Interview Date: July 28, 2014
Interview Location: Kansas City, Missouri
Interviewer: Stewart Schley
Collection: Cable Center Hauser Oral History Project
SCHLEY: Greetings. I’m Stewart Schley for the Cable Center’s Oral History series, and I have the privilege of sitting with Steve Weed, the founder and CEO of Wave Broadband, but not always the founder and CEO of Wave Broadband. Steve has a rich history at cable that we’ll talk about. It’s July 28th of 2014. We’re in Kansas City in association with the Independent Show, presented by the American Cable Association, and Steve, thanks a ton for being with us today.
WEED: My pleasure. Thanks for inviting me.
SCHLEY: You and I have an interesting crossover in that we both worked in and around the cable industries in Los Angeles circa 1981. So let me take you back, because I think your first job was an interesting one. You were a sales rep for a company called TelePrompTer Cable.
SCHLEY: Tell us about that. What did you do, and what was the landscape like back then?
WEED: Well, what’s unusual for somebody who started in the industry that young is that I didn’t have any family members that had anything to do with the cable business. In fact, my dad was in the radio business, and he -- he came -- he didn’t like cable because they were taking advertising revenue from radio back then, but a family friend just said, “Hey, I got this job selling cable, and we’re making a lot of money.” And so, I was like, “Wow, can you get me an interview?” So I was hired, and I think it was the same week I was hired, Ted Turner came out; this was January 4th, 1981. And we personally visited the system in Seattle -- this was Seattle -- to launch his new cable network.
WEED: CNN, yeah. (laughter) So that was my -- that was like my first day, and shortly after that, we -- you know, of course, MTV was launched. We launched Showtime in addition to HBO, and so, it was -- as a sales rep, it was like -- it was easy money. And I was quickly promoted, because I was the one guy that still worked hard, even though it was easy.
SCHLEY: How old were you?
SCHLEY: And was it door-to-door, or --
WEED: Yup, yeah.
SCHLEY: So you went door-to-door in telling people about cable television?
WEED: Door-to-door, door-to-door and say, “Hey, you need to get Showtime and HBO.” The job was really selling HBO, and then it was selling Showtime and HBO, and then, you know, along with your cable subscription, which at that time had hardly any content on it. I mean, CNN was on, and then the local broadcast networks.
SCHLEY: We used to call them “truck chasers,” in the day, right, people who had this pent-up demand to subscribe?
WEED: Yeah, truck chasing came a little bit later once we started getting some more content on. But, so it was, you know, it was a lot of fun, and you know, I thought I was just going to do that for a while. And you know, I think six months, I got promoted to sales manager, and relocated three or four times, and by the time I was 21, I was in L. A. working for Marc Nathanson at Falcon Cable.
SCHLEY: Just have a curious question. How did they compensate door-to-door sales reps? Was it pure commission?
WEED: It was pure commission, yeah.
SCHLEY: So you made what, when you made a sale?
WEED: I don’t remember. It was so much per unit, and HBO was a unit, and cable was a unit, so we could make two units. And then when we got Showtime, they left the commission the same, but you could sell three units, and we quickly learned that you could get customers to just buy three instead of two, and so we all started making 50% more money. And so it was pretty good -- it was a pretty good living.
SCHLEY: This was the dawning of the multi-pay category, basically, in cable.
WEED: Yeah, yeah, yeah. It was multi-pay.
SCHLEY: But you thought enough of the industry, and you probably did well enough that you said, OK, maybe this is a place to be for a while?
WEED: Yeah, you know, I don’t even think I thought about it. I was just -- there was a lot going on, and you know, Avon, Group W bought TelePrompTer, and they brought in all these Avon guys to run the marketing department. And I just -- you know, since I came up through the direct sales ranks, I was being tapped to move up and become the marketing sales manager in the Washington state market, I went to three or four different markets. So it was just, things were just going so fast, and I didn’t even have time to think, do I want to do this or not. It was just a lot of fun, and I was having a lot of success, and being called to move to this city, and I went to Wenatchee, and then Richland, and then back to Seattle, and then I went to L. A.
SCHLEY: So -- but I do think opened up opportunities for a lot of people, young and not so young, because it was fertile territory, really, in the day.
WEED: Yeah. Oh, we were hiring people like crazy. I remember doing recruiting. Of course, with Avon, it was all about the number of salespeople you hired, and we would go to the University of -- or Washington State University, and recruit other -- their media group, they had a communications degree program, where the guys went there learning how to be on TV. And we’d recruit from them and say, “Hey, you can come to the cable company, because we’re doing TV.” But you know, we recruit them to do sales, and they’d move in -- you know, move up from there.
SCHLEY: So, Los Angeles then, that was mostly an unbuilt market at the time, right?
WEED: Yeah, when I went down there, in fact, there were several people from Seattle who were recruited to move down to L. A., because Seattle had cable early on. So there was a lot of people in the Seattle market because of the hills that knew cable, where L. A. was flat, and there was no cable there for TV reception. And in the early ‘80s, franchising started to get awarded, as cable networks started to come on, and people had a reason to buy cable, other than just for reception. So when we got there, I got there in the end of ’83, and Falcon had been awarded a lot of franchises, and was starting to build them out, and I went down there as a marketing manager to help sell the service once they activated the plant. And that was the truck chaser time, right, so...
SCHLEY: OK, and Falcon was one of those companies when there used to be a lot of MSOs and independent -- I guess an independent cable company with a lot of quality, quality properties run by Marc Nathanson. I believe there’s an oral history about Marc Nathanson --
SCHLEY: -- on the Cable Center website. But, that introduced you, that, I guess that experience to that whole, maybe, Southern California cable industry that was beginning to blossom, both on the operations and the programming circuit.
