Chapter 5: The Satellite Breakthrough
Home Box office was not an instant success. In fact, it almost didn't make it through its first year. On more than one occasion the small HBO staff discussed what would happen if Time Inc. decided to shut the project down.
The service suffered from multiple ills. Most serious was the product itself. Studios were reluctant to provide films, fearing the wrath of theater owners. HBO had to repeat the films it did have over and over.
"We were constantly running out of movies," recalled Jerry Levin, who was running HBO just a few months after its launch in Wilkes Barre Pa., in November, 1972.
Even when a studio was willing to do business with HBO, it was limited by law as to what it could sell. The Federal Communications Commission had ruled that no film could be sold to a pay service unless the film was less than two years old or more than 10 years old. This was designed to protect the syndication window for the broadcasters who generally would rent films for showing a couple of years after they had appeared in theaters.
Scheduling also was a problem. Films started whenever the last one ended. Viewers accustomed to having shows start on the hour or half-hour found the scheduling confusing.
Churn was enormous in part because of overselling by contracted salesmen who were paid a commission on each sale made and therefore encouraged to exaggerate the benefits of HBO. They suffered no penalty if a customer canceled a month or two after signing up. Some of them promised things HBO could not deliver, particularly first-run motion pictures. Some subscribers were shocked by the nature of some of the racier films shown on HBO, films that would not be shown on the broadcast networks without severe editing.
The HBO team had adopted the subscription model, in part because they thought it would make subscribers more likely to continue to pay, as was true in the magazine business. This proved incorrect, as the service found out the summer after it launched, when subscribers disconnected in droves.
"We didn't realize you had to continue to market," Levin recalled, particularly in the summer months when customers had alternative ways to spend their entertainment dollars.
The difficulty in selling HBO was compounded in older cable systems where for years customers had been getting a dozen or so channels for a price of about $8 a month and were now being asked to pay another $8 a month for a single additional service.
Cable operators also were not accustomed to marketing. Most had been trained as engineers or financial people and knew little about selling. That didn't much matter in the 1950s and 1960s when cable was a service highly desired by consumers who had no other way to receive television signals. But the lack of understanding of how to entice the customer to buy was a critical shortcoming when it came to selling pay television services.
Hardware also presented some major problems. Until the advent of pay television, cable systems simply delivered the same package of signals to every home that signed up. With HBO it became necessary, for the first time, to deliver different sets of signals to different subscribers.
The early pay television systems, including HBO, used converters to accomplish this. The signal would be sent out off-frequency and then could be converted back, using a device that sat on top of the set, to a frequency the TV set could recognize. Customers with these "set-top converters" could get HBO. Those without converters could only get the "basic" package of broadcast and local origination channels.
Converters also could accomplish other tasks, including allowing far more than 12 channels to be delivered to the home. The 12-channel limit had been set by the tuner in the TV set, which could handle only 12 channels. Use of the converter also reduced "ghosting" caused by interference from signals being broadcast on the same frequency as those being sent over the cable system.
But converters were expensive. To meet consumer demand a cable system might need to have several thousand on hand, at a cost in excess of $30 each. Operators then had the problem of reclaiming the converters from those homes where customers dropped the premium service.
This issue was solved with the advent of the trap, a simple device costing only a couple of dollars and placed on the drop cable. The trap would scramble an individual signal. The strategy was to go into a town before the launch of HBO, place a trap on the drop cable on the home of every cable subscriber and then remove the traps from those homes which signed up for HBO. But it didn't take very long for enterprising consumers to recognize that if they wanted HBO for free, all they had to do was remove the trap themselves.
Traps were useful only where the system could add HBO without breaking the 12-channel barrier. If a cable system was already offering 12 channels and could not drop one, adding HBO meant using converters.
All of these issues were new ones for the cable operators, who patched together makeshift premium television marketing plans as best they could. At the TelePrompTer system in Elmira, N.Y., for example, the system manager dumped HBO in the lap of Tony Lynn, a recent graduate of the Newhouse School in Syracuse who had been hired to do local origination programming. Lynn, who's now president of Playboy TV, recalled that when the system decided to launch HBO, "we had no marketing department at all."
"Les Read came up from New York to tell us how to sell HBO, and I became the pay TV marketing manager."
"We would hire these Bedouin trap installers," Lynn recalled. Several dozen would check into a hotel and then trap the whole town in a week. The head of one such group became known, Lynn recalled, as "Trapper John."
HBO also had competitors, including a service called Channel 100 started by Geoffrey Nathanson in Los Angles. This service worked with an in-home box. Subscribers would purchase a card that allowed them to activate the box so they could watch the movies. Time Inc. president Jim Shepley was acutely aware of what Nathanson was up to. "He had a friend who would give him information about what Nathanson was doing," Levin recalled. "Here is the president of Time Inc., and in comes this kid (Levin). He was very critical and could be very intimidating."
But the biggest problem for HBO and all the other pay services was distribution. Microwave transmission was enormously expensive and worked from point to point rather than on a broadcast mode. A cable system could receive the signal only if it was along the microwave route.
Claus Kroeger, an assistant general manager for a group of New England systems owned by Cox Cable, recalled how difficult it was to manage the microwave transmissions.
"The towers were all up on a mountain top," he remembered. "If the signal went out in the winter somebody had to snowshoe up to the top carrying all the equipment while it was 10 degrees below zero with the wind howling. And if any one tower went out, all the systems down the route would be affected.
"It was an immense amount of work to keep that signal going."
His systems were classic operations that had been running for many years, mostly without price increases. And the consumers were all New Englanders who took pride in their reputations as skinflints. Moreover, Kroeger recalled, they just felt that movies should be seen in the theaters, not at home. For all these reasons there was considerable consumer resistance to the out-of-town, fast-talking marketing crews that swept down to sell door-to-door when HBO launched.
Kroeger tried lots of marketing ideas. He put an HBO promotion on the message wheel. This was a device that would rotate different print advertisements every few minutes in front of a stationary camera. The systems decorated their offices with giant movie posters touting upcoming HBO films. He put popcorn in the lobby and offered lollipops to the kids. He tried direct mail and newspaper ads.
But nothing really worked very well. "We got to 10%-12% penetration and just stalled there," he remembered.
All these troubles added up. A year after launching, HBO had about 8,000 subscribers nationwide, down from the 12,000 it had had at the peak. Then Time Inc., majority owner of HBO and one of the nation's largest cable operators, got cold feet about the business.
HBO had started as an outgrowth of the Sterling Communications partnership Time had with Charles Dolan, a partnership which also operated the enormously expensive New York City cable system. In 1971 the system lost $2.5 million and in 1972 $4 million, according to the New York Times. Time Inc. had been loaning money to the enterprise in return for convertible debentures that could be transformed into stock. By the beginning of 1973 Time's equity and convertible debentures entitled it to own 80% of Sterling.
According to James Heyworth, then HBO's chief financial officer, Time's accounting firm advised the company that it could no longer list Sterling as an off-balance-sheet asset. It needed to consolidate Manhattan Cable and HBO into its regular operations.
So Time sent Dolan packing, with a nice check for his remaining share of the business, but with a bitter sense that he had been booted out of a business he had spent the better part of a decade building. "It was a difficult period," is all that Dolan would say 25 years later.
Then Time decided to get out of the cable business altogether. Its stock had come under attack on Wall Street and the company was shedding non-core assets such as its paper mill and broadcast stations. It even shut down one of the jewels of its publishing stable, Life Magazine.
Time Inc. agreed to sell Sterling -- the Manhattan cable system, systems in Long Island and a controlling interest in HBO -- to Warner Communications for $20 million. Time traded its remaining systems to ATC for roughly 9% of ATC's stock.
But the deal for Sterling fell through when Warner took a look at the New York City franchise requirements. Time offered Manhattan to ATC, but Rifkin also balked at the enormous cost to build and manage the system.
Dolan got word of the Time-Warner deal while on a trip to Las Vegas. He flew back to New York and went to see the folks at Time Inc.
"I asked them: 'How about taking a bid from me?' " Dolan was told the deal was done and was given a copy of the contract, signed by Warner but not yet by Time Inc. "So, with the contract in my hand, I went in to see (Time president) Jim Shepley."
