Chapter 4: The Dark Ages
For the cable television industry, the Dark Ages began on a mild, rainy spring day in Washington, D.C., in the glistening white marble structure that houses the Supreme Court of the United States.
For the first 20 years of its history, the industry had enjoyed enormous growth, largely free from regulation by the government. In 1960 the U.S. Senate, by a single vote, had rejected legislation that would have allowed the Federal Communications Commission to regulate cable. Cable operators had dodged or defeated efforts to classify their businesses as common carriers at the federal level or to regulate them as public utilities in the states. City officials, anxious to bring television to their constituents, welcomed cable with open arms, imposing few if any limits on rates or services.
But in the mid-1960s the tide began to shift.
Going into a Tough Stretch
The mid-1960s and early 1970s were a tough time for cable operators financially, operationally and in terms of their image. TelePrompTer CEO Irving Kahn's federal conviction for bribing city officials in Johnstown, Pa., in 1971, was just the start of an era that would shake up his company and many other cable operations. Here's a look at some of the forces that hammered the cable industry in those years:
Stymied In the Courts:
The Supreme Court gave the FCC unlimited authority to regulate cable in the Southwestern decision in 1968. The FCC proceeded to freeze distant signal importation, ban ad sales on local cable programming and mandate signal quality.
Hamstrung at the Banks:
Cheap money to build systems disappeared in the late '60s as the prime rate climbed to 8.5% in 1969.
Slammed on Construction Costs:
Copper -- the key ingredient in coaxial cable -- rose to 42 cents a pound in 1968, from 29 cents a pound in 1960. Only 90 new systems were built in 1969, down from 250 the year before.
Regulated -- Again:
In 1970, the Supreme Court ruled that cable companies could be regulated by state public utility commissions.
As construction slowed, Jerrold was forced to lay off 550 workers in 1969. Vikoa reported a 1970 loss of $8 million. Ameco's revenues were halved in 1971.
Dumped on Wall Street:
TelePrompTer's financial troubles, discovered after Jack Kent Cooke's takeover of the company, caused cable stocks to lose luster on Wall Street. By 1973, analyst Paul Kagan recalls, "There was no market at all."
Stock woes made it hard to raise money, and some MSOs found themselves in deep financial waters. TCI, for example, was paying interest on $134 million in loans in 1974, a year the company generated just $18 million in revenue.
The FCC, with new, activist members appointed by Presidents Kennedy and Johnson, limited the importation of distant broadcast signals by cable systems saying the practice would damage the economic interests of local broadcast stations.
The new FCC rules were challenged by Southwestern Cable Co., which imported signals from Los Angles stations and delivered them via cable to customers in San Diego. The system won in the Appeals Court, which ruled that the FCC had no specific authority to regulate cable under the 1934 Communications Act.
But when the Supreme Court ruled on the case in June 1968, it took a different view. In a sweeping decision, the court ruled by a 7-0 vote that the FCC had virtually unlimited authority to issue rules governing all forms of communication by wire or over the air.
The court also upheld the FCC's contention that it needed to regulate cable to ensure the survival and growth of broadcast television. "The Commission has reasonably found," the court said, "that the achievement of each of these purposes (to protect broadcasting) is placed in jeopardy by the unregulated explosive growth of CATV."
The ruling was a blockbuster, but it was not the only decision that impacted cable that week. The second decision evened the industry's record at the Supreme Court.
Ever since 1948, when Ed Parsons asked for permission to pick up the signal of a Seattle broadcast station and retransmit it via cable, the issue of a system's right to pick signals out of the air for free and retransmit them to paying subscribers had been open to question. Program producers and broadcast stations had repeatedly taken the position that programming could not be "stolen" by cable operators and then resold to consumers without paying the copyright holders. Cable operators maintained that once a broadcast signal was sent out over the airwaves it was free to anybody who wanted to pick it up for any purpose. Cable, they maintained, was simply an effort by a group of citizens to get together to build a bigger and better antenna.
The issue inevitably wound up in court.
In 1960 United Artists Television Inc., a movie distributor and program producer, sued two cable systems in West Virginia owned by Fortnightly Corp. United Artist charged that Fortnightly was illegally picking up broadcast signals that contained UA-produced programming and then selling those signals to cable subscribers. UA asked the court to forbid the practice without the permission of the copyright holder.
It seemed to UA, and to many cable attorneys as well, that the studio had a strong case. Copyright was firmly embedded in the US system of laws. The notion that cable was simply a passive way to pick up signals that anybody could get with a big enough antenna was undermined by the increasing tendency of cable systems to use microwave links to import stations from hundreds of miles away. Cable attorneys knew their reasoning was shaky, but as one of them, Stratford Smith, said later, "it was the best thing we could think of at the time."
The industry arguments proved inadequate in the District Court, which ruled unanimously for UA, and in the U.S. Court of Appeals, which backed the lower court by a margin of 14-0.
The NCTA almost decided not to take the case any further and to work something out with UA and other copyright holders. But NCTA president Frederick Ford and special counsel Smith persuaded the board to take a shot. (Fortnightly Corp.'s systems, meanwhile, had been purchased by Jack Kent Cooke, who had agreed to assume liability for any judgment against the systems.)
By the time Supreme Court decided the case, the cable industry had received two-last minute breaks:
The ruling on the Southwestern case, which had come just prior to Fort-nightly;
The courtroom demeanor of the attorney for United Artists, Louis Nizer.
Nizer was as famous in his day as F. Lee Bailey or Johnny Cochran would be later on. He was a brilliant courtroom attorney and won the UA case handily in the district and appeals courts.