WEED: Yeah, yeah. I mean, Marc was a great -- he was a mentor of mine, right? So he had started Falcon, and he was involved in recruiting me to come down there. And you know, I got to work directly with him, even though I didn’t report directly to him quite enough that, you know, and he (inaudible) marketing background, so that was a neat part about being there. I enjoyed being part of that little company that Marc started at that time. And then you’re right, the Southern California Cable Club flourished, you know, from, I don’t know, the early ’80s until the late ’80s, and I think there was something like 20 or 30 cable -- different cable companies in Los Angeles. And so, you know, we had the Cable Club with, you know, 3 different cable companies in Southern California, as well as all the vendors, and of course, that was where the content -- a lot of the content guys were, so it was a big group that met, you know, on a regular basis.
SCHLEY: And I want to ask your color about this, because it was a crazy market, like you said, reception was challenging, and yet you had these subscription TV channels that were floating around the market --
WEED: Yeah, Z Channel was one that was our big competitor --
SCHLEY: Z Channel?
WEED: -- when we launched, yeah.
SCHLEY: Yeah, what was --
WEED: And the problem with Z Channel is they had exclusive content that the national guys didn’t have, right? So Z Channel was affiliated with the studios -- whether it was affiliated with them, or just had priority contracts, I’m not sure. So Z Channel was a wireless system, which you know -- once again, L. A. was flat, so you could send a pay TV service wirelessly, and they had -- it was encrypted signal, so you had to subscribe to get it. But Z Channel had much more current release movies available than what the studios would give to any national provider, because it was only in L. A., and it was, you know, sort of controlled in their backyard. It was like the studios distributing more current releases to -- in fact, the national contracts, the premium guys sometimes were exclusive with one, HBO, or Showtime, where Z was excluded from that because they weren’t a national carrier, so they always had all the content.
SCHLEY: It was a beloved channel, I mean, people --
WEED: Because of that, yeah. They had the best movies, by far, and everybody knew that, yeah.
SCHLEY: But despite that, and despite other form -- select TV, and I think there’s over-the-air pay TV service. But cable started to make steady inroads in L. A., right, you were part of that, saw that happen?
WEED: Yup, yeah. And, you know, it was -- you know, once we got the networks built out, and you know, what solved L. A. for the cable business was we moved from just being a movie channel, like HBO, Showtime, which is when I started, and that’s what L. A. was with Select and Z, to the content on basic cable became more and more popular. Right, so, we sort of think about that today, as we’re here at our 30th anniversary at the co-op, and that was the era of “I want my MTV.” Back then, you know, people wanted their MTV, and that wasn’t available on those terrestrial-based services.
SCHLEY: Every category began to be represented. You made a move to go work for the Hefner family, right --
SCHLEY: -- for Playboy, so that was one of the premium offshoots of that whole crowd. What was -- so you were selling into the cable industry at that point.
WEED: Yeah, and you know, the Playboy Channel was originally started by the Rainbow Group, which some people forget, but they just licensed the name to Rainbow, and Que Spaulding I think who ran Rainbow at the time, when Christie took over -- Christie Hefner took over Playboy, she terminated that license agreement, and wanted to bring the channel in-house and actually start their own network. So even though the Playboy Channel had been around for awhile, I was actually one of the first hires by Playboy to work for the Playboy Channel. Que Spaulding came over. Michael Fleming, who ran Game Show for a long time, and then Michael Finer, who I knew because these guys had called on me as a cable operator, recruited me to join. So I was probably -- you know, it was fourth or fifth hire in their programming distribution company that was started once Christie got there.
SCHLEY: Cable used to be famous for legendary parties, you know. Disney Channel threw a big party at Disneyland, and then --
WEED: Yeah, the Western Show parties. I miss those.
SCHLEY: -- there was a famous party, I think probably you were there at the mansion, at the Playboy Mansion, when either that transition happened, or when the channel was launched, but --
WEED: Yeah, I think I missed that party, darn it. (laughter)
SCHLEY: I was there. I was there. I’ll recount that for you.
WEED: I’ll been to some parties there, but the big one, when they launched it was before I started, I think.
SCHLEY: Tell me about Summit Communications, which was, I think your next job. What was -- who were they, and what was the position for you?
WEED: So, Summit Communications was an MSO based on the Seattle area. I’ve been in L. A. five years and was eager to move back home, and one of the great things about my job at Playboy was, my job was to get the network launched on the West Coast, so I got to know all the cable operators on the West Coast. And one of them was Summit, and he was looking for a general manager to run the system he had just bought in Seattle.
SCHLEY: Who was he?
WEED: Jim Hirshfield.
SCHLEY: Jim Hirshfield. OK.
WEED: So Jim Hirshfield was the founder of Summit. So he hired me in 1989, or ’88, late ’88 or early ’89, to run their Seattle-area cable systems, and I got to move back home.
SCHLEY: Were they built out, Steve, at the time, the -- those -- OK.
WEED: Yes, it had just been built, so it was the last franchise awarded in Seattle, and it was awarded to a minority company, which the city wanted to do. And the minority company turnkeyed the construction into a third party, who didn’t know what they were doing, and so the system had been built, but it was in -- it didn’t operate very well, and they eventually needed to sell it, and Jim Hirshfield, who operated cable systems in Oregon and Washington, acquired the systems sort of out of distress. And that’s right when he hired me to run it. The penetration at that system was less then 20% or something like that, in a market where it was, you know, 60% around it. So he wanted somebody with a marketing background that could solve that penetration problem.
SCHLEY: I mean, how did -- A, how did you do it? B, what were the challenges of an early-stage cable system at that point in the industry’s development?
WEED: Yeah, well the funny thing is, he -- you know, he -- the reason I got the job was because of my marketing background, and you know, two weeks into the job, it was clear that the plant didn’t work. And the reason that there weren’t any subscribers is that the service sucked, right? So, this actually became sort of fundamental for -- even through today, when we think about marketing issues, it’s all about service quality and customer satisfaction. And you know, what I quickly learned was how to be a plant manager, and got the resources, and we fixed the technical issues on the system within, you know, six months to a year. And then grew customers like crazy, and Jim Hirshfield thought I was a marketing genius, because I was able to, you know, gain so many customers on the network. I joke, but he knows what really happened.