Shepley, irked that Warner was not going to take Manhattan, said he was willing to split off the Long Island system and give Dolan a chance to bid. "Shepley told me 'The price is $900,000. Show up here in the morning with a check for $100,000 and a note for the balance and you can have it.' "
Dolan did just that, forming Cablevision Systems Corp., which would operate the systems on Long Island and become one of the nation's largest and most innovative cable operations. (And Dolan never lost his love for movies or his faith that showing them on cable would produce profits. He founded American Movie Classics and Bravo).
So Time Inc. was forced to keep its white elephant cable system in Manhattan and with it the fledgling Home Box Office. The Time brass began to put the heat on Jerry Levin, telling him that unless considerable progress could be made toward profitability the future of the pay service was in serious doubt.
Shelpley gave Levin a benchmark: Get 20,000 subscribers by June of 1974 or face a shutdown of the service. "We just made it," Levin recalled, and some who were there at the time remembered that the number was made in part because the service ignored a couple of hundred disconnects. In any case Levin remembered that the small HBO staff held a victory celebration at a small Italian restaurant in New York.
But their troubles weren't over yet. HBO continued to operate in the red. And it was clear that this small, regional pay service delivering programming to a few thousand customers in the Northeastern U.S. didn't fit the image of Time Inc., publishers of the mighty Time, Sports Illustrated, Time Life Books and other huge nationwide publications.
"To sustain Time Inc.'s interest, we needed a big idea," Levin recalled. He set to work to find one.
Dolan, meanwhile, took over in Long Island and began to look for financing to upgrade and expand the system and bid for other franchises. The best place, in fact just about the only place, to find money for cable systems in the early 1970s was from the Jerrold Electronics Division of General Instrument Corp., still the leading supplier of hardware to the industry and increasingly reassuming the role it had played in the late 1950s as a major source of funding for cable systems as well.
In March of 1973 the company had set up the GI Credit Corp. to provide financing for cable system construction. Backed by a $25 million line of credit from Chase Manhattan Bank, the structure was similar to the automobile companies, which sell a car to a customer and then loan him the money to purchase it through an in-house finance operation.
When Dolan completed arrangements for the first infusion of cash from Jerrold, the manufacturer's new 32-year old president came out to ink the deal. Dolan remembered him as looking even younger than his age, with a very matter-of-fact, straight-to-the point style.
His name was John Malone.
Malone grew up in the upper-middle class town of Milford, Conn. He graduated Phi Beta Kappa with a degree in electrical engineering from Yale in 1963. At Johns Hopkins University in Baltimore he earned a Masters of Science degree in Industrial Management and a Ph.D. in Operations Research. (Otherwise a decidedly unpretentious man, he does prefer to be known as Dr. Malone).
While still pursuing his doctorate, Malone went to work for Bell Labs, the think tank for AT&T. He was assigned to do a study of how AT&T could create more wealth for its shareholders. He prescribed a cure that included more debt and less equity, a pretty radical prescription for the queen of the Blue Chips.
After he presented the plan to the AT&T management committee, he recalled later, "I was waltzed out of the room by the AT&T chairman. He told me, 'Kid, that's very nice, but don't expect too much. If you can see one change in Bell during your entire career, you have accomplished a lot.' "
Malone chafed under the strict Bell system, and soon took a job at McKinsey & Co., the high-prestige business consulting firm. His first day on the job he reported to an office he would share with another McKinsey hot-shot, Lou Gerstner (who later became CEO of IBM), to find a note on his phone that read: "If you can't be in Montreal for lunch with the chairman of Bell Canada this afternoon, please call."
So he sped out to LaGuardia, hopped a plane and spent the rest of his first day with McKinsey trying to help Bell Canada reorganize. He worked on a variety of accounts including development of a new organizational structure for General Electric Co., where he met two rising GE executives, Jack Welch and Bob Wright.
But all these experiences, Malone later recalled, had been in a rarefied atmosphere, an intellectual arena of philosophical and broad strategic issues. "It was a gentleman's club to the extreme," he remembered. "It was all so disconnected from the real world." He started to get itchy to get his fingers dirty running a real business.
When McKinsey was asked to look at the operations of General Instrument Corp., Malone first encountered cable television in a major way. He also encountered GI's chairman: a gruff, hard-
ened, old curmudgeon named Moses "Monty" Shapiro.
Malone fell in love, with Shapiro, with GI and with cable television.
GI had just purchased Jerrold Electronics Co., founded by Milton Shapp, and it was going very badly. Costs were soaring, cable companies were on the verge of bankruptcy, construction had stalled and, while the government had relaxed its distant signal rules, it showed no real signs of lifting a host of other onerous regulations.
Malone took Shapiro's offer to become head of Jerrold and a vice president of GI. He set to work to slash costs, outsourcing many of the company's operations to cheaper vendors and moving its expensive manufacturing operations from Philadelphia to Mexico and Taiwan.
He instituted a policy of "key account marketing," which called for him to visit personally on a regular basis all of his biggest customers, all of whom soon owed Jerrold huge sums of money thanks to the GI financing plan that Malone instituted and without which many cable operators would have had to halt construction and perhaps operations as well.
Every few months he would do a swing around the country, stopping off in Tulsa to see Gene Schneider and in Denver to see Bob Magness, among others. He would stay at their houses, enjoy a cocktail or two with them, get to know their families and become more of a partner and a friend than a simple vendor selling some products.
These businessmen were very different from those he had dealt with in such huge corporations as Bell Canada, GE and AT&T. These cable guys were worried about how to make next month's payroll and how to pay the banks. It was a long way from Yale, Bell Labs and McKinsey. These guys were living in the real world.
So was Shapiro who, Malone recalled, would call him regularly to chew him out for one alleged sin or another. Malone would put down the phone during Shapiro's tirades and, 30 years later, would swear that receiver would actually move across the desk so strong were the vibrations from Shapiro's voice.
One time Shapiro sent down a group of auditors to study Jerrold's books, and Malone locked them out of the office. "So he called me up again to chew me out." But Malone did listen to Shapiro's advice, bits and pieces that the GI chairman called his "Talmudic wisdom."
"The question you have to ask is 'if not,' " Shapiro would advise him, always pressing for action rather than seeking reasons not to act. Thirty years later Malone would
still refer to Shapiro as "my
Malone over time adopted some of Shapiro's techniques and mannerisms, including a habit of attempting to intimidate people when he first met them.
(When this reporter first met Malone in 1981, it was just after I had printed a story about a deal his company had done, including some details that had not been part of any press release. "It's a pleasure to meet you," I said. He glared at me with cold, gray eyes and responded: "Where do you get that shit?"
"Excuse me?" I said.
"You know, that shit you print," he growled. "You know what we do with publications like yours? We buy them and we close them down."
I noted that we had attempted to get his comments on the story but had been unable to reach him. I suggested that had he commented we certainly would have printed what he said, and perhaps altered or even killed the story. I recommended that he authorize someone else to speak for his company when he was unavailable. The story, by the way, had been confirmed off the record by one of Malone's own lieutenants and was accurate.
After that first meeting Malone was unfailingly courteous and kind to me, even when he was rushed or under pressure. I later figured his opening bluster was just a test he applied to new acquaintances from time to time to see if they would buckle and could be bullied.)
Malone also had an unusual approach to business. He is a mathematician by training and instinct. He doesn't approach the world with the win-lose perspective that so many Americans have from too many hours watching football and baseball.
Instead Malone sees the world through the eyes of a mathematician. In mathematics the object isn't to score more points than the next guy or drive him off the field. The object in higher mathematics is to achieve a solution, preferably an elegant solution. The best solutions are the simplest, as in the equation E=Mc2. One of Malone's favorite pieces of Talmudic wisdom is KISS, which stands for "Keep it Simple, Stupid."
Malone's gruff style earned him a reputation as a ruthless competitor. He appeared at times to revel in his self generated image as a tough guy who would run over his grandmother to gain a few extra points on the cash flow margin. The shareholders of the companies he ran sure loved that notion.
