Chapter 12: A Bright Future@
It began as a joke, cocktail party banter between cable's youngest CEO and the world's richest man.
Brian Roberts had met Bill Gates before but had never really had a chance to spend time with the founder of Microsoft until the spring of 1997 when Roberts and a handful of other top cable executives took a tour of the big computer companies on the West Coast.
The pilgrimage to Silicon Valley had its origins when the cable industry found itself on the defensive the previous summer at the annual conference for media moguls hosted by financier Herb Allen in Sun Valley, Idaho. There, in the ski lodges and adjacent buildings, the likes of Warren Buffett and Michael Eisner rub shoulders with Barry Diller and Jerry Levin. And every so often one or more will give a presentation to the group.
In 1996 the presentation was by Intel founder and CEO Andy Grove.
Grove reviewed the various new initiatives his giant chip maker was launching and at one point came to the issue of cable modems, the devices that allowed consumers to access the Internet via cable systems rather than phone lines. Such modems, Grove, said, would not make an appreciable difference to Intel in the near future because so few cable systems had upgraded enough to handle Internet access. With cable stocks depressed and the industry under attack in Washington, he said there was little reason to expect cable would be a viable delivery system for Internet access in the near future.
The news sent stock analysts at the Allen meeting running for the phones to dump their cable stocks, already near rock bottom because of reregulation and competition from DBS and other alternative delivery systems.
The cable guys at the meeting &emdash; Chuck Lillis of MediaOne, John Malone of TCI, Jerry Levin of Time Warner &emdash; organized a counter attack. To make cable's case they selected Brian Roberts, the 37-year-old son of Comcast founder and chairman Ralph Roberts.
Despite his youth, Brian Roberts was already an industry veteran. He had followed his father around as a young boy to meetings with investment bankers, to strategy sessions and briefings on technology, to the print shop to proofread the prospectus on Comcast's first public offering, and to meetings of Comcast's system managers. After graduating from the Wharton School, his father's alma mater, the younger Roberts had pleaded with his father for a job at Comcast.
The elder Roberts felt it would be better if his son started at another company.
"Now I had a problem with that," Brian later recalled. "My dad's 40 years older than I am. He was 61 years old at the time, and I thought 'Gee, how many good years are we gonna have together? Why do I have to prove myself? I mean, I'm either gonna be good or bad. If there's some good reason for me to work somewhere else, fine. But don't you love me?' That got him."
Roberts started at the bottom, selling cable door-to-door, climbing poles and doing installations. Those who worked with him found him to be an almost painfully earnest young man, eager to succeed and with none of the affectations one might expect in the CEO's son.
"He wanted so desperately to do well," recalled Bob Clasen who served as Comcast president during the young Roberts' apprenticeship. "Everybody was charmed by him. He endeared himself to everybody. There was never any suggestion he wanted the right to go directly to the top. Everybody knew Brian in those days, and we all felt better knowing he was going to be the heir. We felt it was an insurance the company wouldn't be sold."
So there in Sun Valley was Brian Roberts, (his father had skipped the Allen meeting) preparing to take on Andy Grove in front of the most prestigious gathering of media executives in the world. The cable guys decided it might help to plant a question from the audience. They asked Bill Gates to pose it.
In the middle of Roberts' presentation Gates stood up and directed a question at Grove. "You didn't really mean to say that the cable modems won't work?" Gates asked. "You just mean they won't have a big impact on Intel's earnings."
And Grove backed off, conceding that the technology would work but that Grove simply felt that not many of the modems would be rolled out in the near future.
To educate Grove and his colleagues about the progress cable was making on Internet access and other services, the cable CEOs organized, through CableLabs, a tour of Silicon Valley the following spring. They started with Netscape and followed with visits to Intel and Microsoft. At each stop they delivered the message that cable was ready to do what the telephone companies had promised but had failed to deliver: build a high-bandwidth network capable of delivering voice, video and data at high speeds and with great reliability.
"When we made the presentation to Gates and told him that two-thirds of the cable plant in the country would be rebuilt by the year 2000 you could almost hear him say 'wow'," Roberts recalled.
The evening after the Microsoft presentation Gates hosted the cable CEOs at dinner in a restaurant overlooking Seattle harbor. At Gates' table were Malone, Roberts and Cox Cable CEO Jim Robbins. The talk turned to cable's depressed stock prices and how badly the industry needed a shot in the arm to raise the money to finish rebuilding its plant.
"Gee, Bill," said Roberts, "why don't you just buy 10% of everybody in the room."
Gates laughed and everybody else laughed and the laughter died down and Gates asked, "Well, how much would that cost? Because I have $10 billion in cash."
A quick calculation arrived at a price of about $5 billion. Everybody laughed again and the talk returned to Gates' upcoming trip to the Amazon River with fellow Microsoft founder Paul Allen.
Then, a few minutes later, Gates got back to the subject. "Would there be any regulatory problems if I bought into the cable business?" he asked. Nobody could think of any.
The dinner went on and the next morning Roberts took some ribbing from Robbins and Malone about his brash attempt to sell the cable business to Bill Gates.
The jokes were over the next day when, back in Philadelphia, Roberts got a call from Microsoft's chief financial officer saying that Gates had asked him to follow up on the idea of buying a stake in Comcast.
A month later the deal was done. For a price of $1 billion Gates bought an 11.5% share of Comcast.
It was the single most important deal in the history of the cable business. The world's best-known businessman, the guru of the computer industry, had placed his stamp of approval on cable as the best road to the future of telecommunications. In a press conference announcing the deal, Gates said that despite the promises of telephone companies to build high-speed data delivery systems, cable has "a very strong advantage" in carrying high volumes of digital information.
Where Bill Gate led, hordes of investors followed. The Kagan Cable MSO average jumped 18% the week after the announcement. Shares of Cablevision Systems, widely viewed as the next likely takeover target, jumped 47% on the news. Century was up 23%, Adelphia 21%, TCI 23% and Jones 21%.
By the end of the year Adelphia's stock price would be up 191%, Cablevision Systems' 209%, TCI's 112% and Comcast's 82%. The dark days of reregulation were at an end.
Gates' investment in Comcast was not an act of philanthropy. Over the next 18 months, his investment would triple in value. But more than that, he would have a chance to help develop the new information infrastructure for the 21st century that would use cable's hybrid fiber-coax network to delivery a vast array of new services to TV sets and computers, many of them embedded with Microsoft software.
The deal, while universally welcomed by cable operators, also caused some to be cautious about Gates' intentions. Microsoft had built a reputation in the computer industry as a ruthless practitioner of monopolistic tactics. Cox CEO Jim Robbins warned that the industry would need to "keep an eye on our new friend's investment" to make sure that Microsoft would not monopolize the software links between the cable system and the TV and personal computer. The dilemma was solved when TCI decided in January of 1998 to use Sun Microsystems' Java programming language in many of its digital boxes, ensuring that the industry would have more than one source of the software needed to run the new services.
At the core of the Gates decision was the belief that cable would be able to deliver the vast streams of digital bits needed to run advanced computer programs.
The company that had blazed the trail to high-speed delivery of digitized data more than any other was Continental Cablevision.
The birth and growth of Continental was a classic cable story. The company was the brainchild of Amos Hostetter, a 1960 graduate of Harvard Business School who had first encountered the industry while working as an investment banker. One of the people who came to see him in search of financing was Bill Daniels, looking for an additional $50,000 to close the deal to sell a cable system in Keene, N.H.
After arranging the financing Daniels needed, Hostetter sought out an old acquaintance, Ray Armstrong, head of the Starwood Office, a financial house in New York that had provided financing for several cable companies. "I went to New York and spent two weeks at the knee of Ray Armstrong who taught me everything he knew about cable," Hostetter later recalled. "A light bulb just went on, and I knew this is what I wanted to do. I thought the key skills the industry would need would be marketing and finance. For construction, engineering and operations, we could hire people."
Hostetter called his friend Irv Grousbeck, who had been a year ahead of him at Amherst College and Harvard Business School and had concentrated in marketing while Hostetter had focused on finance.
On the living room floor of Grousbeck's apartment outside Boston, the two poured over maps of the United States and the broadcast television signal coverage maps of The Television & Cable Factbook. They identified all the cities with broadcast stations and then drew circles around them on the map to outline the reach of those broadcast signals. They were looking for communities beyond the reach of broadcast signals. They then looked those communities up in the Factbook to see which ones did not yet have a cable system.
Pickings were slim. "We found that almost all of the markets with no broadcast station or only one station had been wired," Hostetter recalled. "So we decided to be pioneers in wiring communities with two stations."
With a investment of $2,000 each, the partners formed Continental Cablevision.
The closest communities to Boston with no cable and only two broadcast stations were in central Ohio. Hostetter and Grousbeck bought a couple of plane tickets and paid the area a visit.
The first town they looked at was Mansfield. Grousbeck would knock on doors and explain that he was being transferred to the town, that his wife was an invalid and spent much of the day watching TV. Then he asked if he could come in and see how good the reception was.