SCHLEY: Well, but -- because churn probably haunted you in the early days, as people were dissatisfied with their service, or whatever. And that’s exactly what I was asking, because it really was -- how many channels, for instance, did you guys (inaudible)?
WEED: You know, it’s, like, 30 channels of basic plus premiums. Back then, we did event pay-per-view, you know, mostly fights. We hadn’t started movies yet, but we were starting that at Playboy when I was there. So yeah, the churn issues back then were really -- you know, the challenges we had in driving customer satisfaction was reliability of the network -- so before fiber, right, so the networks were tree-and-branch, and they failed more than they do today. And then your customer support was always challenged, because you had unanticipated volume of customers wanting to order or call because of problems, and so you know, some notorious hold times. All right, we ended up getting regulated over hold times. So, the challenges were, you know, the reliability of the network, the hold times, when customers called. But really all that, you know, solved itself if you focused on, you know, solving network issues, maintaining a quality product, and providing good service.
SCHLEY: It’s interesting, Steve, because as I’m following your story, you sort of had this immersion in sales and marketing, in the programming side of the business, and now kind of in operations, and to some extent, technology. So were you aware that you were sort of building this pedigree across the industry or -- because you kind of were.
WEED: Yeah, you know, I just wanted to move back to Seattle, and it was a great job, and Jim Hirshfield was a great guy who worked for us. So, that’s what I was focused on.
SCHLEY: Millennium Digital Media was next. Why don’t you just kind of take us through what that company was about, and how you became involved there?
WEED: Yeah, so Jim Hirshfield was the founder of Summit, and I worked for him for the first three or four years as a general manager. He promoted me to chief operating officer of that company. We sold -- we lost broadband internet early in 1996 on that network, and demonstrated that product, and then Jim put the system up for sale, at the time when a lot of people were. This was in the late ‘90s, so you know, the promise of broadband internet had been demonstrated, and investors like Paul Allen and Millennium Digital Media, and a few others were sort of rushing in to buy cable systems. And so, that was a great time to sell for Jim, and he sold it in 1999, and as the chief operating officer of Summit, I agreed to stay on as president for the Northwest for Millennium. And Millennium was based out of St. Louis; it was former Charter guys that had started it. They left Charter before Paul Allen -- or maybe when Paul Allen invested in it, they left. I’m not sure. They had some Charter roots, but so it’s, you know, four guys out of St. Louis that started Millennium, and I ran the Northwest region, which was basically Summit. So I stayed on and continued to run the same company, but for new owners.
SCHLEY: I don’t want to just step lightly over the whole broadband transformation, basically. So you talked about Summit launching an internet product in ’96, I think? Does that sound right?
WEED: Yeah, yeah.
SCHLEY: So what was that like? I mean, as a guy who’d grown up on the television side of the cable business, probably an exciting kind of progression.
WEED: Yeah, I mean for us, you know, this is another one of those things that just sort of happened to be in Seattle, where there was a lot of knowledge and excitement among guys my age about the internet, and you know, how cool that was. I mean, I was on the Cable Advisory Board with a University of Washington professor in the early ‘90s, who was telling about the internet, and gave me a tour of their internet connection to the universities, and then I had another friend who launched a dial-up ISP to compete with AOL. And so we sort of knew it was cool, and that allowed us -- plus I knew people that knew how to connect to the internet once we got a resident connected. And so we built a system with LANcity modems in the mid-’90s, commercially launched it in ’96. And we had some test customers, one of which was a venture capital guy, who I knew, and after we did the test, I had him come speak to my management team and he says, “This product,” he says, “It’s like a drug. When you get online with a 10 Megabit connection,” at that time, “that’s always on, and then you take it away because of the test, there’s no way you’re taking this out of my house.” He says, “This, it changes your life.” And so I’m like, wow, that’s a pretty interesting testimonial. And so we, you know, at that time, felt like -- you know, we agreed with the hype of the market, that broadband was going to be huge, and that customers were going to really love that product, and it was going to be very sticky. And you know, that was exciting, and that’s what we were focused on, and when I agreed to stay on with Millennium, it was, you know, sort of the idea and excitement about working with them to, you know, continue to build that product out in the Northwest.
SCHLEY: I think we forget about it -- right, because you talked about 10 meg per second, and then always on, you know, which is --
SCHLEY: -- if -- we either forget about it, or if we’re young, we never experienced that, age of dial-up, age of broadband. One day everything changed.
WEED: And the consumer behavior chain -- at that time, the primary thing that changed consumer behavior was the always-on, more than the speed, because there wasn’t anything -- there wasn’t much to download anyway. Websites didn’t have -- I remember when we were demo-ing it for the city council, we had to find a NASA website so you could download a photo.
SCHLEY: Everybody used that NASA website, I remember.
WEED: (laughter) To demonstrate the speed, because there weren’t any big photos online. But the always-on thing really does change behavior, because instead of looking something up on the yellow pages, or -- you could go look it up online. I mean, so -- you know, if you wanted to, you know, know what the weather was -- people started doing things, that was so much easier if you didn’t have to go dial-up and then go look it up. You could just go to your computer and punch it in. And so that was the early time of the internet which really started changing consumer behavior, which, “Oh, I can go get information this way easier than some way else.”
SCHLEY: Because it took us away from that notion of having to go conduct a “session,” right? Now is the time I’m going to go do the internet, and -- anytime.
WEED: Yeah, to where it was just easy there; it was quick to get to, yeah, and then --
SCHLEY: Did you guys work with @Home, or were you sort of independently --
WEED: That was before @Home. So we launched as our own -- we called it “Cable Speed.” It was our own product. In fact, we had two products, we had “Cable Speed” and “Always On” internet. And so, one was the fast 10 meg product, and one was a lower-cost product, but you know, you’d have to dial up. And so it was LANcity modems with our own system, our own connection to the internet.
