Chapter 6: The Programmers
Ted Turner really isn't a businessman. He is more a force of nature, closer to Hale-Bopp or El Nino than to any business school graduate.
Raised in Savannah, Ga., Turner was the son of an alcoholic father who believed the best way to build character in the boy was to beat him regularly and praise him never. Young Ted was sent away to boarding school in the fifth grade and never really returned home except for summer vacations until he was tossed out of Brown University for having a woman in his room.
A magnificent sailor, he had led the Brown sailing team to a national championship by sailing across a stretch of ice to overtake a boat from the University of Michigan. So uncanny were his instincts that one of his crewmates was convinced Turner could tell ahead of time when the wind would shift and in which direction.
That same fearless bravado epitomized his business career.
Turner's father committed suicide when Ted was 24, leaving the young man with a small outdoor advertising business the senior Turner had built up during years of battling rivals for choice locations on two-lane southern highways.
All his life, Ted Turner loved being the underdog. Over and again he would portray himself as the Vietcong fighting the U.S., the Confederates surrounded by Union soldiers, or Hannibal outwitting the much larger Roman legions. Success bored him. Each time his business reached the brink of profitability and stability, Turner would risk everything, including his own personal fortune, to take on some seemingly impossible task and regain his status as the underdog.
One early example came when he decided to become a broadcaster. He had finally managed to get his outdoor advertising business on an even keel when he jumped into a new business he knew almost nothing about.
In 1970 he purchased for $2.5 million WJRJ-TV Channel 17, a UHF station in Atlanta that was losing nearly $1 million a year as the fifth-ranked broadcaster in a five-station market. Within a year he had bought another bankrupt UHF in Charlotte, N.C. He renamed the Atlanta station WTCG for Turner Communications Group or, as Turner loved to say, Watch This Channel Go, and the Charlotte station WRET, for himself, Robert Edward Turner.
He hired a group of young sales people, including two who would remain with him for years - Gerry Hogan and Terry McGuirk. But Turner led the troops. An amazing general he was.
He would do anything to get a sale. He would come into the office of a potential advertiser, jump up on the desk and blare out his sales pitch, punctuating his performance with wild gestures. If he was turned down he would fall prostrate on the floor, grab his throat, choke himself, gag, and cry out, "You're killing me."
Sometimes the antics worked, but sometimes they didn't. WTCG moved up in the Atlanta rankings only when the other UHF station in town folded for lack of audience.
Turner tried just about everything to draw attention to his station. And in the course of it he developed an instinct for promotion, particularly cross-promotion. He used his billboards to promote his station and vice versa. And he used his own personality to promote them both. His persona became an even more valuable asset after he won the America's Cup yacht race in 1977 - and after his picture began to appear on the cover of such publications as Sports Illustrated, Time, Newsweek, Forbes and Fortune. These were tactics that would serve him well in the future.
Above all he learned to market, rather than to sell. Art Dwyer, who worked both for Turner and for Cox Cable in the 1980s, defines the difference: "The marketer creates a need and a desire for the product. A salesman is just trying to sell you a bill of goods. The two best marketers in the business were Chuck Dolan and Ted Turner. They could truly excite you about their product. They talked marketing potential. Neither one ever sold anything, but they never left without getting the order."
As he cast about for ways to keep his company afloat, Turner became aware of the cable systems that were carrying his little UHF station in places such as Dalton, Ga., just outside Atlanta. The biggest problem for a UHF station was that it required a second antenna on the TV set that had to be tuned just right to allow for reception of the weak UHF broadcast signals. Compared to the stronger VHF stations, the UHFs looked pretty bad on most people's TV sets.
But cable leveled the playing field. When picked up and retransmitted by cable systems, the signal of a UHF station could be received by a cable subscriber without the need for a special antenna and could be nearly as good as the signals of the VHF stations.
"I realized that cable converted a UHF station to a VHF that people could get," Turner recalled. "And that was good for Channel 17."
He called his friend Henry Harris, president of Atlanta-based Cox Cable, and over lunch Turner learned everything he could about cable. He asked Harris to introduce him to the cable operators. The two went up to a regional cable meeting at Myrtle Beach, S.C., and Turner pitched the audience on the virtues of adding WTCG to their channel lineups.
"I formulated a plan to gain the rights to the Atlanta Braves (Major League Baseball team) games and (National Basketball Association) Hawks," and to televise the games on WTCG throughout the southeastern region, via microwave and cable, Turner said. There were no other independent stations in the Southeast at that time, and cable systems in Savannah and other southern cities were eager to have more programming, particularly something that would allow their subscribers to watch the South's favorite (in fact only) pro baseball and basketball teams.
Turner struck a deal for the TV rights to the Braves in 1973 and to the Hawks shortly thereafter. Within a couple of years he would own both teams outright. (Neither team was very good in those days. When Turner took over the Braves he was so excited when one of his players hit a home run in the opening game that the young owner leaped out of his seat, ran onto the field and accompanied the player from third to home base. The Braves still lost the game, but the photo of Ted Turner crossing home plate made nearly every paper in the South.)
Turner's plans for a regional network received a major boost in 1972 when the FCC relaxed its prohibition on the importation of distant signals, allowing each cable system to carry two distant signals so long as they did not "leapfrog" other nearby stations. Since WTCG was the only independent in the Southeast, Turner had an open shot at carriage on all systems in the region.
McGuirk, who had been promoted to Turner's special assistant in charge of cable, recalled that "Ted really laid siege to the cable industry." One early meeting took place in Lakeland, Fla., at the Florida state cable convention.
"Ted had been listed as a speaker, but they had put him 20th on the roster, which was not really acceptable at all," McGuirk recalled. "We forced our way up to second or third."
"It was the first time anybody had really seen him. He had them rolling in the aisles, laughing and having fun and when he was finished with his speech he gave them all an unscheduled intermission."
He preached like an old time evangelist, waving his arms and asking his audience rhetorical questions. He electrified the room.
His pitch was perfect for the cable operators, who also saw themselves as upstarts competing with the giant broadcasters who were using their clout in Washington to crush the small cable operators.
If Turner dreamed of becoming a general leading a ragtag army against a giant, evil enemy, he found willing recruits in the ranks of the cable operators.
he operators, initially taken aback by this gale wind from Atlanta, lapped up his act. None of them had ever seen anything like him, or would again. "It brought him instant icon status," McGuirk recalled.
It also brought him more and more viewers. By 1976 his little station was being carried by systems with nearly half a million subscribers throughout the Southeast.
The big jump in viewers barely moved the bottom line. Advertisers in Atlanta didn't much care about reaching viewers in Birmingham, Ala., or Charleston, S.C. And regional or national advertisers wouldn't even consider buying a station with no discernible ratings even in its home town.
But a new kind of advertiser was starting to emerge on the national scene, one who didn't care about ratings, only about results: the direct response, or per inquiry, advertiser. The purveyors of Ginzu knives or K-Tel knitters didn't really care at all whether the order for their product came from Alabama or Florida. All that mattered to them was how many orders there were. And WTCG delivered orders, splitting the revenue with the manufacturer.
But while this revenue helped, the relationship between Turner and the cable operators was still hampered by technology. The microwave hops that were needed to bring the signal to cable systems hundreds of miles away were expensive and unreliable and left hundreds of cable systems out of range of the signals.
Then, one day in 1975, Turner recalled, he was reading a story in Broadcasting Magazine about the plans HBO had to put its signal up on the satellite.
He knew instantly that this would be his path to success. "I was like the hound on the trail of an escaped criminal," Turner later recalled with glee. He hired an NCTA official, Don Andersson, to help him work out his satellite plans and help find a way through the Washington land mines.