But when the day came to argue before the Supreme Court, Nizer adopted an attitude of disdain for the cable operators. His demeanor appeared to some of those in the courtroom to be a snub of the Justices themselves who had agreed to hear the case in which the outcome, Nizer implied, should have been obvious. He gave the impression to some who heard his arguments that the court was wasting his and everybody else's time by even hearing a case which was so clear-cut.
But the justices didn't see it as a clear-cut issue. As they questioned Nizer it became apparent that several of them were put off by his cavalier, almost arrogant, attitude.
On top of that, the Southwestern and Fortnightly cases were argued before the court on the same day and the Southwestern ruling came just two days before Fortnightly. In the Southwestern case the court had stated that the FCC had almost unlimited authority to regulate cable television. The reasoning in Southwestern spilled over to the copyright case as the court ruled that it was up to the Congress and the FCC to make clear the issue of cable copyright. On a 5-1 vote it overturned the lower court and ruled against United Artists.
It was a huge, upset victory for cable. The two attorneys who had argued the industry's case -- Robert Barnard and Smith -- had come down to the court chambers on three successive Mondays waiting for a decision. When it finally came, the two moved quickly out of the court chambers and struggled to keep their balance as they sprinted down the polished marble floors to phone industry leaders with the good news.
Had the cable industry lost Fortnightly it would have been a crushing, perhaps fatal blow. Systems would have been liable for enormous programming costs and perhaps for penalties for past copyright infringement as well. But the decision, as much as it avoided the worst, did nothing to improve cable's status. It merely upheld the status quo and sent the copyright holders scurrying to the Congress and the FCC for relief.
Southwestern also seemed at first glance to be a decision upholding the status quo. After all, it merely affirmed a power to regulate cable systems that the FCC had first asserted in 1966. But when the ruling came out, its sweeping language spurred the FCC to issue a whole flurry of new regulations governing the industry.
Within a week the Commission had issued rules that effectively froze the additional importing of distant signals into big cities, without any chance for waivers. The Commission also required systems to carry all local signals without degradation and prohibited cable systems from carrying advertising on locally originated programming.
The FCC followed up on that ruling with a series of decisions that imposed even more stringent restrictions on what cable systems could do.
By December it had issued a set of proposed rules to ban the importing of any distant signals at all in the top 100 markets and to ban systems in other markets from importing any distant signals other than those closest to the system.
Many in the cable industry viewed the FCC as the captive of broadcasting interests. Certainly the broadcasters were relentless and effective lobbyists. And certainly the rulings of the FCC were overtly designed to help the economic viability of broadcast stations.
But the FCC rulings were not the product of broadcasters buying off commission members. A majority of the Commissioners and many of the staff members genuinely believed that what they were doing was in the best interest of the public.
The two principle champions of regulation -- Commissioner Kenneth Cox and general counsel Henry Geller -- genuinely believed that the federal government had a responsibility to the public to make the world a better place, a pervasive feeling in Washington in the days of the New Frontier and Great Society. The FCC, they believed, had a responsibility to ensure more diversity in programming and universal access to television service, particularly local news and public affairs. They believed that the best way to do this was to encourage the growth of more broadcast stations.
Moreover they believed it was possible for a small federal agency to regulate a huge and rapidly changing industry in a way that would accomplish the government's lofty goals of programming diversity and universal access.
The actions of the FCC in the late 1960s and early 1970s had a devastating impact on the cable business, which in the end proved much more able to provide diversity of programming, including local programming, than the broadcasters. The broadcasters also found that their status as the government-ordained primary source of television was not an unmitigated benefit. The government imposed a series of rules -- equal time, the fairness doctrine, limits on network programming and requirements for children's TV -- on the broadcasters who howled in protest. At the end of the Johnson Administration, the Congress, over the vigorous objections of the broadcasters, enacted a law creating the Corporation for Public Broadcasting to fund a network of public stations that would compete for viewers with the commercial broadcasters.
The FCC rulings were not the only bad news the cable industry received in the late 1960s and early 1970s.
Even more disastrous for the industry than the FCC and Supreme Court rulings was the general state of the economy. The cable industry had been built with cheap money. For much of the first two decades of its existence interest rates had remained well below 5%. But in the late 1960s that began to change as the first hot winds of inflation began to stir in an economy already overheated by the war in Vietnam and the social programs of the Great Society.
The prime interest rate, the fee banks charged their biggest customers, soared from 4.5% in January 1965 to 8.5% in mid-1969. Many cable operators had bank loans that were tied to the prime rate. For them the change meant that the cost of money, far and away the biggest expense for any new system, effectively doubled in four years.
As the cost of money rose, so did the cost of equipment. The most expensive ingredient in coaxial cable, copper, began to become scarce in the late 1960s. Its price rose to 42 cents a pound in 1968 from 29 cents a pound at the start of the decade. Suppliers of coaxial cable were forced to follow suit. Times Wire increased its prices for drop cable by 6% in 1968 alone, and other suppliers hiked prices as well.
Technology, which had been a friendly Dr. Jekyll for 20 years -- making it possible to build more reliable systems and deliver more services at a lower cost -- turned into a Mr. Hyde in the late 1960s, particularly when coupled with the evils of the franchising process.
In 1967 Alan Gilliland, a California broadcaster, built a system for San Jose that had two cables, effectively doubling the channel capacity which heretofore had been limited to 12. Customers were given an A/B switch that allowed them to move from one cable to another to view a different set of channels.
