Chapter 10: Return to Rereg
Daniel K. Inouye belongs to the Club, that group of 15 or 20 members of the United States Senate who really run the place while their colleagues tilt at ideological windmills, fret about reelection or dream of redecorating the White House.
Membership in the Club has nothing to do with party affiliation or what state is represented. Members of the Club are generally willing to take a pragmatic, rather than a strictly ideological view of issues. They have secure political bases at home, rarely facing more than token opposition when they go before the electorate every six years. They have a sense of how power works. And they understand that a Senator serving 30 or more years wields more power than any President. They are willing to work in the shadows, foregoing the spotlight so many of their colleagues crave. They believe the U.S. Senate is the functional heir to the Senate of Rome, and is in fact as they describe it: the world's greatest deliberative body.
Inouye is a war hero. During World War II he and other Japanese-Americans who volunteered for the Army were assigned some of the bloodiest tasks in the war. In Italy Inouye lost his right arm while his unit was coming to the rescue of a group of soldiers from Texas. In gratitude, the state of Texas made him an honorary citizen.
When he came to the House of Representatives in 1959 as the first Congressman from the newly admitted state of Hawaii (and the first Japanese-American ever to serve in Congress) he became a protﾈgﾈ of the powerful Speaker of the House, Texan Sam Rayburn. It was Rayburn, and his Texas colleague Lyndon Johnson who started Inouye on the ladder to leadership.
Inouye is a man of enormous dignity. With a round face that has aged little after more than three decades in Washington, a deep, James Earl Jones tone and a deliberate cadence to his voice, he commands a respect more often reserved for taller and more physically imposing men.
In Hawaii he wields power greater than any political figure since the death of the Islands' last king, Kamehameha, in 1863.
Hawaii's largest cable system, in Honolulu, had long had an informal agreement with the state, which administered franchises. In return for a low 1% franchise fee, Oceanic Cable, owned by American Television & Communications, agreed to keep rate increases to a minimum. The deal had worked well in avoiding the kind of battles over rate increases that had taken place in other U.S. cities.
When the 1984 Cable Act's rate deregulation provisions took effect in the fall of 1986, ATC continued to honor the unwritten agreement with the state of Hawaii. It kept rate increases modest and infrequent. But not everybody at ATC's parent company agreed with the strategy. Repeatedly Nick Nicholas, Time Inc. executive vice president and heir apparent to CEO Dick Munro, pressed ATC chairman Trygve Myhren to raise the rates in Honolulu.
Myhren resisted, further aggravating what was already a contentious relationship between the two men. In the spring of 1988 Nicholas ordered that the headquarters of ATC be moved from Denver to Stamford, Conn., effectively forcing Myhren to resign. He was replaced by Joe Collins, who came over from the presidency of HBO.
Almost immediately Nicholas ordered the Honolulu system to raise its rates, by a hefty 10% in June 1988 and another 10% in January 1989. Nobody took the time to inform Inouye or any state officials.
Within hours of the announcement Inouye's long time administrative assistant was on the phone to Myhren, who remained at ATC during the transition to Stamford. "Your people are being absolutely insensitive to the true relationship here," Myhren recalled Inouye's aide saying. "I can't believe this is happening."
"I told Nick he was putting the future of the industry at risk for an additional $250,000 a month in revenue," Myhren recalled. "But he felt we were leaving money on the table."
Inouye was a bad person to alienate. He had been a friend of the cable industry, supporting the 1984 Act. He had been in the Senate since 1962 and was chairman of the Senate Communications Subcommittee, which oversaw cable legislation. And he was a member of the Club.
Other Senators had been pounding cable since the ink had dried on the 1984 Act. Sen. Howard Metzenbaum (D-Ohio), backed by the Consumer Federation of America, Ralph Nader and other consumer groups, had held hearings to blast cable operators for raising rates and delivering poor customer service. Senator Al Gore (D-Tenn.) was incensed when MultiVision bought a group of systems, one of which served his family home, and immediately doubled the rates.
But Gore and Metzenbaum were well outside the circle of power. Their tirades were designed more to garner publicity and win points with constituents and potential campaign contributors than they were to pass legislation. (Gore spent most of 1987 and 1988 running an unsuccessful campaign for the Democratic nomination for President).
