MVPDs Have More Work to Do to Minimize Customer Disruption During M&A Integration

Some warned that companies that didn't go slow in changing equipment, billing systems, customer service and other operations after mergers and acquisitions sometimes paid the ultimate price by having to file for bankruptcy. Some other companies were broken up. CEO Jerry Kent of mid-sized cable operator Suddenlink cited the bankruptcies of FairPoint Communications after it bought assets in the Northeast from Verizon, and Hawaiian Telcom, after The Carlyle Group bought Verizon's landline assets in Hawaii. Acquirers that didn't resolve culture clashes also struggled, he said, citing AOL/Time Warner and Sprint/Nextel. TWC was later separated from Time Warner, as was AOL. Hawaiian Telcom representatives said it's not an example of integration gone wrong, because it was acquired as a standalone entity and so there wasn't an integration. The other companies had no comment.

The prevalence of readily available online-only video services makes a smooth transition for this round of M&A even more important than in the past, said analysts and consultants. Failing to deliver what customers want will give online-video rivals an opening to become substitutes for MVPD service, not just complements, said David Sanderson, head of Bain & Co.’s media and entertainment practice. "The bar is going to go up" for what customers expect, he said. "The entity that delivers ... will be the one who will prevail over time."

MVPDs must focus on keeping existing subscribers, perhaps by offering them discounts or other incentives, said experts. They said the industry must keep broadband and video customers in mind when planning what changes to make at acquired systems, to better avoid the billing errors, programming lineup confusion and miscommunication to customers and employees seen after past takeovers. They prescribed communicating clearly to employees how jobs will change after takeovers, and deciding quickly which executives to keep and who will get severance packages.

"It’s unfortunate whenever there is an acquisition, there is going to be some customer disruption," said Kent, who estimated he oversaw $40 billion of cable M&A during a career that included running Charter. "The focus is to minimize the impact of that customer disruption." More improvement is needed, said Kent and others. "We can do much better as an industry" in improving reputations and being more technology-friendly, said Tapan Dandnaik, senior vice president-customer service and financial operations at cable operator Mediacom.

Part I of our series found that MVPDs' reputations could suffer even more if AT&T gets regulatory approval to buy DirecTV and Comcast the OK to buy TWC and to divest some systems to Charter. In this Part II, experts said in interviews that with prices likely to keep rising for broadband and video, customer service and free enhancements need to improve. Some said that smooth integrations are more critical now that MVPDs are losing subscribers, for the first time ever in 2013, according to SNL Kagan analyst Ian Olgeirson. He predicts cable subscriber losses again this year.

"AT&T has done a lot of large M&A over the years," said a spokesman. The telco has "a strong track record of successful integrations," he said. The other merging companies had no comment.

Priorities

Prioritizing what changes to make post-takeover and better working with other industries were among experts' suggestions. They said MVPDs can reduce the likelihood of major problems by setting clear goals for employees, communicating frequently with affected customers and making upgrades during off-peak times. "If you change one thing, it could be disruptive to the entire customer experience," said Sanderson, who consults with MVPDs. Name one point person to oversee integration -- "one throat to choke" as Kent put it. Companies are most vulnerable to losing customers in the time between reaching a deal and completing it, as rivals look to snare subscribers, said Sanderson.

Glitches will occur, and employees working on integration need to adjust even the best-laid plans as needed, said executives. MVPDs need to resist a natural desire to move as quickly as possible to unify disparate systems, said Chief Technology Officer-Connected Devices Ken Morse of Cisco, which sells set-top boxes and other video devices. "Be very cognizant of the time it takes to validate and test properly, so the first new experience you give to the TV customer isn’t one they treat as a backward experience." He counseled executives to "put yourselves in the shoes of the customer," especially those whose systems are being acquired, who will be "a little wary, to say the least."

MVPDs must communicate more clearly with customers when problems occur, said executives. "There may be glitches, but one thing that can help is communication," said Managing Director David VanAmburg of the American Customer Satisfaction Index, which finds MVPDs are the second-lowest rated industry behind only ISPs. To turn customers into promoters of brands and not detractors, MVPDs must be "clearly communicating a set of expectations a customer should have and meeting or exceeding those expectations," said Sanderson. "I'm not sure ... the industry has done all that good a job of delighting customers in the past." MVPDs haven't made enough use of VOD to tell customers where integration stands, said Morse. It "can actually make a big difference in keeping people’s loyalties," he said. "Even if there are hiccups."