In Mansfield, they found, the broadcast reception was pretty good. So they moved down the road to Findlay. There the signals were weaker. But a franchising team from Cox Cable, led by a former governor of Ohio, had already arrived. Cox offered them a deal; if they would give Findlay to Cox, Cox would let them have a free hand in two other nearby towns: Tiffin and Fostoria. They went to Tiffin first.
"The head of the town council was a barber," Hostetter recalled. "Irv and I had our hair cut once a week whether we needed it or not."
At the franchise meeting the two had to answer many of questions that citizens all across the country in those days asked about cable: Would cable suck all the signals out of the air and make it impossible for sets to pick up over-the-air broadcasts? Would radiation from the system make everyone in town sterile?
After answering these questions and paying for a couple of dozen haircuts, Continental won its first franchise. In neighboring Fostoria (a good German town where the names Hostetter and Grousbeck sounded local) they also seemed well on the way. All they needed was the money to build the system. That turned out to be not so easy.
"We went to 50 banks between Boston, New York, Cleveland and Chicago," Hostetter recalled. The only one who offered any encouragement was Arthur Snyder of New England Merchants National Bank, the bank that had provided loans to many of the high-tech, startup companies that lined Route 128 outside Boston. Snyder told Hostetter, "Find out what the other banks will do and then come back to see me. I'll see if I can do better."
Hostetter struck out everywhere else and went back to see Snyder. The banker told him, "Before you say anything else, here is the deal I will make: I will give you a seven-year term loan, with payments in the first two years of interest only." He offered to loan the company half the $600,000 they needed to build the system.
Now Continental needed investors to kick in the other half. Hostetter got $50,000 from his father, another $25,000 from a Harvard classmate, $25,000 from an Harvard professor and $150,000 from Boston Capital, the venture capital firm. The final $50,000 came from a broadcast television station broker in Cincinnati named Dick Crisler.
The ordeal of raising the financing had been a long one. And the folks in Ohio weren't very patient. While Hostetter was putting together the financing, the Fostoria city council had awarded a competing franchise to a company headed by radio broadcaster Malrite and Texas cable operator Fred Lieberman.
Boston Capital, into the Continental enterprise for $150,000, was not pleased. "They hauled us all into a room at the Boston Statler Hotel," Hostetter recalled, "and said, 'Okay, who is going to buy and who is going to sell?'" Finally Malrite was persuaded its main business was broadcasting and agreed to sell out for $85,000, what the company said was the cost of the work it had already done to get ready for the construction.
Continental eventually charged that the price had been inflated by $22,500. The dispute raged back and forth until, Hostetter recalled, "I found out Lieberman was a tennis player." Hostetter was a championship tennis player in college. "I offered to play him for it. He told me he would have a better chance if we just flipped coin."
Hostetter won the flip.
In January 1965, Continental Cablevision turned on its system in Tiffin and Fostoria. It offered, in addition to better reception of the two stations consumers could already receive, signals from an ABC affiliate, from the Canadian Broadcasting Corp. and from the Public Broadcasting System that area residents could not get off-air.
Hostetter and Grousbeck set off across the country to seek new franchises, winning in Quincy, Ill.; Stockton, Calif., and Concord, N.H.
Hostetter took on the task of lobbying Washington, joining the NCTA board in 1968. With his blue chip education, the tall, handsome, articulate Hostetter was a good addition to the rough-and-tumble crowd that dominated the NCTA. (But he remained a spectator at the poker games that took place every night in Bill Daniels' suite during the NCTA conventions. Daniels, Bob Magness, Martin Malarkey, Irving Kahn and others played for pots of thousands of dollars. "The numbers were just too awe-inspiring for me," Hostetter recalled.)
As the industry waged its political battles in the late 1960s and early 1970s, Hostetter emerged as a leader of the industry. His devotion to the business and his genuine desire to be a good corporate citizen &endash; paying attention to public service as well as the bottom line &endash; stood him in good stead.
So did his tennis game. For several years he had teamed as a doubles partner with FCC commissioner James Quello. In the late 1960s when the FCC imposed a freeze on construction of new cable systems in the big cities, Continental's build in Stockton, Calif., was caught in the middle. As the freeze continued, "Our franchise was starting to grow whiskers," Hostetter recalled. Continental sought an FCC waiver of the freeze.
The commission rejected the request on a vote of 4-3, with Quello voting no.
Then the fellow next to Quello leaned over and said, "Jim, do you know you just voted against your tennis partner?" Quello changed his vote and the Stockton build went forward.
Throughout his career, Hostetter was convinced Continental should remain a private company, a tenet that had been drilled into him at Harvard Business School. "We didn't want to have the personal intrusion of being public," he recalled, including having to file financial reports that would make public the salaries of the company's officers, its debt load and other details.
Staying private had its downside as well. When Grousbeck wanted to cash out in the late 1970s, there was no way for him to sell his share of the company. To give him a way out, Hostetter gave him a note that by 1993 required him to pay his old partner a sum of $300 million. (Hostetter borrowed the money from a group of banks which insisted on so many covenants that they presented him a set of golden handcuffs as a symbol of the deal.)
Staying private proved to be a liability in the franchising arena as well. The public companies spread rumors that Continental was skating on thin financial ice.
"We got to the point where we felt we had no choice but to go public, and in late 1981 we filed for a public offering. The very week we were to go public I got a call from Lehman Brothers (the investment banking house). They had a client who wanted to buy the entire offering." It was Dow Jones & Co.
Dow Jones CEO Warren Phillips came up to Boston a few days later and asked what the price would be. Hostetter told him that they had planned on price between $22 and $25 per share, although the investment bankers had warned him the market might not go that high. "$25 will be fine," Phillips told him.
"Out of nowhere, this angel had arrived," Hostetter recalled. Continental was able to remain private, could provide some liquidity for its investors, and could tell franchising authorities that it had the backing of the prestigious publisher of The Wall Street Journal. Dow Jones would exit the business at the end of the decade, having made about $600 million on its investment of $70 million.
Hostetter was deeply rooted in New England. He maintained a summer home on Nantucket Island, vacation spot for some of the most elite businessmen in the nation. And his office in the Pilot House on Boston Harbor had a picture window that made it seem that one of the yachts could, at any moment, tie up right at Hostetter's desk.
As Continental expanded it became the biggest cable operator in New England, outside of Boston, which had been won by Cablevision Systems. And perhaps more than any other operator, Continental prided itself on having state-of-the-art systems and superior customer service. (Asked in the mid-1980s who ran the best systems in the country, Daniels & Associates vice chairman John Saeman didn't have to think before answering "Continental.")
Because it was located in Boston, the company had the benefit of regular communication with the high-tech, Route 128 firms and the area's prestigious universities.
In the late 1980s the vice president of engineering for Continental's New England systems, Kevin Casey, proposed interconnecting all the Continental systems in the region via fiberoptics, creating a central customer data center with sophisticated billing and information management. At the same time the company began to offer data services to other businesses using its fiber network to link the separate offices of such firms as Wang Labs.
Casey continued to look for new ways to use the network. "One day Kevin came to me and told me about this thing called the Internet," Hostetter recalled, "and told me we could do this faster and cheaper. I told him 'Let's get on this.'"
By August 1993 Continental announced it had formed a partnership with Performance Systems International, a leading maker of equipment to link personal computers to the Internet.
The idea was to use cable systems to deliver digitized information to personal computers at speeds Casey said would approach 10 megabits per second, hundreds of times faster than the speeds available using phone lines. He predicted the service would quickly evolve to allow high-speed electronic mail and other services.
In March 1994, Continental launched its Internet access service in Cambridge, Mass.
Reaction was mixed. The Wall Street Journal noted that the new service would allow consumers to download information from the Internet at speeds 200 times faster than phone lines and to access services such as full-motion video, which required transmission of high volumes of data.
The story also pointed out that the price was steep: $125 a month. "Even if cable subscribers could pay cheaper rates for Internet access," the story noted, "some observers doubt the service will catch on because the network is so difficult to navigate."
But other cable operators recognized the opportunity. Within a year most major MSOs had launched high-speed data projects and Internet access services.
Tele-Communications Inc. in 1995 teamed with a group of San Francisco entrepreneurs led by publishing heir William Randolph Hearst III to form an Internet service provider called @Home. The service charged $150 for a hookup and $39.95 a month for modem rental, unlimited Internet access and a package of local and national content developed by @Home. TCI brought in seven other MSOs as equity partners: Cox, Comcast, Shaw Communications, Rogers, Cablevision Systems, Intermedia Partners and Marcus.
By the middle of 1998, @Home counted more than 100,000 customers, and company CEO Tom Jermoluk predicted that number would hit 300,000 by the end of the year and one million by the end of 1999.
Time Inc. quickly followed with its own service, dubbed Road Runner. By the middle of 1998, Road Runner was serving some 90,000 customers nationwide and signing up 1,000 new subscribers per week.
Adelphia's Internet access service, PowerLink, counted 10,000 subscribers by the middle of 1998 and was adding 1,000 per month.
The business got a jump start when several MSOs, including TCI, decided to launch service using phone lines for the upstream channel and the hybrid fiber-coax system for the downstream channel until the cable systems were fully ready to handle two-way communications. CableLabs entered the picture early, issuing RFPs to ensure that the Internet access modems were interoperable and that they could therefore be sold at retail.