SCHLEY: Do you remember the rates you charged for those two products?
WEED: I know we launched; with the 10 meg, we launched with 99 dollars. At the time, it was a super high-end product targeted to people who wanted T1 lines, or you know.
SCHLEY: Because that was 99 a month, you’re saying?
WEED: Ninety-nine a month.
WEED: Yeah, isn’t that funny. So yeah, this is mid-’90s, and you couldn’t get it any other way, and we were pricing it relative to T1 lines, which were 2000 dollars a month, and it was a much better product. So it was really geared towards -- and the LANcity modems were $500 apiece, right, so we didn’t rent those. It was -- they were expensive. And you had to have a mo-- I think you had LANcity-- we might have had a modem on each end; I can’t remember exactly -- I had to pair it, and so it was -- I’m pretty sure you had to pair them. But anyway, it was expensive to deploy any individual customer, so there was some justification to that. And it wasn’t until we got DOCSIS that we lowered the prices, I Think.
SCHLEY: That’s right, that was pre-DOCSIS when you launched. So I want to spend some time, obviously talking about Wave Broadband. And tell me about the kernel, or the inspiration, or the beginnings of the vision for what would ultimately become your company?
WEED: So I stayed on with Millennium, and you know, a year or two later, that wasn’t working out, it didn’t work out for that company, and I could see that it wasn’t working out for them. So when I sort of looked at what I was going to do, knowing, or feeling like it wasn’t going to -- this company wasn’t going to be a successful as I hoped, I looked at what I wanted to do, and the first thing I wanted to do was buy the company back, right? And so I made an offer to Millennium to buy the company back, Summit Communications back from Millennium. And they turned me down. So I said, OK, well if that’s the case, I’m going to go do my own thing. And so I left and went to start a company, Wave Division Networks is what I called it, and it was focused on broadband internet, and I went out to do that without -- trying not to have a preconceived notion about the technology, right? I wanted it to be network-agnostic, or technology-agnostic. And actually, through another investment, launched a wireless broadband company down in Petaluma, California, at about that time, in fact, right at that time, which was used in a Nokia mesh system to deploy wireless. We looked at some broadband over power line stuff back then, which didn’t work. So -- and the Nokia mesh system turned out not to work. So, and then we looked at wireless, and other wireless stuff just didn’t scale at that time. So the early technology of what became Clearwire was -- we looked at that right about that time too, was using [MWS?] licenses to sell wireless. But we just looked at the technology and said, you know what, cable’s the best technology to do broadband, and what do you know, I happen to know that anyway. So I went out to acquire, you know, a cable system, to sort of start Wave.
SCHLEY: How do you do -- I mean, you obviously had confidence in the business and its future. I imagine you attracted, or rounded up financing, so you were in a position to start to buy properties.
WEED: Yeah, I didn’t know how to do it. I called the investment banker that sold Summit for us and asked him, “Hey, could you raise me money if I could find a cable system to buy?” And he said, “Yeah, you’ve been running cable for a long time, so, I think we could attract some investors,” and so, you know, we flew to New York, and Boston, and I went calling on all these private equity guys, and you know, generated some interest. We went through two or three firms before we settled on a deal that I actually had, because we looked at some cable deals that fell through. And then, private equity company, Sandler Capital, that backed what was Wave Broadband; what became Wave.
SCHLEY: What was your first deal, what your first acquisition was?
WEED: Very first one was Pat Davis, who owned a company called Cedar Communications. It was a little system outside of Seattle, about 5,000 customers. And, you know, he was a member of the ACA, and I was -- I think I was chairman at that time, and we were flying back on the plane together, and I knew he had been interested in selling to TCI. And the deal fell through because they sold to AT&T, and that whole thing collapsed. And so I said, “Hey, you know, what were you going to sell it for? Would you still sell it for that?” And he said, “Yeah, if you could get that money, I’d still sell it. I’m still, you know, interested in retiring from the cable industry,” and so that was my first deal, and it was, you know, basically handshake on the plane, and you know we put an agreement together. I then went to -- that was too small for Sandler Capital, so we then went to Northland Communications, who had two systems for sale that were near Pat Davis’s system. One was right next to it in North Seattle, and the other one was out in Port Angeles, Washington, which was, as the crow flies, about 30 miles away, but you have to take a ferry and drive around to get there, so...
SCHLEY: These are bigger systems?
WEED: The total of the two are 15,000 customers, so you know. And you know, this is a time when the industry, this is 2002 that we signed these deals up, and a lot of these guys, if they hadn’t rebuilt their networks, they were losing customers to satellite. And if they didn’t have broadband launched, they were just losing revenue, and not offsetting it with broadband. And Pat Davis had launched broadband, but Northland had not, and so they were losing customers to broadband. And so, these were great markets that, (inaudible) on these cable systems from my perspective, and they were incented to sell by their banks to solve a debt problem they’d gotten into because of that problem someone in the industry had, if you hadn’t rebuilt your networks before, you lost to satellite, you were in financial distress, so...
SCHLEY: And the new owner obviously had to be willing to commit new funds to upgrade the systems.
WEED: Yeah, so the model I built -- so I ended up signing both deals, and not having closed either one, and then built a model that says I’m going to invest the money to fix -- to upgrade the network. Because by now, people have made that mistake where they bought systems and underestimated the cost upgrade. And so we knew what it was going to cost to upgrade, and I had done that before. And so the presentation to Sandler Capital was, we were going to buy these three cable systems, two from Northland; one from Cedar, upgrade them to launch broadband, and then tie them together to create enough scale. And it worked.
SCHLEY: It’s interesting because, as you alluded earlier, with reference to TCI and Charter, there were bigger companies circling, right? There was some consolidation going on in the industry.
