-up business. Dial-up was 56 kilobits per second. You couldn’t deliver media over that type of infrastructure. And what we've been able to do is affordably deliver a tremendous amount of speed to customers’ households such that speed almost no longer matters anymore.
People are able to access all of the wealth of the world’s information on virtually any device, thanks to what we've done. We haven’t done that alone. There have been lots of Internet pioneers, companies like Google and Facebook and Amazon. But what they’ve done could not have been possible without the cable industry. And you’ve got telephone companies that were doing this alongside us and that’s good; competition has made us all better. You’ve got wireless companies giving people more flexibility outside the home. But most of the consumption is taking place inside the home. And most of that is being delivered by the cable industry
That’s something that is worth celebrating. It's worth preserving. It's an important part of our history and it doesn’t get told enough. So that’s an example, I think, of why this is so important.
Arenstein: I agree. And I remember when Glenn Britt retired, that’s one of the main points he made, was the cable industry has a great story to tell and we’re not telling it loudly or well enough. So that’s what the Cable Center…
Last question, Peter. What are we looking at here? We’re looking at this crazy world, this crazy Internet digital world, what is it look like ten years from now? What does the cable industry look like ten years from now?
Stern: The good news I think is that we have technology infrastructure that has an enormous amount of life left in it. And it will be even more relevant to people’s lives in ten years than it is today. Our broadband services will be available in gigabit per second-plus speeds. We will be doing that with a mix of hybrid fiber coaxial cable as well as fiber to the premises in some circumstances or in an increasing number of circumstances—we’re already doing it in some circumstances. We’ll still be in the video business but we’ll be delivering video as an application on top of that broadband experience, giving customers the ability to pick flexible packages, accessible on any device they like. We won't be, I think, at that point leasing traditional cable set-top boxes because every device will have enough intelligence embedded in it to be able to actually take an IP service from a cable company. That by the way will dramatically reduce the barriers to entry for customers to get into the video business or to become video customers and it will reduce the capital intensity of the cable business. You know, the phone business will become more of a communications vehicle cross-platform and it will still be relevant to some households but declining. A fraction of households will consume phone the way they consume it today. Our business services business will be tremendously important to us and to the economy. We will be delivering those same gigabit-type per second speeds to businesses who are not just consumers but they're also producers so the upstream needs they will have will be significant. That will largely be done with fiber to the home at that time. And I think we will have a wireless infrastructure built off the foundation of our widely deployed wired infrastructure that allows us to give customers the ability to consume massive quantities of video or virtual reality content or whatever content they want to consume in the places that are convenient for them without having to worry about consuming cellular bits. And of course we’ll be doing all of that while at the same time supplying invaluable cellular backhaul to the cellular companies that are in the business as well.
I think you're going to be looking at a business that is still vibrant, but has evolved significantly at that time. One that has a valued infrastructure but that we’ll have to continue to invest in in order to stay relevant.
Arenstein: OK, so we’ll come back here in ten years…
Stern: I look forward to it.
Arenstein: I'm sure you're going to be right. It was a pleasure, Peter.
Stern: Seth, likewise.
END OF INTERVIEW