In 1969, the first two-way cable system was built by Continental Telephone in Reston, Va. Local origination programming began to spread as cable systems televised high school football games, city council meetings, local parades and other events. Bill Daniels made news in 1968 when he became the first cable operator to purchase equipment capable of producing and delivering local programming in color.
As the franchising process heated up, competing cable companies vied to offer bigger and better systems with even more local programming. They did this despite the fact that there was really no way to pay for these improvements at the time.
City councils became far more savvy about what they could demand from their local cable systems. They all began to read the trade press and the press releases from the cable companies themselves. Consultants began to go from town to town offering to help city councils with the franchising process. In 1970 the Cable Television Information Center was started with money from the Ford Foundation to help cities get better deals from their local cable companies.
Spurred on by their consultants, cities all across the country began to demand state-of-the-art systems for their communities.
They insisted on increased channel capacity even though there was little programming to put on these additional channels. They demanded more local origination programming, particularly channels devoted to covering city council meetings, school board sessions and local news. The publication of the best-selling book, "The Wired Nation," by Ralph Lee Smith outlined the great benefits cable would bring the country, and city officials everywhere were eager to be the first to bring the new services to their constituents.
One early dual-cable system, outside Philadelphia, offered subscribers four educational stations, a channel showing the AP news ticker, a channel showing the weather and the time, and a channel each for the color and black-and-white test patterns. Even in the sleepiest American towns it was difficult to imagine anyone paying extra money for the chance to watch test patterns.
And operators found it tough to get permission to raise rates. Rate increases hadn't mattered much to cable companies until the late 1960s. Prior to that time they had been adding so many new subscribers they didn't need more money from their existing customers. But as penetration levels approached the maximum in many towns and costs continued to rise, rate hikes became more important.
"I don't think we had any rate increases to speak of until maybe 1972 or 1973," recalled Bill Arnold, then chief financial officer for GenCoE. "I guess maybe it wasn't until the early '70s people said 'Well, you can kind of see from where we are now to the end of the houses that we can serve, and costs are creeping up. We now began to talk about needing rate increases."
But most franchise agreements gave city councils the power to approve or reject rate increases, and most local politicians were not eager to approve rate hikes for the cable customers, who were also voters. At the same time, they found that the franchise fees were a ready source of income for the cities without the need to raise taxes.
In community after community, officials used the franchising process to hold down the cost of cable for consumers and line the coffers of the local government. City officials then could brag about keeping more money in voters' pockets without having to cut taxes and about increasing city revenues without increasing taxes. They could have it both ways against the middle. The only one squeezed was the cable company.
A study released by the FCC in 1970 found that cities were charging cable companies an average franchise fee between 7% and 9% of gross revenues. In newer franchises the figure was 8% to 11%. In Albuquerque, GenCoE agreed to pay $25,000 for the franchise, $10,000 a year in fees until the system began to operate and up to 30% of gross revenues in franchise fees thereafter depending on the success of the system.
Then, to add to the industry's woes, the Supreme Court in 1970 ruled that cable companies could be subject to regulation by state public utility commissions. The decision upheld a Nevada statute placing cable under regulation by the PUC, paving the way for other states, such as Connecticut and Hawaii, to institute state regulations. The court rejected the argument that because the federal government was regulating cable, states had been preempted.
The combination of FCC rules, more state regulation, higher equipment costs, greater demands by the cities and increased interest rates was a near-fatal cocktail for cable in the late '60s and '70s.
Some systems folded. In Cleveland shortly after the FCC rules were announced, the system owned by Cox and the Cleveland Plain Dealer announced it was shutting down, having attracted only about 1,000 subscribers after 18 months in operation and losing $20,000 a month.
The system had tried just about everything, recalled its director of marketing, Greg Liptak, who took the job just out of graduate school. The company developed a series of local programming efforts, covering high school sports, and even inaugurated a local newscast six days a week. Although the efforts won the plaudits of local civic leaders, it didn't attract enough customers to stem the red ink.
In nearby Akron, Ohio, cable operator TeleVision Communications Co. forged ahead with construction of a dual-cable, two-way system. But after 18 months and only 17,000 subscribers, it was forced to sell out in the spring of 1972 to a new player in the business, one with deeper pockets. The buyer was Kinney Services, owner of Warner Bros. Studios and soon to be renamed Warner Communications.
"We worked for 10 years to develop this company," TVC president Alfred Stern told Forbes Magazine, "and I could see our leadership going down the drain."
Warner also bought the systems owned by Continental Telephone, including the two-way system in Reston, Va. With Akron and Reston, Warner became an instant leader in interactive cable systems.
All across the country construction ground to a halt. TV Digest, which had reported the launch of more than 250 new systems in 1968, found only 90 startups in 1969. Manufacturers were devastated. Jerrold, still the biggest and most influential equipment maker and supplier, and newly acquired by General Instrument Corp., announced layoffs of 550 people, nearly a third of its workforce. Vikoa reported a net loss in 1970 of more than $8 million. Ameco reported revenues for its fiscal year 1971 of $1.5 million, less than half the revenues of the year before. Spencer Kennedy Labs was purchased by Scientific Atlanta, a small manufacturer of antennas.
Entron, another major manufacturer, was acquired by Spedcor, a telephone equipment manufacturer which wanted Entron's cable systems and the tax losses it could take from shutting down the equipment business. As Entron president Ed Whitney later remembered: "The main thing is that the FCC put a halt on our development and we (didn't) have the financial resources. We didn't have the capability of carrying on and going on long term to try to recover. We just simply had to stop business. They knocked us dead."