WEED: At that time, there was. This was -- it was right after 9/11, so I started Wave Networks in November after 9/11. And then, this was the following year. Cable had lost to satellite; the debt markets were in trouble. So this was a window when, in fact, in multiple cases, in Northland’s case, and in Cedar’s case, they’d try to sell them, and the sales didn’t go through, and you know, there were no buyers. So at that -- you know, there’s that short little window there, where the finance market hadn’t recovered after the recession from post-9/11, and there were some cable industries that had some serious debt problems because of their loss to satellite.
SCHLEY: Was it scary, were there sleepless nights for you, you’re making big investments?
WEED: Yeah, I think -- you know, I’d made a little bit of money when Summit sold, working for Jim, so that gave me a little bit of breathing room, thinking, OK, I could work for a year, so, you know. Live for a year or so without working. But what I didn’t estimate was how much money it was going to cost just to get these deals done, right? So I had a half million dollars in legal bills that had piled up, that I hadn’t paid. You know, fortunately, the local law firms had agreed to, you know, defer payment until we closed, but if we didn’t close, then I was going to be in trouble. So you know, it was definitely an exciting time, and trying to get a deal done with a private equity company for the first time was not easy. You know, they know your -- if they know you need them more than they need you, then the deal gets worse. And so, there were a lot of sleepless nights where I owed a bunch of money, and I wasn’t sure these deals were going to get done, and I had to get a deal done with private equity to get it funded.
SCHLEY: But you got them done, and then you continued to grow from there, right?
WEED: Yeah, so we closed those three systems simultaneously in March of 2003. It shows you, again, the market, because we were late, and the sellers agreed to wait and let me get funding put together, because they didn’t have any other choice. And six months later, we went to Charter, who had the Port Orchard system, which was -- so we had 20,000 customers. Charter had 25,000 customers in Port Orchard, which was next to where we operated. Most of our systems were not in the Seattle DMA. This was the one in the Seattle DMA. Charter tried to sell assets the year before, the whole Northwest, and you know, no buyers. And so we went to them and said, hey, why don’t you sell just this one system, not the whole Northwest, and it has a higher value per customer than the rest of them because of its demographics, and they had launched internet, so they had higher -- everybody’s looking at price per subscriber. And Charter was trying to keep their stock above a dollar so they didn’t get delisted. And, you know, it was a classic win-win, and they were able to announce that sale. It was the first time Charter had sold anything since Paul Allen started buying. At a high price per subscriber, I think it was $3600 back then, which you multiplied that times all their subscribers, you know, the company would be worth a lot more than it was trading. And so that was the benefit to them, they could say, “Hey look, we were able to sell something, and here’s the value of it.” And the value to us was, because their broadband penetration was so high, it was still a good deal. So, that was our next acquisition, and that was the one that gave us scale, which allowed me to hire -- bring in my partner, Steve Friedman, who I’d worked with at Millennium.
SCHLEY: Right. By -- sort of fast-forwarding, but by 2011, you did a 60,000 subscriber acquisition with Broadstripe, correct?
WEED: Yeah, so that’s the old company that I tried to buy back. And you know, long story short, we continued to try to buy them, because we ended up buying the stuff in Seattle that they didn’t own, so we bought the independent cable systems around them, and the ones I just described, and so then they were left as the natural piece of the puzzle for us. The rest of it was all Comcast by now. And so we tried to buy that. Much earlier, I think it was 2006, or 2005, we had a deal to buy it. And private -- Highland Capital, it was a hedge fund, came in and bought all the debt and then refused to close the deal. And so that deal fell through, ended up in litigation with them, and that with some other litigation Millennium got into in trying to buy James Cable and backing out of it. Highland Capital running a cable company, and never run cable before, they got into a litigation over not selling, and they got a litigation over not buying. They ended up going into bankruptcy. They were in bankruptcy for three years, and we ended up buying it out of bankruptcy. We finally closed it in January, I think, of 2012. And we bought all the assets from Millennium out of bankruptcy and spun off the Detroit area to my friends at Wide Open West. Steve Cochran, who’s also a former Millennium guy, we worked there together. And then we kept the rest of it.
SCHLEY: Along this path, and you had also sort of set your sights south in California during the interim, right? Because, yeah, I think you were one of the first operators to get a statewide franchise in California.
WEED: Yeah. Yeah, so you know, we got those deals done in Seattle, and the model proved out. We launched internet; we were growing the business, outperforming, you know, what our projections were, you know, because internet was growing faster than people thought. And we upgraded networks, and so it was going great. And so, OK, now what do we do? Well, a system came up for sale, another one in bankruptcy in Ventura, California. And we bought that from the family that owned it, one of the original pioneers in the industry. I’m drawing a blank on the name now, but it was the -- sort of the north half of Ventura, California, was an independent cable operator. So that was our first entrance outside of the Seattle market, was we went down south and bought that cable system. Those guys had gone -- very unfortunate; the family had owned it since 1950. They were trying to rebuild it to launch internet. They got the rebuild done, but then they defaulted on their payments to the contractor, and the contractor refused to finish it unless they paid him, and they ran out of money. And so we bought that system, finished the rebuild, and had internet launched within months from acquiring it. And similar result, I mean, once you got broadband on, the system was great. And that was southern California, then we bought another system out in Cerritos, California, from -- it was the Verizon System in Cerritos, California. We bought that. Similar thing, we bought it and rebuilt it. So our model was, you know, buy these distressed things, rebuild them, and launch internet, and grow the business. We then -- in San Francisco area, Xcel Energy had built an overbuild system in Walnut Creek in Concord, California. And it was a green-filled overbuild. This was -- you know, RCN was building San Francisco. Xcel Energy built the East Bay, Concord Walnut Creek. This was in the late ’90s, early 2000s, and where RCN stopped and went bankrupt, Xcel energy finished the rebuild, because they were -- you know, they had the money, and they finished it. And as soon as they finished the build, then they put it up on the market for sale, and we bought that in, I think 2004, ’05. Probably 2005. Which was a great deal, because they had -- as a power company, they didn’t know how to operate margins, right? So we got a brand new system that had just been rebuilt. They had a lot of customers on it, but -- and a great reputation. It was a gold-plated system that we operated and tied into our network. And we kept expanding in San Francisco; we bought the RCN system after they went through their bankruptcy, and combined that with the Xcel Energy system, and that’s our San Francisco platform that we have today. And then in L. A., we had been talking to Charter about buying their Sacramento area systems, and we also were looking at an independent cable operator in Sacramento named Starstream. And so we did this deal where we bought Starstream, and we traded our L. A. properties to Charter, who was big in L. A., for their Sacramento systems. And so, that’s the markets primarily we have today. We’ve done some little stuff, but it’s -- San Francisco is the combination of Xcel Energy and RCN, and Sacramento is what was Charter and Astound in the Sacramento DMA. There are suburbs around it.