But when the industry began to alienate Inouye and other members of the Club, it ran into some real trouble. Rate increases weren't the only problem. Well-respected Republican Sen. John Danforth of Missouri was outraged by the heavy-handed tactics employed by some TCI officials seeking a renewal of the franchises in Missouri. Sen. Robert Byrd (D-W. Va.), majority leader of the Senate, found that his flowery speeches on the Senate floor could not be seen by many of his constituents because the systems in several of West Virginia's largest cities did not carry C-SPAN II.
Such incidents served to create a climate of hostility toward cable on Capitol Hill. As Ed Allen, who was chairman of the NCTA when the Cable Act passed, described it in an interview in 1988: "There's an old saying that the cuckoo is the only bird that fouls its own nest. I've got to say that I think we have some cuckoos in our industry which, over the last four years, have fouled our nest, and the Congress is not going to tolerate it."
The political climate was even further poisoned in the late 1980s by the news coming from Wall Street, where cable stocks were the darling of the Street. Almost daily there were reports in the financial press that rate increases had left the cable operators "swimming in oceans of cash," as NCTA president Jim Mooney recalled it. The publicly held companies were happy to tell their upbeat story to the analysts. But every time they did, Metzenbaum and others seized on the news to bolster their argument that the rate hikes were simply lining the coffers of the greedy cable operators.
And the news cable companies delivered to Wall Street was good. In the first nine months of 1989 the price of ATC stock soared 60%, Cablevision's was up 37%, Century's 84%, Comcast 65% and WestMarc 70%.
The cable industry was aware of its growing political problems. An NCTA survey found that rates had increased by 11% in the first six months of deregulation and that in the congressional districts of members of the House and Senate telecommunications subcommittees rates had increased between 30% and 60%. A report by the federal General Accounting Office found that rates increased nationwide by an average of 29% from January of 1987 to October of 1988 and that 40% of subscribers had received rate increases of more than 40%. Mooney kept warning that the combination of double-digit rate hikes and continued inattention to customer service would be a potent combination leading to political disaster.
Cable operators felt that the increases were justified after years of regulation by the cities had kept prices for their service artificially low. They also argued that the increased revenues were needed to pay for better programming and service. They complained that the Congress simply did not understand the economics of the cable business.
But as Mooney told them at one NCTA board meeting, "Congress does not care about economic theory, because economists don't elect them."
Cable's political problems in the immediate aftermath of rate deregulation were exacerbated by a whirlwind of system sales. A survey by the GAO found that some 53% of cable subscribers were served by systems that had changed hands in the three-year period from 1986-1989. And often the new owners would increase rates, restructure the channel lineups, bring in new managers, rename the system and make other changes that would confuse and sometimes anger their customers. In 1988 alone cable systems serving a record 7.2 million subscribers changed hands, some for the second or even third time.
In tiny Alturas, Calif., for example, the system was sold three times from December of 1986 to August of 1988.
And the big companies were merging as well, led by the blockbuster merger of Time Inc. and Warner Communications, a deal that left the combined company with debt of almost $11 billion. A bitter battle left Viacom in the hands of National Amusements chairman Sumner Redstone.
Tele-Communications Inc. gobbled up United Artists Communications and United Cable Television Corp., WestMarc and Heritage Communications. Continental bought American Cable. Cablevision Industries bought BT Cable/Wometco. Cablevision Systems bought the Adams Russell and Viacom systems in Ohio and New York.
TCI president John Malone told the NCTA board in the fall of 1988, "Systems are being bought and sold at high per-sub multiples because of the potential to raise rates continuously. It may be inevitable that there will be some kind of government control or ceiling on rates."
As the perception spread that some kind of reregulation bill would pass, cable operators figured they had better raise rates soon, before Congress shut the door.
As Myhren told the board in 1988, "We may force regulation upon ourselves through dramatic rate increases that may come as a result of the message getting out that the industry is considering agreeing to some form of rate regulation." It was a Catch 22. The more discussion there was about the possibility of a bill passing and the possibility that the cable industry might support a compromise bill, the more operators rushed to get in one last rate increase further angering Congress and creating even more pressure to pass a bill.
Exacerbating all of the problems were the almost continual changes by cable operators in their channel lineups. They were prompted by a variety of factors: retiering in anticipation of reregulation, changes in system ownership, mergers of programming services and new networks coming on line.