The amount of money the cable companies needed to borrow in order to expand from their rural roots into the urban and suburban communities was staggering. Amos Hostetter, then executive vice president of Continental Cablevison, told the 1972 NCTA convention that the total amount of capital loaned in the U.S. for all construction purposes was about $35 billion a year. Of that, about half was used by the utilities -- phone and power companies. Outside of that group no single industry had ever borrowed more than $1 billion in a single year -- not steel, not automobiles, not railroads, not mining. Yet cable would need to raise at least $1 billion a year every year for the coming decade if it were to succeed in wiring the nation's most populous areas.
To raise more capital, some cable companies had begun, in the late 1960s, to turn to a new arena, the public markets. The first publicly traded cable companies entered the market through the back door. H&B American had started life on the New York Stock Exchange as a transportation company. It underwent a metamorphosis and emerged as a cable company when it purchased the systems owned by Jerrold Electronics in 1961.
TelePrompTer also started out as something different (a company that rented out TelePrompTer machines and produced closed-circuit events.) Very quickly after its chairman, Irving Kahn, discovered cable, TelePrompTer shed its other businesses. The company then found it could trade its stock for cable systems. By taking stock rather than cash, the seller could avoid paying huge capital gains taxes on the proceeds, participate in the growth of the company and sell stock to raise cash as needed.
The trail blazed by TelePrompTer and H&B was followed by a group of other MSOs, beginning in 1968. The first cable company to go public expressly as a cable operator was Cypress Communications, owned by cable operators Leon and Randy Tucker, the Cole family of Cleveland and by Hornblower & Weeks, the big stock firm. It was followed quickly by seven others. By the end of the decade 10 cable companies were publicly traded.
One of them was American Television & Communications Corp., formed by Daniels & Associates partner Monroe Rifkin.
Rifkin had been busy since joining Daniels in 1964. He had brokered dozens of systems for hundreds of millions of dollars, dealing with a wide variety of buyers and sellers. And as he structured the buying consortia, he found that the partners often would have different goals. Some would be looking for a relatively rapid turnover while others had a longer time frame. Sometimes the initial goals of the partners would change. One might find a sudden need for liquidity and seek to cash out while the others wanted to stay for the long haul. Or the death of a principal might create a sudden need for cash to settle an estate. At times the different needs of the different partners could create stress within a cable company.
One lender to some of the entities Rifkin created was Naragannsett Capital Corp., whose chairman Royal Little, was a friend of George Peabody Gardner, senior manager of Paine Webber, Jackson & Curtis, the big stockbroker. Gardner first suggested to Rifkin the idea of going public.
Rifkin rolled 16 different cable companies with 69,000 subscribers in 14 states into a single company. He assigned to each partner a number of ATC shares in proportion to the value of the cable properties contributed to the new company. Then, in the spring of 1969, the company went public under the name American Television & Communications Corp.
Rifkin hired Douglas Dittrick away from GE Cablevision to become vice president of finance. Another early hire at ATC was June Travis who started out as a secretary, rose to senior vice president and later became president of Rifkin & Associates cable company and still later executive vice president of the NCTA.
The ATC deal had terrific advantages for those who participated. ATC was able to sell sufficient stock to the public to raise badly needed construction capital and to retire a total of $2.1 million in debt to Memorial Drive Trust and Boston Capital Corp., two lenders anxious to redeem their loans. Going public allowed the investors to sell portions of their ATC shares for cash, without having to get out of the business entirely. (Bill Daniels, ATC's largest individual shareholder, was one of the partners who needed some cash from time to time but didn't want to sell out completely.) And the offering enabled ATC to raise additional funds for working capital, upgrades and acquisitions. It consolidated the operations of the systems and gave the company additional clout for negotiating with suppliers and lenders.
The systems ATC managed were strong and getting stronger. Revenue for the company's systems totaled $3.5 million in 1967, up from $1 million in 1965. Operating income (profits before depreciation, amortization, and interest expenses) had grown from $175,000 in 1965 to more than $1.5 million in 1967. Things were looking even better in 1968.
But ATC, like all the other cable companies which went public in the late 1960s, had a problem. Its essence was contained in two sentences of the original prospectus: "ATC has paid no dividends and does not presently contemplate paying any dividends in the foreseeable future. It intends to use all available funds for expansion of existing CATV systems and the acquisition of additional systems."
This, of course, was standard operating procedure for cable companies, many of which went out of their way not to report taxable profits. In 1965, after depreciation, amortization and interest, ATC posted losses of $673,000; by 1968, its losses were more than $900,000.
ATC attempted to explain this to potential investors: "Operation of CATV systems involves a high ratio of fixed costs resulting in substantial losses in the early years when revenues are relatively low. The company's losses increased in 1965 and 1966 largely because of depreciation, amortization and interest charges resulting from the expansion of plant facilities through acquisitions and construction."
It also noted that "revenues increased in 1967 and 1968 through substantial growth without substantial additions to plant facilities.
Starting with 1966, revenues have exceeded all expenses other than depreciation and amortization."
In other words, ATC was generating a huge amount of free cash flow that could be used to build and expand. But by writing off the cost of plant and interest it could report a loss to the IRS and avoid having to pay taxes.
All in all it looked like a pretty sweet deal. But not to Wall Street.
The major investment and brokerage houses on Wall Street had a decades-old, ironclad method of measuring the success of a company. It was based on earnings and dividends. Cable companies had neither.
The major indicator of the value of a stock was its price/earnings ratio, a figure derived by dividing the price of a share of stock by its earnings per share. No such calculations could be made for the cable companies because they had no earnings or had earnings so small they yielded enormous p/e ratios.