SCHLEY: Steve, how big is the company today, if you look, kind of a household served, or whatever metric --
WEED: We think of it as RGUs, we think it’s more relevant than video and all that. And we’re 430,000 RGUs. It’s 350 million in revenue, 150 million in cash flow.
SCHLEY: It’s a big company.
WEED: Yeah, it’s certainly --
SCHLEY: By cable standards, it’s a big company.
WEED: A thousand employees, we just had 1,000 employees last week. That’s a big deal for me.
SCHLEY: As I listen to you recount the story of the growth and the acquisitions, you keep talking about internet, and how that was such an economic propellant of what you were able to do, both from a raising funds standpoint, and a revenue standpoint. And you named the company Wave Broadband.
SCHLEY: You didn’t name it Wave Cable.
SCHLEY: So, I just would love you to riff a little bit about the role of broadband, as kind of this, you know, driver of what you’ve been able to do, and how you’ve organized the company around it.
WEED: Yeah, I think we -- from the beginning, you know, I always said to our teams, like it’s about selling broadband internet. The video business at that time was still good, but it wasn’t growing. And all the growth was coming from broadband. And in the markets we were in Seattle, and later in San Francisco, we were just absolutely convinced that every home was going to have broadband connection at some point. So, you know, we wanted to be ahead of where the market was going, and from the beginning it was, we want to have the -- you know, our core business plan from the beginning was we want to have the fastest internet and the lowest-cost internet in every market we operate, so that if someone wants to connect to the internet they’re going to connect from us. And you know, from -- this was early 2000, we led with internet, and we led with choice and control. You can have super fast, or really cheap. I used to call it -- with the team, I called it, “just as shitty as DSL.”
WEED: And it was just -- we had a product to make sure that if you wanted slow internet, we would have that at a lower price than DSL, but you really would want fast internet. And we launched that way from the beginning, and our marketing was focused on selling internet. And oh, by the way, do you want TV? And a lot of people do that today, but this was, you know over ten years ago. And that really worked, and it especially worked with cable systems who had lost a lot of customers to satellite. And still today, you know, we have, you know, a lot more internet customers than video. When they’d lost customers to satellite, it was hard to get them back. But you could get them to buy our internet. And so, you know. We were featuring internet because that’s what we thought the future was. We wanted to get ahead of the market. We wanted to make sure that anyone who wanted internet connectivity, whether they want it fast or slow, they’d buy it from us. No reason to buy it from anybody else. But what we didn’t think about was that the video business was going to stay bad, right? We thought that those video customers would come back, and that really never happened. To this day we have markets. The Portland market was the last one we acquired. And they still hadn’t launched internet everywhere, when we bought them in 2008. And you know, they had markets where 20% penetration. A lot of the Portland markets were like below 20%. And they’re still sitting there at that penetration even though we’ve got great video product. But once customers have shifted, it’s harder to get them back, where on the internet side, those markets are growing like crazy.
SCHLEY: I think it’s interesting, because you sort of offered this preview, I think, of where the cable industry may be going in a couple of ways. You know, there was an investment analyst report last week that said, we’re about to reach this point where there are more broadband customers than video customers in the cable industry, domestic cable industry at large. So that’s -- but you’re already there.
WEED: Yeah, I’ve crossed that years ago.
SCHLEY: You’ve been there for a while. And then I want to talk about your vision, because I think you expressed this at a panel session a little bit this morning. When you think about the future of bundled video, where are you going? And where is your company going?
WEED: Yeah, I mean -- once again, not only you focus on broadband internet, but you focus on what the customer wants, and what drives satisfaction. And today, when we look at the products we’re offering to our customers, they love our broadband internet, high satisfaction, high perceived value. They like their phone product. If they have a landline phone, that’s a high-quality phone at much better value. They like our WiFi in the home, connecting all the devices. That’s become a much more high-value product today than it was even two years ago, with all the smartphones and laptops. They love our DVR, HD-DVR -- multi-room HD-DVR, where you’re connecting all the TVs to a single recordable device, they can watch all our shows, they can get HD, you know, we’re expanding that.
The one thing that’s the big tailwind, or headwind on our customer satisfaction, and value, which ultimately drives, you know, the growth of the business, is the programming cost, right? So our video subscription rates go up every year, and that makes our customers mad. We’re putting through unjustified rate increases. We’re passing those on to our customers. So despite all this positive value we’ve created around our products, we have one product which a lot of our customers still associate us with as our primary, even though it isn’t, that’s got decreasing customer value every year when the rates go up. You know, the customers perceive that as costing too much, and being forced to buy stuff they don’t want, and the rate increases aren’t justified.
And so, what we want to do, is we want to get out of the business of passing through the programmer’s rate increases, and in the business of just doing all the stuff our customer loves us for. And you know, fortunately today, the technology path is pretty clear. I mean IP Video and over-the-top video, some people thought as a threat. Well, it turns out to be a savior if you’re an independent cable guy, and you want to connect customers to some content, and let them pay the content provider directly.