And he set out to find a satellite and a transponder. His search led him first to Western Union, which was planning to launch a satellite and whose marketing vice president, Ed Taylor, tutored the young Atlantan about satellite technology. But when Turner and Taylor went to call on Andy Goldman, a TelePrompTer executive who had run some of the Alabama systems that carried WTCG, Goldman told Turner he was on the wrong bird.
Only if he were going to be carried by the same RCA satellite that HBO was using could cable operators pick up both signals with a
single dish. TelePrompTer was not about to shell out an additional $100,000 per system to pick up the WTCG signal on a second satellite dish, Goldman said.
But after steering him to RCA, Goldman was encouraging, as were other cable operators. "(TCI President) John Malone told me 'Ted, you'll never get it through the government, but if you do I'll put it on everywhere,'" Turner later remembered.
Malone initially appeared correct about the government, but Turner wouldn't take no for an answer. Andersson arranged for him to testify before a House subcommittee where Turner's down-home style and self proclaimed crusade against the broadcast networks found a sympathetic audience.
Eventually he worked out a deal with the FCC under which he would separate the programming and transmission aspects of his business. He set up a separate company, Southern Satellite Systems, to lease the transponder and distribute the station to cable systems. He offered ownership of the new company to a number of his friends, all of whom turned him down until Ed Taylor, the Western Union vice president, agreed to buy it for the price of $1.
It took Taylor a while to raise the money to buy a transponder, but at last, on Dec. 17, 1976, the FCC gave the final go-ahead and WTCG launched satellite service on Satcom I. (Shortly after going up on the satellite, Turner changed the call letters of the station to WTBS, for Turner Broadcasting System. To do so he had to buy the rights to the call letters from Massachusetts Institute of Technology, which had been using the same initials for its student-run Tech Broadcasting Station.)
The impact of satellite distribution astounded even Turner, who had entered the venture hoping to become a regional network, but with little thought that he would reach nationwide audiences.
"We had no way of knowing who was carrying us," he said later. Although cable systems in theory were supposed to pay SSS a small carriage fee, there was no way to prevent them from picking up the signal for free if they chose, particularly in the initial weeks and months after the satellite launch.
The only way to judge who was watching was from the direct response advertising mail, the orders for Ginzu knives and K-Tel knitters that poured into the WTCG offices every day. "I would personally go and get the bushel baskets of envelopes every day," Turner remembered, and count the letters from the Atlanta and those from outside the city.
(One consequence, he recalled, was that he noticed how sloppy the post office was. "A lot of time they didn't cancel the stamps." Turner ordered that the uncancelled stamps be steamed off the envelopes and reused.)
The letters, he found, were coming from all over the country. "We were looking for an audience in the Southeast," McGuirk recalled, "in Louisville, Ky., and Ft. Lauderdale, Fla., and places like that. That is where we expected the signal to come down."
But within days McGuirk and Turner realized that this was going to be bigger than they had thought. "We were getting mail from Minnesota and Washington State and California. It was magical. We couldn't keep up with the (direct response) orders," McGuirk said.
Because he was getting as much mail from outside Atlanta as from within the reach of his broadcast signal, Turner figured his nationwide audience was at least as large as what he was getting in Atlanta.
He tried to sell that idea on Madison Ave. "I made the calls personally," Turner remembered. "I remember one guy at (advertising agency) Dancer Fitzgerald. After I made my pitch, he laughed so hard his swivel chair want out from under him and he fell back and hit his head so hard it almost killed him."
He called on the A.C. Nielsen Co. as well, to complain that the ratings service was undermining his station. "I'm going to sue you for every Goddamn penny you have," Turner recalled telling them, "for treble damages. You are treating me like Lester Maddox used to treat the black people. I'm going to be like Martin Luther King."
But Turner made no headway. Advertisers wouldn't budge, while syndicators of programming, convinced that WTCG had a national audience, were demanding higher fees for their programming. It was starting to look as if Turner had outfoxed himself when he went on the bird.
As McGuirk later put it "It was cowboys and Indians time."
Typically, Turner struck hard. He set up a rate card based on the audiences he was getting nationwide and announced he would charge everybody those rates, even the local Atlanta advertisers. The rate was 10% higher than what he had been charging. Atlanta advertisers balked. And nobody signed up for a national buy. For six months, Turner made not a single sale to a national advertiser. But he wouldn't give up.
"Then one day an advertiser came to us and bought the whole boat," McGuirk recalled. "Within 30 days the whole thing turned around. They just wanted to make him sweat ... for a very long time."
While TBS was the first advertising-supported service to launch on the satellite, it was still essentially just an Atlanta broadcast station that was now being distributed nationwide.
The first advertiser-supported programming service created expressly for satellite distribution to cable systems was the brainchild of Bob Rosencrans, the head of UA Columbia Cablevision who had been the first to agree to install a satellite dish to receive the HBO signals from Satcom I.
Rosencrans quickly saw the benefits additional programming could bring to cable systems. His subscriber rolls had soared in the first couple of years after HBO launched on the satellite.
For several years he had been running events from Madison Square Garden, imported via microwave, on the UA systems in the suburbs of New York.
"So we began to talk to MSG," Rosencrans said. "The events were already being produced, so there was no programming cost. We told them we will distribute them by satellite and pay them a small fee for each subscriber we reach with the signal."
It would all be incremental revenue for the Garden, Rosencrans reasoned, and wouldn't hurt its gate since most of the viewers would be well outside the New York area. Finally, it would add to the Garden's reputation as the nation's premiere site of major sporting events.
Rosencrans and MSG formed a joint venture to launch the project. To run it he hired a young public relations executive who, along with her husband, had worked for UA previously in the effort to win franchises in New Jersey and upstate New York. The effort had been so successful that Rosencrans had shut it down until he could build all the franchises he had won.
Kay Koplovitz had become a devotee of satellite distribution when, as a college student bumming around Europe in the summer of 1966, she had happened to attend a lecture at the London School of Economics delivered by Arthur C. Clarke, the science fiction novelist who had been the first to propose the idea of geostationary satellites.
He talked about how satellite communications would fundamentally change the world, knock down walls, make democracies out of dictatorships. "He was very compelling in talking about his ideas. I just knew that these dreams would come true," Koplovitz later recalled.
"Listening to him had a profound effect on my life. I just thought 'You've got to do this.' "
She ditched plans to enter medicine and instead wrote her college thesis on communications satellites, something nobody knew much about. "I just never understood why people thought I was from outer space," she recalled about her enormous enthusiasm for a technology most people thought was science fiction.
After a stint as a producer for a TV station in Madison, Wis., she and her husband Bill looked for a way into the cable business. Bill went to interview with Rosencrans about a franchising job and called his wife to say, "You won't believe this guy. He is so down-to-earth, such a straight shooter and such a visionary."
As Kay Koplovitz remembered years later, "That wasn't the type of person we were used to dealing with in the television business."
The only bad news, Bill told his wife, was that they would have to move to New Jersey.
After a stint at UA's franchising division, Koplovitz set up her own public relations agency in Washington, D.C, and took on as a client Home Box Office. She produced many of its early launch events, including the first one via satellite in Vero Beach, Fla., where she was on hand to witness the dreams of Arthur C. Clarke come true less than 10 years after she had first heard them.
When Rosencrans decided to start a network of his own, he knew instantly who should run it.
"He called and said he wanted to do this, but wouldn't do it unless I agreed to run it," Koplovitz remembered. "He was enormously generous," she said, referring to his decision to take a chance on a young, inexperienced former TV producer to run a network. His offer wasn't just generous, it was smart too.
Koplovitz laid out a business plan that called for charging cable operators 10 cents a subscriber per month for the service. This, she figured, would just about cover the cost of programming, the transponder rental, marketing and overhead. Any profits would come from selling advertising.