The attitude of the major brokers was made clear in 1969 when E.F. Hutton assigned one of its young analysts to study the new cable industry. He came back with a glowing report about a business that was growing quickly, that had a monopoly on delivery of a commodity every American wanted, and that could take advantage of some pretty terrific tax dodges.
Then his boss asked him: "Where are the earnings?" Told that the cable companies didn't report earnings, preferring to plow cash flow back into the business, the senior analyst replied in the lofty tone: "E.F. Hutton does not do reports on companies with brackets on the bottom line." (Losses on a financial report were typically indicated by enclosing them in brackets.)
The young analyst figured that made no sense. So he quit and started his own firm to follow the cable industry and look for investment opportunities. His name was Paul Kagan.
Kagan, born in 1937, grew up in what he now calls "the golden era of New York City." As a kid he was a big-time baseball fan, able to rattle off the batting averages of Joe DiMaggio, Mickey Mantle, Jackie Robinson and the other players on the hometown Yankees, Dodgers and Giants.
After graduating from Hunter College, Kagan got a job as a sportswriter at the daily paper in Binghamton, N.Y. There he covered the minor league baseball team. On slow news days he learned to make up stories based on the statistics. He might tell readers that if the team made two more double plays in July they would be third best in the league or if the second baseman continued to hit doubles at the current pace he would be on track to break the team record for two-baggers by an infielder.
In short, Kagan learned to play with numbers, to look at statistics in unconventional ways and to find stories in numbers that others regarded as boring or routine. He also began to do some freelance writing for business publications. He covered trade shows-- the Toy Fair and the Point-of-Purchase convention -- and learned to dig up hard news amid the hawkers and promoters. His big break came in 1967 when he went to work for Barron's, the weekly financial publication. From there he went on to E.F. Hutton.
Armed with all the research he had done while at Hutton and which Hutton had spurned, he printed his first newsletter in November 1969, spending "every last dollar I had" to send out newsletters to 2,500 people. After six weeks 100 subscribers had signed up at $100 each.
With that as his base, Kagan set out to change Wall Street's views on how to value cable companies. In the January 1970 issue he proposed something he called "Total Market Value" as a way to determine the relative value of the cable companies traded in the public market. The formula was as follows:
Take the current stock price, multiply by the number of fully diluted shares outstanding, factor in the long-term debt minus working capital and divide by the number of subscribers served by the company. Each company could then be assigned a total market value per subscriber, which could be used to compare it to other cable companies, both public and private.
The cable industry ate it up. It provided every cable operator in the country a quick way to calculate his company's net worth. Somebody running a mid-sized system with 2,000 subscribers could look at Kagan's chart, find that the average public company was valued at about $600 per subscriber and go home that night to announce to the family that they were millionaires.
Brokers and some financial officers at cable companies had been using similar systems for years. But Kagan was the first to make these numbers public, at least to those willing to pay for his newsletters.
Kagan followed this up with a blizzard of new charts and statistics, analyses of mergers and offerings, articles on regulation, operations and technology. Above all, he hammered away at the Wall Street way of looking at the industry.
"Wall Street makes a mistake every time it looks at cable earnings based on current accounting," he wrote in the issue of Jan. 15, 1970. In October he told readers, "CATV companies can be evaluated best in terms of cash flow and not traditional taxable profits. This is simply because CATV companies net 50 cents on a dollar of revenues before depreciation, amortization and interest payments. But they cannot show 'Wall Street type earnings' because they are still infants and need all their cash for growth."
And in 1972 he was still trumpeting, "It is wrong to buy or sell a CATV stock on a price-to-earnings ratio basis. It is nonsense to talk about 20, 50 or even 100 times earnings when those earnings are for bookkeeping purposes or for unsophisticated investors and brokers who need numbers because they don't understand concepts."
Kagan's analysis was right, and eventually would be proven so. But his timing was horrible. When he launched his first newsletter cable was about to enter the most difficult period in its history. Like the industry he covered, Kagan himself "died three times in the next five years," as he later recalled.
The business was whacked by multiple hammers in the period from 1968-1974: rising interest rates, more regulation, Supreme Court rulings, lack of understanding by Wall Street. And in the most public blow, the head of the nation's largest cable operating company was indicted, convicted and sentenced to jail for bribing a city official in Johnstown, Pa., in connection with the cable franchise.
Irving Kahn, the great showman, huckster, entrepreneur, visionary and financial wheeler-dealer had a darker side. It wasn't that he was a crook, the kind of guy who stole Social Security checks or robbed gas stations. But he did have an impatience with the petty details of life that sometimes led him to cut corners or ignore the rules that apply to other people. It was the same syndrome that sometimes leads powerful congressmen who deal with matters of war and peace and billion dollar budgets to ignore "No Parking" signs or to use money from the stamp fund to pay for greens fees.
When he got involved in the world of professional boxing, for example, Kahn found he could make more money selling TV reruns of a fight that went six or more rounds than for one that ended early. He passed the word on to some of the fighters that if they kept things going their paycheck would be a little larger.
"I got very friendly with (Heavyweight champion Floyd) Paterson through (manager) Cus D'Amato," Kahn later recalled. "I said 'Look, I'm not telling you to prolong the fight. But if there is some chance that you feel sure that you can go past six rounds you're worth an awful lot of money.' In looking back on some of those early films I think he could have polished them off a little quicker in some cases."
It wasn't exactly fixing the fights, but it wasn't something he learned along with baton twirling back at Boy Scout camp either.