So, you know, Netflix is the biggest obviously, and most known, and we have a Netflix agreement now; many cable operators do. You know, that’s an agreement where we feature Netflix on our customer premise equipment and enable the customer to easily go get it in a way that’s more convenient for them than if they weren’t a customer of ours. And yet they pay Netflix directly. And so we’re not in the business of passing through whatever they choose to charge. But we are in the business of providing a user interface, a media gateway. In this case, we launched Roku three years ago, we had ARRIS Media Gateway two years ago, we’re now focused on TiVo now that they have a media gateway with the Pace box. Because it’s a great operating system. And that’s sort of the next generation to the HD-DVR. We have a media gateway, it’s got six tuners. It not only connects every TV into the house to a single recording unit, but it connects all those TVs to the internet. It connects all your other devices in the home to the TV signal so you can stream our cable content on handheld devices. You can get onto the internet from your TV.
So we think that’s the platform that, you know, today, these over-the-top providers are primarily providing alternate content. And customers like that because there’s some choice and control, but there’s still a need for livestreaming, you know, basic cable content, live TV. But that technology, the same technology that allows them to go to Netflix, or Amazon, or Hulu, or YouTube, exists for somebody to have a virtual cable operator lineup. And Dish has announced they’re going to do that. We think with this media consolidation, it’s really about getting the lowest cost programming so you can sell over-the-top to all consumers, whether they’re on your network or not. So you know, Dish has announced that I’m convinced that if Dish launches, if you’re Comcast or AT&T, DirecTV, when you launch an over-the-top cable lineup also, if you can get the rights to do so.
So you know, we think that that’s going to happen, and that in addition to this over-the-top content, you’re going to have these virtual cable operators that they’re probably just the big guys who have lower content cost. And they’ll make that, what looks like a cable subscription available to anyone at a lower price than we’re paying for the content, because they have much lower costs than us. So if you see that coming, on one hand it’s like, oh no, these guys are going to put me out of the video business, because their costs are so much lower than mine. But the positive is, hey, here’s an opportunity for me to be the service provider to my customer, the stuff they really love, which is connecting all the devices in the house, providing good service, WiFi, media gateway, and then enabling them to go purchase that content from whoever they want, pay them directly, let them shop and choose, have more choice and control. I solve my customer satisfaction problem by giving the customer his own freedom and choice and control to pick whatever content they want. And what I’m providing is, you know, the broadband connection, and the smart home, and the service, and the operating system, which by the way is where we make our money anyway. You know, we make more money on the HD-DVR and that equipment today with high customer satisfaction than we do on the video subscription business.
SCHLEY: That is crazy.
WEED: If you separate video, then -- (inaudible) supposed to starting to look at this now, a lot of them had the video revenue all lumped together.
SCHLEY: Including the HD-DVR, yeah.
WEED: If you pull out all the equipment, and you look at just the subscription business, minus your cost to product, because the margin’s been shrinking, you know, we’re only making 14% of our gross margin, is -- of our total gross margin, only about 14% is from the video subscription business. So, I can keep all the business that my customers are happy with and buy content from somebody else. And that’s what we’re -- that’s not our business plan. And we’re executing on that, and you know, we -- there’s some things that have got to come together, mainly around the equipment, and operating software, and TiVo’s got to make some improvements. But you know, we’re excited about that.
SCHLEY: What a transition, though. And I think, there’s a lot that’s captivating about what you just described. But one element I don’t want to lose is that it’s not just providing a dumb pipe service. You’re -- to date, OTT video has sort of been a homemade proposition. You have to kind of rig up the stuff yourself. And you’re sort of managing that on behalf of your customers.
WEED: Yeah, the TiVo example is -- the agreement we have with TiVo and Netflix is we’re positioning Netflix with a jump channel. So, there’s two ways you can get over-the-top through TiVo. One is you can go their app store, and then from the app store you can go to get over-the-top stuff, and it’s kind of like Roku, it’s just scattered out there. And of course, TiVo’s better, because it’s going to be on every TV; you can access it. But with Netflix, we’re going to have a jump channel, so it just looks like a channel on your lineup. So as you’re paging down your cable lineup on your Wave box, which is powered by TiVo, Netflix will just be one of those channels. And if you click on it, it automatically sends you to Netflix and authenticates you. So it’s going to be a much easier way to get over-the-top content. It’ll work seamlessly. You know, customers already have high value when you connect all their TVs to a DVR. Now you add, you know, the VOD service, and the over-the-top services, I think we’re excited about that.
SCHLEY: And you’re OK with that customer dealing with the programmer independent of you.
WEED: Yeah, because my business is delivering a quality broadband stream, and providing that service in the house, of which there’s high demand. We’ve seen it -- we now see it with WiFi routers. Customers would rather have us install WiFi, or they could buy it from somebody else. TiVo could have sold their boxes retail, but they’d rather buy it from us. There’s clearly a strong demand -- phone product’s another one. You could buy phone from an internet provider, or you could have us install it and hook it up. Well, you know, we’ve got, you know, 30% phone penetration, or 30% of the market. So there’s clearly a value that the customer sees besides the pipe in the service that we offer in hooking everything up, providing tech support around it, making sure it works, sending -- giving them the updates when the more and more of your house gets connected to the internet, the more you’re going to need a broadband service company to deliver it and make sure all the devices in your house that are connected, which is mostly TVs and iPads today, but it’s going to grow, they’re going to need somebody to provide the service around that, and I think that’s high value. And I don’t want -- I don’t need -- they don’t need to be my customer from a content perspective. They just need to be my customer from the broadband service.
SCHLEY: I also wanted to talk, Steve about -- you know, from the very early stages of your career, and I can’t remember which company you were talking about earlier, but the service has to work, you know, or you’re going to suffer churn, and you’re going to be haunted by defections, and whatnot. You guys with Wave did something that I think is interesting with, the physical arrangement of your customer service team, and where they work, if I understand correctly, and without -- tell me about the decision there.