One big cause of channel realignment was the federal government. In 1988, the FCC reimposed syndicated exclusivity and network non-duplication rules that had been jettisoned in 1980. These rules gave each local station the right to demand that the cable system black out duplicated shows on imported distant signals.
When the rules took effect in January 1990, some systems dropped the distant signals rather than deal with the complexity of blacking out programs in question. Others installed equipment that would automatically black out specific shows. But both options required extensive explanations to customers.
"By noon on Jan. 2, Bob Rightsell of Comcast Cablevision in Lompoc, Calif., was already hoarse from taking calls from viewers looking for everything from Teenage Mutant Ninja Turtles to Sally Jessy Raphael," Cable World reported in its coverage of the second day of syndex.
"These people are irate," Rightsell told the magazine, noting that about 20 hours a day of programming were affected by the new rules.
In Miami one independent station agreed not to seek syndex blackouts if area systems would give it a more favorable channel position. In York, Pa., the system dropped WPHL-TV Philadelphia rather than black out 20 to 30 shows that were duplicated by local stations. The change was part of a general channel realignment that brought American Movie Classics to basic from a tier and added The Comedy Channel. Despite these additions, the system's customers did not welcome the changes. "We had a lot of negative feedback," director of marketing Brad Schofield told Cable World.
Eastern Microwave・carrier of New York Independent station WWOR ・attempted to solve the problem by offering a separate satellite feed with programming that could replace the blacked-out shows on the station. But while this helped cable operators, it didn't calm viewers who couldn't see their favorite shows.
Another cause of the channel realignments was a move by many major cable companies to tier their services, offering packages of programming at different prices rather than a single package with all the channels.
With so many new channels coming on line it was considered unwise to keep adding to the basic package and having to increase its prices. And operators also figured any reregulation would probably apply only to the lowest, least expensive, tier of service. Typically that contained local broadcast stations, local origination and government channels, and a few relatively inexpensive services such as C-SPAN.
But the biggest motivation for tiering was the increasing prices being charged by the major cable networks to cover original programming and the cost of outbidding broadcasters for high profile programming such as the NFL. Leading the charge to higher-quality, higher-cost programming were ESPN and USA.
When ESPN launched in 1979 it was free to operators. ESPN even offered financial incentives such as marketing and launch support that made the affiliate relationship a cash-flow negative one for the network.
The bleeding at ESPN was so intense that owner Getty Oil called in McKinsey & Co. to determine whether it even made sense to remain in the cable network business. McKinsey assigned one of its young analysts, Roger Werner, to the task.
Werner determined that only with an affiliate fee could ESPN become a viable financial proposition. In 1982 and 1983 he and company president Bill Grimes and vice president Roger Williams began to approach cable operators about instituting a monthly fee. Without it, they bluntly said, the service would not likely survive.
The first to agree had been Bill Daniels, always a staunch supporter for cable networks and a sports entrepreneur to boot. By the following year ESPN had signed long-term contracts covering 70% of the industry with affiliate fees that ranged from about 6 cents per subscriber per month for the first year up to 12 cents per sub per month.
This base allowed the network to chase after some of the high profile sporting events that had previously been the domain of the broadcast networks. The affiliate fees, Werner recalled, "allowed us to make dramatic improvements in the quality of the product we were offering." That improvement, he noted, enabled cable operators to deliver high quality programming to their subscribers and develop local ad sales.
By the late 1980s ESPN had deals with the major college sports leagues, with Major League Baseball and the NFL and had developed some high profile sports news programs such as SportsCenter.
And ESPN owner ABC had been acquired by Capital Cities Broadcasting, which had been a major cable operator itself and whose chairman and president, Tom Murphy and Dan Burke, were supportive of ESPN's efforts to go after even more sports.
The end of ESPN's three-year contract with the NFL came in 1990 and the bidding war that broke out over the package resulted in a further escalation of prices.
The NFL worked a deal to sell packages of games to both ESPN and Turner Broadcasting. It boosted the cost of the cable rights to NFL games to a total of $900 million from the $135 million ESPN had paid for the original package. The cost per season went from $51 million to $224 million and the cost per game from $3.92 million to $9.2 million.