This was the first time cable operators had been asked to pay for programming directly. HBO had agreed to split revenues with the operators. WTBS was available from Southern Satellite Systems for three cents a subcriber a month, a fee designed to cover the cost of the satellite transmission.
But the new MSG Network pioneered the concept that operators would pay a fee for the programming as well as the distribution based on their total number of subscribers, whether anyone watched or not.
Koplovitz also offered cable operators the chance to sell local advertising to insert into predesignated "avails" of 30 or 60 seconds each during the network programming. It was the first chance local systems had had to sell ads in a national network.
The operators loved it. Greg Liptak, by then running marketing for the United Cable Television system in Tulsa, Okla., recalled that any programming that could give the urban operator an edge over the local broadcasters was desperately needed.
"At the beginning we were welcomed by the industry," Koplovitz recalled, "because they knew they needed more programming to penetrate the urban markets."
Cox Cable was one of the first big cable companies to sign up. After a presentation to Henry Harris and his colleagues, Koplovitz came away with a commitment to launch on all the Cox systems.
When the network went on the bird in April, 1977, it was received by cable systems serving 750,000 subscribers. Even without advertisers, the network was able to cover its costs in the first year from the fees charged to cable operators.
But expansion and profits would depend on the ability to crack Madison Ave. "We set out with missionary zeal to bring in advertisers," Koplovitz recalled.
Without any ratings numbers, the pitch was based on the concept that viewers across the country would certainly want to see the huge events at Madison Square Garden. The first break came when agency Young & Rubicam, anxious to experiment with this new medium, committed its client, Gillette, to spend $100,000 to advertise on the new network.
MSG was the first cable programming service to achieve a dual revenue stream - part from advertising and part from subscriber fees. This financial model, replicated by dozens of ad supported networks in the coming decades would give cable networks a huge leg up in their battle with broadcast networks for viewers and advertising.
Using this model, a cable network could begin to purchase programming and market its service before selling a single ad. The revenue stream from cable operators could be leveraged to fund the pre-launch expenses and then used to pay for the first months of a service's operation.
What Rosencrans understood was that by adding new services, cable operators in turn could increase the rates they charged their existing subscribers and add new customers, boosting their own revenue stream more than the cost of the additional programming.
Koplovitz then began to seek programming from other venues besides MSG. She cut a deal with New York Yankees owner George Steinbrenner to carry the games of the Bronx Bombers on her new network. The first game she televised was a hotly contested battle between the Yankees and their arch rivals, the Boston Red Sox. Koplovitz came into the office the next morning elated. At least until the phone rang.
On the line was Major League Baseball commissioner Bowie Kuhn, who told her that the deal "flagrantly disregarded League rules" because each team had the exclusive rights to sell TV rights to their games in their own markets. The Red Sox were livid that their game with the Yankees had been imported into New England without the permission of the team.
"He told me he was going to court that afternoon to seek a restraining order to prevent the telecast of the Yankee games on MSG. I put him on hold and called my husband (an attorney) and asked him whether Kuhn had a case. He told me that Steinbrenner would be the one in trouble, not us, but that it was certainly possible that Kuhn could block the deal.
"So I got back on the phone and asked him if he would be willing to talk to me about a league deal. 'I'll see you in my office tomorrow at 9 a.m.,'" Kuhn replied. The result was the first deal between Major League Baseball and a cable network, giving baseball a couple of cents per sub per month in added revenue and requiring MSG Network to black out games in the home cities of the teams that were playing.
The blackout provision would continue for decades, forcing MSG to put up a second feed to provide alternative programming to the systems where the games were blacked out and forcing cable operators to install equipment capable of blocking those games.
Still, it was the beginning of an enormously lucrative, if at times contentious, partnership between cable and major league sports, giving the leagues a new revenue source and cable hundreds of hours of highly desirable programming that was already being produced but which was not being televised except in local markets.
Koplovitz followed with deals for NBA, NHL and North American Soccer League events.
Rosencrans and Koplovitz had always planned to develop a network with a wide array of programming, like the broadcast networks themselves. Almost from the start they had been looking for ways to expand beyond the sports schedule. In 1978 Koplovitz unveiled a block of children's programming to run in the mornings. She called it Calliope.
"At the time there was a huge public debate over the disintegration in values in children's programming," she recalled. "The broadcasters were being accused of commercializing children's programming. We found that there was a huge block of programming available for children, mostly short films, of wonderful quality and at a very low price."
Calliope remained part of the network schedule for 15 years. Koplovitz followed by creating a segment on health, aimed primarily at women viewers, called Alive and Well, sponsored by Bristol Myers. And she provided time for a couple of other programmers as well. One wanted to offer public affairs programming and the other had a notion to develop fare geared to minorities. The first was Brian Lamb and the second Bob Johnson.
By the end of the decade the network had expanded its programming mix well beyond sports and changed its name to USA Network. In 1981 UA and MSG sold their interests to a joint venture of Time Inc., MCA and Paramount Pictures.
The launches of USA, WTBS and HBO were soon followed by dozens of new networks. This onslaught of new, cable-exclusive programming fundamentally altered the nature of the cable business. Hastening that change were the activities of two newcomers to the business, both with deep roots in program production and distribution: Warner Communications and Viacom International.
Warner had entered the business in 1972 when it purchased TV Communications, the cable company that had been started by Alfred Stern and had built a two-way interactive system in Akron, Ohio. Warner also bought out Continental Telephone's systems, including the two-way plant in Reston, Va.
Warner was headed by Steve Ross, a flamboyant deal-making genius who followed his instincts rather than any set business plan. Ross had started out running a funeral parlor in New Jersey, expanded into parking lots and in the late 1960s acquired the foundering Warner Bros. studio.
In 1973 Ross reached outside the cable industry for an executive to run his systems. He hired Gustave M. Hauser, who had been executive vice president of Western Union International, and prior to that for 10 years the CEO of General Telephone & Electronics International.
Hauser had already compiled a distinguished career when he decided to "take a flyer" on cable as he later recalled his decision to join Warner. A graduate of Western Reserve University, Hauser had earned degrees from both Harvard Law School (where he met his wife, Rita, also a Harvard Law graduate) and from the University of Paris Law School. As a lawyer in the Pentagon in the late 1950s he had written the first treatise for the Department of Defense on legal issues in outer space after the launch of the Sputnik satellite by the Soviet Union.
Ross ran a decentralized business, allowing his lieutenants wide leeway to operate as they saw fit and backing them with financing for any idea that caught his imagination.
When he bought his collection of cable systems, Hauser said, Ross "hadn't the faintest idea of what to do with it."
The one thing that was clear was that Ross, and Hauser, weren't interested in running an old fashioned reception service. "We shared a vision that cable could become a big business," Hauser said of his first meetings with Ross. But they realized together that there was one central problem: "Cable had no product."
The retransmission of broadcast television signals, which had been the mainstay of cable in the 1950s and 60s in rural and small town America, didn't work in big cities where broadcast reception was generally very good without any cable. The FCC had severely restricted the importing of distant signals, and the cities were insisting that any of the cable systems built needed to offer dozens of channels, including those devoted to public access and government.
The first thing Hauser did when he came to Warner in late 1973 was to bring in a group of people from outside the industry to reorganize the cable operations and stop the financial bleeding.
"We brought in people from ITT and other companies accustomed to running trucks," Hauser recalled. They instituted a systematized and computerized system to monitor the installation and repair schedules for cable systems, saving the systems thousands of dollars a month in operating costs.
Hauser cut staff, laying off as many as 50% of the employees in some divisions.