But it's difficult to find many in the industry who, even off the record, will say that Malone set out deliberately to ruin them or that he acted unethically or unfairly. About the worst that is said of Malone came from the CEO of another cable company who remarked: "If John is going to rape you he tells you in advance and explains why."
And dozens of his colleagues and peers relate stories about how Malone was willing to lend a helping hand to get a new project started or to bail somebody out of a tight spot even when it didn't appear to do him any particular good.
Eighteen months after Malone took over the company, Jerrold had turned around. Its profit margins had moved to the 50% range from the mid-20s that Malone had inherited and it was contributing much of the parent company's revenue and all of its cash flow.
But Shapiro was nearing retirement age, and Malone figured the company would never consider a 33-year-old as a successor. So he began to look around for other opportunities. He talked with TelePrompTer, Warner Communications and his friend in Denver, the gap-toothed, homespun, nearly bankrupt, ex-Oklahoma cotton-seed buyer, Bob Magness.
TelePrompTer he dismissed because of the battle for control raging between Irving Kahn and Jack Kent Cooke. Warner chairman Steve Ross offered to double Malone's salary.
"But I didn't relish the thought of the New York City commute and I wanted a better place to raise a family," Malone remembered. Even when the famously generous Ross offered to supply a company limousine to take him to and from work each day, Malone declined.
He opted instead to take a substantial pay cut to join a company that had $132 million in debt with only $18 million a year in revenue and that faced almost certain bankruptcy.
Asked later why he chose TCI, he said it was partly because he liked the people so well, in particular one former Jerrold employee, J.C. Sparkman, who had become TCI's head of operations. When he got there, he knew, he would not have to make any changes in people. He also liked the idea of working for a company where cable was the only business rather than a company such as Warner where cable was one of many businesses.
Most of all, he said, he like the challenge.
But just before Malone left Jerrold, he needed to hire somebody to head up a new division -- the terminal products and services division -- to try to catch up with competitors in the hot new market for interactive devices. The fellow he hired came to the cable industry from a longer distance -- both geographically and culturally -- than any other top executive. Yet he was to be the only person ever to achieve the cable industry hat trick: serving as the head of the leading hardware supplier, as an executive of the largest MSO and as CEO of a major programming service.
John Sie was born in Nanking, China, in 1936, the son of a diplomat and scholar. His family moved from Nanking to Shanghai just weeks before the Japanese Imperial Army entered Nanking and slaughtered tens of thousands of innocent Chinese civilians. Sie grew up in a China that was occupied by Japanese troops. His father was in Italy, serving as ambassador to the Vatican for the Chinese nationalist government of Chiang Kai Shek.
After World War II, Sie's father returned to China, helping to get his family on the next to last boat that left Shanghai for Taiwan before the Chinese Communist takeover of the mainland.
In April 1950, Sie's father had been appointed ambassador to Belgium and the family was in the United States, en route from China to Belgium, when the job fell through.
"He asked us what we wanted to do: stay in the U.S, return to China or go on to Europe," Sie recalled. The family voted to stay.
Sie enrolled as a sophomore in public high school in Staten Island, N.Y. He didn't speak a word of English. He would copy down the lessons from the blackboard every day and then translate them at night. His first year he averaged a C. Second year he made a B and from then on it was all As.
"Two things made me excel," he recalled later. "In China you didn't want to lose face for your family. And my uncle had always told me not to worry if I came to America because all Americans are dumb. So I figured if they were all so dumb I better not fail or I would really lose face for my family."
He wanted to be an artist, but his father steered him to engineering where there was a better chance to make a living. He won a full scholarship to Manhattan College in the Bronx and received his masters degree from the Polytechnic Institute in Brooklyn. He went to work at RCA, specializing in advanced amplifiers.
Pretty soon he realized that while there were plenty of Chinese American engineers and technicians, there were very few Chinese American executives in management. And it was there, he saw, that the real power lay. So he gave up on becoming a Ph.D. and instead joined a group of his fellow RCA employees to start a company developing advanced microwave technology. This was sold to Raytheon in 1964 and Sie worked there until 1970 when Raytheon began to retrench and Sie got the entrepreneurial bug again.
He set up a company to create synthetic diamonds, becoming a certified lapidary in the process. He worked at this until similar operations in Israel and Brazil began to produce cheaper versions and Sie ran into the opportunity at Jerrold.
"I remember he (Malone) didn't understand the word 'lapidary' on my resume," Sie recalls. But the two hit it off when they began to talk about advanced electronics, particularly the Asaki diode that had been Sie's specialty at Raytheon.
"He (Malone) wanted to know how you created a negative resistance from a two-terminal device," Sie recalled.
He also recalled how quickly Malone made decisions, including the decision to hire Sie to head up a new division for Jerrold.
Among Sie's first customers was Service Electric Co., which was using Jerrold converters to offer its customers the newly launched Home Box Office pay service. Sie, a tireless worker, soon got to know all of the other entrepreneurs in the cable business, a group that even in the face of hostile government regulations, opposition from the broadcasters, soaring interest rates and other obstacles, continued to find a way to survive and grow.
Among those who did so were two products of small town America -- one from the coal mining regions of Pennsylvania and the other from the Catskill mountains of upstate New York. Each grew up in a lower middle class family where, while nobody ever starved, nobody ever had an extra nickel either. Each got his start in the military, learning valuable skills. Each started his career without a dime. Yet each would build a company that would be worth, by the end of the century, more than a billion dollars. One was Glenn Jones. The other was Alan Gerry.
Of all the mavericks in the cable industry, Jones may be the most unusual. The son of a coal miner and truck driver, Jones turned down the chance of a scholarship to Yale and got a job in the local steel mill after high school. One day his father woke him up before the swing shift, said, "Get dressed, you're going to college." Jones was driven west to Findlay, Ohio, where his father had enrolled him in Findlay College. Affiliated with the Church of God, Findlay didn't look kindly on the young Jones when it was reported in the newspaper that he had was playing the piano for a local vaudeville show (including his own composition, "Baker St. Boogie" from the street where he had grown up) and assisting the magician Theo the Great.
His father hauled him back home and enrolled him in the closer Allegheny College from which Jones graduated with a degree in economics. With the Korean War still going, he joined the Navy and volunteered for the underwater demolition unit, the folks who defuse unexploded bombs. He knew he had weak eyes and memorized the eye chart the day before the exam. But they switched charts on him and he flunked. When it turned out there were no other volunteers, they lowered the standards and let him in anyway. Asked later what drove him to volunteer for such duty, he cited the $120 a month additional pay for hazardous duty.
So the nearsighted lieutenant junior grade was shipped to the Far East where he donned an underwater suit to dismantle sea mines, unexploded bombs and other ordinance left on the beaches and ocean floor after Korea and World War II.
After his stint in the Navy, Jones found a job with Martin Corp. in Denver, testing explosive devices needed to launch the intercontinental ballistic missiles Martin was building. He also went to law school, graduating from the University of Colorado.
One evening while hanging laundry, Jones met a neighbor in his apartment building, Carl Williams, who was a partner of Bill Daniels. Williams gave the young attorney some legal work and liked what he saw well enough that pretty soon Jones was handling many of the Daniels transactions.
In 1964 Jones read the book "Conscience of a Conservative" by Barry Goldwater and decided to change the world. Jones sought and won the Republican nomination for Congress from Colorado's First District, encompassing the solidly Democratic city of Denver and represented by a popular, long-time incumbent. Jones was buried in the Johnson landslide and left $40,000 in debt.
While he never ran for office again, Jones' ambition to change the world never really left him. He just shelved it while he focused on getting out of debt and bringing in enough income to keep his family fed and clothed.
He found legal clients wherever he could, operating out of cafes and restaurants because he couldn't afford an office. One client was the Southern Baptist Convention, which from time to time had legal squabbles with their individual churches. Jones was sent to resolve them, and the church, so as not to be embarrassed by the old junk heap their attorney was driving, gave him a brand new Volkswagen, brought over from Germany by a missionary.
All the while he kept an eye out for cable systems that might be for sale, recalling the millions that had been made by Williams and Daniels. In Georgetown, Colo., a mining town of a few thousand souls, he hit pay dirt. The system was owed by the local plumber, and it was leaking like a sieve. Built with open, 350 ohm wire, strung on trees and bushes, with a live, 440-volt line running up the mountain to the antenna, the system was more trouble than it was worth. It had fewer than 100 subscribers, most of whom had been refusing to pay their bills for months.