At the same time that the cable industry was launching its Internet access business, it was also beginning to see the first rollouts of long-delayed digital video service.
TCI launched its digital system, dubbed ALLTV, in Hartford, Conn., in October 1996. The service offered a package of more than 150 channels, including 40 channels of pay-per-view, 25 premium networks and 18 special interest channels. The company charged $15 for installation and between $34.99 and $69.99 a month, depending on how many channels were ordered.
By the end of April 1998, TCI had more than 275,000 digital customers using about 345,000 set-top boxes. By the end of July it had more than 600,000 digital subscribers. Company president Leo Hindery predicted TCI would have more than one million digital customers by the end of the year.
Cash-flow margins on the revenue from digital tiers approached 60%. Within a few months most other major MSOs began to roll out digital tiers.
Smaller cable companies were able to offer digital services as well. Buford Television, a 150,000-subscriber MSO, said the penetration rate for digital tiers had hit 13% in its Heath, Tex., system less than a year after it launched. "I think it's a 20% (penetration) business," said Buford executive vice president Ron Martin. He estimated that the company was producing a profit of just under $4 per month on each digital customer.
Translated over a national base of some 60 million basic cable homes, it was possible to imagine digital services creating some $1 billion a year in incremental cash flow for the cable industry.
Cable telephony also arrived in 1996 and expanded with a vengeance the following year. Cox got the jump, launching in the San Diego market a personal communications service in alliance with long distance company Sprint Communications, the day after Christmas, 1996.
Cablevision Systems reported 12% of the first 3,900 homes offered telephony signed up in the first six months. Company CEO James Dolan, son of founder Charles Dolan, called the results better than he had expected and predicted that the ultimate take rate for cable telephony would be between 20% and 25% of the market. Cablevision planned, he said, to offer phone service to 60,000 homes by the end of 1998 and 200,000 by the end of 1999.
MediaOne, the cable operating company spun off by U S West, launched its cable telephony service in April of 1998. Company vice president Greg Braden predicted the business would reach $2 billion in revenues nationwide in 10 years.
As cable's first half-century drew to a close there were also signs the industry had turned a corner in Washington. Replacing Reed Hundt as chairman of the FCC was William Kennard. The new chairman continued to hammer away at what he called unacceptable cable rate increases (the average hike in the first half of 1998 was 8.5%). But he also conceded that imposing a blanket freeze on cable rates would be like "performing brain surgery with a meat cleaver."
The biggest issue before the commission, and the media industry, in 1998 was how to treat digital transmissions by broadcasters. The FCC mandated that all broadcasting be converted to digital within 10 years. But the major question for cable operators was whether the additional channels broadcasters planned to provide via digital transmissions would be subject to must-carry and, if so, what standard would be used and how much space the new channels would therefore take up on a cable system.
While these debates continued, the industry had the advantage of a restructured and revitalized NCTA. Passage of the 1992 Cable Act and the subsequent FCC regulatory actions had shattered the cable industry's relations with Congress.
The exercise also strained relations between the NCTA and its own members. NCTA president James Mooney tended to play his cards close to his vest, attempting to limit the number of players involved in the negotiations with Congress and other parties over legislation. This strategy may have made sense in terms of negotiations, but it left many segments of the industry feeling left out of the process and angry at the results.
Programmers, small operators and state associations were among those who felt that the NCTA had not included them in the debates and discussions that led to the 1992 Act. Small cable companies ended up forming their own organization, the Small Cable Business Association, to promote their interests. Programmers nearly did the same. Mooney, not a very social person, especially angered some of the programmers by not showing up at some of the premieres and other promotional events they staged in Washington and New York.
At the same time, members of Congress and the Administration felt the industry was not to be trusted. They recalled that cable had initially expressed a willingness to support rate regulation legislation and then changed its position. Some of that ire was directed at Mooney who was perceived in some quarters as arrogant and aloof because, for one reason, he was generally willing to deal only with members of Congress directly and not with their staff aides.
When Mooney left, he was replaced by a very different kind of leader, one who was much more of a people person. Decker Anstrom had grown up in the West, the son of a teacher who was also a labor organizer and would spend a few years in one town organizing a union and then head to another.
Anstrom had come to Washington and initially landed a job at the Department of Health Education and Welfare in the Nixon Administration. When Jimmy Carter became president, Anstrom joined the Office of Management and Budget and later the White House personnel office.
When Carter lost, Anstrom formed a consulting firm before an old friend from the White House, Bert Carp, called to say he was leaving his job at the NCTA to head up Turner Broadcasting's D.C. office and asked Anstrom if he wanted to take over at NCTA. Anstrom joined NCTA as executive vice president in 1987.
When Mooney stepped down in 1993, Anstrom told the NCTA board that he would serve as acting president while they found a replacement, but that he did not want to be considered for the job.
"I just felt that the NCTA needed a clean start," he later recalled, "and I felt that hiring from within was not the best way to do that."
But after six months of searching the NCTA board asked Anstrom to take the job on a permanent basis, and he agreed.
He moved quickly to make major changes in the way the group worked. First he hired as executive vice president June Travis, a former ATC executive who was then president of Rifkin & Associates, the small MSO that former ATC chairman Monroe Rifkin had founded in the late 1980s.
The decision to ask Travis to move to Washington was a stroke of genius. She was the first person with experience as a cable operator to serve in a top position in the NCTA staff. With nearly 30 years in the industry, she provided an important bridge between the world of Washington and the world beyond the Beltway. She was able to explain to the NCTA staff how cable worked and to cable operators what the Washington developments would mean for their business. When she spoke to members of Congress or the FCC she could speak as a real cable operator, not some hired gun. The difference was enormous.
She had an interest in politics which had been honed while she served as head of CablePAC, and a devotion to such cable-sponsored public service organizations as C-SPAN and Cable in the Classroom.
Anstrom and Travis set out to restore the NCTA's reputation within the industry. They included more programmers on the board of directors, and created a place for programmers on the executive committee. (In 1996 Ted Turner became the first non-cable-operator to serve as NCTA chairman.)
Programmers played a key role in the effort to shape the "going forward rules" that provided the industry with the first relief from the onerous rate rollbacks the FCC had instituted in the wake of the 1992 Act. Cable network executives such as Lee Masters of E! Entertainment Television, John O. Wynne of Landmark Communications and John Hendricks of Discovery Networks testified and lobbied tirelessly on the issue. And members of Congress found it a lot tougher to say no to the founders of the Discovery Channel than to big, faceless MSOs.
They instituted regular calls with the state organizations that had been largely ignored in the Mooney years. Anstrom spent countless hours at the state association meetings, not just making speeches but hanging around for the wine and cheese receptions where anybody could come up and talk with him.
They organized a "key contact" program where every member of Congress had one person in the industry whose job it was to keep contact with that member, attending fundraisers, meeting with him or her in the home district and visiting him or her in Congress.
Under the direction of NCTA chairman Larry Wangberg, president of Times Mirror Cable, the organization reached out to members of the "entrepreneurs' club," a loose organization of cable company owners such as Alan Gerry, Glenn Jones and Jeffrey Marcus, some of whom had felt left out of the key decisions during the debate on the 1992 bill.
With respect to Congress, the aim of the NCTA, Anstrom recalled, was to "get in front of the public policy debate." A group of industry statesmen &emdash; Dick Roberts of TeleCable, Amos Hostetter of Continental, Brian Roberts of Comcast and Bob Miron of Newhouse &emdash; worked to establish a policy under which NCTA rather than opposing prospective changes in policy that might threaten the business, would instead work to shape legislation in a way that might be positive. The aim was to become an instrument of change rather than a backer of the status quo.
The first major challenge came in 1994 when Congress considered legislation to reform the entire telecommunications industry. The big decision, Anstrom recalled, was to "embrace competition." By that he meant that the industry would put aside its opposition to telephone company entry into the cable business in return for permission for cable to offer telephony, Internet access and other services free of regulation. It also sought a date by which regulation of cable rates would end.
In the late summer of 1993, while still acting president, Anstrom laid out his proposed strategy to the board of directors at a meeting at the Blantyre mansion in western Massachusetts. "They took a deep breath, looked around the room and said 'Okay,'" he recalled.
In the end the legislation did all of those things that the industry had sought, and in the marketplace the cable operator proved to be much more adept at getting into the telephone business than the telcos proved in getting into cable.
The NCTA also took a pro-active approach to the issue of television violence. Under the leadership of Showtime CEO Tony Cox and senior vice president MacAdory Lipscomb, Jr., NCTA developed a proposal for ratings for all TV programs, getting the jump on the broadcasters who were reluctant to go along.
And Anstrom was able to teach the industry how to lighten up. When a new movie "The Cable Guy" starring Jim Carrey was slated to be released, many advance reviews predicted it would further damage cable's image. Some in the industry wanted a strategy to combat the film. But Anstrom simply donned a promotional hat for the film at the next NCTA convention and declared that he was proud to be a "Cable Guy." The film flopped at the box office.