And he raised rates. In most Warner systems rates had been unchanged for 20 years. Again Hauser brought in a group from outside, a "swat team" as he called it, to tour the country and persuade city councils to allow Warner to raise rates in its systems.
In many communities Hauser himself made the pitch. "I remember in Palm Springs, Calif., everybody in town turned out for the meeting. I made the presentation myself. Afterwards the head of the community group opposing the increase took me aside. 'Don't worry,' he said, 'rates aren't really the issue. This just gives us a chance to make a fuss.' "
But the most fundamental problem Hauser faced was how to create a product that people really wanted in communities such as Akron where off-air broadcast signals were so readily available.
Ross, who owned a movie studio, had always dreamed of a way to sell movies into the home. So did the head of his movie distribution arm, Ed Bleier, who had come to Warner after at stint at ABC where he did a strategic study of cable TV. Bleier, as he later recalled, was sitting on a library of films that "were collecting dust."
After looking at the Akron system, Bleier realized that this could provide an additional outlet for Warner Bros. films. "Bingo, there's pay TV," he remembers thinking.
At first they attempted to run pay-per-view movies in Akron, where there was a two-way system. But the equipment installed by Jerrold proved to be highly unreliable, and Hauser decided to junk the entire system.
Columbus, where Warner owned a state-of-the-art 36-channel system, seemed to be the next best test market, Hauser recalled, "because people weren't buying cable. We just couldn't get any penetration. When we did get somebody to sign on we couldn't keep them more than a month."
The other attraction of Columbus was that the city council was willing to allow Warner to experiment. "They weren't interested in regulation. You could do anything."
Hauser created another swat team with such people as Mike Dann of CBS, Vivien Horner of the Children's Television Workshop, and radio executive John Lack.
Now he needed the equipment to pursue his two-way interactive dreams. To build the hardware needed to provide interactivity, Hauser recruited Pioneer Electronics, the giant Japanese manufacturer, to enter the cable business.
Pioneer and Warner had developed a relationship because Warner produced records and Pioneer produced stereos.
Hauser and Ross decided to call the system QUBE (standing for nothing in particular).
Among the first programming efforts at QUBE was a children's channel, developed by Horner, the CTW veteran with a Ph.D. and a national reputation as an expert in child development. "We bought all the children's programming we could get," Hauser recalled. "It was easy to do, nobody wanted it."
The channel started with no advertising, and even after it became Nickelodeon, it continued to limit advertising and to place restrictions on what could be advertised. By 1979 it was on the bird. QUBE also launched pay-per-view and a monthly movie package called Star Channel, later renamed The Movie Channel.
The QUBE systems devoured programming. "We would go around and buy anything that flickered," Hauser recalled. "Everything was fair game."
One day John Lack came in with the news that some of the record companies were experimenting with a new format: short-form videos to match the music.
Warner started putting the clips - those few that were available - on a segment of QUBE called Pop Clips.
Because the QUBE technology could monitor how many homes were watching any given channel at any given time, it was easy to measure the response to Pop Clips. It was huge. Not only did it draw a sizable audience of teenagers, but they in turn proved to be ready buyers for the music shown on Pop Clips. Warner quickly determined that music videos could be a hit for everybody - cable operators, advertisers, music companies, record stores and viewers.
They called the new service, MTV: Music Television. One minute after midnight on Aug. 1, 1981, MTV went on the satellite.
In a few months, Lack brought a hot young radio programming executive, Bob Pittman, who originally came on board to work on the Movie Channel, over to head MTV. Within a year, American youth was rallying to the theme, "We Want Our MTV."
QUBE was a hotbed for innovations in programming and cable operations. It attracted enormous nationwide attention (its launch made the news on all three broadcast networks). And it proved an enormous plus for Warner during the franchise battles of the 1980s as city councils around the country were shipped to Columbus to see the cable system of the future up and running.
Unfortunately, QUBE never made any money. "It was," Bleier said later, "the most successful failure known to mankind. While QUBE didn't work (financially), it made everything else work."
Viacom, the other new entry into the cable business in the mid - 1970s, was born by government intervention in the communications business. The FCC forced broadcast networks to divest their ownership of cable and syndication businesses. CBS, which had extensive operations in both areas, spun off those businesses into a company headed by Ralph Baruch, who had been president of CBS's syndication business.
Viacom inherited about 30,000 subscribers from CBS, most of them in clusters in the San Francisco, Seattle and Long Island areas. As the executives of the new company sat down to plan their strategic objectives, Baruch recalled, "It was obvious that within the next two to three years costs were going to outpace revenues, which would have been an unsupportable condition. It seemed to us the only thing on the horizon was pay television."
But Viacom was dissatisfied with Home Box Office, which it had launched in several of its systems. The churn was high and Viacom, which had experience in TV production and syndication as well as cable operations, felt it could do a better job of creating a pay service.
Viacom started with a pay-per-view experiment in the system in Suffolk County, Long Island, using a device developed by a company called Transworld, a subsidiary of Columbia Pictures. The system didn't work very well, and Viacom shifted its focus to a monthly pay television service. To run it the company hired a 33-year-old executive who had worked with Michael Eisner and Barry Diller at ABC TV and developed that network's strategy of two-hour made-for-TV films. Jeffrey Reiss had been born in Brooklyn and studied biology at Washington University in St. Louis.
He worked in the theater in New York, producing several off-Broadway plays one of which won an OBIE award. In 1971 he became involved with a startup company that had developed one of the first versions of the videocassette recorder.
At Viacom Reiss took a close look at HBO and found what he believed was the reason for its high churn rate: "The product was overpromised and oversold."
When customers first looked at the HBO schedule, they were overwhelmed by its choice, as many as 80 or 90 movies a month plus sporting and other special events. But after a few months they began to discover that many of the films were repeated. Pretty soon many of them would be saying, Reiss recalled, " 'Gee, there's nothing on this month that I haven't already seen.' "
Reiss designed a service that would offer only 12 movies a month, but would change the entire schedule every month so that there would always be something fresh each month.
He also brought to the mix some of the programming and marketing expertise he had honed at ABC. He developed interstitial programming to go between the films so that the movies could begin on the hour (he adopted the word interstitial from his days in biology. The word refers to the space between the cells of a living creature). He hired Jules Haimovitz, another ABC veteran, to do the programming.
The service launched in Dublin, Calif., outside San Francisco in June 1976. It was a success, drawing 35% penetration in the first marketing sweep. But signing up customers wasn't the goal. Keeping them was.
Reiss and Haimovitz monitored the sub counts closely and after a couple of months they began to decline. The small Showtime crew set up a war room, taking over the Viacom board of directors room, to continue to watch the movement. After a few more months the levels began to stabilize and then to increase, eventually going past the penetration levels that had been achieved in the first push.
They charted the growth, decline and more growth in a pattern that became known as the Haimovitz curve (or Haimovitz hump as Reiss called it because it resembled the humps of a camel.)
Like HBO, Showtime relied heavily on its guide to promote upcoming films and to retain customers.
The second guide was to carry on its cover a picture of Gene Wilder, star of the film Young Frankenstein. It was set to go to print when the studio called and said the movie couldn't be used because its producer, Mel Brooks, had never heard of Showtime. Reiss picked up the phone to call Brooks and was told he had the flu.
"So I sent down to the delicatessen and had a large order of chicken soup with matzo balls sent to Brooks' home with a note asking for a chance to speak to him." The director called the next day. "Who are you?" Brooks bellowed into the phone at the startled Reiss. "Do you know who I am? Do you think Jewish jokes are funny? How was I to know you weren't some nut? How was I to know the soup wasn't poisoned?" Brooks in real life was just like the characters he portrayed on the screen.
Reiss sent him over some copies of the guide and the next day had his approval.