The operators were faced with affiliate fee increases of around 12 to 14 cents per sub per month from each network to carry the games.
"It's a mess," was the way CableVision Industries vice president of programming Michael Egan put it, reflecting a widespread view that cable had played into the hands of the NFL by allowing Turner and ESPN to get into a bidding war.
By the end of the decade ESPN, which had begun as a free service and had been charging 6 cents a month in 1983, was charging a fee in the area of 30 to 45 cents per month, including the surcharge for the NFL.
USA Network also spent much of the decade improving the quality of its programming, also at a price. In the mid-1980s it broke the lock broadcasters had on the market for first rights to rerun popular programming that had previously aired on the broadcast networks. USA signed deals for the exclusive rights to retelecast episodes of Miami Vice and Murder She Wrote. And in 1988 USA budgeted $250 million to develop original programming including a series of 24 full-length films. Affiliate fees for USA quadrupled during the decade.
In all, the annual expenditure for cable programming, which had been virtually nil at the start of the decade, hit the $3 billion mark by the end of 1989, according to figures compiled by Paul Kagan Associates. Affiliate fees charged to cable operators climbed accordingly.
In response, operators began to move ESPN, USA and other networks with high affiliate fees to more expensive upper tiers which were, operators figured, likely to be exempt from regulation.
TCI established a two-tier system in 1990, creating a low-cost basic and a more expensive upper tier with ESPN, USA, American Movie Classics and TNT. Cablevision Systems adopted a tiering system around programming types. It clustered all the sports channels together in one package, all the news and public affairs channels in another and all the entertainment channels in still another.
ATC introduced tiers in the spring of 1990 in many of its systems with the lowest cost cable services and the broadcast stations bundled in the less expensive tier and more expensive services in the upper, discretionary package.
Retiering also caused major upheavals in channel alignments, again igniting customer confusion and complaints.
The battles for carriage also prompted some systems to change their lineups, dropping some networks to make space for others. The result wasn't always consumer-friendly.
The most publicized of the switchouts revolved around the launch of CNBC.
To help NBC devise a strategy to cope with cable and the other new delivery systems, NBC president Bob Wright, who had been head of Cox Cable, hired Tom Rogers, who was the chief counsel on the House Telecommunications Subcommittee and a key architect of the Cable Act of 1984 and other communications laws.
Developing a cable plan for NBC wasn't easy. Within the company there was constant opposition from the broadcast stations and the network whose executives viewed cable as a competitor.
Nor were there any easy entry points into cable itself. Regulations prevented broadcast networks from owning cable systems. "The only major opening was in cable programming," Rogers recalled.
He held discussions with Turner Broadcasting's Terry McGuirk about taking a stake in TBS and had a handshake agreement to buy 25% of that company. But GE chairman Jack Welch blocked the deal, Rogers recalled, fearing that GE as a minority owner would "end up as passive players in an MSO-run programming game." (That investment of $400 million to buy 25% of Turner in 1988 would have been worth
$2 billion to $3 billion in 1998. "We all have regretted not doing it," Rogers later recalled.)
Then Rogers looked at Financial News Network, an upstart operation that was delivering financial news to cable systems nationwide. But FNN wanted too much, so he looked elsewhere.
The chance came to buy a network that had been started by Southern Satellite Systems, the distributor for Turner Broadcasting System. SSS had been purchased in 1988 by Tele-Communications Inc., which was willing to sell Tempo TV to NBC. Rogers bit. (TCI president John Malone reasoned it would be better to have the broadcast networks become part of the cable industry than to have them as everlasting opponents politically and economically. Rogers later acknowledged that without Malone and TCI senior vice president John Sie, "There would have been no NBC entry into the cable business. Malone was a guiding force.")
NBC transformed Tempo into CNBC, a financial news service that would compete head to head with FNN. The fight between the two networks for channel space became bloody.
CNBC's first big contract was with Cox Cable, where Bob Wright had maintained good relations. Cox agreed to switch out FNN for CNBC in all its systems. It was a public relations nightmare. Cox simply had not anticipated that dropping a network with such a small audience would create such havoc. At Cox systems across the country, picket lines went up and phone lines were swamped as angry FNN fans protested the move. The biggest problem was that FNN had included a crawl at the bottom of its picture giving the latest stock prices, a feature CNBC did not have at launch.