The same mentality was at work when it came to a renewal of the franchise in Johnstown, Pa. TelePrompTer owned the Johnstown cable system when the state of Pennsylvania passed a law requiring that all cities have formal franchises for their systems.
Most communities simply gave the franchise to the existing operator, making official a situation that had existed for many years.
But in Johnstown the mayor threatened to put the system up for bid. The process would require a tremendous amount of work by TelePrompTer just to keep what it already had. It looked like a needless headache to Kahn who was working on much bigger issues.
"I don't know about your experience with going from New York to Johnstown," he later recalled. "Weather being what it is, eight out of 10 times the flights in the winter don't land in Johnstown. For me to take a day off, with two lawyers and someone who knew the technical end of cable to go down and argue with Johnstown, we figured it would cost $3,000 to $4,000 a day. It wasn't a great town to go into with a private plane because they didn't have great instrumentation. Finally, at one of the meetings either the mayor or someone suggested that if I were to contribute $5,000 apiece to (the mayor's and two city councilmen's) campaigns we would get the franchise."
Kahn's attorney, Pennsylvania cable operator George Barco, advised against it. But it looked like an easy shortcut to Kahn. "I was sitting there thinking we were going to have to make 10 more trips back to this place. That was my mistake. In hindsight I should have given them the money but I should have brought the FBI in and we would have gotten (the franchise) anyway."
Kahn didn't do this deal very well. In the first place, by traveling from New York to Pennsylvania he violated federal, not just state, laws. Then, he gave the mayor not cash, but a check, a corporate check, which later caught the attention of an IRS agent looking into an entirely unrelated issue. But it didn't seem like such a big deal to Kahn, even when he was hauled before a federal grand jury.
"I didn't attach much importance to this. They wanted me to fly up (to testify). I was in the Bahamas with my wife and kids for Christmas on the boat, and they said come on up here and we'll just go over this. I said 'What have I got lawyers for? Don't bother me.' I just didn't take it seriously."
He should have. And he should have been more careful when he did testify before the grand jury. "They started to ask me about my company. Well, I'm naturally enthusiastic, particularly about something I believe in. They asked me a whole bunch of questions. When I came out they let us know they had me on 69 or 70 counts of perjury."
Then two of the Johnstown officials agreed to testify against Kahn in return for lesser sentences for themselves. It was a short trial. Kahn was sentenced to three five-year terms in the federal penitentiary. He got out in 20 months, the minimum.
Prison failed to dampen Kahn's ebullient spirits. While in jail he took a correspondence course in cable technology from Penn State University and became a certified cable technician. He applied for franchises in New Jersey (using the prison warden as a witness to some of the paperwork), built microwave systems to serve them and launched an extensive local origination service to televise high school football games and other events of local interest. All this he did from his cell in the Allenwood federal penitentiary.
When Kahn left prison the cable industry didn't quite know how to handle him. His conviction had been front-page news across the country and had given cable its biggest public relations black eye ever.
Kahn's conviction "cast a pall over the entire cable industry," Business Week reported, not just because TelePrompTer was the biggest cable company in the country, but because "Kahn has been cable TV's chief visionary and evangelist."
Just months before going to prison, he had spoken to a group of executives from major financial houses predicting that TelePrompTer would launch its own communications satellite to beam a new network of cable-exclusive programming to systems around the country, revolutionizing the industry and creating vast new wealth for those who had been wise enough to invest in TelePrompTer. His predictions may have seemed like science fiction to the conservative investment executives at the time. After he went to jail they had even less credibility.
Finally, a year after getting out of prison, Kahn was invited to speak at the Texas Cable Television Association annual convention. It was a big risk for the industry to give him a forum. Industry leaders were a little nervous about what Kahn would say in his first public appearance after getting out of jail.
When he stood up before the convention there was silence. Kahn looked around the room, cleared his throat and began:
"Now... as I was saying before I was interrupted."
The line, suggested by Kahn's long time colleague Linda Brodsky, brought down the house and opened the door for him back into the business, although never again at the level he had played on before going to jail.
His company, in the meantime, was in shambles. Just before he became a guest of the federal government, Kahn had completed an acquisition of Jack Kent Cooke's cable company, which by that time had merged with H&B American to become one of the biggest in the nation. The TelePrompTer deal required Cooke to vote his stock as Kahn
dictated, precluding a takeover of the company without Kahn's approval.
But when Kahn went to jail Cooke declared the agreement null and void. He engineered a takeover of TelePrompTer. What he found when he got to corporate headquarters wasn't pretty.
"The company was virtually bankrupt," recalled Bill Bresnan, who was named chief operating officer of the company by Cooke. "It had a $40 million line of credit with Chase Manhattan Bank and had borrowed more than $50 million. It was building systems in Manhattan, Los Angeles, St. Petersburg (Fla.), Seattle. It was spending money very fast.
"The financials were a real rat's nest," he said. TelePrompTer had listed 65,000 subscribers for its Manhattan system. But when Bresnan finished looking at the books he found that there were thousands of disconnects, free installations and others listed as paying customers. The real number, he later concluded, was only 34,000.
By the time they had finished going over everything the company was forced to take a $30-million write-off. The stock had dropped 18% on Kahn' indictment. It kept plunging as the trial continued and Kahn was convicted, Cooke launched a takeover attempt, and the new management found one skeleton after another in the various TelePrompTer closets. "We were virtually bankrupt, but we were just too stubborn to admit it," Bresnan said later.