Jones offered to buy the system for $12,000, with $1,000 down and the rest secured by his signature. Finally, after wooing the plumber for weeks (including spotting his truck in front of some home where he was working on the pipes and then bringing him fresh coffee) Jones won out. When he couldn't raise the down payment, Jones borrowed $400 against his new Volkswagen, and promised the plumber he would have the rest shortly.
The deal was made. Jones bought on credit a small state-of-the-art television monitor, the kind used in TV studios. He took this with him as he went door-to-door in Georgetown to collect the past due bills from his new customers.
When the customers complained about poor pictures Jones hooked up his top-of-the-line monitor to the cable and -- lo and behold -- the picture was far better than on the larger, less efficient TV sets most of the cable subscribers had. "Must be your TV set," Jones would say as he collected his funds. Within a few weeks he had the rest of the down payment.
Jones continued to bootstrap his way along, winning the franchise to build the system in neighboring Idaho Springs, Colo. The only hitch was that the city council didn't much like the name of Jones' company: Cowpoke Cable. The council members felt that had a bit of a fly-by-night ring to it. On the way to the final council meeting Jones passed one of the local mines, The Silver King, and decided to call his company by the more distinguished name: Silver King Cable. (That lasted a few years until a company financial officer, a native of Czechoslovakia, found it difficult to pronounce, leading many leading many investors to write checks to Silver Kink Cable, and Jones renamed the business after himself.)
As Jones expanded he continued his unorthodox ways. He would look through Warren Publishing's Television & Cable Factbook and find systems that had multiple owners. Then he would get out a contour map and fly over the areas the system served to check out the lay of the land. "I must have looked a bit strange with my contour maps, the Factbook and binoculars on these flights," Jones later recalled.
If the area looked promising Jones would drive up to see the owners. One system in California, it turned out, was owned by a group of businessmen headed by the local Republican County Chairman. To buy it, Jones needed $20,000 down. On a single day he borrowed $5,000 each from four different banks in Denver, all on unsecured, personal 30-day notes, and bought the system. As soon as the ink dried on the sale document, Jones drew out the $23,000 in cash the system had on hand and used it to repay the banks. It was bootstrap financing at its most basic.
But Jones didn't really leap into the front ranks of the cable industry until he hit on a new way to finance acquisitions, a device that had been used with great success in the oil and natural gas business: the public limited partnership.
It worked this way. Investors would put money into a fund to finance the acquisition or construction of a cable system. Jones would manage the system for a fee. For the first few years the system would operate at a tax loss, and the losses would be passed on to the investors. Then, when the system began to turn a profit or was sold, the proceeds were split among the investors, with Jones taking 25% and the investors 75%.
In the 1960s and 1970s the tax bite for high-income individuals was often in excess of 50%, and doctors, dentists, lawyers and others with high salaries were desperate to find ways to shelter some of that income from the IRS. Cable was a perfect vehicle, particularly for those nearing retirement who needed tax losses in their peak earning years and income after they retired.
Jones, together with his brother Neil, an oil and gas executive, finished raising the money, $150,000, for the first fund in 1972. The money was used to purchase a system in Attalla, Ala. Four years later, in 1976, the system was sold for $500,000, producing a gain for the partnership of $350,000. Jones kept $50,000, leaving the partners with an increase on their investment of nearly 200% in four years. In addition, the depreciation allowance and other tax benefits from the investment had meant that the government, in effect, picked up more than half the original investment. It was a pretty sweet deal.
Soon Jones had turned over the operating side of the business to Robert Lewis, who had worked in the industry for 18 years, including a stint as president of CableCom General, the successor company to VuMore. The Jones brothers concentrated full time on the financial side of the business, constructing a sales force that combed the country for potential investors.
At its height, the Jones money machine was holding a seminar every two weeks or so for high-powered limited partnership brokers from Wall Street houses such as Prudential Bache, Shearson Lehman and Dean Witter. In 10 years Jones raised $1.2 billion for his limited partnerships.
The system worked until the mid 1980s when the tax laws were changed to limit the writeoffs available to limited partner investors. By then, though, Jones had made enough to buy out many of the partnerships himself (including the Alabama system that had been purchased and then sold by the first fund). Thirty years after borrowing $400 against his VW to buy his first system, Jones had built the eighth largest cable company in the country, serving nearly 1.5 million customers and worth in the area of $3 billion, give or take a hundred million or so. And Jones returned to his original plan of trying to change the world, using the communications medium that had made him rich.
While Jones was negotiating the loan on his Volkswagen, 1,500 miles to the east another entrepreneur was building his cable company, only doing it with means much more conventional than the exotic limited partnerships Jones would construct.
The story of Alan Gerry is as salt-of-the-earth, American, Horatio Alger as they come. The son of a frozen food distributor who struggled to keep his family fed in the late Depression, Gerry grew up in Liberty, N.Y., about 90 miles from New York City in the heart of the Catskill vacation region. The 20,000 population of the county would swell to 200,000 or more in the summer when sweltering New Yorkers would swarm to the "bungalow colonies" to find relief from the city heat.
After high school Gerry joined the Marine Corps and was trained in communications. After getting out in 1948 the 19-year-old worked at various jobs -- on a coal truck, chicken farming, construction -- before taking a course in television at the Delehanty Institute in New York, paid for by the GI Bill.
He came back to Liberty, put an ad in the paper that read "Got a TV problem? Call Alan Gerry" and, as he later remembered, the phone never stopped ringing.
Gerry worked like a dog: nights, Saturdays, Sundays running the repair business out of the basement of his home. It didn't matter when a TV set went out, Gerry would be there to fix it in an hour. He started to sell his own TV sets and would routinely double the manufacturer's warranty on every set he sold. "We wanted to make certain the customer was very, very satisfied," he recalled with an intensity undiminished 30 years later.
Among the jobs he took on was to build huge towers on which he mounted antennas for the TV dealers in the county so they could get a clear signal to show prospective TV set buyers.
"One cold day in February I was up on one of these towers, 80 feet up, changing out a tube and this fellow stops by and yells up at me," Gerry recalls. It was salesman for Jerrold Electronics, Walter Goodman, who happened to be passing through Liberty and noticed the big tower and the fellow on top.
"How come there's no cable in this town?" Goodman yelled at Gerry. "Cable, what's that?" Gerry shouted back. After coming down off the tower and hearing the Jerrold pitch, Gerry was hooked. But he didn't fall for the "yellow dog" deal in which Jerrold would get equity in the system and a per sub fee in return for helping Gerry to get started.
"They talked about it," he recalled. "I wasn't a Ph.D. but it just didn't make any sense to me."
Instead, he scraped together $1,500, rounded up seven or eight local businessmen to form a pool of $20,000 and borrowed another $20,000 from the local bank and began to string wire. It was 1956.
"The state-of-the-art in those days was five channels, Gerry recalled. Since there were seven channels available out of New York City, Gerry would pick and choose which to put on.
"I didn't always please everybody," he recalled. "I remember one day I was out mowing the lawn and this good old gal comes driving by, Mrs. Blatchley. She raised bloody hell because I had taken off the wrestling matches to show a Yankees game. Boy, was she ticked off that she couldn't watch her wrestling."
And boy, was Gerry close to his customers. He stayed that way for the rest of his career, never moving from the home where he had repaired those TV sets in his basement (he did put on some additions) and still passing on his way to work every day the two-room schoolhouse where he had learned to read and write and planted a line of scrawny pine trees one Arbor Day that later would tower a hundred feet above the road.
After wiring Liberty, Gerry began to look at franchises in nearby towns but had a tough time persuading the banks to loan him more money. His partners didn't help much either, taking a dividend every time there was a little extra cash in the till. Gerry wanted to use every dime to expand. Eventually he bought them out.
One day in the mid-1960s a fellow came by to see him with an offer to buy him out. It was Fred Lieberman, then of GenCoE and later a founder of Communications Properties Inc., the Texas cable company that eventually was sold to Time Mirror Co.