WEED: Yeah, so the way I’ve described it to our time, and the other fundamentals of Wave when we started it was, it’s got to be-- you know, it was all about delivering a better experience than the competitor, and their -- you know, there are three pieces to that. One is, you’ve got to have a reliable network. So we upgraded the networks with fiber, and make sure they’re reliable; make sure they’re redundant, so it works all the time, as much as possible.
The second is, you had to have all the cool products, right? So customers have a reliable network, they want to have cool products. I mean, you’ve got to make sure that you have cool products at competitive products. Mostly broadband network, that’s, you know, give them choice and control, cool products. You’ve got the products they want. That included video a lot in the past with VoD and HD. We were early on those two, to make sure we had the cool products, we were early on phone.
And then the third piece, which is the hardest one, which is every time a customer interacts with us, it has to be a positive experience, and hopefully a surprisingly positive experience. And so, when we started Wave, we said, OK, we have to do these three things. And if you do all three of those things, you’re going to have high customer satisfaction.
And you know, most cable operators can do the first one, build a good network. Most of them now can go figure out what products customers want and launch those. But the third piece is the hardest, and I think we knew that. And when I started Wave, we went to the nicest building in downtown Kirkland, which is a high-end market. I mean, Google was in our building. Microsoft’s across the street. This is a high-tech, high, expensive job market. And we chose to locate our call center there, which is counterintuitive, and some of my bankers thought I was crazy. You’re going to pay 15 an hour instead of 10? You know, if you go a mile -- an hour away. But, and we not only located in this cool building in a hot job market, we put them on the top floor that had the view of the lake and downtown Seattle, and we had barbecue decks.
And you know, this was 10 years ago, when a lot of call centers were still overseas, or in lower-cost markets, and the idea was that, plus with our field techs, those were -- our customers made contact with us. It’s got to be a positive experience. Well, how do you do that? You’ve got to have -- it’s got to be a fun place to work. You’ve got to have smart kids working for you, that knew what they were talking about, and it needed to be located right where the corporate office was. So we could walk in, and for the first five years, the call center was right out -- my office was -- my door was open; I could hear call center reps talking to customers.
And in fact, I talked to one of the CSRs the other day, and she says, “Do you know how stressful it was sitting right outside your door?” I don’t sit there anymore. They’re happy about that. So, it was designed to try to drive that customer experience, and we’ve done pretty good at that. We compare satisfaction scores to a lot of our peers, and we’re right near the top of Net Promoter score, and that’s been -- in addition to, the call center location is sort of symbolic, but there’s a whole business plan around that, and employee’s bonused on customer satisfaction, has been for years.
SCHLEY: That’s maybe the one element of the cable industry that, you know, throughout your career and others, that hasn’t changed, right? Everything else has changed. Customer satisfaction part.
WEED: Yeah, but, it’s still --
WEED: -- it’s still key. Now today, and that’s another thing going forward, the customer, you know, when I started Wave, it was true, had these three pillars of customer satisfaction. Well, there’s a fourth pillar now, and that’s how a customer interacts with you, how they do business with your online, or without actually talking to someone. And that’s -- you know, Amazon had sort of created that, and you know, I know -- Amazon is right across the lake from us, and Nordstrom’s right next to Amazon, and I know -- like Nordstrom, and he’s always looking and Amazon, and Blake’s all about the human interaction. Well Nordstrom’s a very fast-growing tech company now, because they focused on, and picked up early that driving customer satisfaction actually was an online experience as well, and Amazon’s proven that. High satisfaction, and you never talk to Amazon, right? And they figured out how to make it easy to do business with me, without actually talking to me. So, there is a change now, it’s still an issue, and it’s still corridor business, but you know, over the next five years, we’ve got to -- we’ve got to get much better at making it easy to do business with us, without talking to us, and that’s another initiative of ours.
SCHLEY: As such, your personal odyssey and then the Wave Broadband story, they’re both great cable stories, the Cable Center is in the business of storytelling, and Steve, we greatly appreciate you sharing some time with us today. For the Cable Center’s Oral History series, this is Stewart Schley.
SCHLEY: That was awesome. I love that -- where you’re going with the business plan.
WEED: Thank you.
SCHLEY: And I’m convinced that’s where the cable industry is going.
WEED: Yeah, I think most people are.
SCHLEY: But you’re getting there faster.
WEED: They’re just --
SCHLEY: Really, even the --
WEED: They -- well they -- you know, when I was talking to Shalini [Ramachandran] about it, she goes, “Why isn’t everybody else doing this?” And I say, you know, I said, “They’re afraid of the revenue they’re going to lose.” And when I was on that panel, they’re texting questions, right? And she was getting half of them, but they were all about, “How do you make up the revenue? How do you get a return?” And, I think that’s the issue is people, they’re not going to leave the video business until they’re absolutely sure that it means I’m not going to lose revenue -- or I’m not going to lose cash flow, right?
SCHLEY: Exactly, and I think it’s part -- because I agree. I mean, if you look at the Comcast, you know, breakdown of revenues, that’s still the single biggest contributor, and so if it disappears one quarter, it’s disaster from an investment standpoint. But it’s kind of an education thing. It’s not just about the revenue.
WEED: Well, first you’ve got to go gross margin, because cost-to-product doesn’t exist for internet or phone. And then you’ve got to take out the equipment and say, “OK, can I keep that business?”
SCHLEY: That’s what -- I think they should start focusing on. Because when you said that, that if you take out the -- the margin on the equipment and whatnot, there’s really nothing left. I don’t think a lot of people know that.
WEED: I’m talking to this guy, I mean, there are some big MSO’s in the last six months where I said, “Yeah, we were looking at the equipment too,” I mean, so people are starting to figure it out. But you know, it’s just, you know, there’s such a -- the industry is so heavily financed, that the, “Whatever you do, don’t screw it up,” overrules.
WEED: So, it clearly is the way to go, I think, and I don’t think people disagree. They’re just not comfortable with the risk.
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