Chapter 7: The Growth Era
The 1970s ended with a bang. The noise came from an explosion that destroyed a small, navigational motor aboard the Satcom III satellite shortly after it was launched on Dec. 7, 1979. With the motor gone, the satellite drifted off into space, never to be found. With it went the hopes of a dozen cable programming networks that had planned to use the bird to launch new services.
Satcom I, which had carried the first satellite signal from HBO and which had been the home to a couple of dozen other cable networks, was getting old and unreliable by the end of the decade. Satcom III was expected to provide a much more reliable distribution system for such existing programmers as Home Box Office and Warner Amex Satellite Entertainment Co., each of which had reserved five transponders on the new bird. The vulnerability of programmers to satellite outages had been demonstrated in September of that year when Satcom II, used for other telecommunications services, went out of orbit temporarily.
RCA, which owned the Satcom satellites, then moved some of its Satcom II clients over to Satcom I, bumping five cable networks off the air for up to 15 hours while it fixed the trouble on Satcom II. The satellite company was able to do this because some of the cable networks were leasing less-expensive, "preemptible" transponders, and therefore could be bumped off the bird if a client with a "guaranteed" transponder experienced trouble.
The loss of Satcom III was most devastating to a half dozen new programming services that had been scheduled to launch using the new satellite. The most visible and the most vulnerable of them was Cable News Network, the brainchild of Ted Turner.
Turner had been thinking about news for a while, he later recalled, ever since HBO went on the satellite. Of the four major categories of television programming - general entertainment, sports, motion pictures and news - only news was unserved by a cable network by the end of the 1970s.
"There wasn't much news on the local broadcast channels," Turner recalled, "and I didn't get home in time for the network news." So Turner figured there was a niche. Besides, his SuperStation WTBS (the name had been changed from WTCG) was doing well and he was ready to bet the ranch on something new.
Through Scientific Atlanta president Sid Topol, Turner had met the owner of a broadcast TV news syndication business, Reese Schonfeld, who had been playing around with the idea of a 24-hour news network for several years. He had pitched it to prospective backers including former CBS president Arthur Taylor and Time Inc. video division chairman Jerry Levin but had found no takers.
Turner was the only one willing to take the plunge, after checking with Time Inc. to make sure they would not get into the business. "I went to see Jerry and told him 'I won't do it if you are going to.' And he told me, 'We won't do it.'"
Turner asked for a chance to meet with the NCTA board of directors at the Western Show in Anaheim in December 1978. As Terry McGuirk recalled "Ted took the floor, and I distributed contracts to everybody. He said he wanted to start a 24-hour cable news network and he needed 15 cents a sub a month with three million subscribers and wanted everybody in the room to sign the contract committing to carriage."
"They howled and laughed. After they calmed down, they asked if they could think about it for a little while."
Turner and McGuirk and newly signed affiliate relations vice president Roy Mehlman worked all through the next year, pitching operators, signing up veteran newsman Dan Schorr to be an anchor, contracting for equipment and breaking ground on a new studio. Turner had to pledge not only his company's earnings, but his personal wealth as well to raise the money to get the network under way.
Then Satcom III disappeared.
"Ted was seeing stars," McGuirk recalled. "We were dead."
But McGuirk remembered that there was a clause in the transponder contract between WTCG and RCA that said something to the effect that if an extra transponder ever became available RCA would be required to notify Turner about it before leasing it to anybody else. The wording was vague enough so that the Turner folks felt they could make some kind of case that RCA owed them first crack at any available transponder on Satcom I. It was a thin reed, but the only hope they had. Turner asked for a meeting with the satellite provider.
"Ted," McGuirk later said, "went into his 'Rasputin the Mad Monk' routine."
He yelled and screamed and waved his hands around and promised he would sue RCA, break it up into little pieces and make sure "none of you guys will ever have jobs again."
When one of the RCA lawyers attempted to challenge him, Turner grabbed the fellow by the collar and backed him up against the wall. It was a full-blown performance.
Then Turner unveiled his contract clauses. "They just went white," McGuirk remembered. None of the RCA lawyers had read the old WTCG contract or knew about the clause. And they were petrified that Turner would sue them. He, after all, had nothing to lose and was clearly not in a mood to be mollified. Turner did file a suit, seeking $34.5 million in damages.
RCA decided to compromise. It agreed to allocate to CNN a Satcom I transponder it had been reserving for its own message traffic. The deal was only good for six months, but it would do.
"It isn't everything we wanted," Turner said at the time. "But we were frozen in terror two weeks ago. Now we're breathing a lot easier."