Lieberman asked Gerry if he would consider selling and offered to pay him $250 to $300 for each of Gerry's 1,000 subscribers. "Would you mind putting that in writing?" Gerry asked. Lieberman did and Gerry promptly took the offer to the local bank which agreed to lend him $100 per subscriber, raising his line of credit to a cool $100,000.
It would be the closest Gerry would come to selling for the next 30 years.
Gerry's company, Cablevision Industries, never went public, never sold equity, never took on a big company as a partner, never did a deal with venture capitalists, never used limited partnerships or other exotic financing schemes. He built his company, which eventually became one of the nation's top 10 MSOs with more than 1.5 million subscribers, in the most prosaic way imaginable. He borrowed money, first from banks and then from insurance companies and other lenders.
At times he was heavily in debt, always among the most heavily leveraged cable companies in the country. But he paid back every nickel and never violated a covenant or missed a payment. The more he borrowed and the more he paid back on time, the better his credit became and the more he expanded, always paying close attention to the needs of his customers just as he had back when he was repairing all the TV sets in Liberty.
"Our hallmark was always excellent service and excellent pictures," he recalled with evident passion in his voice. "You read about cable systems going out. Not our systems!" Gerry hired crews of people to "run the lines," looking for amplifiers and other equipment that might cause problems and fixing them before they went out.
The tactics produced extremely loyal customers, shielding Gerry's systems from the churn that plagued so many other cable companies. He also operated in communities where the population was more stable than in larger cities and where word of mouth worked better than more expensive forms of advertising to let people know about a good service. For years he had some of the highest penetration numbers of any cable company in the country.
He had lots of chances to sell out, after the Lieberman offer. But he never did. Not until 1996, when he finally merged his company into Time Warner Cable.
Why? "Because I loved it so much," Gerry said later. "I was passionate about it. It was the center of my whole being, building that company. The first time I saw my name on Kagan's list of the top 100 cable operators it was like I had been nominated for an Academy Award. The same was true the first time I was interviewed for a cable magazine or the first time I was on a panel at a Kagan conference. It got to the point where there wasn't enough money in the world to take that away from me."
But Gerry, Jones and the other cable operators struggling to expand in the 1960s and early 1970s would never have become as big as they did, or even survived in some cases, had it not been for a new technological marvel that emerged to save their skins: satellites.
Learning How To Market
Unlike car dealers or grocery stores or movie theaters, cable systems don't compete directly with each other. As a result, system operators have always been ready to share information on how to run their businesses more efficiently and profitably without fear of giving away trade secrets to a competitor.
As HBO launched on the satellite, followed quickly by WTCG and MSG Network, cable operators were propelled into an era in which marketing would be critical to their success.
Yet few systems in the early 1970s had marketing personnel, and those who did employed some very junior people often just out of college.
One of the first full time marketing executives in the business was Greg Liptak, who started out at the Cox systems in the suburbs of Cleveland, moved on to work for Gene Schneider's flagship system in Tulsa, Okla., and by 1975 was marketing vice president of marketing for Communications Properties Inc., the nation's eighth largest MSO.
When Home Box Office announced its plans to distribute via satellite at the 1975 NCTA convention in New Orleans, the torrential rains that devastated the convention arena did nothing to dampen the excitement of Liptak and a small group of marketing colleagues.
As the conventioneers headed for home, Liptak recalled, he found himself in the damp and deserted hallway outside the convention hall where he ran into George Sisson, president of Colony Communications and a member of the NCTA board. The two were joined by Tom Willet of Continental Cablevision and David Lewine from TM Communcations.
The talk turned to formation of a formal organization that would enable marketing executives to meet and exchange ideas. Such events had happened before -- in 1972 when the NCTA sponsored a marketing meeting and a couple of years later when TelePrompTer marketing vice president Marc Nathanson had held a similar gathering. But nothing permanent had ever been set up.
Liptak sent out invitations to a meeting to be held at the O'Hare Hilton in Chicago, and the result was the establishment of the Cable Television Marketing
Society (later changed, at Nathanson's suggestion, to the Cable Television Administration & Marketing Society). Liptak served as the first president, with Telesis marketing vice president Gail Sermersheim as vice president.
Each year since the CTAM meetings, conferences and related activities have proved to be the focal point for discussions of marketing and operations issues facing cable systems across the country.
In 1958 Americans had awakened to the most dramatic and disturbing news to hit the country since the death of Franklin Roosevelt: the Soviet Union had launched the world's first satellite, Sputnik.
The nation raced to catch up. It beefed up mathematics and science courses in schools, diverted hundreds of millions of dollars into the military and launched a space program that the newly elected John F. Kennedy promised would put a man on the moon by the end of the 1960s.
But a handful of cable operators and suppliers understood that these satellites also could revolutionize the communications business. A science fiction writer, Arthur C. Clarke, in the late 1940s had proposed that a satellite placed 22,300 miles above the ground would orbit at a speed matching the rotation of the earth. The satellite would therefore appear to be stationary to anyone standing below it. Such a "geostationary" satellite could be used to beam radio, television and telephone signals sent from a single point to a vast area, called a footprint.
At TelePrompTer in the mid-1960s, chairman Irving Kahn and his chief lieutenant, Hub Schlafley, began to talk about the potential of satellites and take the first steps to make them a reality. TelePrompTer even filed an application with the FCC for permission to launch its own satellite.
But there were some pretty big hurdles in the way. First, the United States in 1972 still had no communications satellites. The FCC and other agencies of government couldn't decide who should operate the satellites.
In 1962 Congress had established a quasi-public company, Comsat, to develop domestic communications satellites and to represent the United States in Intelsat, the organization that was developing international satellites.
Comsat developed many of the early experimental plans for domestic satellite communications and argued it should be granted the sole franchise for development of domestic birds. The FCC seemed inclined to go along with the notion that a single entity should be given the right to handle all satellite business, the same way AT&T handled all telephone business.
But the country had a president, Richard Nixon, who was deeply distrustful of the federal bureaucracy, which he felt, with some justification, was riddled with appointees of Presidents Kennedy and Johnson. Nixon had established a new office in The White House, called the Office of Telecommunications Policy, headed by a man named Clay Whitehead (and staffed by, among others, a young Brian Lamb and an attorney named Antonin Scalia).
Whitehead advocated what he termed an open skies policy under which any entity with the financial and technical means could apply to launch a domestic communications satellite.
While the U.S. was debating how to proceed, Canada launched its own satellite, the Anik I. And Hub Schlafley, by now president of TelePrompTer, decided to demonstrate how the signal of the Anik satellite could be used to reach all the TelePrompTer systems in the U.S. He put out a request for proposals for a company to build a portable earth stations.
At that time a major shareholder in TelePrompTer was Hughes Aircraft, itself a giant communications company. But when Hughes learned that the budget was only $100,000, it passed.
Into this scenario walked Sid Topol, a short, energetic engineer from Boston, who had spent 22 years developing new communications systems for the Raytheon Corp.
Born in Boston to Polish immigrant parents, Topol worked as a young boy in his father's fruit and produce distribution business. In the ninth grade he won admission to the Boston Latin School, the oldest and many believe the most prestigious and academically rigorous public school in the country.
In the Army in World War II Topol was placed in an accelerated program to learn communications systems, including stints at Harvard and MIT. He emerged from the war trained in some of the very latest techniques: radar, microwave and other technologies.
After the war he returned to Massachusetts, graduating with a bachelor of science in physics from the University of Massachusetts. At Raytheon after the war he worked in the antenna division and then moved over to microwave design. Among his biggest customers was Tele-Communications Inc., where chairman Bob Magness was using Raytheon equipment to build a microwave network to serve his far flung collection of cable systems in the Western United States.
In 1969 Raytheon was approached by a small company based in Atlanta, Scientific-Atlanta, about the possibility of a merger. S-A had been founded in the early 1950s by a group of professors at Georgia Technological Institute to manufacture antennas. Topol looked into the company and recommended against a merger.
The S-A board continued to express interest, however, this time in Topol himself. In 1971 he agreed to become president of the company and moved to Atlanta to take over the company. S-A made a good deal of equipment for the cable industry, having just purchased the amplifier business of Spencer Kennedy Labs. But it was by no means in the same league as Jerrold or even Ameco.