Such tactics, big and small, helped the NCTA to restore its relations with Congress and with its own constituents and enter the 21st century stronger than it had ever been.
On the cable equipment front, the industry at century's end was taking the first steps toward an entirely new way of dealing with the in-home equipment such as set-top boxes, digital converters and modems. From the time converters were first used in the mid-1960s, cable operators would purchase them and then lease them to consumers as part of the cable bill. By the mid-1990s the cost of such an effort had grown to enormous proportions. More than 50 million converters were in the field at a cost of about $100 each, for a total investment that exceeded $5 billion. Cable operators had to buy those converters, install them, maintain them and then retrieve them when service was canceled. It as a huge logistical headache.
For years some operators had dreamed of the day when they could get out of the businesses of owning and leasing in-home equipment. The launch of digital services gave them their chance.
In the mid-1990s both General Instrument Corp. and Scientific-Atlanta Inc. announced partnerships with major consumer electronics retailers. GI's deal was with Sony and S-A's with Pioneer and Toshiba. The alliances laid the groundwork for a system in which consumers would select, purchase and install their own in-home equipment. The change was akin to what happened in the telephone business in the 1970s when it became possible for consumers to own their own phones rather than leasing them from AT&T.
The same strategy was in play from the advent of the cable modem business. CableLabs served as the catalyst for the strategy. Its DOCSIS (Data Over Cable Service Interface Specifications) and OpenCable projects aimed to persuade manufacturers of all in-home cable devices to make their products interoperable so consumers could purchase any of a variety of set tops or modems and install them in any cable system in the country. The FCC, seeking more consumer choice, backed the movement with a series of rulings.
The years 1997 and 1998 saw several major MSOs solve some nasty internal problems as well.
At TCI the company and CEO John Malone settled a lawsuit that had been brought by the heirs to company founder Bob Magness, who died in November 1996. Under the settlement, Magness' heirs agreed to put their shares in a trust that would vote in tandem with Malone, effectively ensuring that Malone would retain control of the company. The settlement resolved a major uncertainty about the control of the company that had existed since Magness' death. TCI also moved to purchase the supervoting shares of TCI shareholder Kearns Tribune Corp., further consolidating control in the hands of Malone.
But more important in the resurrection of TCI was the appointment of a new company president, Leo Hindery, who had been CEO of Intermedia Partners. (Malone had become chairman when Magness died.)
Hindery moved quickly to institute sweeping changes in the beleaguered company. He cut corporate staff, forcing the exit of many of the young executives recruited from outside the cable business by Brendan Clouston, whom Hindery replaced as president.
Malone had already brought back to the company such veterans as JC Sparkman and Marvin Jones, ordered pay cuts for senior staff and sold off the company's corporate jets. Hindery scrapped the organizational structure Clouston had created &emdash; along technological lines &emdash; replacing it with more traditional regional operating divisions. He also decentralized operations, moving to the operating units many of the functions Clouston had maintained in house.
"This is still a local business," Hindery said, "and it should be run as a local business. It's measured by only two things: the quality of the service you are providing your customer and the perception of the price-value relationship you're providing."
As Jones put it, "You need management autonomy and responsibility as close to the customer as you can get it. You have to make sure that the beast isn't so large that it takes too long for the message to get from the brain to the tail."
But most important, Hindery began to execute a series of deals with other MSOs. In a market where TCI and another company had systems, TCI would suggest combining operations under a partnership managed by the other company. Or it would offer to swap its systems in the area to the other company in return for shares of that company's stock. In either case the systems could then be operated by the other company off the TCI books, but with the TCI programming discounts and with the efficiencies that came with clustering.
The first such deal was with Hindery's old company, now run by former Jones Intercable president Bob Lewis. The two concerns agreed to merge their operations in Kentucky into a partnership that would be managed by Intermedia.
Similar deals followed with Cablevision Systems, Falcon, Adelphia, Comcast, TCA, Marcus, Bresnan, Lenfest and others. By then end of 1997 some 4 million of TCI's 14 million subs had been transferred to operation by other cable companies.
The deals took much of the debt off TCI's balance sheet and placed it on the shoulders of the partners. With the partnerships and with corporate cost-cutting, TCI was able to reduced its debt-to-equity ratio and regain the coveted investment grade bond status it had lost after reregulation.
Hindery also took on many of the public relations tasks that Malone had always disliked. Hindery was a frequent visitor to Washington, accessible at the NCTA conventions, and involved in such industry ventures as C-SPAN.
The changes had their impact. In the fourth quarter of 1997 TCI posted an increase in cash flow of 37% from the year before. It stemmed the loss of basic subscribers.
Wall Street noticed. When Hindery took office at TCI in February 1997, the company's stock had sold for $13.44 a share, just off its post-reregulation low of $11.31. By July it was up to $16.50 and in February 1998, a year after Hindery's arrival, TCI's stock was back up to $29 a share, within striking distance of the $33 a share it had sold for just after the Bell Atlantic deal was announced.
Time Warner was also on the rebound. Its merger with Turner Broadcasting had been greeted with skepticism when it was announced in 1996. Time Warner partner U S West sued, charging the deal violated terms of the Time Warner-U S West deal. Analysts speculated that Ted Turner would never be happy as second in command. And rumors circulated that TCI's Malone would work to undermine Time Warner chairman Jerry Levin and perhaps launch a hostile takeover bid for the company.
These prophets of doom failed to take into account the strong ties that already existed between these companies and their CEOs. Levin, Turner and Malone had known each other well for the better part of 20 years. They had in effect already been partners as shareholders in Turner Broadcasting System. where TCI and Time Warner had a deal to vote together on any major proposal.
Many of the top aides to all three principals had known each other for years. Bill Grumbles, head of distribution for Turner, for example, had worked for Levin at HBO. And most of the Turner operations remained under the control of the same team that had run it before the merger, led by Terry McGuirk.
It turned out Turner was happy to be relieved of some of the day-to-day duties of running a company so he could focus on more strategic objectives, which were his greatest strength. Malone held to his promise (needed to get government approval for the deal) to remain a passive investor in Time Warner. And even U S West retreated from the barricades, dropping its lawsuit to block the merger.
"I don't think there has ever been an acquisition that has gone better," Levin later recalled. "Maybe it's because we had known each other for such a long time. We had the same value systems. Terry McGuirk, for example, started in the industry at the same time I did. I know his family. There is a bond between us because we all went through the rough period when the vested interests were all against us. We have a shared sensibility, a special dimension of respect even if we have different opinions on things.
"Most businesses are very impersonal. In acquisitions the transactions are done by bankers. There are layoffs. But here it was a group of people coming together who had shared values."
Part of the success of the merger was attributable to Levin's style of management. Soft-spoken, clearly brilliant and with a deep belief in the cable industry, Levin has the ability to listen to a wide range of views and make shareholders, partners and subordinates &endash; some of whom had very strong egos and had been used to running their own ships &endash; feel a part of a team.
It also helped that the company's bottom line began to improve in the late 1990s. In first quarter 1997 Time Warner's cash flow increased to $499 million from $338 million the year before. The cable division's cash flow jumped 18%. Such improved results and the smooth integration of Turner boosted the company's stock from $37 a share in January 1997 to $88 a share by the middle of 1998.
On the competitive front, cable appeared by the end of 1998 to have escaped the worst fates predicted by those who had forecast that DBS would be the end of cable. DBS services continued to grow, adding some 700,000 new subscribers in the first four months of 1998 to bring the total to about 7 million nationwide, according to DBS Investor newsletter. But there were also signs that many of these DBS subs were keeping their basic cable connections and downgrading only premium services which they could get direct from satellite. This gave cable the chance to reclaim them as subscribers or, at the least, to offer them enhance services such as Internet connections and telephony they could not get from DBS.
And some of the DBS providers hit bumps. By the middle of 1998 none had been able to find a way to use their technology to offer Internet access, telephony or other advanced services that cable systems were launching. A proposed merger between EchoStar and Rupert Murdoch's News Corp. fell apart when cable operators, led by TCI, reminded Murdoch that cable was the primary delivery mechanism for his Fox programming services. EchoStar struggled in its efforts to find a way to deliver local broadcast signals via satellite. And the company managed to go through three presidents in a six-month period. Primestar continued to find itself blocked in its effort to secure FCC permission to use a high-powered satellite to deliver its DBS service.
But the best news for cable on the competitive front came from Toms River, N.J. There Bell Atlantic had announced with much fanfare in 1995 that it planned to build a state-of-the-art system that would take way most of the customers from incumbent cable operator Adelphia Cable. It built a switched digital broadband network and leased it to a separate company that actually operated the system (a necessary division at the time when telcos were prohibited from operating cable systems in their service areas). The newcomer pledged that its prices in Toms River would always be 10% below what Adelphia charged.
But Adelphia responded aggressively, rebuilding its plant to 750 MHz, offering high-speed Internet access, digital video, long distance and local telephony and other advanced services. The company also boosted its customer service and marketed like crazy.