It wasn't so easy when it came to getting Viacom to approve satellite distribution. Reiss recalled that the brass at Viacom was skeptical about his ability to make satellite distribution pay, and by the time they had the go-ahead, it was 1978, and a huge amount of territory had been lost to HBO.
To make up the ground, Reiss made a radical hire, bringing on board not somebody from an operating company or a programmer, but John Sie, head of the Jerrold cable division. Again some of the Viacom brass were doubtful.
"I was just so impressed with his analytical ability and his communication skills," Reiss recalled. "He had one of the best pitches I have ever seen, and he had passion. Above all he had passion."
But the two of them would have to wait until 1978 before they could offer cable operators a satellite-delivered pay service. And HBO in the meantime was signing up subscribers and affiliates.
The launch of satellite programming, and the new wave of cable customers it produced, particularly in the more populous areas of the country, forced major changes in the way cable companies were run.
As long as cable remained a small-town phenomenon, with the primary goal of retransmitting broadcast signals, most systems could be run by a couple of people: an engineer who kept the system running and an office manager to answer the phones, send out the bills and deposit the checks.
But as cable companies grew, they required people with more complex skills to run them. During the late 1970s many of the largest cable companies began to bring in new talent, often people who had no experience in cable but who could bring skills from other businesses to the industry.
After wresting control of TelePrompTer from Irving Kahn, Jack Kent Cooke installed as company president Russell Karp, a Yale Law School graduate who had held top positions with Hollywood studios Screen Gems and Columbia Pictures. Bill Bresnan remained as senior vice president of TelePrompTer and president of the cable division. The new lineup also included two under-30 marketing executives, Marc Nathanson, from Cypress Communications, and Jeffrey Marcus, from Sammons, to head up a major effort to boost subscriber levels.
At American Television & Communications Corp. CEO Monroe Rifkin recalled, "We had been promoting from within. I decided to bring in better talent to the industry." In short order he had visited many of the major business schools recruiting such people as David Van Valkenburg from Harvard Business School, John Rigsby from Harvard, Mike Kruger from Stanford, and Larry Howe from Dartmouth. A headhunting firm brought him a rising young marketing executive and Dartmouth graduate who had worked at Procter & Gamble, Trygve Myhren.
One of the first in this new wave of well-educated talent was Joe Collins, a 1972 graduate of the Harvard Business School who had done his thesis on cable television and sent out letters to the heads of all the major MSOs when he graduated. Rifkin was the only one to reply.
ATC assigned Collins to be marketing manger at the system in Orlando, Fla., which Rifkin later recalled was a place where the company "learned an ugly lesson." The Orlando market had a full complement of broadcast television stations, and ATC's expensive two-way system was achieving very little penetration. When Collins arrived, it had only 500 customers, among the 2,500 homes passed.
Collins recalled that he felt this was actually pretty good since the only programming the system offered that could not be received over the air was an educational station from Tampa and a local origination channel.
The only marketing effort the system was making when Collins arrived was the door-to-door selling that had been the mainstay of all systems up to then. So he tried some of the tricks he had learned at Harvard - point-of-purchase displays in the local stores, direct mail, telephone solicitation. With the marketing blitz and the addition of a couple of distant signals from Miami and Tampa when the FCC allowed it, Orlando, where Collins had been promoted to general manger, was able to increase its penetration to the upper 30% range from the 20% he found when he arrived. In 1973 he received a special marketing award from the National Cable Television Association.
After moving to ATC's Denver headquarters in 1974 Collins managed the installation of satellite dishes and the conversion to pay TV for ATC systems in the late 1970s. He recalled the headaches as systems went from coupon billing systems to computers. "In Reading, Pa., there was a man who had trained his dog to bring the coupon book and the payment to the office every month," Collins said. "He was heartbroken when we made the switch and the bill had to be sent someplace else."
Continental Cablevision was facing the same challenges and bringing in new talent to help. Within a few months in 1974 Amos Hostetter and Irv Grousbeck had hired ex-broadcast news producer Jim Robbins, psychology professor Robert Clasen, Harvard College history major and assistant director of the Bedford Stuyvesant project Barry Lemieux, and banker Tim Neher. Each would wind up being president of a major cable operating company. So would Ray Joslin, who had been one of the first employees of Continental. Joslin was serving as regional sales representative for the Jones & Laughlin Steel Co. in 1966 and living in Findlay, Ohio, when he met Grousbeck, his next door neighbor, and signed on to work for Continental.
In those days, Joslin later recalled, the system managers did everything, including bailing the construction workers out of jail on Monday mornings so they could go back to work and build a few more miles of plant.
Clasen recalled an early experience in Upper Sandusky, Ohio. He was seeking a rate increase to $7.25 from $5.90 per month (almost 23%) and some of the city council members were threatening to oppose it. So Clasen, using his psychology background, took out ads in the local paper with a picture of a huge nickel, with a slice cut out, and a message stating that the increase would amount to less than nickel a day. The local paper ran a story on the matter with the headline, "Cable company asks for only a nickel increase," and the council approved the rate hike.
Robbins, a Harvard Business School graduate who had worked at WBZ-TV news in Boston, and had started in cable at Adams Russell in Massachusetts, was assigned to run the Continental systems outside Dayton, Ohio. His big breakthrough came when General Instrument introduced the first remote control, a long wire that attached the channel changer to the TV set.
He launched a marketing blitz to sell the remotes for $1 per month extra, reaping huge profit margins for the system which bought the devices from Jerrold for less than $5 each.
Robbins also leaped into the political fray. He was infuriated by the FCC rules that required systems to black out shows carried on distant signals when local stations owned the rights to air the same shows. The local Dayton broadcasters had purchased the rights to syndicated shows that they were warehousing, simply retaining the rights to air the shows without actually running them. The objective was to force blackouts in the distant signals carried on the cable system.
The system was required to black out these programs. So Robbins created a campaign against this so called "syndicated exclusivity" and used ads on his own system to urge customers to send in postcards (preprinted by the system on red paper) to the Federal Communications Commission and the Congress to protest the rule. 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.
When Robbins himself traveled to Washington to lobby on the issue, he recalled, one FCC staffer opened the drawer of his desk "and it was full of red cards."
But nowhere was the impact of fresh new management felt more acutely than at Tele-Communications Inc. John Malone was a sailor, and when he arrived at TCI, even though it was far from the ocean, the waves were beginning to wash over the gunwales and the squalls on the horizon were dark and ominous. As he put it 25 years later, "There weren't any more deck planks to throw into the fire."
In 1972 TCI chairman Bob Magness had gone on an acquisition binge, convinced that the FCC's decision that year to relax the distant signal rules indicated a new era of deregulation in Washington. He had financed his purchases with so-called bridge loans, short-term financings that he expected to be able to repay by selling additional TCI stock after the acquisitions had been completed.
Magness loved to pour over a deal, often taking days at a time to review every detail. And he had an unusual culinary tic while he did it. Once Jack Kent Cooke was selling a system to TCI and Magness showed up at Cooke's office early one morning to sign the deal. The Oklahoman pulled out a cigar from his pocket and Cooke asked if he needed a light. "No thanks," Magness replied. He began chewing on the cigar. As the stogie released its juices Magness would just swallow them. By the end of the day he had eaten the entire cigar, much to the amazement of Cooke. "He must have had a cast iron stomach," commented Bill Bresnan who was on hand that day. Magness would need it in the mid-1970s.
When the cable stocks crashed in the wake of Irving Kahn's conviction and interest rates began to skyrocket, TCI was caught in a squeeze. Magness' bridge loans had become pier loans, and the banks weren't happy. Magness needed help. When he brought Malone on board as TCI president Magness told friends, "I just hired the smartest son-of-a-bitch I ever saw."