More Complexity

MVPDs' increasing complexity makes for tougher integrations, said executives. With broadband, home security, phone and other products, not just video, more can go wrong. "This isn’t your grandmother’s cable business," said Kent. "There are a myriad of services, and that makes it much more complicated. We all may be better at it, but we also have more challenges."

MVPDs now keep customers more firmly in mind when combining companies, said executives. Cable operators have become "pretty good at merger integration, because that’s fundamentally the way these businesses have been built," said Sanderson. Cable & Telecommunications Association for Marketing Senior Vice President Mark Snow said, "You are starting to see these companies put customers in the middle" and think through how they'd be affected by changes.

MVPDs can improve their reputations through enhancements that don't cost extra, like TV Everywhere, introducing new products and using social media and data to measure customer satisfaction, said Snow and CTAM's Senior Vice President Anne Cowan. But TV Everywhere is "one area that this industry has not done a good job of serving our customers," said Kent. "We need to have our programming brethren and fellow operators" work more effectively, so more content is available on TV Everywhere and it's easier for cable customers to log in, he said.

Summers of Love

Some executives think integration woes could be eased by a return to the comity that characterized the late 1990's. Since then, the relationship between programmers and MVPDs has soured on rising cable-channel prices. Inter-industry cooperation may not return to past levels, some said.

"The customer is paying the price" for lack of wide cooperation, said former AT&T Broadband CEO Leo Hindery, who now helps run a media investment firm and has estimated he helped arrange more than $150 billion of M&A. "When there is an absence of cohesiveness, an absence of best practices, then the industry suffers and as a consequence the customer suffers." It's "become an adversarial world, because it’s come down to margins and the cost of programming is skyrocketing," said Mediacom's Dandnaik. "In the good old days, it was very cordial" between content suppliers and MVPDs, he said, saying MVPDs still have good relationships with equipment vendors.

Hindery, now InterMedia Partners managing partner, said he "couldn’t be more optimistic" that cooperation will return to what he called the summers of love of 1998 and 1999. He pointed to the work of cable's research and development arm, CableLabs. Under CEO Phil McKinney, the R&D organization has been cooperating more with other industries (see 1403030031). Integration will be informed by the experience of veteran executives, said President Bruce Leichtman of industry consultant Leichtman Research Group. "You do have people in the industry who have done it before," said Leichtman, who worked in marketing for a cable operator. "These are all industry veterans. These are not telco people trying to become a cable company."

Widely adopted standards will ease the transition of customers from one MVPD to another, because systems more closely resemble each other, said executives. They said customer devices have become easier to update, as a previous series of articles examined (see 1310310026 and 1312240034). Newer standards like those from the Digital Living Network Alliance give video subscribers no matter their provider similar product features, and they can keep the options they like if they change providers, said Amol Bhagwat, CableLabs principal architect. "We are hoping there will be nationwide support for a technology like this from the cable operators."

Merging Like With Like

Among the current crop of deals, AT&T/DirecTV may be the most challenging to integrate and take the longest to finish, because of differences in those companies' platforms, said executives. They said it will be harder to integrate piecemeal acquisitions of parts of companies, as with Charter's pending purchase of some systems, than full takeovers like Comcast/TWC. "Things that are more alike to start with will generally go smoother," said Cisco's Morse.

While some cable operators can combine systems in several months after a deal, it will likely be a multiyear process at AT&T/DirecTV, predicted experts. Because of differences in their technologies, it will be three to five years before there is "meaningful" tech integration at AT&T/DirecTV, said analyst Sam Rosen of ABI Research. Interconnecting different content delivery mechanisms can pose challenges, said Morse.

Comcast's efforts to move functions from household devices to the cloud and to standardize its operating system under the X1 will make integration of TWC easier than melding other systems, said executives. Functions already are updated daily in the cloud, said Morse. "You get updated all the time and we’re unaware of it." Comcast also has more experience than any other MVPD with integration, noted analysts. It seems to have "operationalized the integration of cable systems at every level," said Rosen. "They found a way to get past integration barriers." Leichtman called it the "Comcast way."

Yet Comcast and TWC have the most vulnerability to customers leaving that consulting firm cg42 has found of any sector. Those companies should use their deal as a way not just to cut costs and boost profit, but to pass savings along to customers from efficiencies of scale, said cg42 Managing Partner Steve Beck. If subscribers don't share in savings, they will escalate cutting back on cable in favor of online competitors, he predicted. Comcast/TWC integration "has the potential to be a soup of misery" for consumers, "if they do not start to aggressively go after some of these challenges" of what Beck called "already pathetic levels" of consumer attitudes toward the firms.