At the same time the Bell Atlantic strategy changed. In the wake of the Telecommunications Act of 1996 it took over programming and marketing the system itself. It wasn't exactly Bell Atlantic's area of expertise. And the huge telco found that the switched network it had built wasn't the most cost-effective way to deliver cable service. Finally, it began to dabble in other areas, including a deal which had its cable system sell dishes for DirecTV.
By the middle of 1998 Bell Atlantic threw in the towel, announcing it would raise its rates to match Adelphia, and would henceforth regard Toms River as an experimental system with an architecture that would not be widely deployed. At the time it made these announcements Bell Atlantic had signed up only 3,000 of the 110,000 subscribers in the town.
Adelphia executives held down the cheers. "It shows when faced with competitive pressures the cable operators are successful," said Jerry Clark, the Toms River government/community affairs manager who had been with the system for 20 years.
But the battle of Toms River offered a deeper lesson, one that had been in play a decade earlier when ABC and Westinghouse attempted to take on Ted Turner in the cable news business. The incumbent fought desperately to hold on to his primary business, knowing that if he lost he would be out on the street. The challenger, larger and better financed, nevertheless had a wide array of businesses and was unwilling to risk years of losses needed to put a tough little competitor out of existence. It was like a Discovery Channel documentary about how a small animal fighting for its life can sometimes defeat a larger predator just looking for another snack.
As the industry began to get its house in order politically and as new services came on stream, the basic cable networks continued to increase their audiences. In the first quarter of 1998 basic cable posted a 14% gain in household ratings, to a 22.4 average in prime time. The charge was led by USA Network, which saw its average prime time ratings jump to 2.6 from 2.0. The beat continued in the second quarter as basic cable posted a 12% gain in ratings. The broadcast networks continued to drop, with the figures suggesting that sometime early in the 21st century the combined ratings for cable networks would exceed the combined ratings of the major broadcast networks.
The number of cable networks continued to grow. The advent of digital tiers changed the equation for ad-supported networks, working to the advantage of companies with one or more well-established networks and to the disadvantage of standalone, startup networks
"There is lots of music we can't play on MTV," he noted, either because there is not enough time in the day or because the music does not appeal directly to the MTV audience. To allow that music to be played, the programmer launched in mid-1998 a "suite" of digital services, all of them carried on the same satellite transponder as MTV's flagship services: MTV, Nickelodeon and VH1. The new networks included M2, MTV X (active rock), MTV S (Spanish language), VH1 Smooth (jazz and New Age), VH1 Country and VH1 Soul.
The economics of launching such a wide array of new networks, Rosenthal said, are "very attractive." Although he would not discuss the financial details of any of his new services, several programming officials said that it was possible for an established network such as MTV to launch a spinoff network for as little as $100,000. That's because there are essentially no additional costs for transponders, ad sales teams, affiliate relations personnel or even programming assuming the flagship network's library could be used to program the new network.
That price for a new network compared to the $30 million to $40 million it cost to launch a new service a decade earlier.
Digital was to television what cold type had been to publishing. In the 1950s it cost so much to print and produce a publication using linotype machines that only those with the largest circulation could prosper. That was the era of Life, Look and The Saturday Evening Post. When cold type and desktop publishing were introduced in the 1970s the cost of printing dropped and it became possible to publish and make a profit with much smaller titles, serving narrow niche audiences. Newsstands became filled with such publications as Bow Hunter, Doll World and Southwestern Art.
But while the advent of digital favored such incumbent programmers as MTV, allowing them to leverage over a larger number of networks the investments they had already made to launch their flagship services, the reverse was true in the case of standalone networks.
For a standalone service attempting to launch in the late 1990s, being relegated to a digital tier meant giving up large chunks of the potential audience that could be found on the more widely distributed analog tiers of service. At the same time, new government regulations threatened to revive the very channel crunch that digital was supposed to eliminate.
When Michael Fleming took over as president of the Game Show Network, a venture backed by Sony Corp., he quickly learned that the game had changed considerably since he had been on the affiliate relations team at Turner Broadcasting in the late 1970s and early 1980s.
The FCC's going-forward rules had allowed cable operators to raise prices for basic cable only if they launched new services. The ruling set off a scramble for networks to be among those launched. E! Entertainment Television led the way, offering itself to operators for free for several years in exchange for long-term carriage deals. It wasn't long before networks began to offer cash payments to operators in return for carriage, severely damaging the economic model for new services that was based on a dual revenue stream.
Fleming noted that this change alone forced GSN to redo its business plan, doubling the amount of time needed before the networks would break into the black.
Must-carry and retransmission consent, meanwhile, continued to give an advantage in the carriage wars to networks owned by broadcasters. Such networks as ESPN2, MSNBC, CBS Eye on People and Fox News were all launched with the idea that cable operators would be willing to carry them in exchange for an agreement by the networks' parent companies not to charge for carriage of their broadcast stations.
Another government regulation hit GSN like a two by four. The FCC had ruled that all networks must deliver their programming with closed captions for the hearing impaired. For networks producing a lot of original programming this was not such an onerous provision. They simply added it to their production costs. But for GSN, which relied almost exclusively on a library of old game show programs, the cost was huge. Fleming estimated that the requirement would cost his network about $20 million.
While Sony had deep pockets and plowed ahead in the rough waters of the late 1990s, it seemed almost impossible that a private individual such as a Brian Lamb or John Hendricks with merely a good idea could get a network launched. "I feel bad for people who are trying to start a totally new programming service from scratch," MTV's Rosenthal said of the situation in 1998. "Operators won't pay you for the service and Madison Avenue. won't even look at you until you have 20 million subscribers. And since most of the conceivable niches have been filled, you would almost certainly be competing with some existing network in some way."
The advent of the Internet changed cable programming as well. Many channels &emdash; led by ESPN and CNN &emdash; established their own web sites, offering viewers a chance to access more information than could be delivered on the network and to offer comments.
Two new networks launched in the late 1980s with joint online and video versions. One, MSNBC, was a joint venture of NBC and Microsoft. The other, ZDTV, was a subsidiary of computer industry publishing giant Ziff-Davis. Each would aggressively promote the Internet aspect of its network, effectively whetting the appetites of viewers of the very kinds of data and Internet access services cable was gearing up to offer.
But for the cable operator, it didn't matter much who produced the new programming. The bottom line was that there were dozens of new channels to fill the digital tiers, most of them spinoffs from existing analog channels that would promote the new tiers like crazy. MTV, for example, was full of spots touting its new digital sister networks.
With stocks up, new services coming on line, the regulatory situation under some degree of control and the financial situation looking better and better all the time, it began to seem to some operators that the time had come to sell.
The first to do it was Amos Hostetter. "We had over 400 employees with substantial interest in the company and no liquidity window for anybody," he recalled. "Over the years lots of stock had been given away to institutions &endash; Princeton and Stanford for example &endash; and they had no way to turn that into cash." The lack of liquidity also complicated estate issues.
At the same time, he recalled, the company would have to find a way raise $1 billion a year for the next five years (1995-2000) to upgrade its plant to offer data and telephony services and enough new digital networks to compete with DBS.
Hostetter began to look for a buyer. From 1994 to 1996 he "talked to virtually everybody." From the beginning, though, the logical buyer had been U S West. Most Continental systems were outside the U S West service area, so the federal ban on telcos owning cable systems in their own service areas would not be as much of a problem.
U S West had already bought cable systems serving some 500,000 subscribers in the Atlanta market from Prime Cable and had operating experience from the investments it made in United Kingdom cable systems a decade before.
In March 1996 Continental announced it had reached an agreement to sell its systems to U S West for a total of $10.8 billion, including the assumption of $5.5 billion in debt. The price worked out to $2,190 per subscriber or 11.1 times cash flow. The deal left Hostetter with $1.3 billion in cash and stock. It was a sweet return on the $2,000 initial investment he'd made to start Continental three decades earlier.
The companies announced that Hostetter would continue to manage the enterprise and that most of the Continental employees would remain in place. The agreement provided Continental not only with the cash it needed to give liquidity to its shareholders and rebuild its systems, but also a corporate parent with deep pockets and lots of experience in delivering telephone services.
Hostetter would report to Chuck Lillis, CEO of the U S West Media Group.
But it wasn't long before Lillis and Hostetter found they would not be able to work together. The break came when Lillis decided in 1997 to transfer the corporate offices of the newly renamed MediaOne cable company from Boston to Denver. He argued the company would better be able to operate closer to its roots at U S West headquarters (the telco had taken the first steps toward a complete spinoff of MediaOne).
The decision outraged Hostetter, who had promised many of his employees they would not be transferred and had assured city councils across the country that Continental management would remain intact. Hostetter was unwilling to make the move himself. He appealed to the board of directors of U S West, but was rebuffed and resigned. Along with him went many of Continental's top employees. To replace Hostetter, Lillis named Jan Peters, president of U S West's wireless telephony division.
The ouster of Hostetter was the most stunning change in cable company management since the removal of Bob Rosencrans by United Artists a decade earlier. Like Rosencrans, Hostetter was a universally respected figure in the industry.
