US WEST: bucking the merger trend to gain speed

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In June 1998 US WEST, the smallest RBOC bucked the merger trend of its competitors, when it completed a division into separate telco and cable companies. US WEST's president and CEO Sol Trujillo explains the thinking behind this move to Basil Ballhatchet and describes his vision of the new digital economy.

While other US operators sought to boost market share through mergers and acquisitions in 1998, US WEST adopted a diametrically opposite approach. In June 1998, the company completed a split into separate telco and cable companies.

The new, leaner US WEST remains focused on its core territories and aims to remain independent for the foreseeable future. US WEST has virtually focused all investments on its 14 state operating territory. "They offer a diverse range of services from traditional voice telephony and data services to wireless services, "commented Tom Aust, a telecoms equity analyst at Chase Research.

The company may not have the most expansive international policy, but US WEST has been one of the leaders in offering high-speed Internet and data services. It has a "Megabits" service, which offers customers speeds from 256 kbps to 7 Mbps. Customers receive their own private link to the Internet, their existing phone line, increasing security and reliability. These services are available in numerous cities in US WEST's core region and will bring high-speed Internet use to millions of homes and offices and not just high-end users. Aust considers US WEST to have led deployment of the latest technologies: "For some time the telcos did not develop very good technology. It was still in the laboratory. US WEST has taken the technology out of the laboratory and rolled it out into commercial applications. They have shown that it can be done and on a cost-effective basis. They have been very innovative and that has been a strength for them."

However, the operator's investments in DSL could be affected by regulation, as Aust explains: "The problem with DSL is that it presents some very difficult regulatory questions. If you deploy it in a regulated environment, you may not achieve very good returns. The returns are no longer guaranteed by the regulator. The regulators are still exercising influence and control over pricing, but there are now competitors in the market. Some of these businesses that have tremendous potential, such as broadband in the home, could be a terrific business in the long term, but you need to be sure that you are able to structure your operations, products and pricing so that it is competitive and you can win in the market."

In an exclusive interview, the president and CEO of US WEST Sol Trujillo talks about the operator's digital strategy and the US market.

How do you view the recent era of consolidation in the US? What are your opinions of the SBC/Ameritech and GTE/Bell Atlantic mergers?

We have now entered into a time where different people's strategies are beginning to play out. In the case of US WEST, rather than continuing to try and consolidate multiple sets of assets, we actually split our company in June. We split off all our cable properties and other investments from what was formerly the telephone company, but what was really a company well beyond being just a local telco. Other companies have chosen to get bigger by acquiring more like assets - here I am employing the literal sense of the word, meaning two telcos that are simply expanding geographically and have more of the same. Some companies are pursuing that strategy. In the case of US WEST going forward after our split, I have a strong belief in becoming a next-generation company, a company that is very focused on data and the wireless assets, but really moving into the environment of an IP-centric company, which does not necessarily require old assets. It requires new assets in the new IP-centric world, as well as lots of innovation and speed to market in order to compete effectively.

Can you expand on the reasoning behind the split of US WEST and the US WEST Media Group?

We were two businesses under one umbrella sharing a single balance sheet, a single board of directors, and going in opposite directions strategically and competitively. It didn't make any sense to continue, because there was too much conflict associated with public policy, choice of partners and balance sheet resources. This indicated that we would be better off independent from each other, so that each company could pursue its strategy aggressively and not feel constrained in the market.

In an era where most companies are merging and getting bigger, US WEST split became a much leaner operation. What advantages can you perceive for US WEST from its smaller size?

The single biggest advantage is speed. I believe that I don't have many people sitting in meetings worrying about organization charts and which person from which company is going to be running which part of the business. Such activity is very distracting for a management team. I do want our people to be focused on the set of customers, applications, services and suppliers that we need to be partnering with in order to get capabilities delivered. I believe that speed is absolutely imperative in a hyper-competitive market. And differentiation is also obviously very essential. So if you are focused on speed and innovation - in addition to executing on a quality product, which is true of many RBOCs, and not just US WEST - I think that this constitutes a tremendous advantage in the market. That is what size means to us. That does not mean that we don't intend to get bigger. That does not mean that we don't think we can't get bigger in the right way. I believe that we are not at a disadvantage today, especially in view of the strategies that we have pursued.