S-A's chance to break out of the pack of cable equipment manufacturers that trailed Jerrold came when Topol heard that TelePrompTer was looking for a company to build satellite receiving equipment. "I had learned the budget was $100,000 and although it was going to cost us more to build that unit than $100,000, we bid $100,000.
"Hub was not convinced that Scientific-Atlanta was a company that was in the communications business," Topol recalled, "and preferred a bigger company such as ITT or Raytheon." But Topol persisted. "We convinced him that we were capable, that we were eager, that we were enthusiastic and we bid $100,000 and we won the job somewhere in the fall of '72."
Teleprompter wanted the system ready for a demonstration at the NCTA convention in Anaheim, Calif., in the spring of 1973. So S-A set to work and had an earth station ready in time. Home Box Office, the fledgling pay television service, agreed to provide the programming for an initial demonstration in its suite at the show. The next day TelePrompTer president Bill Bresnan introduced satellite-delivered television programming to the NCTA national convention.
Live, via the Canadian satellite Anik I and a Scientific-Atlanta earth station, the convention heard an address by Speaker of the House of Representatives Carl Albert.
Bresnan was nervous as he introduced Albert. "I just wondered if it was going to work," he recalled. "But we flipped the switch and there he was, just fine."
It was the first demonstration ever of the possibility of live satellite transmission of television programming.
But nobody bit. Most cable operators were impressed with the technology but didn't see what it would mean for their business, which was still primarily delivering local broadcast signals. "What does this have to do with me?" was the general response, recalled S-A's Alex Best who helped set up the downlink.
TelePrompTer and S-A continued to haul their earth station around the country, demonstrating the feasibility of satellite transmission at a variety of different locations. But the effort generated "no real excitement," Topol later recalled. The earth stations were still enormously expensive, in the six-figure range. There were no U.S. satellites to deliver the signal and no cable programmers with a signal on the satellite. It made for a tough sell.
When RCA won permission to launch its domestic satellite in 1974 Topol wrote to HBO chairman Jerry Levin, a group of cable operators, and RCA asking for a meeting to set the stage for the debut of satellite-delivered cable programming. The meeting was set for the Time Inc. headquarters in New York.
Topol opened: "Listen, gentlemen, I think we have everything in place now for satellite-delivered television programming. HBO, you have the programming. Monty Rifkin and Bob Rosencrans, you have the subscribers. Sid Topol, you have the capability of building the earth stations. RCA, you have the satellite. What's preventing us from going moving ahead?"
Rifkin's initial idea was to build 10 earth stations and then feed the signals from them to other cable systems via microwave. In the end it proved more economical to put an earth station at every cable headend.
Levin pledged to ask the Time Inc. board for permission to lease a satellite transponder at a cost of about $8 million for a five-year period and to build an uplink. Levin must have had some magical ability in front of the Time Inc. board. Over and over he had persuaded them to keep supporting HBO, and here he was, back again, asking for a multimillion dollar pledge to try out a completely untested technology to support a business that had yet to show a dime of profit. But he did it.
The next thing he needed was a commitment from some cable operator willing to install an earth station and receive the HBO signal.
B ut in 1975 most cable companies were deeply in debt and few had any funds to spend on an expensive, untested system to deliver pay television programming. They were having a tough enough time making their bank payments without shelling out $100,000 for an earth station to bring in a signal from HBO which was selling to only about 15% of their customers in any case.
An exception was Bob Rosencrans. A soft-spoken, amiable native of Woodmere on Long Island, Rosencrans had graduated from Columbia College and Columbia Business School. After a stint in Korea he got involved in the closed-circuit television business and eventually went to work for TelePrompTer.
In the mid-1960s, Rosencrans left TelePrompTer to found his own cable company, which he named Columbia, after the river which flowed nearby one of his first systems.
He took the company public in 1968 and merged it with a Washington State-based cable company, International Cable, headed by Ken Goddard whose son, John, would later become president of Viacom Cable.
Unlike many of his colleagues, Rosencrans proceeded cautiously when it came to finances. "We nursed what we had," he said, never taking on great amounts of debt. By 1969 he merged again, this time with a group of cable systems owned by United Artists Theaters to form UA Columbia Cablevision. The mergers were all stock for stock, avoiding taxes and debt. He locked in long term fixed debt at about 10%, forming an alliance with Home Life Insurance Co. to provide the funds needed to expand.
"When the rates went up" in the early 1970s, Rosencrans recalled "we were untouched."
Rosencrans pursued franchises in the suburbs of New York, hiring a husband and wife duo -- lawyer Bill and TV producer/public relations executive Kay Koplovitz -- to head the franchising team.
He also experimented with pay television. He tested the Channel 100 system developed by Geoff Nathanson and imported games from Madison Square Garden to run on his systems in New Jersey and New York State.
So when Jerry Levin called in 1975 seeking a cable operator willing to install earth stations to receive HBO, Rosencrans didn't have to think about it very long. He had been at the meeting with Topol and Levin in New York and knew what the deal was.
"He (Levin) called on a Friday, I remember, and I called him back Monday to say we would take seven or eight earth stations at $100,000 each. It was very easy to do. A management team ran the company and we weren't laden with debt."
Levin was astounded. "It was so easy," he recalled. Rosencrans didn't have to get anybody else's approval or do a study. He simply followed his gut.
"Bobby is the symbol of the cable industry," Levin said 30 years later. "He is an instinctive player. He didn't run it through a committee or do a business plan. It just seemed right, so he went ahead."
Rifkin committed ATC to take at least two downlinks, one for the system in Jackson, Miss., and another for Orlando, Fla.
At the NCTA convention in New Orleans in April 1975, the three unveiled their plans. It was, reported Broadcasting, "the best piece of news cable TV has heard in two years."
"An industry chastened by a two-year diet of humble pie began to act like a winner again," the magazine noted.
Still, Levin had to keep the folks at Time Inc. from turning back. The NCTA announcement generated enormous press, including articles in the New York Times and Wall Street Journal. Time Inc. president Jim Shepley began to get calls from some friends saying that the company was going too far out on a limb. Levin remembered the heat Shepley was taking. " 'This is crazy,' they would tell him," Levin recalled. " 'You've got this kid running this thing.'"
It helped enormously when TelePrompTer president Russell Karp agreed to purchase 65 earth stations to serve his vast cable empire. It was a start to get the handful of systems Bob Rosencrans had. It began to look like a real business when TelePrompTer came on board.
Holding the Time brass in line, Levin then tiptoed down to Washington to get the necessary FCC approval for his plan. The HBO chief assumed it would be blocked by somebody -- the networks, the theater owners, a rival pay service -- any one of a dozen or more who might want to delay or kill the HBO plan. Any objection would have triggered a process that could have lasted years, time which HBO did not have.
"I assumed the networks, particularly CBS, would object," Levin recalled. "All they needed to do was object and it would have been held up by a year. Time Inc. would have lost its nerve."
But nobody did object, and Levin received his approval.
Then came another indication that the stars were at last lining up right for HBO. Levin ran into fight promoter Bob Arum of Don King Productions, who offered to supply the upcoming heavyweight championship fight -- Muhammad Ali versus Joe Frazier, the Thrilla from Manilla -- for a price that Levin later described as bupkus. That set the date by which HBO would have to launch its satellite service: Sept. 30, 1975.
Rosencrans suggested his Vero Beach-Fort Pierce, Fla., system as the site of the first satellite-delivered programs. Vero Beach was an up-to-date system with about 10,000 subscribers and was out of the way of ice and snow storms that had nearly doomed the launch of HBO on microwave in 1972. HBO's chief finance officer, Jim Heyworth, had just returned from Florida with optimistic news about a possible microwave link up the backbone of the state. A dish in Fort Pierce could supply more than one cable system, they reasoned.
"The equipment went in the 28th or 29th of September," Rosencrans recalled. The company had planned a huge party and unveiling for Sept. 30. Rosencrans hired Kay Koplovitz to stage the event, and she brought down all the major press, members of Congress and top executives of the cable industry. Another downlink was set for the ATC system in Jackson, Miss., and the Scientific-Atlanta headquarters outside Atlanta where the Southern Cable Association was holding its meeting.