But CNBC persevered, added the stock quotes and helped other operators with public relations campaigns to prepare viewers for switchouts.
"It taught us a lot," Rogers later said.
FNN, led by former Showtime executive Mike Wheeler, put up a good fight. But eventually CNBC, with its superior resources (and an offer to operators of $3 per sub in launch support money) prevailed, buying out its rival in 1990. That brought NBC firmly and permanently into the cable industry. Because ABC owned ESPN, CBS became the only one of the big three broadcasters with no stake in cable.
Another programming squabble that made waves in the late 1980s involved a spat between Jones Intercable and USA Network. A dispute over a rate increase by USA grew into a personal battle between Jones CEO Glenn Jones and USA chief Kay Koplovitz. Jones abruptly dropped USA from all its systems, and the network retaliated by filing lawsuits (including one charging Jones with violating anti-racketeering laws) and by testifying against Jones at franchise hearings. The dispute was eventually settled, but a lot of blood had been spilled in a very public way.
MTV Networks stirred operator ire when it launched HA! TV Comedy Network by running a sneak preview of the network on Nickelodeon, MTV and VH-1 on April Fools Day, 1990. Nobody had told the cable operators. The stunt backfired in some areas as angry consumers called to complain about programming such as Saturday Night Live showing up on the channel normally devoted to Nickelodeon.
The MTV stunt was an example of a growing trend in which cable networks would promote a new service by running ads on existing networks. HA! was promoted in spots on MTV, Nick, and VH-1. WTBS and CNN were full of ads for new Turner networks such as TNT. On USA, viewers were exposed to a barrage of ads for the new Sci-Fi Channel. The ads frequently urged viewers to call their cable operators to demand that the new network be carried. Operators, short of channel capacity, were not pleased.
But whatever the cause of programming changes, the result almost always produced consumer outrage. Americans had a personal, almost intimate, relationship with their television sets that went far beyond what they experienced with such other services as electricity, water, mail, or telephone. Messing with somebody's favorite channel was akin in many consumers' minds to breaking into their home and rearranging their furniture. When it happened, consumers felt violated.
And cable operators were ill-equipped to deal with customer complaints or even queries. Most cable system offices in the late 1980s operated on a 9-5, five-day-a-week basis. Customers calling with complaints or questions outside these hours were greeted with a recording at best or no answer at worst. And with the increased demand for more channels and service, customer service reps and installers were swamped. Service calls sometimes went unanswered and installers were often late for appointments.
Amos Hostetter, whose Continental Cablevision systems were considered to be the best-run in the nation, urged his fellow operators to improve. "Operators need to make sure their phones are being answered and take a look at the pattern of rate increases," he told an NCTA board meeting in 1988.
Another consequence of the mergers and acquisitions that took place almost weekly during the 1980s was an increasing gap between the big operators and the smaller ones in terms of what they paid for programming and equipment.
Nearly every vendor in the business・networks and equipment suppliers ・offered volume discounts, giving as much as 25% to 50% off the "list price" to customers willing to purchase in large quantities or deliver large numbers of subscribers. In the case of programming, the contracts also sometimes included both maximum and minimum payments. The practice enlarged the gap between what large and small cable companies might be paying per subscriber for a programming service.
For example, a programming service might have a list rate of 20 cents per subscriber per month for its service. It might additionally offer big cable companies a discount of 20%, bringing the rate down to 16 cents per sub per month. It might also have a cap of $25,000 per month as the maximum any one company would pay and a minimum of $75 per month (an amount the network would need to justify sending out a bill every month and providing other services to a new client.)
A company with 500,000 subscribers who had this type of deal would be paying 5 cents per sub per month, an effective discount of 75% off the list price. But a system with only 100 subscribers would have to pay the minimum, making its effective rate 75 cents per sub per month, 15 times as much per sub as the bigger company.
That kind of disparity played a key role in spurring even more mergers and acquisitions as bigger companies found they could pay the interest on a loan to buy a smaller company simply by applying the corporate discount to programmers and equipment suppliers.