But the crusade to find subscribers was tougher than they had thought. Many operators were grateful to Turner for launching WTCG on the satellite and wanted to support him. But they weren't sure he could pull off launching a 24-hour news channel and they didn't want to promise one to their subscribers only to have it go dark after a couple of months. And nobody could quite grasp the concept. Why would anyone want 24 hours of news, they thought, failing to understand that the concept was that news would be available 24 hours a day so anyone could watch a half hour or hour any time. It would be like a water faucet, always ready to turn on when you want. That was a radical notion in the TV business in 1980.
The cable operators' biggest concern was that the enterprise would look second-rate next to the glitzy, expensive broadcast network newscasts and that cable would suffer a black eye. It was a risk few of them were willing to take before CNN launched.
Operators owned by companies with broadcast interests also felt some heat from their station manager colleagues. At Storer, McGuirk recalled, "Jim Hall and Jim Faircloth got their necks chopped off" when they committed to carry CNN.
When CNN launched in June of 1980, it was carried on systems serving only 1.7 million subscribers, well below the five million Turner had been telling advertisers, and the three million he had told the NCTA board he would need to get the enterprise off the ground. (The cable industry had about 15 million subscribers at the time.) But Turner didn't hesitate. He announced the launch of the network, declaring that the last story it would cover would be the end of the world.
It would seem like the end of the world more than once in the next few years. "Schonfeld's initial budget had pegged the first year's loss at $12 million," McGuirk recalled. "Then, two weeks after we launched, it turned out to be $18 million. Then, three months into it we were going to lose $32 million. It was like a runaway train."
Turner was in debt up to his neck, borrowing $200 million to keep the network on the air. He cut every expense he could find. "We were like the Viet Cong," he recalled with a grin. "Living off a handful of rice a day."
Scientific Atlanta's Sid Topol recalled when Turner decided to buy an earth station to transmit CNN. "He called me up and said he wanted to buy an uplink. I said 'Great, send me the specifications and we'll do a design.' And he said, 'No, Sid, I want to buy a dish today. Send your man over right now.'" So Topol sent one of his salesmen over to see Turner who asked how much the entire package would cost. Told it would be about $250,000, Turner wrote out a check and handed it to the startled salesman. On the way out Turner cautioned him "Just don't deposit it until next Monday."
CNN survived. By the end of 1981 it would reach break-even with some 10 million subscribers. As the industry began to build the major urban areas, its prospects for growth were even brighter.
Of the five new services that had planned to launch on the ill-fated Satcom III, only CNN made it on a bird.
By taking on the broadcast networks in an area where they had seemed invincible - national and international news - CNN gave the cable industry a legitimacy it had not had before, particularly with more upscale, better-educated viewers and with political and civic leaders.
CNN wasn't the only network to boost cable's image as a provider of information as well as entertainment.
The story of C-SPAN is in some ways even more improbable than the story of CNN, HBO or USA. It was the creation of a trade magazine reporter with no business or TV production experience, financed as a non-profit venture by a group of cutthroat capitalists, and given to the people of America in what has to be the largest public service gift ever given to any country by any industry in history.
Brian Lamb grew up in Lafayette, Ind., about as quintessentially a middle America community as can be found. He became interested in broadcasting when he took a course in television from a popular high school teacher, Bill Fraser. Fraser, Lamb later recalled, "taught me how to interview, taught me how to listen in an interview."
After graduating from Purdue University in 1963, Lamb joined the Navy and served in the Pentagon as public affairs officer, witnessing the coverage of the anti-war demonstrations in Washington in the late 1960s.
He worked for Colorado Sen. Peter Dominick for a couple of years and then moved over to the Office of Telecommunications Policy in the Nixon White House where he got a behind-the-scenes look at how government policy is formulated and received an education in the media, including cable TV.
He was irritated continually by the lack of information available to the public about what was happening in Washington. "I kept seeing things with my own eyes and realizing that I wasn't getting this on the nightly news," Lamb later recalled. "I wanted to do something about that."
He took a job in cable trade publishing, first with the Searle brothers and then with CableVision magazine where he found an extraordinary supporter in publisher Bob Titsch.
Titsch offered to pay Lamb a full-time salary while Lamb spent part-time working on his idea of a public affairs cable network. Titsch also agreed to help find backers for the project. He called 15 different CEOs at cable operating companies and persuaded each to contribute $1,000 to the project, enough to enable Lamb to buy a video camera and tape machine.
Lamb began to comb the corridors of the House and Senate office buildings, seeking out interviews with members of Congress and then sending tapes of those interviews to the cable systems in that member's district.
It was pretty rudimentary stuff. In the spring of 1977, a group of cable operators calling itself the Cable Satellite Access Entity met in Washington to listen to ideas for new networks to put on the satellite.