Among those on hand for the Florida launch was Irving Kahn, Rosencrans' old boss at TelePrompTer and one of the first to talk about the potential of satellite-delivered television. Kahn, only a year out of prison where he had served 20 months for bribery, had not been formally invited to the event. But Rosencrans made him welcome nonetheless, inviting him to the dinner after the launch. "He had always dreamed about it," Rosencrans said, and here was his dream coming true.
The signal was uplinked from Manila to California via an Intelsat satellite. It was then sent across country via AT&T landlines and then sent by microwave to HBO headquarters in New York and then to Valley Forge, Pa., where it was uplinked once again to Western Union's Westar satellite and back down to the dishes in Florida, Georgia and Mississippi.
(HBO had planned to use an RCA satellite, Satcom I. But it would not launch until December, so for the first couple of months HBO sent its satellite signal via the only available domestic bird: Westar.)
In all the signal traveled 93,000 miles, noted The New York Times, which added: "How long did it take to make the connection and travel that extraordinary course? Almost, literally no time at all. Give or take a millisecond or two, the reception in Florida of the Manila fight was instantaneous."
The pictures were so good, Rosencrans recalled, "It looked like they were fighting in the next room."
The next day ATC launched its satellite service in Jackson, Miss. The world had changed.
"In short order we put them in all our larger systems," Rosencrans said. Other cable companies followed suit, particularly after the FCC ruled that smaller dishes were permitted and the price began to decline.
The economics were so compelling that the old idea of installing a few dishes and hooking up multiple systems to each downlink via microwave was quickly abandoned.
"It was just cheaper and easier to duplicate the dishes," Rosencrans said. Charging $8 a month retail for HBO returned about $40 per year per subscriber in incremental revenue to a cable system after the split with HBO. By adding 1,000 subscribers, the system could pay for the dish, even a $100,000 dish, in just over two years. And there was no cost after that, whereas the price for microwave transmission was an ongoing expense.
HBO also moved to solve some of its other problems as well. Levin was promoted to chairman and Time Inc. brought in Nick Nicholas, a hard-headed financial expert who had been running Manhattan Cable, to help deal with the explosive growth ahead.
Tony Cox came over from Sports Illustrated to head up field marketing. Austin Furst, who had been looking into pay per view for Time Inc., was named head of programming. And a young attorney from the William Morris talent agency, Michael Fuchs, was hired to develop original programming.
(Fuchs took the job after his boss at Morris turned it down. He later recalled: "I was at William Morris and Neal Pilson was my boss. He came to me one day and tells me he'd been offered two jobs: one at CBS Sports and one at HBO. He said he was taking the job at CBS Sports because it was more aligned with what he wanted to do while the HBO job involved more programming and seemed like something I might like. That was like telling a kid he could have all the chocolate sauce he wanted on his sundae. I literally went down the hall and called Austin Furst and I told him 'I hear you're looking for talented people. Why don't I save you some time and money.' I think I got the job based on that comment because I could hear Austin say 'I love it.'")
Furst reorganized the programming schedule, setting movie start times on the half hour or hour and developing "interstitial" programming: to fill the gaps. Among those he hired was the former local origination manger from the TelePrompTer System in Elmira, N.Y., Tony Lynn and a young film buyer for a broadcast station in Washington, D.C., Jim English.
Fuchs began to court Hollywood producers and studios. In particular he pitched the stars and big name directors, offering them the type of creative freedom that would never be allowed on broadcast TV. HBO could present uncut productions, free from advertising breaks. It would allow off color language and nudity. It could provide major chunks of prime time, and devote that to live concerts or events. It didn't shy away from politically controversial topics. It was an attractive proposition for many in Hollywood, tired of the tyranny of the broadcasters, even if the money wasn't as good as what the networks would pay.
And Cox put together a team of hungry young "affiliate representatives" to market HBO to the cable operators and help them in turn to market to the consumer.
Among them was the manager of a group of small TelePrompTer systems, Bill Grumbles. Grumbles' father had been a broadcaster in Memphis, Tenn. When Grumbles went to Southern Methodist University he took an investment course and found that the stock of a company called TelePrompTer was skyrocketing. The two experiences led him to seek a job in the business, first with Ben Conroy at CPI and later with TelePrompTer, running a group of small systems in Texas.
When HBO came along "I thought it was the coolest thing I had ever seen in my life," Grumbles said 25 years later with an enthusiasm undiminished by time.
He got an appointment with Cox and managed to "blow the interview" as he later recalled. Learning that Cox had decided not to hire him, Grumbles laid siege to the HBO headquarters and didn't quit until he had another chance. Finally Cox told him "I have to admire your persistence and your gumption. I'll see you around."
HBO sent him to open the regional office in Kansas City in January 1978. He combed through the TV Factbook looking for systems with 10,000 subs or more. When the price of a dish dropped to around $30,000 HBO began to be affordable to systems with as few as 2,500 subscribers.
HBO provided the field reps with a kit to cover all aspects of their job. A one sheet pro forma showed the operator that by charging $9.95 retail for the service and sending HBO $4.25 the service could generate in excess of $60,000 per year for the system. After paying off the cost of the dish, nearly 90% of that could be taken to the bottom line every year.
The HBO field reps were, as Grumbles later described it, "a different breed of cat" from the operators or from the equipment sales people. On the equipment side, once the sale was made, except for service, the salesman's job was done. For the HBO rep the sale meant the job was just beginning.
HBO handled all the launch plans, providing movie posters, customized press releases, direct mail pieces, newspaper ads, training for customer service representatives, and the first of what would become a flood of HBO premiums: key chains, T-shirts and lighters. "We called it the 'womb-to-tomb' plan," Grumbles recalled.
"The whole town would get real excited," Grumbles recalled. "We'd get the mayor out for the launch and make a big deal of it."
Levin attended many of the early launches. He recalled in particular the excitement that the installation of the dish itself would generate in towns such as Laredo, Tex., where HBO launched in 1976. "When they installed the earth station, it was like the astronauts had landed," he remembered. "It was a huge attraction. People would come just to look at it. It was such a galvanizing thing from a marketing point of view."
The systems were working out the marketing and operational kinks as well. Kroeger, at the New England Cox Cable systems which had had such difficulty selling HBO as a microwave service, recalled that the first step was to end the practice of roving bands of salesman and recruit a permanent sales force from the local towns. They instituted tap audits to find out who might be stealing the service. And more and more systems moved to computerized billing systems, replacing the old coupon books and card files. Some, like Cox, did their own in-house operations while others signed on with a new Sacramento-based company, CableData, that within a decade would handle half the billing for the entire industry and become, in the process, the single largest customer for the US Postal Service.
But HBO's biggest marketing tool was the guide. Most local newspapers refused to carry listings of HBO programming. The service developed its own guide which it mailed to subscribers every month, inserting it in with the bill.
"The (arrival of) the guide was a terribly exciting event every month," Grumbles recalled. "People would collect them like baseball cards." By enclosing the guide in the bill, HBO radically reduced churn, because those who were thinking about disconnecting when the bill arrived would find something in the coming month's attractions to keep them paying.
The results for the cable industry were phenomenal. Not only did HBO provide a new source of revenue from existing subscribers, but it pushed those who had not signed up for cable to become customers as well. In the suburban markets where off air-signals were plentiful "penetration had been 10% to 15%," Rosencrans recalled, and "in no time we moved up to 30% to 40%." It didn't take him long to realize what this meant. "All of a sudden the big markets began to look feasible."
The results for HBO were astounding as well. By the end of 1977 HBO had more than 1.6 million subscribers, from a base of 20,000 (minus a few disconnects) in June of 1974. Paul Kagan Associates estimated that in 1977 HBO generated revenue of $124 million of which it kept more than half. In the fourth quarter of 1977 HBO moved finally into the black.
The satellite launch of HBO did more than just rescue a struggling regional pay TV service from the brink of insolvency or give the cable industry the engine it needed to drive growth in the suburbs and cities. When HBO went up on the bird it fundamentally changed the nature of the U.S. television business, and ultimately the entire world of communications.