While the bitterness among Hostetter and some of his top employees lingered, it was softened somewhat by that universal balm: money. When the headquarters was moved, the decision triggered the stock option clauses in many Continental executives' compensation packages, creating more than a hundred new millionaires overnight. And MediaOne stock prices rose along with the rest of the industry, jumping from $22 a share in August, 1997 to $42 a share by July of 1998.
But while the U S West purchase of Continental demonstrated the belief of a telephone company that cable and not telephone systems offered the best road to the future, such investments had been made by telcos before. It was Bill Gates' investment in Comcast that really opened the eyes on Wall Street.
Just a few months after Gates made his entry into cable operating companies, his Microsoft co-founder and fellow multi-billionaire, Paul Allen, followed suit, purchasing 94% of Marcus Cable Partners for $2.8 billion, or about $2,350 a sub. Allen quickly boosted his cable holdings by spending $4.5 billion to buy the 1.2 million subscriber Charter Communications. The price worked out to an eye-popping $3,700 per subscriber, one of the most expensive deals ever. The purchase, analysts said, was the first to fully factor in the revenues that would come from new services such as digital tiers, Internet access and telephony.
Like Hostetter, Marcus' new owner promised that he and his team would continue to run the company from its headquarters in Dallas, where Marcus was as deeply entrenched as Hostetter had been in Boston.
But like Hostetter, CEO Jeff Marcus saw the promise soon ignored. After the Charter deal, Allen announced that the combined companies would be run from the Charter headquarters in St. Louis.
Another long-time cable leader who exited the business in 1998 was Glenn Jones. His departure was less than graceful, albeit well-greased. In 1994 Jones had sold a third of his cable company, with an option to buy more, to Bell Canada. The agreement came on the heels of the Bell Atlantic deal to buy TCI and the Southwestern Bell offer to purchase Cox. Of the three, the Jones deal was the only one that lasted.
But relations between the two companies quickly went sour. In 1997, Bell Canada sued Jones, charging that he had inked sweetheart deals between Jones Intercable (in which Bell Canada had invested) and companies Glenn Jones owned entirely. In particular, the Canadians charged that Jones had awarded the Jones Intercable contract for Internet access to the Jones Internet Channel, 100% controlled by Glenn Jones, without seeking bids from other Internet access companies such as @Home or Road Runner. (Jones named nearly all his subsidiary companies after himself.)
In May 1998, a U.S. District court ruled in favor of Bell Canada. The telco said it hoped to resume its relations with Jones. But within a month it had sold its shares in the company, together with its option to buy a controlling interest, to Comcast. Comcast, in turn, elected to immediately trigger its options to buy a controlling interest, buying out Jones' super voting shares for $69 a share.
Public shareholders, whose stock never rose above $28 a share, were outraged. "It's extremely disappointing that in negotiating his own exit from the company (Glenn Jones) didn't insist that public shareholders be taken out as well," Gordon Crawford, executive vice president of Capital Research and Management, a Jones shareholders, told Broadcasting & Cable magazine. "He has basically left his public shareholders once again to dangle."
But the difference didn't bother Jones who had started in business in 1964 by convincing consumers in Georgetown, Colo., that the lousy reception they were getting was the fault of their TV sets, not his cable system.
As Cable World reported "Asked how he's justifying a deal whereby he will get a big premium and his common shareholders get nothing, (Jones) said 'Hey, it's America.'"
The exits of Jones, Hostetter, Marcus were dwarfed by the announcement in June 1998, that AT&T would purchase TCI for $48 billion or roughly 14 times cash flow. The deal came within a few months of the 50th anniversary of the construction of the first cable system in the U.S. It also marked a full turn of the circle for TCI chairman Malone. The TCI chief had begun his career working for Bell Labs where he penned a long treatise on how AT&T could operate in an unregulated environment. The effort, he later recalled, earned him a bum's rush from the AT&T boardroom by the company chairman who told him on the way out that if Malone were able to make a single change in Ma Bell during his entire career he would be lucky.
The deal was the apex of an astounding rebound by TCI and the entire cable industry from the cellars they had hit following the 1992 Act and the FCC regulations that followed.
The deal was a classic Malone operation, enormously complex but ingenious as well. It was, of course, a stock deal so that Malone and the other TCI shareholders would not have to pay taxes on what they got from AT&T. (In Malone's case the value was around $4.5 billion. He would also be the new AT&T's biggest shareholder.)
The agreement also provided that AT&T, after the merger, would be split into three divisions: one for business services, another (with Hindery as president/COO) to handle the long distance, wireless, Internet and cable holdings of the company. The last, which would have Malone as chairman and Liberty Media president Robert Bennett as president, would supervise all TCI's programming holdings, including its shares in Time Warner, USA Network, Discovery Channels, Encore and Fox Sports.
The Malone unit, to be called AT&T Liberty/Ventures, would trade as a separate "tracking" stock from the other units but would have the umbrella of the parent company's credit rating. The deal called for Liberty-owned cable networks to have a first crack at channels on AT&T/TCI cable systems.
The deal had something for everybody. AT&T got control of TCI's cable systems, allowing it to bypass local telephone companies in offering long distance service. It also would be able to compete with local phone companies in offering local telephone and Internet access services.
The deal was sweet for TCI shareholders, who would be given AT&T stock worth $51 for each share of their TCI stock, which had traded below $12 a share only two years before and $33 a share just a week before the deal was announced.
Malone himself got a huge payoff, including a substantial premium for his Class B supervoting TCI shares. As chairman of AT&T/ Liberty, he would have the chance to run a company that seemed small and entrepreneurial, but enormously well-funded, compared to the huge, highly leveraged cable company he had headed. (Malone once said that running TCI was like steering a giant oil supertanker: After the captain had turned the wheel, it seemed to take forever for the ship to respond and alter course.)
Recalling the collapse of the merger with Bell Atlantic, Malone included in the purchase agreement a clause that required AT&T to pay TCI almost $2 billion should the deal not be completed.
The TCI sale to AT&T, together with the exits of such figures as Alan Gerry, Glenn Jones, Amos Hostetter and Jeff Marcus from the operating side of cable, spelled the end of an era in the industry.
For its first 50 years, the cable industry had been like a small American town. It had its pioneers, many of them still around, who had first settled the community. It had its chamber-of-commerce types and civic boosters. It had its conservative bankers and its loud, used car dealers. The residents of the community competed with each other, for financing and franchises in the case of operators, for viewers and carriage in the case of programmers and for sales and new technology in the case of manufacturers. But when they were attacked by somebody from outside the community, they banded together to defend their common home.
Now the big chain stores had come to town offering huge incentives for the original founders of the local businesses to sell out. Some would decline the offers, preferring to hand the businesses they had built on to the next generation (Brian Roberts, James Dolan and the Rigas family for example). But many would see the chance to sell out as a great opportunity to watch their businesses become part of a much larger effort.
The open question was whether the new owners &emdash; most of them huge, multi-billion dollar, publicly held companies &endash; would be able to expand the home-grown, closely held businesses while at the same time retaining at least some of the entrepreneurial spirit responsible for the industry's dramatic rise over the previous half century.
Whatever the future held in terms of the business world, it was clear as the 20th century drew to a close that the cable industry had changed the world of communications in a fundamental way, constructing an enormously powerful network of fiber and coaxial cable capable of offering some 60 million U.S. homes a huge array of video services, advanced voice communications and Internet access that would shape the world in the 21st century and well beyond.
The $1 billion investment by Microsoft chairman Bill Gates (left) in Comcast Corp., engineered by Comcast CEO Brian Roberts (right), boosted cable stocks on Wall St.
WORKING THE STREETS:
Continental Cablevision Chairman Amos Hostetter welcomes the MSO's first subscribers in Tiffin, Ohio, to the 30th anniversary party marking Continental's entry into the cable business.
Cable MSOs took advantage of cable modem technology to launch @Home and RoadRunner,two high-speed Internet access services, in the mid-1990s.
Cox Communications launched personal
communications services in San Diego in 1996 in a joint venture with Sprint Corp.
NCTA president Decker Anstrom donned a "Cable Guy" cap at an NCTA convention.
Leo Hindery led TCI's turnaround in 1997 by stemming subscriber losses, reaching out to political groups and entering into joint operating ventures with other MSOs.
Cable operators took advantage of the public's interest in the World Wide Web to offer consumers high-speed access to the Internet via cable modems.
Rainbow's Josh Sapan, Showtime's Tony Cox and NBC Cable's Andy Friendly helped launch the cable industry's Voices Against Violence campaign.
The MTV brass (l-r), Rich Cronin, Judy McGrath, Tom Freston, Mark Rosenthal, John
Sykes and Geraldine Laybourne join model Cindy Crawford to debut MTV's electronic retailing test in the mid-1990s.
U S West Media Group CEO Chuck Lillis oversaw the company's Continental purchase and the MSO's move to Denver, which caused Continental chairman Amos Hostetter to resign.
Cable programmers extended their brands to the Internet providing consumers with some of the most popular destination points on the World Wide Web.
Boxing promoter Don King wheels Showtime Entertainment Television executive vice president MacAdory Lipscomb Jr. through the halls of the MGM Grand Casino in Las Vegas in the spring of 1994. King and SET produced some of cable's most successful PPV, many featuring King's best-known client, Mike Tyson. (Lipscomb was recovering from a skiing injury.)