Do you believe that US WEST could merge with another operator over the next few years?

Well, that is not our plan. Our plan is to operate and compete effectively and continue to expand our business. I guess that the interesting part of today's world is that it is getting much more competitive than it has been historically. I would say that it is hyper-competitive in certain segments of the market. But at the same time, as consumer needs are changing and technology is enabling us to do much more, I think that we have some pretty significant growth opportunities in our core operating area: in our case, in the 14 states where we operate.

Secondly, because we have been a very significant player in the data space, we have been expanding our capabilities nationally. I believe that there will be further opportunities for us to continue to expand nationally and potentially globally in the time frame that you referred to.

What are your views on DSL (Digital Subscriber Line) technology? What are the goals behind offering "Megabit Services"? How many customers will have access to this service?

Right now we have equipped a significant number of our central offices with what we call D-slams, which is the equipment that you place to provision the service ultimately all the way to the home. But we have equipped enough where today we can probably serve 5 million to 5.5 million customer lines. We have access or we are providing access to that many customers. Now clearly there are some limitations with the DSL technology. But I firmly believe that over the next 12-18 months many of those problems will be solved with advances in this technology. But we are being very aggressive and plan to continue in this vein when offering high bandwidth services to our customers.

Could you explain the strategic importance of the relationships you have with suppliers such as Cisco, Oracle, Sun and Microsoft? How are these partnerships helping you attain your goal as a leading data provider?

I would say that these relationships are very important. We intend to be quick to market. Quick to market means that where it is extremely important, we will be first to market. In other cases, where it is not imperative, we will be early to market with that capability. I firmly believe that you have to pick world-class companies that understand and share the vision of where you want to be and want to go. These are very good and well- focused companies in terms of next-generation capabilities.

I don't know if you are a hockey player or fan, but I like referring to an interview one time with Wayne Gretsky. Some would say that he is probably the greatest player in a very competitive sport. Asked to describe the key to his success, Wayne Gretsky provided a very simple answer: "I always move to where the puck will be". As opposed to moving where the puck is or was. And I think that business is very similar. The companies that are very successful know where to be, as opposed to where the action was.

Which other suppliers are you working with?

Clearly we continue to work with Lucent and Nortel, because I believe that they are also starting to become very focused on this next-generation set of capabilities. We are also working with some of the suppliers of computers and devices, owing to another focus of mine. Ultimately when you think about an Internet-based or web-based world, the simplicity of how you can get things done is going to be facilitated to a large extent by devices. And it is the software that loads or feeds into the devices.

For example, almost a year ago we reached an agreement with Dell Computers. They would load into their modems the card or chip or whatever would be required, so that when a customer ordered one of Dell Computers' Dimension PC products, if the customer said that he or she received Megabit Services DSL services from US WEST, Dell would load the DSL card right into the machine. When you unpacked your machine, you could literally plug it into the telephone jack and play. To me that is very important. Thinking about the whole supply chain, how a customer ultimately turns up service, it needs to be simple.

In my opinion it is our job to essentially recreate in an IP-centric world the dial-tone model, where you can walk into a room and intuitively see a device, know how to use it and make it work and access all the things that you want. In short, we need to deliver what I call "web tone". We are very focused on enabling that kind of vision.

Could you explain what you mean by the term "the new economy"? What role will US WEST play in the new economy?

The new economy is clearly being defined in this country, but it is happening in countries all around the world. The information-based economies are here. If you look at the percentage of workers today that are technology workers, if you look at the percentage of workers today that are dependent upon being networked, either networked within their company Intranets or Internet-based networking and extra-based networking, we have redefined how commerce occurs today. And we are only seeing the beginning, given all the things that US WEST is doing, as well as what literally thousands and millions of other businesses are doing, and what consumers are doing in their homes.