Malone knew full well how bad the situation had become. TCI had been a major customer when Malone ran Jerrold and the cable company had made full use of the financing program Malone had set up. When Malone moved to Denver, TCI had $132 million in debt, and only $18 million a year in gross revenues. Its stock dropped as low as 7/8. Its market capitalization was down to $3 million.
Malone cut everybody's pay, including his own, by 30%. He visited the communities where TCI had pledged to upgrade the systems and warned them "there wouldn't be any picnics this year, and probably not next year either," he later recalled.
He and his colleagues slept two or three to a room at Holiday Inns. They paid their employees in stock (a payment scheme that would make some of the clerical help millionaires a decade later).
Malone situated his office so he could hear who was coming to the reception area and make a quick and quiet exit when creditors arrived. And he found a way around the rules he himself had set up when he was at Jerrold.
John Sie, who became head of the Jerrold cable division when Malone left, recalled that TCI's precarious economic conditions and tardy payments forced Jerrold to put the company on credit watch, denying it additional products until it brought its payments up to date. But Sie noticed that Jerrold was still shipping out product to TCI systems. When he looked into it he found that Malone had set up many of the TCI systems as separate companies which were then able to apply for credit with Jerrold on their own with clean bills of health. It was the only way Malone could keep his systems operating while he fought his biggest battle: with the banks.
TCI's debt had been financed by a group of seven banks. The loan agreements imposed a repayment schedule as well as a variety of covenants that restricted what TCI could do (limiting such items as debt-to-cash-flow ratios, purchases of additional equipment, and even stating, in a Catch 22, that TCI could not spend more on launching pay TV than it was earning from pay TV). The agreement stated that if TCI failed to make an interest payment any bank could call its loan. If TCI violated the covenants, a majority of the banks could call the loans.
Two of the banks had been on the short end of a deal that TCI shareholder George Hatch had done to purchase a motion picture company called Republic Pictures. Hatch had guaranteed his loan would be repaid by TCI without informing Magness. But Magness stood by his friend even as the banks filed suit charging criminal fraud. It was a messy situation.
Both banks involved in the Republic fracas were ready to call their loans to TCI at the drop of a pin. As Malone recalled later, "There were a whole lot of covenants, and we weren't meeting any of them."
The two banks that had been burned on the Republic deal were all for calling the TCI loans. But the other five had been willing so far to hold back as long as TCI made its interest payments.
The standoff among the banks came to a head when TCI needed them to grant a waiver of the covenants so that the company auditors could give TCI a clean bill of health for its annual report to shareholders. Without a waiver of the covenants, the auditors would not have been able to sign off on the TCI financials and the company would have collapsed.
That was the scene facing the new TCI president, all of 33 years old, when he met with the bankers for the first time to seek the waiver. Magness, Malone later recalled, was so angry at the banks and his blood pressure was so high he left before the meeting even started.
Malone outlined the situation and asked the somber-faced bankers for help. "They asked me, 'What is your plan to repay these loans?' And I answered 'I don't know. Heck you guys made these loans before I got here. What were you thinking? How did you expect us to repay them? Maybe there's a memo in your files someplace that will tell me how you expected to get your money back.'"
After a few hours the bankers adjourned to discuss what they would do. When they came out, the lead banker went down to Malone's office where the CEO was waiting. The bankers, Malone was told, were prepared to grant TCI the waiver ... if TCI agreed to pay a higher interest rate.
Malone didn't miss a beat. "We have this thing screwed down as much as possible," he said. "If you raise the interest rate, we won't be able to continue to operate."
He reached into his pocket and took out the keys to the office. Sliding them across the table he said, "If you guys think you can run this thing better, you run it." And he walked out.
The next day the bankers called and told Malone he would have his waivers. But the relationship between TCI and its bankers remained one of thinly disguised hostility. Malone did get a few breaks in the next few years, some of them almost by providence.
One of the companies Magness had acquired was Athena Cable. The deal allowed TCI to take all of the Athena assets. Among piles of paper that TCI personnel found when they assumed control was a group of warrants for the purchase of stock in Resorts International, a company which had recently won the rights to build a casino in Atlantic City. The warrants were worth millions.
But, as Malone later recalled, "We were in the woods" until he was able to strike a deal with a group of insurance companies for a $76 million, 15-year line of credit at a bearable interest rate of 7 5/8%.
Malone called a meeting with the bankers, all of whom expected more bad news and were already grumbling over their coffee when Malone opened the meeting.
"From time to time," Malone said, "some of you have expressed a desire to reduce your exposure to TCI. I am pleased to announced we are prepared to allow you to redeem your loans."
Malone then introduced a representative of Chase Manhattan Bank, the agent for the insurance companies, who said he was ready to write out a check then and there to any bank wanting to get out. And the TCI president once again got up and started to leave a room full of open-mouthed bankers. As he reached the door he paused.
"And by the way," he said over his shoulder. "From now on TCI is a prime rate borrower."
He later heard that there was silence for several minutes in the room after he left, until one of the bankers exploded: "TCI isn't a prime rate borrower and never will be."
Two of the banks took the offer and bailed out. The other five stuck with TCI. As Malone later recalled it, "The weight of 18 months was off us and we could stop biting our fingernails down to the bone every day. After that, we never looked back."
With the banks off his back, Malone could begin to look at the possibility of launching pay television in his systems. By this time TCI was one of the few cable companies that had not yet launched pay service.
Malone had the luxury of choosing between HBO and the new upstart Showtime and he made the most of it, driving a hard bargain in simultaneous negotiations. HBO president Nick Nicholas flew out for the showdown and tore up his company's rate card to meet the TCI demands for a multiyear contract. Showtime matched his pricing but could not match HBO's delivery system. (The dealmaking was typical of Malone who would many times play off one supplier against another to get the best deal for TCI.)
At the end of the day HBO had agreed to finance the TCI earth stations and provide help with marketing, a nearly no-lose situation for the operator. But the final call was made because HBO was already up on the satellite and Showtime wasn't.
"I remember he took me out to the parking lot at TCI and put his arm around my shoulder and pointed to TCI's earth station," Showtime's Reiss recalled. "He told me 'I can receive HBO's signal in my parking lot today. I have an obligation to my subscribers to give them something I can deliver on. Showtime says it will go up on satellite, but it might and it might not.' " TCI went with HBO.
As the years went on, Malone again adopted some of the characteristics of another mentor, this time Magness. Like many easterners who move to the West, Malone reveled in the freedom of the region. He shed the tie and business suit (except when the bankers came to town) and adopted the feet-on-the-desk, shoot-from-the-hip, part cowboy, part outlaw characteristics of the old West. And when it came to a model, Magness, part Cherokee Indian and raised in Oklahoma, was the genuine article.
The parking lot visit with Malone and other similar experiences with cable operators convinced Reiss that Showtime would never catch up with HBO under the game as it was being played. Cable operators were signing up with one or the other, and most had gone with HBO.
There were only two avenues that would allow Showtime to catch up. One would be to convince a major HBO customer to switch to Showtime. The other would be to convince MSOs that they should carry both services.
The MSO came in the form of TelePrompTer, whose original HBO contract ran out in 1979. Russell Karp, TelePrompTer's chairman, had been one of the first to sign up for HBO when it launched on satellite. But he had also become convinced that his company should share in the ownership of a premium service he was delivering to some 300,000 TPT subscribers.
Viacom offered him a half ownership of Showtime in return for an agreement to switchout HBO for Showtime in all the TPT pay homes. It was a huge undertaking, involving major marketing efforts to prepare consumers for the change. Showtime used satellite-delivered training sessions to teach TPT customer service representatives and managers how to deal with customer complaints.