AT&T's Michael Armstrong and TCI's John Malone seal the deal that would bring TCI under the ownership of long-distance telephone giant AT&T.
CABLE IN THE CLASSROOM:
CABLE GIVES TO EDUCATION
Along with C-SPAN, the most important public service from the cable industry is Cable in the Classroom, a joint effort of programmers and operators to wire the nation's schools and deliver a package of commercial-free video programming that can be used by teachers.
The effort came as the industry's response to a venture started in 1989 by Christopher Whittle. Whittle's plan was to create a 12-minute daily news program with commercials that would be sent free to schools around the country and used by current events teachers. Whittle planned to use the ad revenue to pay for the satellite dishes, monitors and other equipment schools would need to receive the transmissions.
Ted Turner, whose CNN had already developed its own news service for schools &endash; Week in Review &endash; saw the Whittle effort as a threat to CNN. The Whittle plan also raised objections from educators who opposed the introduction of commercials into classrooms.
When he heard of Whittle's plan, Turner called his Washington representative, Bert Carp, and told him that the cable industry would have to respond. Carp in turn called Robert Sachs, at Continental Cablevision, and Bob Thomson of TCI, each the head of his company's governmental relations office.
Turner, Carp, Sachs, Thomson, Continental chairman Amos Hostetter and TCI executive vice president J.C. Sparkman &emdash; with staff support from the NCTA vice president of public affairs Louise Rauscher &emdash; announced Cable in the Classroom in April 1989. Hostetter later recalled that the decision to have no commercials on Cable in the Classroom programming was made by Turner in the elevator on the way to the press conference announcing the project.
As its first executive director CIC hired Bobbi Kamil, an educator with a Ph.D. in instructional technology from Syracuse University who had worked on the Annenberg/CPB project to encourage the use of college level courses for credit via TV. In 1997 she was succeeded by Megan Hookey, a former Storer Cable official who had been Kamil's deputy.
In 1989 Cable in the Classroom began with some 6,165 schools. By the middle of 1998 cable operators had wired some 78,000 of the nation's 100,000 elementary and secondary schools (some were hooked up via the Primestar DBS service). Each day those schools receive via satellite a package of programming from 28 cable networks such as Discovery Channel, C-SPAN, CNN and A&E, that can be used by educators to help teach such diverse subjects as civics, current events, ecology and drama.
The cable industry, under the guidance of Bobbi Kamil, developed the Cable in the Classroom initiative that provides noncommercial content to school teachers across the country.
LOOKING BACK AND LOOKING AHEAD
The National Cable Television Center and Museum grew out of a desire by some of the industry's early pioneers to preserve a record of how the industry had begun and grown and to provide a focal point for future research and educational efforts.
George Barco, founder of one of the early systems in Pennsylvania and the third president of the NCTA, located the center initially at Pennsylvania State University under the direction of Stratford Smith, who had been the first general counsel to the NCTA.
In 1996 the decision was made to move the center to Denver where the University of Denver, headed by former Group W Cable CEO Daniel Ritchie, offered to make room for it.
The major drive to create a permanent Cable Center and Museum with its own building and endowment began the following year under the leadership of Marlowe Froke, a Penn State professor who had taken over as president of the Center with its move to Denver.
By the middle of 1998 the Center had raised almost $50 million, including a gift of $10 million from Alan Gerry, to build a permanent home on the DU campus and launch a series of programs. These included projects to compile oral histories of the industry's founders, to develop a series of seminars and lectures, to create advisory and reference services, to launch a "demonstration academy" to educate the public officials and other community leaders about cable.
The Center was scheduled to open in the fall of the year 2000.
Under the guidance of Marlowe Froke, the Cable Center raised more than $50 million to build a permanent cable museum and education center in Denver.
"In the beginning was the word."
St. John, the apostle and New Testament writer, understood the power of communications. Had he lived 2000 years later he might have noted that nobody ever went broke overestimating the desire of humans to communicate.
That fact is most clearly demonstrated by the history of communications devices.
When a new method of communicating arrived, the widespread assumption was that it would kill off the older ones just as tractors eliminated oxen in farming and indoor plumbing eliminated the outhouse. But radio did not kill newspapers. Television, in turn, did not kill radio. Cable didn't put the broadcasters under and DBS didn't kill cable.
At the end of the 20th century even the most ancient forms of communication, live theater and handwritten letters, were still very much alive, coexisting comfortably with the Internet and satellite television.
Humans have an almost insatiable appetite for communications. That hunger drove the growth of cable television in the last half of the 20th century. But the industry would not have grown as fast as it did, and might not have survived at all, had it not been for an extraordinary confluence of events and individuals.
The most important factor in the development of cable was the system of entrepreneurial capitalism practiced in the United States. That system made it possible for an individual, even with little or no resources, to transform a dream into reality.
The cable industry was not built by giant corporations. It was built by private individuals and small businessmen &emdash; Bill Daniels, John Rigas, Alan Gerry, Bob Magness, Glenn Jones and others. In fact, when the big companies did get into the business as often as not they stubbed their toes. American Express, CBS and Westinghouse all found cable too difficult a business and exited.
Part of the reason for that was that cable was a different animal financially from the traditional American business. Cable made no profits. To find the financial resources it needed to build a huge new communications infrastructure, cable first had to persuade bankers, stock analysts and others in the financial establishment to abandon a decades-long belief that profit was the best measure of a company's health.
They had to be educated that profits were not the only, or even necessarily the best, measure of a company's strength. That task of education was largely shouldered by John Malone.
Reporting profits, according the Malone doctrine, was a mistake. Profits in America were taxed twice, once when the company made them and again when the individual investor received them in the form of dividends. Malone argued that it was better to plow profits back into the company, generating future growth. The best measure of success, he said, was the growth of the company's cash flow, the difference between revenue and expenses before deducting such items as depreciation. That cash flow, in turn, could be used to borrow more money to grow the company even more, all the while avoiding posting taxable profits and avoiding having to share even a nickel with Uncle Sam.
To pursue such a strategy in which cash flow was reinvested rather than distributed, it was necessary for cable companies to remain private, or at least closely held. Most cable companies that went public &emdash; TCI, Jones and Comcast, for example &endash; created supervoting classes of stock held by a small group or an individual. That way they could continue to reinvest their cash flow in more acquisitions and construction without having to worry that the lack of earnings would hurt the stock price and would open the door for a hostile takeover by an outside party.
Malone and other innovative financiers such as Julian Brodsky made use of a wide array of financial instruments &emdash; from Eurobonds to industrial bonds to limited partnerships &emdash; to raise the money needed to build cable systems across the country and overseas.
In addition to the doubts on Wall Street, cable operators had to overcome adverse rulings by the federal government, which at several junctures seemed bent on crushing the industry. But government proved to be an extraordinarily inefficient way to regulate an industry that was growing so fast and changing as quickly as cable television. It was, after all, a government designed by people who wore powdered wigs attempting to regulate an industry that was building the information pipeline for the 21st century.
It was hardly surprising then when an action by the government produced a result that had been unintended or unforeseen or was exactly opposite of what the regulators had sought.
Sometimes government regulations had the unintended consequence of helping cable, as with the freeze on new broadcast stations in the late 1940s which helped cable get started.
At other times the government unintentionally clobbered the industry, as with the highly leveraged transaction rules which were intended to shore up the banking industry but at the same time nearly drove cable under.
Even when the government wanted to achieve a specific goal with respect to cable, its regulations sometimes produced results exactly opposite of what had been intended.
Such was the case in the late 1960s when the Federal Communications Commission set out to promote diversity and universality of television service. To do this, it reasoned, it had to protect broadcast television stations from competition by limiting the growth of cable. But it soon became clear that cable, not broadcast, would be the medium that offered the most programming diversity.
The reason was the fundamental economics of the two businesses. Each broadcast station had only one source of revenue: advertising. That forced broadcasters to air shows with the widest possible appeal to the lowest common-denominator viewer.
Cable, on the other hand, had two sources of revenue: advertising and subscription fees. That allowed cable networks to program to niche audiences. The cable audiences were smaller, but far more loyal and devoted than the broadcast audiences. Cable subscribers were willing to pay directly for the programming. Advertisers were given a way to reach specific segments of the audience most likely to buy their products.
The most dramatic example of government's ineptitude with regard to regulation of cable came in 1992 when Congress passed a bill designed to hold down cable rates. But the rules adopted by the FCC to implement the law had exactly the opposite effect for millions of subscribers, raising their rates.
In the end, the regulators did prevail. But they did so only with the most heavy-handed tactics. Rate rollbacks drove several cable companies into bankruptcy and ushered in a recession for all the others. It forced many cable companies to cut back on expansion plans, to lay off workers and to swap programming with high affiliate fees for networks such as home shopping channels that paid for carriage. The regulations cost millions of dollars and millions of people-hours to implement and decipher. All this to save consumers a dollar or two per month on their basic cable bill.