Probably one of the most noticeable phenomena during the holiday season late last year was the amount of shopping conducted over the Internet and how easy it has become for people. Instead of getting into their cars in cold weather and driving to a mall and fighting for parking spaces, doing all the traditional things that everybody has gone through, people can now stay where they are and order everything through the Internet from wherever and buy whatever they need. The business model for commerce is changing very rapidly. There will be even more change into the future. This is really driving a different focus in terms of our economy, a movement from traditional hard physical asset-based investments to centres of intellectual capability, including the programming and software development that enables all this and the networking that ties it all together. To me that is what the new economy reflects.

How do you view the role of the FCC? With US WEST moving aggressively into DSL, what particular problems does this present for the regulator? Is there not a possibility that the regulators will still exercise control over pricing?

It is unfortunate that the FCC thinks it needs to play a role, simply because the market is very competitive and very capable. Consumers, who should be the focus of the FCC, are demanding the development, deployment and investment in new telecommunications and data products and services. If you are in downtown Denver, Colorado or in Butte, Montana, you want those services as a consumer. Under the current FCC view of the world, they disincentivize investment for anybody other than those people who live in dense quarters and population centres. That is really unfortunate, since consumers are affected. How are we going to deal with this situation? Clearly, the way we will have to deal with it is to act like our competitors. We will have to invest where the density and incentives are.

How do you view opportunities to provide long-distance services within your 14 state region? How important to your overall strategy is it to offer long-distance services? When do you think that you will receive regulatory approval to do so?

It is clearly very important, since many customers expect single providers to offer them a whole bundle of services. Clearly, the biggest companies in the market - companies I refer to as the gorillas - AT&T with a market capital of some $150-200 billion and MCI WorldCom with a similar market cap, are out there totally unconstrained and able to offer whatever service they want. Long distance is an important element for most customers in the global world in which we live. They live a much different life than 30 years ago, relative to travel, relationships, how they shop and buy, which means that long-distance access is very important.

As to when we will be able to offer full long-distance services, I would say very emphatically that we will have earned the right to offer long distance some time in the first half of 1999. In fact, we will be able to go to our regulators in our states and to the FCC and openly state that we are meeting the check list requirements. I would say that hopefully at some point in 1999, when we have gone through the processes of the regulators at state and federal levels, we will receive approval in one or two states. In 2000, we look to receive approvals in the rest of our territory. I would like to emphasize that we will have earned the right to do that, but this is a political process.

What are the goals behind your wireless operations? How many subscribers do you currently have? What are your growth projections for 1999?

We have only been in the market for a little over a year now with our wireless PCS business. But we have penetrated the market more deeply and rapidly than any other player, whose results we could track in the US market. At year's end, we had more than 185,000 customers. I am very pleased. I don't know if you are aware of the fact, but we have figured out with some patented technology how to integrate wireless and wireline service. Think about the model that we all grew up with over the past 10-12 years, since cellular came to market. That is, you could buy a stand-alone device with a stand-alone telephone number. That device had its own stand-alone features and capabilities. Over time we all became relatively prolific users. We had a device we could carry around. We generally had one in the car. Maybe in some families the spouse had a device as well. Pretty soon everybody was trying to keep track of lots of numbers.

Meanwhile, voice mail was also becoming very popular. But you had to have a voice mail box for every device. Pretty soon not only did you have a separate telephone number to keep track of, you also had to check multiple mail boxes for messages, which is not a fun, simplified experience for most consumers. When we conducted research, consumers said that they wanted someone to solve this problem.

We have gone to market with an integrated value proposition. We can give customers a single telephone number and a single voice mailbox and the same features and functionality for both their wireline and wireless phones. Only at US WEST can you get that kind of capability. And customers really do like it.