It rankled the smaller operators who did not want to sell out. Nowhere was the discontent more palpable than among the members of the Mid America Cable Association, a trade group of cable systems in Kansas, Oklahoma, Nebraska and Missouri. Particularly concerned was John Thompson, an Oklahoma cable operator and the grandson of a movie theater operator. Thompson remembered what had happened to his grandfather's theater business in the early part of the century when the movie studios began to gobble up theaters and show their films only in the theaters they owned. He feared the same fate for the small independent cable operator.
At Thompson's urging, the Mid America Association in 1984 proposed forming an association to act as the collective buying agent for all the small cable systems in the country willing to join. The operators kicked in enough money to conduct a study of the legal aspects of the proposal and formally incorporated in 1985. To run the operation they hired Michael Pandzik, a University of Nebraska graduate who had run the Kansas City office for Home Box Office and later worked in HBO's new business development unit.
The idea was that Pandzik would negotiate a common contract for all participating systems with each vendor, taking advantage of the same volume discount that would be available if the member systems were all under common ownership.
The buying group, called the National Cable Television Cooperative Inc., would then handle all the billing for its members and send each vendor a single check each month. This would save the vendors the task of mailing out hundreds of bills each month and keeping track of each account, some of which were systems serving only a couple of dozen subscribers.
It seemed like a good idea to the cable operators. Hardware vendors readily accepted the idea. They preferred to sell in volume in any case, avoiding the need to warehouse equipment to respond to a request for a half dozen amplifiers or 300 yards of trunk cable.
But it didn't sound so good to the programmers, particularly those who would realize a huge drop in the per sub fee they would receive from the member systems.
Pandzik set out to land his old employer, HBO, as the first to make a deal with NCTC. "They led us to believe they would be willing to negotiate with us," Pandzik recalled. But after many trips to New York to discuss the matter he sensed he was running into a stone wall. "At the end of the day," he remembered, "they said 'We don't want to do a deal with you.'"
It would be another 15 years before HBO was finally willing to come to the table and then only after NCTC had completed deals with HBO rivals Encore and Showtime.
But Pandzik kept up his quest, and by August had signed his first contract with a programmer, the Weather Channel. The Weather Channel was seeking to expand its carriage, particularly in smaller systems, which found it tough to justify spending the $3,500 it cost to purchase one of the Weather Star units that would download the local forecast as part of the channel's service.
The Weather Channel offered to provide a Weather Star for free for any system with more than 3,000 subscribers, but systems under that level were required to pay.
Pandzik worked out a deal under which the NCTC members could meld their systems to take advantage of the offer. He would match a system with, say, 1,000 subscribers with another system serving 5,000 subs and qualify for the Weather Star as if it were two systems with 3,000 subs each. NCTC members would enjoy a volume discount on TWC rates just as if they were big MSOs, and the Weather Channel, in turn, was able to land dozens of new affiliates.
Creative thinking of this type helped NCTC grow and reach deals with many of the major ad-supported services during the late 1980s. Members of the Co-op were required to pay an up-front fee to join, but no dues after that. The NCTC made its money by taking a commission, typically 2%, from all the funds it collected from its members and paid out to the vendors.
After 15 years of operation the NCTC had grown from an organization serving 12 cable companies with 120,000 subscribers to one which had 900 members serving more than 10 million subs. The median size of the system remained the same, though, at about 300 to 350 subscribers.
Although some major programmers such as Disney and ESPN continued to refuse to deal with the cooperative, Pandzik estimated that over its first 15 years of operation, the NCTC was able to reduce by an average of 25% the payments its members had to make for programming and equipment (more for the smaller operators that had been subject to a minimum monthly fees imposed by many programmers). These discounts almost certainly were the critical factor in enabling many smaller cable systems to maintain cash flow margins and credit at the bank and avoid having to sell out to bigger MSOs in the 1980s and '90s.
The mergers and acquisitions of the 1980s also had another impact, this time on the big companies that were so rapidly growing bigger. As they acquired more and more systems, the MSOs found that their equipment was more and more diverse and that many of the devices that worked in one system would not work in another.
Companies such as TCI and ATC would have to deal with dozens of vendors making incompatible equipment. Adjacent systems acquired by an MSO as part of a clustering strategy often did not have compatible equipment and required separate crews of installers and engineers, negating some of the benefits of clustering.