Rates were always a bone of contention between cable operators and the government. The government itself actually was responsible for a good portion of the monthly cable bills. City-mandated requirements for government access channels, local access studios, franchise fees, and other items not directly related to basic cable service accounted for as much as one-fifth of the cost of cable service. And the HLT rules adopted in 1990 forced many cable systems to increase rates in order to maintain the debt-to-cash flow ratios mandated by the new federal banking rules.
Cable operators were at times capable of the most crass kind of greed. Many of the rate increases that so incensed Congress and the public in the late 1980s came because a speculator had purchased a cable system for a huge amount and then needed to pay back the loans that had financed the deal. The big MSOs, in business for the long term, proved extraordinarily inept in executing even modest rate hikes, improving customer service or even telling their own story.
Despite the undeniable and seemingly widespread instances of unjustified rate hikes, the fact remained that the biggest cause of rate increases in the 1980s and beyond was the increased cost of programming.
Yet few cable subscribers and few lawmakers understood that cable systems actually paid programmers and that increased rates were needed to purchase better programming.
The cable industry was never able to communicate to its customers this basic element of the business. Consumers understood that the price of gasoline at the pump was related to the price of oil at the well. They knew that the price of a T-bone steak at the restaurant was related to the price of corn off the farm. But they did not understand the link between basic cable rates and programming.
This was not the only thing about cable that consumers did not understand. Fifteen years after the launch of C-SPAN, for example, millions of cable customers were unaware that the network was supported by the cable industry as a public service. Many consumers, and a fair number of public officials, continued to believe C-SPAN was funded by the government.
Cable operators, who built the biggest and most powerful communications network in the world, were largely unable to use it themselves to explain to their own customers how the industry worked and what it was doing to make the world a better place.
Despite its inability to project a positive public image for itself, the cable industry managed to escape every time it seemed to be trapped by either government or by competitors. Each time the rescuer was new technology.
In 1974, when limits on distant signal carriage and other regulations had nearly halted the growth of cable, satellite-distributed programming came along to give the business new life.
Twenty years later, when rate regulation had delivered a hammer blow, digital transmission and fiberoptics again launched a series of new businesses for cable that the government had not even thought of when it passed its legislation.
But each new technological advance threatened, or appeared to threaten, the existing business of some other sector of the media business. Theater owners, movie studios, telephone companies, video rental stores, television manufacturers at various times felt threatened by cable and attempted to get the government to intervene on their behalf.
The most brazen attempt came in the early 1960s when theater owners in California persuaded voters to pass a ballot measure banning pay television in the state.
But the industry most threatened by cable was broadcasting. Initially the broadcasters were content to watch cable grow, thinking of it as a means to bring signals to those areas outside the reach of broadcast stations. But as cable and broadcast expanded, they found themselves battling for viewers in the same markets.
It was the broadcasters who demanded the regulations that strangled cable in the late 1960s. And it was the broadcasters who persuaded Congress to resurrect must-carry in the 1992 Act after the Supreme Court had killed it.
Must-carry is an important issue both because of the way it distorts the marketplace and because of the damage it does to a cornerstone of the U.S. Constitution.
By decreeing that broadcasters had an inherent right to be carried on cable, Congress gave that industry a status above all other media. Broadcasters could not only demand to be carried, they could also demand that cable systems pay them for carriage. The impact was not to strengthen local broadcasting, as Congress intended. After all, Congress hasn't yet come to the point of forcing people to watch the broadcast stations. But must-carry and retransmission consent did give the big broadcast networks and group station owners a leg up on creation of new cable programming networks.
Services such as MSNBC, Fox News, ESPN 2, and CBS Eye on People might well have made it on their own. But they all had a head start because Congress in effect forced cable operators to carry them just because they were owned by broadcasters.
The First Amendment to the Constitution states that "Congress shall make no law infringing on freedom of the press." It does not state "no law except where necessary to protect local broadcasters." It says no law, period.
Must-carry and retransmission consent constitute the most egregious infringement on the First Amendment in the history of the nation outside of wartime censorship. One can imagine the reaction of newspapers if Congress attempted to dictate what they should carry on their front pages or gave a wire service, say, the right to automatic space in every newspaper under the theory that the wire service was in the public interest. Yet that is exactly what must-carry did in the world of electronic publishing: dictated what cable should carry on its lowest tier of service and gave broadcasters and their sister cable networks the right to carriage on cable before other networks.
The success of the broadcasters in persuading Congress to reinstate must-carry was a tribute to that industry's ability to position itself as somehow more important than any other in serving the public needs.
Yet the cable industry itself was all too willing to allow the erosion of its First Amendment rights.
Part of the reason was that most cable operators were businessmen, with no roots in the world of journalism that had spawned many broadcasters.
Broadcasters understood far better than cable operator how to influence the political process. They made sure each member of Congress knew the station managers in his or her district. And members of Congress understood that these managers could transmit the images of politicians to millions of voters.
Cable was even better positioned to achieve local political power than the broadcasters. Cable had grown out of a political process: franchising. And cable was even more local than broadcasting. Thousands of communities that had no local broadcast station had a local cable system.
Yet cable systems were slow to add local news shows to their channel lineups. Many viewed local news as a little-watched revenue loser. Broadcasters, on the other hand, were able to make their local news shows sources of both profit and political clout.
Systems were also reluctant to get involved in local political frays for fear of upsetting their franchising authorities.
Cable was also largely silent when the First Amendment rights of other media were challenged. The industry did not get involved when the broadcasters fought the Fairness Doctrine and equal-time provisions. And while cable did defend the video version of Playboy, it was largely silent when the print version came under attack.
So it is not surprising that cable received little sympathy from other sectors of the media when cable's First Amendment rights were challenged.
But the biggest reason cable was unable to assert its status as an electronic publisher, with all the First Amendment rights of a newspaper, was that it was willing to sell those rights in return for a better business deal.
Rights that are not defended are soon lost. Cable operators, even when they were backed by the courts, were willing to make deals with broadcasters and the Congress on must-carry in return for concessions in other areas. They too often appeared more concerned with defending their bottom line than their Constitutional rights.
Despite its own shortcomings and despite the opposition of powerful competitors and the government, cable television in just 50 years was able to revolutionize communications. Along the way, cable television changed society, largely for the better.
In the 1950s most viewers had a choice of, at most, three television stations. In effect, the decision about what people could watch on TV was made by a group of three network executives in offices within a stone's throw of each other in New York City. Their decisions were based on the same set of numbers, brought to them each morning by the Nielsen ratings company.
By the end of the century Americans were accustomed to 50 or more channels of programming, with dozens more in the pipeline or on the drawing boards. The decision about what to watch each night was made by the viewers, not by the network executives.
Americans don't always choose to watch the most uplifting programming. But at least they were deciding. And among the choices cable offered them, and increasingly among the shows they watched, was programming that clearly would make the society a better place. And these shows &emdash; for children or minorities, for women or opera fans, for public affairs junkies or classic movie buffs &emdash; would never have been aired in the world of just three commercial broadcast networks.
The most widely cited cable network in such discussions is C-SPAN. But while C-SPAN is an extraordinary story, even more remarkable in some respects are those networks that managed to serve the public and generate profits at the same time: Nickelodeon, BET, Discovery, A&E, CNN, among others were all started by entrepreneurs with little or no background in television and without the backing of huge, well-heeled corporations. They all managed to prosper in the world of hard-headed businessmen and women closely attuned to the bottom line.
Their existence offers proof that in business it is possible to achieve both social good and financial success.
The impact cable programming has had on society is beyond calculation. Cable had brought the Joffrey Ballet to rural Montana, the debates of the British parliament to the suburbs of Chicago, the O.J. Simpson trial &endash; live and unedited &endash; to every living room in America, the Gulf War to every part of the world, and fourth grade lessons to a little girl in Strongsville, Ohio, too sick to go to school.
One example of the power of cable programming came during the NCTA convention in Atlanta in 1990. It was just after the fall of the Berlin Wall and the collapse of the communist regimes in Eastern Europe.
The final panel session at the convention included Ted Turner and was moderated by NBC TV correspondent Ken Bode.
Bode opened the session by recounting how he had just returned from Romania where he had covered the first free elections in that country's history. In a small town he interviewed people as they waited in line to vote.
He asked one elderly woman how Romanians were able to overthrow a brutal dictator.
She told him she had watched what happened in East Germany on television and figured that if the East Germans could topple their regime, so could the Romanians.
Bode asked her how she had learned of what had happened in East Germany when the state-controlled television station had blacked out such news.
"Oh," she answered. "I watched it on CNN."
Bode told her he would soon be in Atlanta and would be meeting with the man who had founded CNN, Ted Turner. "Please tell Mr. Turner thank you," she told Bode. "Without him the revolution in Romania would never have happened."
Bode invited Turner to the podium. The founder of CNN recalled that when CNN had started he didn't know if it would succeed, and that there were days when it seemed bankruptcy was just around the next corner.
"But I knew that with the support of cable operators we could make it," he told the crowd, "and when we did CNN would shine a light into the darkest corners of the world. And in that light, no dictatorship, no tyranny can survive."
Thomas P. Southwick