Online Extra: Q&A With GCI's Ron Duncan

Cable World, July 25, 2005

An extended interview with the CEO of Alaska's largest cable operator.

By Mavis Scanlon

Bundling in the boondocks has stopped satellite at the front door. General Communications (GCI), Alaska's largest cable operator, is fighting the good fight with its bundle of phone, data and video and its newest product, wireless. In addition, two investment banks initiated research coverage last month of GCI, signifying Wall Street's interest. CableWORLD checked in with CEO Ron Duncan to discuss, among other things, how he's countered satellite's addition of local channels with a smartly priced bundle.

CableWORLD: This year GCI closed its Barrow Cable TV acquisition, expanded local phone service to rural areas and completed its cell phone service rollout. What else is going on?

Ron Duncan: We're finishing up a refinance of a senior credit facility, which will complete the financial restructuring we started a year ago with the offering of high yield bonds, and position us to really go forward for the next three or four years without any financial events. That will also enable us to continue our stock repurchases which we've been doing. We purchased slightly more than 9% of the company's total outstanding stock in the last 12 months. We'll continue at that pace--we anticipate going forward with that over the next couple of years as well. And we'll continue to drive bundled products deeper into the marketplace. We're looking forward to next year when we'll be able to take local service into another 100,000 homes or so where we don't have authority yet to provide GCI service for local telephone, and we think that helps drive the bundle as well. So a lot of stuff going on and we're pretty pleased with it.

CW: What does Alaska's competitive landscape look like?

Duncan: Dish Network put local signals up about two years ago. They initially had some good success with that and we noticed we were losing a number of customers in the first six months. We responded with a couple of product changes, the most notable of which is our Ultimate Package bundle of phone, video and data for $79 a month. That stopped the satellite guys dead in their tracks.

We're seeing customer growth on our side of the fence in contrast to customer erosion before we put that product in the marketplace. We think the bundle really is a compelling competitive offer, and I think the bulk of the Dish growth in this market today comes from areas that are outside of the cable footprint.

CW: How do you make a profit with a $79 product?

Duncan: Well, the bundle itself is profitable, although you'd like to see people buy more, and in fact what happens is they do buy more. The pricing in the bundle is so compelling that when customers get on the line with us they discover they can afford more of what they want--they will add Showtime or HBO to the bundle for $9 a month; they'll upgrade the speed on the data modem; they'll buy more minutes for an extra long distance phone line; they'll take the digital special interest tier as an upgrade. Our average price under the $79 package goes out the door at about $129, so we get a $50 average upsale. It's not that different from what Cablevision was finding with their $90 package. If you get the consumer in the door with a good deal they will give you a bunch more business. In general we've seen slight increases in average revenue per customer for people switching to the package from services that weren't bundled before. It's not because their rates are going up--their rates per unit are actually going down--it's because with the reduced pricing they're actually spending on the telecom service.

CW: GCI lost about 1,400 cable customers between 2002 and 2004. Was that the biggest effect of Dish Network offering local channels?

Duncan: We lost close to that number over probably the first three quarters that Dish was in the marketplace. Once we responded with the bundle we've seen our numbers continue to go up. I suspect Dish has continued to add subs--there has been new home growth in the market, and we see a lot of their dishes popping up in areas on the fringes where cable isn't built out yet and smaller places where it's just not dense enough to build cable. But we're real happy with our products and the response that we put in the marketplace. We're satisfied that we've stemmed customer erosion.

CW: DirecTV is also planning to introduce local channels later this year. How will that affect competition?

Duncan: DirecTV is just awful quiet up here. I don't know what they're going to do. We're out there with 12 channels of HD. And the local channels are converting to HD and Dish is probably not going to carry the HD version of the local channels, so there's a lot more product to be offered on the cable side. And the fact that you can get your phone service and your data service makes a big difference as well. It's good competition, it keeps us on our toes, but I don't think it's going to have an enormous impact on our subscriber base.