With that in mind, what kind of services would you like to offer in this area? How do compete with AT&T's digital one offering?

We compete very well. AT&T's digital one rate offer is really aimed at the high-volume, high-frequent traveller market segment. And it is an attractive offer for that segment. That is not the market segment where we see the biggest opportunity for US WEST. When we started rolling out our PCS service, wireless penetration was at about 6-8% of the population. This means that there is another 90 plus per cent that we could target and their calling patterns won't provide them with an advantage under AT&T's digital one rate.

Is US WEST going to deploy a more aggressive international strategy in the next couple of years? With companies such as BellSouth and SBC pursuing aggressive international expansion programmes, will US WEST change its international focus?

The answer is yes. We are very focused and this is our first priority, on domestic opportunities in the US. But many of our customers have come to us and said that they like what we do here and want us to serve them wherever they operate.

We also think opportunistically, given the competencies that we have developed in the data arena and in the innovation and integration of multiple networks, whether they be LAN networks, voice networks, wireless networks, and delivering innovative services. We believe that we can in fact expand globally and in some cases partner with various companies that have approached us. And we are sorting through what is the best strategy for US WEST at this point in time.

Do you expect any major announcement this year on a potential alliance?

I would prefer not to speculate on that issue at this point in time. But I do spend a significant amount of my time right now thinking about this.

What did you learn from the partnership with Time Warner?

I would point to a couple of things. We learned that partnership is a full-time activity. When you have partners, you have to make sure that there is alignment of interests - alignment of financial interests - and a lot of communication and work is required. I would say that those are principles that we all nod our heads to when we hear them. But it is a lot easier to say than do.

Will US WEST continue to focus on its core territories? Or will the company seek to have more national ambitions in the future and go beyond the 14-state region?

Well, again let me just say that my first priority is clearly to pursue the opportunities in our region. Let me provide a little more clarification. Today, a typical customer might spend $30-35 a month, which is the average bill for a consumer in the home. This is due to the fact that we have been restricted from providing long distance. Hopefully at some point the gating of the system that has been put in place will come to an end and we will be able to get into the business of providing long-distance capabilities, which could be worth up to $10 billion in our region. That is how much revenue is generated through InterLATA long-distance services in our 14 states alone and I am referring to calls that originate in these 14 states and end up somewhere else. That is a huge revenue stream that we can compete very effectively for. In addition, we are expanding our wireless PCS offering across many of our markets in the 14-state region. So if you take a customer that goes from $0-50 a month, that is a significant opportunity.

Overlay on that the opportunity for customers to receive their Internet access from us, obtain this high-bandwidth capability from us and have it integrated and simplified, all for $40-50 a month on top of what we already generate. In addition, in the first half of 1999 we will be rolling out in Phoenix the provisioning of a cable TV service over a technology called VDSL. If that proves to be successful, you can look in the US at a typical spend of $40-50 a month for most cable customers. This is done on a digital network with multiple channels and is a lot better than what you get from cable TV companies today. So there are significant opportunities for us to pursue in our region, when you add long distance, plus wireless, plus web-tone and video. However, that is not the end of the story. The rest involves taking many of these same capabilities and expanding them nationally and internationally.

It has been claimed that US WEST suffers from the fact that it has one of the most rural populations of the Bells. Has this factor hindered growth or have you actually benefited from a less competitive environment?

Our environment is very competitive. In some cases we have been slightly surprised. If you had asked us what our hypothesis was three or four years ago on where competition would first emerge, we all clearly said that it would be in the business market. And that is what has happened.

We are extremely competitive in the business segment. We also faced competition not only in the big cities, which would have been part of the hypothesis: we also have competition in medium and small-sized markets.

Competition is pretty robust in our region. The economics for our competitors may not be as attractive as in Chicago, Boston, Dallas or San Francisco, but that has not deterred competitors from appearing and offering services.

According to analyst reports, US WEST is ranked the lowest of the largest carriers in terms of operating efficiency. How do you view this evaluation and what steps are you taking to overcome this problem?