But the big breakthrough for Showtime came in the unlikely town of Thibodaux, La.
Until 1979 most operators, and the pay services as well, had assumed that every system should offer subscribers only one pay service. After all, they reasoned, who would want to pay to watch more than one network?
But Sie and Reiss had noticed that in a few newbuilds where there was enormous channel capacity, both services could be offered and both could do very well. Womecto Cable TV then decided to invite both HBO and Showtime to launch at the same time in the Wometco system in Thibodaux. It was to be the mother of all battles between the competing pay services, and each side assumed it would be a battle to the death, with the loser being force to play second fiddle forever.
John Sie sent in a new hire, Sara Levinson, to run the Showtime effort, and HBO assigned one of its hot young marketing guns, John Billock, who had just joined the company from Colgate Palmolive, to manage its side of the launch. "I remember Jerry Levin told me 'Go out there and come back a winner,'" Billock recalled, "and I figured 'All right, here we go.'" The town was plastered with posters, newspaper ads, door hangers and other marketing materials in the weeks prior to the launch.
"I literally lived down there for eight weeks," Billock recalled. "I wrote copy for the ads and took the slicks to the local papers. I took the radio spots over to the local radio station. We both overmarketed, but we had a great time."
Just prior to the launch both Sie and Billock were at the system headend and Billock managed to spill his soft drink, a Mr. Pibb, into the character generator that ran a Showtime alphanumeric ad on the system. It was a "very sticky, unfortunate accident," Billock later recalled. Sie wasn't so sure. But the battle, they both later agreed, was all in good spirits.
What happened next amazed everybody. There wasn't one winner and one loser. Everybody won: HBO, Showtime and the cable system."We found 15%-20% of people were taking both services," Sie later recalled.
Billock remembered that the total penetration for HBO after six weeks was about 38%, almost double what might have been expected had HBO launched alone.
Launching HBO and Showtime together had proven more than twice as profitable as launching either one separately. The sum was worth more than the parts.
The consumer had decided that the two services, rather than being competitive, were complementary. Showtime's schedule of all fresh movies combined with HBO's bigger inventory and original fare was an attractive combination. Once again the consumer had proven to have an appetite for more choice than anyone had expected.
"That was the defining event for the entire category," Billock later said. "The marketplace had spoken."
At the Western Show in Anaheim that year Showtime rented a huge ballroom and unveiled the results of the "Showdown." Sie worked up a frenzy, signing up new affiliates, many of them already carrying HBO. "It was like there were 100 John Sies," recalled HBO affiliate rep Bill Grumbles. He was tireless.
Paul Kagan trumpeted the numbers in his newsletters. Within six moths HBO had launched Cinemax as a flanker brand to be able to offer two pay services to systems. The era of multipay had begun.
As HBO and Showtime battled in Thibodaux and Malone arm-wrestled his bankers, the ice at last began to break in Washington.
For the entire decade it had been difficult to get much of anything done in Washington, cable related or not. The Democratic Congress tangled with a Republican President and later the Watergate scandal and impeachment hearings consumed the entire political agenda at both ends of Pennsylvania Avenue.
Then President Nixon resigned, to be followed by the more moderate Gerald Ford. The Democratic landslide in the congressional elections of 1974 brought to town a new generation of lawmakers, Democrats from marginal or normally Republican districts. These new congressmen were not as rigidly ideological as some of their colleagues and were more inclined to look for new ways to do things.
Among them was a freshman from the suburbs of Denver, Timothy Wirth, who had won by the skin of his teeth with the financial support of a group of Denver cable operators. He sought and received a post on the House Telecommunications Subcommittee.
In 1976 another unconventional Democrat, former Georgia governor Jimmy Carter, was elected President, and for the first time in eight years both the Congress and the White House were controlled by a single party, the Democrats. But these Democrats were a different breed from those who had imposed such stringent regulations on the cable industry a decade before. Carter chose as his FCC chairman Charles Ferris, a card-playing, wisecracking but very, very savvy politician who had served as Secretary to the Majority in the Senate, the top staff position for the Senate Democrats.
Ferris, like Carter, was liberal when it came to such issues as civil rights. But he also had an instinctive distrust of media monopolies and a bent toward allowing competition to replace regulation as a way to rein in the power of the broadcast networks and promote program diversity.
This philosophy was reflected elsewhere in the Carter Administration which championed deregulation of the trucking and airline industries.
The turnaround in cable's fortunes began in 1976, before Carter took office, with passage of a copyright law governing the broadcast signals that cable operators carried.
For years the cable industry had argued it had a right to pick up broadcast signals off the airwaves for free and then charge their customers for the right to watch over the cable system. For years the broadcast stations and the program producers had argued that cable operators could not do this without payment of copyright fees to the stations and the producers.
In 1968 the Supreme Court had ruled the issue should be decided by the Congress, and for nearly a decade the various parties and the key members of Congress wrestled with various different solutions to the issue. The battle involved not only the copyright issue. Also at stake were prospects for sweeping legislation to regulate the entire cable industry, which had been proposed in various forms during the Nixon Administration. The National Association of Broadcasters and the organizations representing copyright holders effectively blocked any congressional consideration of broader cable legislation until the copyright issue had been resolved.
The ultimate outcome was a law that set up a special agency of government, the Copyright Royalty Tribunal, which was assigned the task of setting copyright payments by cable system operators. The fees would then be put into a fund which would be distributed to copyright holders.
In return for agreeing to this payment plan, the cable operator won what was called the compulsory license. Under this concept broadcast stations had no right to prevent cable systems from carrying their signals.
Passage of the Copyright Act settled one of the most contentious and volatile issues the cable industry faced in its first quarter century of life. The law would not completely resolve the matter. The various interests battled back and forth in proceedings at the CRT for the rest of the century over what was a fair payment. But the legislation did at least set up the format and arena in which copyright disputes could be settled. And it resolved an uncertainty that had caused concern among the financial institutions backing cable and among cable investors. (It also gave a boost to the career of Tim Boggs, legislative aide to the House sponsor of the bill, Rep. Bob Kastenmeier. Boggs would become the Washington representative of Warner Communications and later Time Warner. )
But the bill came at a cost. As it had several times before when faced with legislative issues, the cable industry split over the issue of copyright. Large MSOs wanted the matter resolved in order to move forward with wiring of the major cities. Smaller operators feared that the imposition of copyright fees would cut into their profits.
The dispute became so contentious that a group of the smaller operators split off from the NCTA, forming their own group, The Community Antenna Television Association (CATA), and hiring the law firm of Rick Brown and Steve Effros to handle their Washington lobbying.
Effros, a feisty, combative former FCC staffer, was successful in negotiating an exemption from the standard copyright payment for operators with less than 1,000 subscribers. Instead those systems were required to pay only $27 every six months into the copyright fund.
"We just made ourselves such a pain in the ass," Effros later recalled, "that (Motion Picture Association of America president Jack) Valenti, just threw up his hands. I told him that he wasn't losing any money anyway since the real copyright money was in the big systems. So he just gave in to get us off his back."
Two years after the copyright bill was signed into law, the cable industry achieved another legislative victory. For 20 years cable operators had battled with utilities over the use of poles on which cable wire had to be strung. It was like the situation in the Middle East. Battles would flare up from time to time and then an uneasy truce would ensue, followed by another period of conflict.
The issue had been partly resolved in the 1960s when the NCTA reached an agreement with AT&T for a uniform, nationwide rate policy for Bell poles. But the deal didn't cover poles owned by independent phone companies or those owned by power companies.
In the mid-1970s as cable's cash registers began to swell with new revenue from pay TV, the pole owners saw a chance to add to their own revenue streams. Most had the simple objective of taking in more fees for the pole rights. But some phone companies also hoped to force cable systems into so-called leaseback agreements in which the phone company would build the cable plant and then lease it back to the cable operator to manage.