By 1973 Bresnan was ready to take drastic measures. He cut capital spending in half, laid off 20% of the TelePrompTer employees (many of them people Bresnan had himself hired and brought up through the ranks) froze the pay for all other workers and rolled back salaries for top management. Even the annual report, normally a four-color glossy brochure touting the future of cable, was printed on recycled newsprint in black and white to save a few dollars, and to demonstrate to shareholders that the company was looking everywhere for savings.
TelePrompTer stock, which had once placed a value of $1,287 on every TelePrompTer subscriber, plunged to where it was worth only $250 a subscriber. Investors bailed out by the bucketful. Kagan remained as one of the few believers, stating in his newsletter of September, 1973, that the "Wholesale dumping of TelePrompTer stock was a 'bullish sign for the faithful'."
The faithful were a dwindling band, however. TelePrompTer's woes, while more dramatic and publicized than those of other cable operators were by no means unique.
None of the other cable companies had endured a public trial and conviction of their CEO, but they were all susceptible to the rise in interest rates, demand from the cities, and the FCC rules that had slammed TelePrompTer. And the TelePrompTer mess had convinced many analysts that the cable companies were shell games, that their talk of valuation on the basis of cash flow, not earnings, was just a sham to cover up phony accounting practices.
By 1973 the market in cable stocks had ground nearly to a halt. There were few sellers at the low prices and even fewer buyers at any price. "This was far from just a bad market," Kagan lamented. "It was no market at all."
A few other analysts, including Mario Gabelli and Dennis McAlpine, followed the business. But the group of cable analysts in the late 1960s and early 1970s couldn't have fielded a baseball team.
Every public company suffered from the drop in stock prices, but none more than Tele-Communications Inc., the multiple system operator that had been started by Bob Magness.
In the early 1970s, Magness had gone on a buying spree, gobbling up a bunch of small systems and MSOs. He had financed the purchases with bank debt, which he planned to repay with proceeds from additional sales of stock after the new acquisitions had been completed and the assets could be listed on TCI's balance sheet. Such short-term bank loans were known as bridge loans.
When the stock crashed, he couldn't repay the bridge loans and was faced with financial ruin. By 1974 he was paying interest on $132 million of debt while taking in only $18 million a year in revenue. It was an impossible situation.
Back east Chuck Dolan was also feeling the financial pinch as he tried to build his cable system in New York City.
A soft-spoken, slight man with a sly, almost elfin grin, Dolan had been born in Cleveland, Ohio, in 1926. His father was an inventor, the man who had developed the locking steering wheel for automobiles and an early version of the automatic transmission. Dolan remembers discovering a trunk in his attic "full of patents."
But as a child Dolan was fascinated not by machines, but by pictures, particularly movies. He bought a home projector and showed films to his friends in the basement of his home. He was a Boy Scout and used to take photos of the Scout meetings and sell them to the local papers for $2 each. When he was 15 he persuaded the Cleveland Press to buy a weekly column he wrote called "Scouting Today."
After serving in the Air Force and attending John Carroll University, Dolan began a business of compiling a weekly sports reel. He would arrange to have film of all the big college games flown to him every weekend, spend Sunday night putting together a script and highlights film to go with it and then send the prints out to stations around the country via airplane. "Some of the stations paid us as much as $15 per week," Dolan recalled. In time the Dolans (his wife, Helen helped) had 30 clients. But they had no profits. "We went broke," he later remembered.
Dolan's only competitor was a company in New York City called Telenews. He called them up and offered to transfer his clients to them if they would give him a job. They agreed and he packed up the car and family and drove to New York.
Engineers Form SCTE Trade Group
When the Industry's Engineers First Formed SCTE, MSOs Resisted, Fearing a Move Toward Unionization; These Days the Society Is An Integral Part of the Business
As more and more cable systems came on line in the 1950s and 1960s engineers across the country were faced with similar problems. But there was no way they regularly communicated with each other.
This created a fertile field for a national organization of cable system engineers that could exchange ideas on improving plant performance and operations. When the trade publication Cablecasting Magazine called for such an organization in its issue of November 1968, engineers from across the country responded. At the NCTA convention in June 1969, 79 of them got together to form the Society of Cable Television Engineers. Ron Cotten, chief engineer of Concord TV Cable of Concord, Calif., was elected the first president.
Response from management was not favorable. The heads of cable operating companies were deeply fearful that their employees would want to join unions, and they saw the formation of the SCTE as the forerunner of such a move. But the engineers forged ahead and began to form regional chapters. By 1978 the society had more than 1,000 active members.
Rex Porter, a cable system operator and salesman for Times Wire, recalled that a group of managers came to the organizational meeting with the express purpose of preventing formation of the SCTE. "A few years later they asked me to help them with the application for SCTE Charter membership since they had been in attendance at the first meeting."
In the early 1980s the group began to face financial troubles. An attempt to hold a national convention and exposition met with opposition from the NCTA, which urged its members not to attend, fearing it would cut into the NCTA convention revenues. General Instrument Corp., still the largest supplier of hardware, was among those that did not attend the first SCTE expo.
By 1983 the group was $60,000 in debt and was forced to move out of its headquarters in Alexandria, Va. To help get the organization back on track, the SCTE hired as executive vice president Bill Riker who had been director of engineering at the NCTA, director of engineering at Showtime Networks, headend and microwave engineer for MacLean Hunter Ltd., and chief technician for cable operating company AmVideo Corp.
Working out of a garage at SCTE president Tom Polis' construction company in West Chester, Pa., Riker and the SCTE board began to pull themselves out of the financial morass. Riker repaired relations with the NCTA and the 1984 SCTE Expo was a financial success. Suppliers found they could introduce new products and court the top management at the NCTA convention but use the SCTE Expo to get down in the trenches and show the folks who actually used the equipment how it worked.