I would say that on some categories we are ranked near the bottom or in a couple maybe at the bottom. In other categories we are ranked at the top. So I would say that it depends on what part of the operation you are referring to. Let me start by looking at operating efficiency in total and density - urban and rural. Obviously if 10 million people live within a limited geographical area, you will be much more efficient.

I could dispatch a technician to a building, and that technician would only have to drive 10 minutes to the building and spend all day in the building handling multiple orders. In the case of US WEST, if you put a technician in a truck, they have to drive to each location: as we are not a densely populated area, you would naturally assume that efficiencies are not going to be the same.

The same applies to capital. Our average loop length is probably two times the rest of the RBOC average. Our capital efficiency won't be quite the same. So it probably doesn't make much sense to compare us with the other RBOCs or say that we should be exactly the same or at the top, because the same principles apply to our competitors as well. For example, if I was competing in down town Chicago, New York, Boston or San Francisco, I could be much more efficient. But if I am competing with US WEST in Albuquerque, New Mexico, my efficiencies will be dramatically different. So it is all relative to your competitors.

Secondly, when you look at operating efficiencies and compare on a like-to-like basis, such as business offices, sales centres, operation centres, we benchmark at the top of the class, where we have non-geographic differences. We manage those parts of our business very well. As a matter of fact, we are at the top end of comparisons.

How do you view analyst projections that US WEST will lose 20-40% of its core local business owing to increased competition? How will you compensate for such a loss?

One of the first questions you always have to ask is which segment of the market do you lose? And we will lose market share. That is a phenomenon of the competitive market. But if the high-value customers continue to do business with US WEST, because we have a better value proposition and the capability to integrate and simplify with a single bill, single customer care and a single sales channel, I would argue that the upside could easily exceed the declines.

With the remaining customers that we have, we plan to grow our relationship pretty dramatically, when going from a $30-35 monthly relationship to possibly $200 a month.

There is still plenty of opportunity for us to grow our business. Instead of spending their money with company A or industry B, they can spend with US WEST and do this in a simpler and easier- to-use manner. That is point number one.

Point number two: we will be expanding our business beyond our 14 states, creating other opportunities and taking new market share with new products, services and capabilities that we will offer elsewhere.

What kinds of pricing packages is US WEST putting together to retain customers?

In terms of pricing, we are being as innovative and opportunistic as we can be, given regulatory restraints and requirements. Clearly regulators still play a role in approving a lot of our pricing in terms of what we do in the market. But we are bundling and packaging products together, offering deal packages for our customers.

In the very competitive spaces like wireless, where there are in general six operators in every major market in which we compete, we are very aggressive and competitive in our pricing. This is reflected in our sales results and our penetration and share acquisition results in the market.

Today in the long-distance space we are very limited in terms of the geography where we can carry calls, but we are very competitive, offering essentially in many markets 9 cents a minute for each intra-LATA long-distance call. We are being innovative in our pricing of packages and services, simplifying the decision-making process and increasing the value proposition for consumers.

Have you made any significant changes in the way in which you market certain products?

In broad terms, the biggest change we have focused on is around innovation and integration as part of our marketing discipline. An example is the way we solved the customer problem of wireless and wireline never working together. US WEST has now solved that problem.

Regarding webtone, it is still not an easy experience for many today to get on the Internet, in terms of what every consumer has to go through. Then once you are on the Internet, getting to the place consumers want to go can be difficult. US WEST is the leader in offering simplified solutions to our customers, where you have single button, single push capabilities to get where you want to go much more rapidly than today. So I would like to emphasize the notion of innovation as a critical marketing element.

We are also learning now offering packaging of products, services and capabilities. Consumers do not want to be buying stuff all the time. They want to order meals from menus, packages of services. They don't want to have to figure out how to make it work themselves. So packaging becomes important in a marketing context.