"What was happening," recalled Harold Farrow, an attorney for the California Cable Television Association, "was that telephone companies in an effort to encourage, shall we say, the cable operators to use facilities owned by the telephone company, would delay or deny pole attachment agreements and tell the cable operator, 'Look, you don't want a pole attachment agreement. You will get that with the lease back service I'll provide.' "
"But the lease back process was a pretty negative and anti-competitive process. The cable operator had to put up in advance all the capital to build a plant. He was limited to use of the plant for only 12 channels in one direction. Everything else was reserved for the phone company. He was then charged a rather exorbitant annual fee for the maintenance of the plant, he couldn't touch the plant ... He would own the little piece of wire at the end of the plant where it was in the customer's house. Basically everything else was under the control of the telephone company."
During the mid-1970s, for example, Pacific Gas & Electric (Calif.) doubled its rates to $5 per pole, Dayton (Ohio) Power announced an increase of 100% to $8 per pole per year, Carolina Telephone & Telegraph (N.C.) shut down service to three ATC systems which had refused to go along with a 50% rate hike, and Toledo (Ohio) Edison asked for a percentage of the cable systems' gross revenues.
The cable industry sought relief from the FCC, but was rejected when the commission decided it had no authority to regulate the activities of utilities. So the industry turned to Congress. There it found a sympathetic ear, partly because the phone companies had one of the worst public images of any American industry in the mid-1970s (reflected when Lily Tomlin played the phone operator, Ernestine, in the popular Laugh In TV series, answering customer complaints with the response: "We don't have to. We're the phone company.")
Rep. Tim Wirth sponsored legislation to grant the FCC authority over pole rates, and attached it to a measure that would also have allowed the FCC to impose fines on cable systems found in violation of FCC rules.
Once again the industry split over the plan. CATA opposed the bill because they feared that smaller operators would not be able to keep up with the avalanche of paperwork the FCC was requiring and would be therefore subject to fines. The larger MSOs and NCTA were more inclined to support the bill to get some relief from the escalating pole rates.
The bill nearly passed in the 1976 session of Congress, but House Speaker Carl Albert blocked its consideration at the last minute because a group of cable operators from his home state of Oklahoma asked him to kill it.
The opposition from the smaller systems was fierce. At one point CATA president Kyle Moore wrote a letter to FCC chairman Richard Wiley stating, "I have an illegal cable system ... Come and get me."
But in the end the legislation passed and the FCC was granted the right to set the fees paid by cable systems for the right to use the poles owned by utilities and phone companies. Another huge uncertainty that had hampered the growth of cable had been resolved.
The National Cable Television Association in the late 1970s also found some stability in staffing after years of a revolving door, particularly at the top. The organization had three different presidents from 1965-1975. Two of them had known little about cable when they took the job, requiring a breaking-in period just to learn the basics of an increasingly complex business.
The public policy issues were difficult enough, but even tougher in some respects was the job of dealing with the NCTA board itself. When David Foster stepped down as president in 1975 after just two years at the helm, NCTA board member Amos Hostetter commented that he was quitting while he was ahead.
"Considering the fact that the board is made up of self-made individuals with strong opinions on everything, the presidency is a transitory job - for anyone," Hostetter told Television Digest.
The shuffle in the president's office also produced several periods in which the organization was headed by a lame duck or by nobody at all while the NCTA board conducted a search for yet another successor.
The revolving door slowed with the selection in 1975 of Robert Schmidt as the new NCTA president. Schmidt had been a staff member at the Democratic National Committee in the early 1960s and had good contacts with the Democrats on the Hill (most cable operators were conservative Republicans). He also had served for a decade as the public affairs vice president for ITT and understood some of the issues facing the cable industry. Finally, he was young, energetic and personable and a good politician able to get along with those who held opposing views.
Schmidt launched an aggressive campaign to position cable as the scrappy underdog taking on the giant telephone and broadcast monopolies. The strategy paid off handsomely in the next decade.
Even more important, Schmidt hired as his deputy a savvy executive from the trade association representing grocers, Thomas Wheeler. When Schmidt left the NCTA in 1979 (the first president ever to leave without being fired or forced out) Wheeler stepped in. Thereafter, each NCTA president would be succeeded by his number two, eliminating the interregnums and break-in periods for new presidents that had plagued the association for its first two decades.
As cable began to resolve some of its financial and political troubles in the late 1970s, it also had new technological developments to provide excitement. The 1975 NCTA convention saw the display of the first feed forward amplifiers, able to boost the cable signal without the distortion that had plagued earlier amplifiers.
But some of the technologies proved to be ahead of the time. This was true of fiber optics, which captured the industry's attention for a while in the mid-1970s. Fiber technology had come a long way since the technique had first been used to send television signals in the previous decade. Manufacturing of fiber had been refined and the manufacture of lasers, used to generate the light beams that were sent down the fiber strands, had progressed as well. Fiber was being used by telephone companies and other telecommunications providers both in the U.S. and abroad.
In 1977 Irving Kahn, the irrepressible former chairman of TelePrompTer who had been an early advocate of using satellites to deliver cable services, arrived at the NCTA convention in Chicago with a new joint venture and a new product.
His joint venture partner was Times Wire, the largest supplier of coaxial cable to the industry. Kahn, who moved to New Jersey after spending 20 months in jail for a conviction on federal bribery charges, had run into a group of engineers for Bell Labs who had perfected a new system for producing fiber strands. Kahn took his invention to Times Wire and persuaded its parent company, Insilco, to spin off Times Wire into a joint venture that Kahn and Insilco would own, called Times Fiber.
"The plan was simple," Kahn later recalled. "If you were going to try to sell the stock of Times Wire, you would maybe get a multiple of five or six to one, and nobody wanted to be in a commodity-type business. On the other hand, if you changed the name to Times Fiber and became a high tech company, Wall Street perceived you as a multiple of maybe 30 to 1. If we could develop the fiber we would phase out the wire, increase the fiber, use our marketing strength and let the profits from the wire fund the development of the fiber."
At the NCTA, Kahn demonstrated his product, which he said could send TV signals down a 10-mile stretch of cable with only 13 repeaters. The same length of coaxial cable would require 30 amplifiers, each of which degraded the signal.
By then end of the year, Times Fiber had installed its fiberoptic cable in the TelePrompTer system in Lompoc, Calif., sending 12 channels down 8.4 kilometers of fiber supertrunk at a cost of about $10,000 per mile for construction.
Because fiber could carry a signal so much farther than coax without amplification, it could produce much more reliable pictures at the TV set and required a lot less maintenance.
Unfortunately, Kahn was ahead of his time. When Times Fiber began to manufacture fiber in large quantities, it ran into trouble. "The truth is that for many, many millions of dollars and virtually no results, we were never able to manufacture a good piece of fiber that was competitive," Kahn later said. The lasers also proved to be expensive and unreliable.
But the plan was a success on Wall Street where Times Fiber, riding a wave of new construction in the 1980s, proved to be a go-go stock, earning a small fortune for Kahn.
But while fiber proved to be ahead of its time in the late 1970s, the glitch was scarcely noticed in the industry-wide euphoria over new pay and basic services, deregulation and the prospect of opening up the major cities to cable.
It was a 180-degree turn for an industry that only five years before had appeared on the brink of disaster. The change had not gone unnoticed in the boardrooms of some of America's biggest companies, including those with such household names as Westinghouse, Times Mirror, American Express and General Electric. Together with those companies that had built the business from the beginning, the group would launch the telecommunications equivalent of the Normandy Invasion, bringing cable into the nation's biggest cities. 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 magazinenext ->