"We brought the glitz of Hollywood to the plains of Kansas," Grumbles recalled. "We were the entertainment industry, and we took what was essentially a retransmission business and transformed it into an entertainment business."
In the process HBO groomed a generation of executives who would go on to help launch dozens of other services, having learned far more about how to win over the American consumer than they could have in any college or graduate school.
Typical of the HBO shock troops was Matt Blank, a native of Queens and graduate of the University of Pennsylvania who joined HBO in 1976 after a stint as a marketing trainee at Phillip Morris Co.
"I was raised in New York City and went to school in Philadelphia. I had never seen anything of America," Blank recalled. "A week after I started I was in Lewistown, Pa.," managing an HBO launch.
Blank found the contrast with Phillip Morris sharp and exhilarating. At the big company there were separate departments to handle everything -- advertising, ad placement, marketing, promotion. At HBO he did everything: made up the print ads, ran the slicks down to the paper, cut the radio spots, bought the time.
In Hickory, N. C., Blank recalled, he met up with TelePrompTer vice president of marketing Marc Nathanson and the system manager to get ready for a launch. Then they found there was a problem with the satellite dish.
The three drove out to the headend in the middle of a pasture. A shabby fence surrounded the dish, and three cows had trampled the fence down and were resting their chins on the dish, interfering with the satellite signal.
"There we were, up to our ankles in mud, dressed in our blue suits and Gucci loafers, trying to move these three cows," Blank recalled.
Blank found the cable operators eager to help educate him about the business. After a dinner at the Pennsylvania show one year, Adelphia Cable founder John Rigas stayed with Blank at the table long after everyone else had left, tutoring the young HBO exec about how cable worked.
"He didn't even notice the time," Blank recalled. "He was so proud of what he did for a living he just wanted to sit there and tell me about it."
The HBO reps were young and enthusiastic. They were mostly single and worked seven days a week. Conventions, Blank recalled, were "one giant party. It wasn't just a business experience, it was a cultural experience." Working at HBO in the late 70s, he said, was the "relative equivalent of going to Woodstock."
"I view my time at HBO not as part of my career, but as part of my education," Blank said later.
But while HBO was the first on the satellite it wasn't the last. As Jerry Levin and Bob Rosencrans met in Vero Beach to launch the first satellite transmission of HBO, their progress was viewed with great interest just to the north. In Atlanta the owner of a small, nearly bankrupt UHF broadcast television station had decided that the satellite would be his path to the future as well, a future in which Channel 17, WTCG (for Watch This Channel Grow) could catapult itself from fourth place in a four-station market to a major regional if not national programming force with a distribution as wide as that of the mighty broadcast networks themselves.
The broadcaster was also a sailor and a friend of Time Inc. president and fellow yachtsman Jim Shepley. Through Shepley he had met Jerry Levin. In September, 1975, he read in Broadcasting about HBO's satellite plans and picked up the phone to ask Levin about it.
"Jerry," he said. "This is Ted Turner."
Local Cable Advertising Owes a Lot to One Backyard Inventor
He raced cars, dropped out of school, figured to die young. Somewhere along the way, Bill Killion invented the local cable advertising business.
"My thing," says the soft-spoken Killion, stressing the singularity of the word, "is putting advertising on cable."
Which hardly seems novel now. But to understand the contribution Bill Killion made, you have to understand that he was talking about putting advertising on cable well before the late 1970s satellite communications revolution, before Ted Turner launched Cable News Network and 39 systems inserted their first local spots on CNN's network feed, and before anyone anywhere figured small-time merchants would put up money to see themselves on television.
Killion was talking about putting advertising on cable at a time when the only reaction he got was silence and puzzled stares. At trade shows, speeches, conferences, Killion told people the day would come. One day, he brought a program switching device to the Western Cable Show in California, boasting that it would allow cable companies to place local commercials within the channels that carried the only cable-original programming of the day, channels like the precursor to USA Network, Madison Square Garden Network. It was a new idea and a new system. "But there was no interest in it at all," Killion said. So he went back to the place where many American inventors go, back to where the drawing board was, back to his garage.
The garage where he started was in El Cajon, Calif. Killion was there out of choice, having quit a technical writing post at a southern California military contractor and broadcast electronics firm, Dynair, in 1974. The idea was to operate his own small electronics manufacturing business backed by a local bank which had promised him financing.
But without a solid business plan and without his Dynair connection, Killion's backing fizzled. Living off his wife's salary as a law firm assistant, Killion scraped up enough components and solder to build 100 VCR controllers, filling an order he won from a hotel group that wanted a way to control in-room movie telecasts. Killion sold them for $650 a piece to Holiday Inns and apartment building owners, and later to cable TV companies for automating crude pay-TV channels. The orders kept him afloat. He named the product Channelmatic.
Killion was selling product, but living lean. A big celebration was "a hot dog and a six-pack," he said. But two things happened in 1977 that would have an ultimate impact on Killion and the spot cable advertising business. Home Box Office had begun transmitting its commercial-free movies to cable systems by satellite. And the microprocessor, the brains behind the personal computer, became affordable.
Killion introduced a microprocessor to his VCR controller, tied in a tone encoder and was shortly outfitting cable systems with devices that automatically switched among program sources so subscribers wouldn't see a dark screen after HBO's feed ended for the day.
The applications for advertising were obvious to Killion. Switching from a satellite feed to a commercial stored on a VCR was conceptually no different from switching between two satellite sources. There were few people besides Killion who made the connection. In Hawaii, Oceanic Cablevision engineer Jim Chiddix began inserting local cable commercials using Killion's invention. USA Network president Kay Koplovitz was intrigued, says Killion, but resisted the idea of cue tones that would be audible to viewers. UA-Columbia engineers took more interest, inviting Killion to San Angelo, Tex., where he received a breakthrough order for 10 systems.
Killion was gleeful over the first big sale. He bought a house in Alpine, Calif., out of bankruptcy and hired six employees to assemble components. But he soon turned pessimistic. "After the UA order, the cable business sort of dried up for us," he says.
Worse, hotel customers were proving to be a collection problem, leaving Killion drained of cash. Their bank account empty, Killion and his wife Sally decided to make one last stab before calling it quits. They charged airline tickets on their credit cards and headed to a cable convention in San Antonio, hoping for a turnaround. The mood was grim. "If we went home without orders, we would have been broke," Killion says.
In Texas, with the stakes high, Killion watched in horror from his exhibit floor booth as show-goer after show-goer passed him by without a second look. "Nobody stopped. We didn't know why," he says.
Discouraged, Killion surveyed the otherwise busy show floor, stopping at the distant sight of a man wearing a cowboy hat. As the individual neared, Killion recognized him as an old acquaintance from his Dynair days. But that wasn't what intrigued Killion. It was the hat. Killion was taken by the image. With nothing to lose, he left the show, found a nearby shop -- the Paris Hattery -- and watched as the proprietor hand-crafted a facsimile of the wide-brimmed Stetson Killion recognized from Clint Eastwood westerns.
Whether the crowds that gathered around Killion upon his return that afternoon were drawn by the sight of a tall man in a cowboy hat, or were simply moved to check out the Channelmatic displays they had previously overlooked, doesn't matter to Killion. He sold dozens of commercial insertion system orders that day and went home delirious -- and still in business. Killion, who was diagnosed as a child with rheumatic fever and expected to die before adulthood, was not one to tempt fate. Since that day, he says, "I was never without the hat."
Or without a paycheck. Killion hadn't paid himself a salary from Channelmatic from 1974 to 1981. But shortly after Texas, he began to realize the fruits of his invention. On June 1, 1980, 39 cable systems, all using Channelmatic gear, aired their first local commercials the day Ted Turner flipped the switch that turned CNN into the world's first around-the-clock news network.
Killion's biggest break came in 1981. Thom McKinney was orchestrating Group W Cable's expansion of local advertising. After meeting with Killion, McKinney took a headlong plunge, agreeing to buy 55 random-access commercial insertion systems recently developed by Channelmatic. Group W got its advertising business rolling. Killion got rich.
-- From: Cable Avails magazine