This dilemma added momentum to a drive that had begun in 1984 when a cable system operator in Cape Cod, Mass., decided to apply to the cable business the techniques he had learned first as a student at the Massachusetts Institute of Technology and later while doing work for the Defense Department that included the top-secret Corona Project which developed high altitude surveillance techniques to keep watch on the Soviet Union in the 1960s and 1970s.
Richard Leghorn had entered the cable business by accident. Frustrated by his inability to pick up Boston TV signals at his home on Cape Cod, he built his own cable system in 1966, later expanding to run systems in five states. He sold out in 1985.
Cable TV was always a sideline for Leghorn, albeit a lucrative one. But he realized some of the lessons he had learned in developing equipment for the Defense Department could be applied to the cable industry.
In particular he advocated the use of systems engineering, first developed at Bell Labs in the 1920s and taught in a course at Leghorn's alma mater, MIT. Unde
The Door-To-Door Billionaire
Even as the highly leveraged transaction rules wreaked havoc with the expansion plans of major cable operating companies, tanked dozens of deals and forced widespread layoffs at brokers and equipment companies, a few hardy souls still found it possible to expand their companies. One even found a way to launch a new MSO.
Jeffrey Marcus started his career in cable selling service door-to-door while an undergraduate at the University of California in Berkeley. "I had been driving a garbage truck to make money for tuition and college expenses, and my roommate had been selling cable door-to-door. I was getting up at 5 a.m. to go to work and getting home at 4 p.m. He was going to work at 6 p.m. and getting home at 10. And he was making more money. So I decided to give it a try," Marcus later recalled.
"In my first day selling I worked two hours and made six sales. Each sale earned me $3 commission so I was making $9 an hour. It was like I had struck it rich."
After college Marcus sold cable full time and soon formed his own company which contracted to handle the marketing for major MSOs. The company, Marcus later recalled, was a victim of its own success, going under after expanding too quickly. Marcus received a call from an executive at Sammons Communications asking if he would be interested in going to work for the MSO as vice president of marketing.
"I remember my interview with C.A. Sammons," Marcus recalled. "He quizzed me closely and then asked 'Jeff, for years you've been coming down here telling us we shouldn't do our own marketing, that we are much better off contracting it out to you and your professionals. Now you tell me you want to do it in-house. How do you square those two?' "
"Mr. Sammons," Marcus replied, "when I was selling you the contracted serviceﾖ.. I lied."
Sammons laughed and hired him. Marcus boosted sales at Sammons and instituted a professional marketing effort that won a major NCTA award. He then got a call from Marc Nathanson, newly hired as vice president of marketing for TelePrompTer, asking Marcus to come to New York to help the nation's largest MSO claw its way back from the edge of bankruptcy.
It was 1973 and TelePrompTer owner Jack Kent Cooke had promised his bankers that by year-end, the company would increase its subscriber numbers by one-third, to one million subs. Nathanson and Marcus were hired to keep that promise.
Every day Cooke called the 27-year-old Marcus into his office or asked him to walk him back to his hotel. And every day Cooke pounded the young man to get more subs. After hiring 600 new sales people, the effort paid off and saved TelePrompTer from bankruptcy.
When new management came into TelePrompter, Marcus left and joined former Times Mirror executive J. Patrick Michaels to form a new cable brokerage company, Communications Equity Associates.
Although Daniels & Associates had for 20 years maintained a huge share of the cable brokerage business, Marcus and Michaels decided there was room for a competitor. "After all," Marcus later recalled, "We figured Daniels couldn't handle everything."
Marcus knew nothing about being a broker and had no financial training. With no financial resources, his wife Nancy took on the job of earning the income by selling magazine ads while Marcus went in search of deals.
His first listing came from an insurance company that was partly owned by Marcus' old employer, Sammons. Marcus first thought about buying the system himself, but couldn't raise the money.
Then he got a call from John Booth, the multimillionaire former publisher of Parade. Booth was looking for some systems to buy. But Marcus was reluctant to tell him about his prospect because he didn't yet have a signed listing agreement and would risk losing his commission. Marcus called Booth back and worried the whole time about how much the long distance call, charged to his home phone, was costing.
"Look," Booth said, "You don't know me. But I am a man of my word. And I am a cash buyer. I'll have my man go up there this week with a check for the down payment. If he likes it we will do a deal."