In 1985 the SCTE began a program to certify cable television engineers and technicians, later expanded to include installers. It established a group to work on industry standards so that equipment made by different manufacturers would be compatible at some basic level. (This same goal would be a prime mover in the establishment of CableLabs later in the decade).
By 1997 the organization had grown to serve more than 15,000 members, changed its name to the Society of Cable Telecommunications Engineers, helped launch a British version of the Society, seen its Expo grow to attract more than 8,000 attendees, and launched a conference on new technologies attended by more than 1,300 in 1997. In 1996 it moved into a new, permanent headquarters office in Exton, Pa., just six miles down the road from Tom Polis' garage.
The Dolans rented a one-bedroom apartment, and he later remembered that the walls of the kitchen could barely be seen because of all the film strips taped up during the editing process.
The company that actually syndicated the films was called Sterling Television, and in 1954 Dolan purchased an equity interest in it. He developed the business into one that produced programming, including news, for targeted audiences. It was an experience that would serve him well in the cable business.
One of the businesses he started delivered a video guide to New York City to TV sets in the rooms of Manhattan hotels. To deliver the guide, Sterling constructed a system of coaxial cables leading into the hotels.
Teleguide, Dolan later said, "turned out to be a lousy business." But while wiring the hotels Dolan became interested in cable TV. He had asked for and received a franchise from the city of New York to lay the wires needed to deliver Teleguide. In 1964 Sterling asked for permission to change the franchise so it could deliver full cable service to Manhattan.
There should have been no problem in getting the franchise. "We were the fair-haired boys" down there at the Board of Estimate that granted franchises, Dolan remembered. The franchising division, accustomed to dealing with bus lines and billboards, hadn't even realized it had authority over the underground ducts Dolan wanted to use until he showed up to ask permission to use them.
But the story leaked and the next day the New York Tribune ran a front page article. Twelve other applications were filed within a few weeks, and the city, besieged, put off granting any cable franchises for a year.
Eventually the city granted three franchises: one to TelePrompTer for the upper part of the Manhattan, one to Sterling for the lower part and one to CATV Enterprises for an enclave in Riverdale.
"Financing it was a bear," Dolan would later recall in a characteristic understatement. The cost of wiring the city was $100,000 per mile. "We borrowed money from my uncles, got a $300,000 loan from Bankers Trust, and sold the motion picture syndication company for $900,000 to Cowles Media Co. It was enough to run the company for two months."
Within a few months the price got too high for Dolan's original partners, Seattle broadcaster Elroy McCaw and jet manufacturer Bill Lear, and they dropped out. Dolan then took on a new partner, Time-Life Pictures, a subsidiary of magazine publishing giant Time Inc. and operator of a group of cable systems and broadcast stations.
Time agreed to loan Dolan money he needed in return for "convertible subordinated debentures," which Dolan later recalled as "one of the great terms of my life."
Negotiating a final contract with the city was tough, Dolan remembered, particularly because of a savvy city employee named Sheila Mahony, whom Dolan later hired to head up the franchising division of his cable company.
The city locked in the fee at $6 a month with an installation charge that could go no higher than $19.
When Dolan began to wire he found it a tough go. Apartment owners were reluctant to allow the cable company into their units. New York City was under rent control. Landlords were allowed to raise rents only when tenants moved out and new ones moved in. Landlords, therefore, were motivated to force tenants out as quickly as possible. Some cut off the heat or refused to fix the elevators. Allowing a new service such as cable TV, they figured, would be an inducement for tenants to stay.
Once in an apartment building, Manhattan Cable found it was vulnerable to theft of service as tenants could easily jimmy open the cable box and string a wire to their apartment without the company knowing unless it ran frequent and costly inspections.
The system also was prone to interference. The strong broadcast signals sent from the Empire State Building interfered with the signals being sent through coaxial cable, causing ghosting for some subscribers. And an outage in a single amplifier could cut off service entirely for thousands of customers in the densely packed city. From time to time a disgruntled employee would make sure that an amplifier did go out, usually in the middle of some hugely popular program.
Kagan, one of Dolan's customers, wrote of the system, "This is a potpourri of just about everything that can go wrong with a cable system."
But Dolan plugged ahead. He solved the interference problem by using dual heterodyne, set-top converters, invented by two engineers, George Brownstein and Ronald Mandell, in 1965. The signal would be sent on a frequency that wouldn't be prone to interference from the signals being broadcast over the air. The cable signal would then be converted to channel 3 by a box on top of the customer's TV set. The viewer would change channels using the converter, not the TV set which would be permanently set on channel 3. These set-top converters also would allow for much larger channel capacity because the barrier to increased channels had been the 12-channel tuner in the TV sets. The converters were expensive, about $30 each, adding still more to the cost of wiring Manhattan.
Dolan began by wiring the tony apartments on Park Avenue. (His first paying customer was the daughter of Henry Ford). There the system fairly quickly got to a penetration level in the upper 20% range. And there it got stuck, well short of the level needed to turn a profit.
TelePrompTer, meanwhile, was wiring the northern portion of Manhattan and having the same trouble. But it had developed one major technological breakthrough that allowed it to dramatically reduce costs: short-haul, AML microwave which allowed it to transmit all of its programming via microwave to various mini headends around the city. (Previous microwave technology had allowed for long distance transmission of a single channel.)
But TelePrompTer was stuck as well.