A third area concerns channels and how you make yourself available to customers and pro-actively attack the market and go after customers against your competitors. We have been expanding our channel capabilities, not just in the traditional business office, where customers call us and place their orders, but being pro-active in the market with direct and indirect channels and on-line channels, so customers are very much in control and can gain access to the things they want.

Finally I would say that our people and the methods of compensation represent a unique element at US WEST. We have struck provisions in our contracts with our union here, the Communications Workers of America, that are unique to US WEST and the industry.

We have put in place performance-pay related plans. We have seen dramatic improvements in productivity in our sales channels over the past two or three years. Now we are able to use performance pay for our network organization.

If you visit some of our sales channels, you will find that people like this environment and they can make more money if the company does well. It is a nice partnership for a competitive market. So you can see a whole series of factors centred around channels, people, products and innovation. And obviously, behind it all is this notion of being able to enhance our capabilities around data bases and knowing our customers well, so that we can offer solutions that are unique to that customer, given his/her lifestyle and needs.

What opportunities do you perceive for US WEST in digital TV? What strategy are you employing in this area?

In the space of digital TV, we do have a digital network. So that helps to start with. We are not like many of the cable companies that have an analogue network and are placing end-points on their network that they call digital, and then they have to go analogue to digital and back to analogue for transmitting signals over their network.

Second is this notion of DSL technology. In the first half of 1999 we intend to roll out in Phoenix a video offering that will enable us to offer up to 120 channels of digital delivered service. And it can be delivered primarily over much of our existing network. Clearly it will be an attractive offer, since our network is already a two-way network, which has been built and engineered to very high-quality standards.

So in terms of a classic or traditional offering of delivered broadcast programming, we can now do that with a digital signal, which will be very compatible with the new digital sets. A digital signal over a digital set is just a very dramatic experience. It is a changed experience for the consumer. On top of that it creates the opportunity for us to offer not only a stand-alone video offer, but also an integrated offering.

In other words, if you want to do your high-speed data work over that same delivered service into the home, you can. If you want to get your traditional voice telephony, you can do that too. For example, you may be sitting down, watching a big soccer match that everybody has been waiting to see on a Sunday afternoon and at the same time expecting an important call.

In my case I don't want to be interrupted by all the calls that come in sometimes. I want to see caller ID integrated into my TV set, so that I can scan and see which calls are coming in and know which one I want to get up and answer and not interrupt the game for all the unnecessary calls.

US WEST is the only company that will provide that kind of integrated capability where you can watch your programme and at the same time have the full value of telephony services and data services available to you.

Meanwhile, someone can be in another room on the PC doing their work and someone else in another room checking their voice mail. That is a true integrated service and represents a different experience for the consumer

Could wireless alternatives, especially in view of the deployment of digital technology, pose an increasing threat to US WEST's core revenues? More and more people seem to be eliminating wireline service in favour of wireless. Surely there is a major risk of migration of wireline revenues to the wireless business?

I think that is probably correct for certain market segments over the next five years. That is why you will find US WEST very aggressive in the wireless space as we are today. I think that you will find that the simple substitution of wireless for wireline isn't enough: you must have the features, capabilities, the ease of use and the access to all the things that you want to do. It must be of high quality. Again you will see US WEST in that space in a leadership role as we already are today.

What are your hopes and ambitions for the company over the next five years? Where do you hope to position the company?

Number one. We intend to continue creating shareholder value in an aggressive fashion for those that do own our stock. Indeed, our total shareholder return has exceeded 120% over the past two-year period. We intend to continue bringing, on behalf of our customers, new products and capabilities that enhance our customers' lives.

We have a "tag line" - a promise that we communicate to our customers - that says "life is better here". And we intend to deliver on that promise to our customers, by simplifying their lives, giving them more in terms of capabilities and also growing our relationships with existing customers, as well as new customers, as we go forward.

We also intend to expand our reach and scope in terms of our business, both in terms of the scope of our products, services and capabilities, and our reach in terms of geography, domestically and within that five-year period, in a more global context.