How Schleyer & Co. will fix AT&T broadband: in an exclusive interview, the new CEO of the troubled unit talks about the pressures of Wall Street, the company's reputation for poor customer service and his plans for change. "It's like a Porsche that needs a tune-up," he says of the nation's No. 1 MSO

Cable World, Nov 26, 2001 by K.C. Neel

After a four-year hiatus, three of the cable industry's most respected cable executives have come back to the business, having agreed late last month to oversee AT&T Broadband, the nation's largest cable operator, which many industry analysts believe has been broken by stalled margins, poor management decisions and low morale.

AT&T chairman Michael Armstrong has charged CEO Bill Schleyer, COO Ron Cooper and CTO David Fellows with improving the financial health of the broadband unit, boosting morale and rolling out new services at breakneck speed. The team that led Continental Cablevision until it was sold to MediaOne Group in 1997 has received a warm welcome both inside the company and out. One corporate VP, who has been with the company for several years at both the regional and corporate level, told Cable World that there is a renewed energy and optimism among the ranks now that the new team is in place.

At the same time, many analysts and industry observers believe AT&T Corp.'s board members finally realized that they needed leadership with strong cable television industry experience to take the broadband unit to the next level. But the expectations are high.

AT&T Corp. paid more than $100 million just to buy Tele-communications Inc. and MediaOne Group. The company also incurred significant costs associated with integrating those two companies as well as various properties it had acquired via system trades over the past couple of years. For instance, at one time, AT&T Broadband supported 24 billing systems throughout its systems that count almost 14 million customers. Today, it has two--one for video and data and another for telephony.

AT&T Broadband has also spent millions of dollars upgrading its plant to deliver local telephone services, a controversial move that so far only AT&T and Cox Communications have undertaken. The result: AT&T Broadband became a massive company that, like Humpty-Dumpty, was so cumbersome and financially unstable that it lost its balance. Can Schleyer and his army put Humpty-Dumpty back together again?

Clearly, there is much to be done. The three executives sat down last week for an exclusive interview with Cable World to talk about the challenges that they and the company they lead will face in the coming year.

Some excerpts:

CW: Why have AT&T Broadband's margins fallen so low, and how do you plan to bump them back up?

SCHLEYER: First of all, our revenue per sun scriber is pretty good and will continue to get better. I'm not going to give financial projections here--I can't do that. But we had, in the last couple of years, the cost of integrating any number of companies, and that is an incredibly expensive ticket. We're getting through that now.

In addition, we had to cross the telephony path, which other companies have not had to do [AT&T leads MSOs with 848,000 sun scribers to phone service over cable pipes]. Cox has telephony, but they're not in nearly as many markets as us. We're in 15 markets right now. We've got fixed costs in all of those markets, plus fixed costs we have here at corporate. That's generating negative margin for us. So when you apply that against the normal cable companies, what you're seeing is a lower margin.

COOPER: One of the things to consider is that all this investment we've made and continue to make has driven our revenue per basic customer to the highest level in the industry. We're closing in on $58 per customer across our entire customer base. No one else in the industry is doing that or is even getting close to doing that across their whole base. We have markets where revenues are over $60 [per subscriber]. As we continue to refine our operating infrastructure, more of that $60 gets dropped to the bottom line. It will have a very favorable impact on margins.

CW: Even so, there's a feeling among analysts and other cable executives that AT&T Broadband is broken. Do you agree with that assessment, and if so, how do you piece it back together?

SCHLEYER: NO, it's absolutely not broken. We've got great employees here. They've undertaken so much activity between the' mergers, the trades, the change of processes, the introduction of the very complex telephony product line. They've tried to do an awful lot in a very short period of time. Have some things fallen through the cracks? Absolutely. No question about it. But, is it broken? Not even close. This company will emerge, I believe, as the premier broadband provider in a relatively short order, and that's what our goal is. We started with a great collection of assets; we started with a great group of people; we've got some processes that need to be fixed, but, you know, it's like a Porsche that needs a tune-up. That's about it. It's still the same old Porsche that's going to run like crazy when it gets tuned up.

CW: Do you run the company differently from the previous management? Do you go down different roads?

COOPER: The road we've taken is an aggressive deployment of all of the products, including the circuit-switch telephony product, and that is not a road that most others in the industry have taken. Now, we're in very large markets.... We have pockets in Chicago, large pockets in Chicago, where our telephony penetration is already over 30%. That is going to prove to be a tremendous investment. We're continuing to do upgrades in telephony deployment here on a very aggressive pace; maybe that's a road that the rest of the industry will come to follow later. It does add its complexity, and it adds costs; but we've figured it provides tremendous outside opportunities, both in the long and the short term.