"So there I was," Marcus recalled. "I was calling him long distance and was worried about how much the phone call was costing. And I was trying to raise the money to buy this system myself. And I didn't have a signed listing and had no way to protect my commission. And here this guy was, telling me to trust him."
Marcus said okay.
The next week the deal was done and Marcus collected a commission of $50,000, more than his annual salary had been in any prior position. Marcus said he went back to his hotel that night and wept.
By the mid-1980s Marcus was as spending a lot of time with TCI president John Malone, selling him systems throughout the country. And always in the back of his mind Marcus had the notion of becoming an operator himself.
In 1979 Marcus found a system in Wisconsin he wanted to buy and put $100,000 down for the $632,000 purchase price.
A few weeks later Marcus and Malone were in Acton, Mass., trying to buy the Acton MSO for TCI. Late one night, after a well-lubricated dinner with the owners of Acton, the two got to talking and Malone told Marcus, "You know, Jeffrey, you ought to sell me that system of yours in Wisconsin. You don't know anything about running a cable system and I have lots of systems in that area. It would fit in nicely."
Marcus recalled that he replied "Fine. But I won't take penny less than one million dollars. And Malone said okay."
The next morning Malone got up and told Marcus, "You know I think I made a mistake last night." (Malone was already building a reputation for making a deal and then trying to make it a little sweeter. It was a great negotiating tactic since the other party had already mentally made the deal, and often mentally spent the money, and was likely to try to accommodate Malone's last-minute demands.)
"I don't think I can buy that system unless you can get a rate increase from the city council," Malone continued.
Marcus replied that he would get the rate increase if TCI would promise to upgrade the system to 24 from 12 channels. Malone agreed and the deal was done, leaving Marcus with a profit of $370,000 on an investment of $100,000 in just a few weeks.
That is the way life sometimes worked in those days.
By 1982, although CEA had grown to where it was challenging Daniels for the position of biggest broker in the business, Marcus continued to want to own systems. He approached Malone about buying the same group of Wisconsin systems. Malone suggested the two become partners and offered to help finance the acquisitions if Marcus managed the venture. It was an arrangement Malone would employ many more times over the years (with such veteran operators as Jerry Lenfest and Bill Bresnan, among others). The deal allowed TCI to list some of its cable holdings off its balance sheet, employ the talents of some experienced operators, keep the TCI operating staff from getting completely overwhelmed and make TCI look smaller to Washington regulators and allow for an easy breakup if new legislation or rules required it. It also allowed Marcus and the others to take advantage of TCI's bulk discounts on programming and hardware.
By 1988 Marcus' company, after merging with TCI subsidiary Western Communications, served 550,000 subscribers. Marcus stepped down to spend more time with his family. (He continued to live in Dallas although WestMarc was based in Denver).
But two years later, the itch hit again. This time Goldman Sachs & Co. offered to finance his efforts to start a new MSO and he began again, once again with 15,000 subscribers from the same area of Wisconsin, which he acquired in exchange for part of his ownership interest in WestMarc.
Marcus also had his eye on another group of Wisconsin systems, owned by Star Cable TV group. He had begun to negotiate with Star in 1989 and reached a handshake agreement that fall. But then the HLT rules hit and the agreement collapsed when several of the banks that were to provide subordinated financing backed out.
But Marcus persisted. Eventually he was able to hammer out an agreement by putting up 30% of the purchase price from the Goldman Sachs money, financing part of the balance through a group of banks led by First National Bank of Chicago and persuading the sellers to carry the subordinated debt that he was unable to find a bank to handle.
And he managed to persuade Star to drop the price from $2,160 a sub agreed to in fall 1989 to $2,000 a sub when the deal was finally put together in August 1990.
The business plan presented to the banks was, by necessity, very conservative. Marcus vice president Louis Borelli at the time noted that "These are plain vanilla systems with little addressability. I didn't project hardly anything in ad revenues. I think there's upside here, but hell if I know how to do it yet." Marcus would figure it out. Eight years later, almost to the day, he would sell those systems, and dozens of others, to computer billionaire Paul Allen for an astounding $3,600 per subscriber.
A few others were able to swim against the HLT tsunami and complete purchases. Marc Nathanson closed the purchase of a group of systems owned by Cooke Media Co., and Intermedia partners bought systems serving 41,500 subs from US Cable.
But such deals were the exception rather than the rule.