Lamb was among 30 invited to pitch the group. After he made his presentation he was approached by Bob Rosencrans, the man who had bought the first satellite dishes to receive HBO and had started what became USA Network.
"We're interested in making this happen," Rosencrans told him. Rosencrans offered Lamb a check for $25,000 in startup money and said he would raise additional funds from his fellow cable operators.
It proved tough going. A month or so later Rosencrans called Lamb and reported sadly, "I can't get a penny out of these guys."
But Lamb kept on plugging. On Oct. 27, 1977, he had scheduled an interview with Rep. Lionel Van Deerlin (D-Calif.), chairman of the House Telecommunications Subcommittee. After the interview Lamb noticed a small TV monitor in Van Deerlin's office. It was used to receive the signal from a security camera that was trained on the House chamber. Van Deerlin could use it to keep an eye on what was happening on the House floor.
Lamb blurted out to Van Deerlin an idea: Put the House of Representatives on a satellite-delivered channel that could be picked up by some 200 cable systems with earth stations around the country.
"Can you write me a speech on that?" Van Deerlin asked. Lamb went back to his office, only to get a call later that afternoon from Van Deerlin. "Brian," he said, "I'm in the cloakroom of the House of Representatives. We're going to vote on this in an hour. I need everything you can get me on those things you mentioned."
Lamb scraped together what he could and Van Deerlin took the floor of the House to promise his colleagues that if they authorized television in the House, cable would carry their deliberations full time, live and uninterrupted to viewers (and voters) all across the country. By a vote of 325-80 the House adopted a resolution authorizing the Speaker to begin television transmissions of the House proceedings.
With the prospect of carrying the House, Rosencrans went back to the industry and found a much more favorable response. Lamb made a pitch at the NCTA board meeting in Boca Raton, Fla., and by the end of the year had signed up 22 cable companies pledging a total of $425,000 to launch the Cable Satellite Public Affairs Network. Rosencrans was chairman of the board and offered to provide time on the satellite transponder used by MSG Network to get the network started. C-SPAN would run during the day and MSG in the evening.
The big hurdle remaining was who would control the cameras in the House. Lamb was hoping that the broadcast networks would not be given the franchise. He figured that if the broadcasters controlled the process they would charge big bucks for anybody wanting to take the feed. The broadcast networks, he reasoned, didn't know how to do anything on the cheap.
Together with NCTA president Bob Schmidt, Lamb paid a call on House Speaker Thomas P. O'Neill (D-Mass.) and his top aide, Gary Hymel. Lamb made the pitch not to allow the broadcast networks to control the televising of the House.
The Speaker decided that the House would maintain control of the cameras and offer the feed for free to anyone who wanted to take it. The decision provided C-SPAN with thousands of hours of programming at no cost.
Sid Topol cut him a deal for S-A equipment and Lamb built an uplink outside Washington in time to launch his service on May 19, 1979.
He was dying to know if anybody was watching. But with no ratings and no direct response advertising (indeed, no advertising of any kind), it was impossible to figure out what the audience might be, or even if there was one.
When the House was not in session C-SPAN needed to find other public affairs events to televise. The first was the Republican Governors' conference in Austin, Texas, Thanksgiving weekend in 1979.
It was a watershed moment.
"The last event was a speech by Henry Kissinger," Lamb recalled. "I thought it would be interesting to know if we had any viewers. I called down to engineering and told them to put up a message on the screen asking viewers to call our number if they had a comment or a question. We only had three lines, and they all lit up at once and didn't stop ringing for the entire weekend. We were running around like crazy trying to answer them all."
The experience led Lamb to launch the first nationally televised call-in shows. They would transform the network once again, from one that delivered huge amounts of unedited public affairs programming into a kind of electronic town hall, where voters could actually comment on the proceedings.
Ever on the lookout for penny-pinching ideas, Lamb had struck a deal with CloseUp, a non-profit organization that brought students to Washington to meet with government leaders. CloseUp had agreed to buy $170,000 worth of cameras and equipment and C-SPAN agreed to televise its events.
It would lead to what Lamb later called the most surprising moment he ever had on camera and another measure of the growing importance of the network.
In 1981 the CloseUp group had just met with newly elected President Ronald Reagan, and Lamb was doing a show with some of the students who had talked with the president. He opened the program to calls from viewers.
Midway through the show there came a call identified to Lamb as being from Washington, D.C. Lamb was inclined to put it on hold while taking calls from viewers who were calling long distance. But his staff put up a sign that read "TAKE THIS CALL NOW."
When he answered a voice said, "Mr. Lamb, hold one moment for the President." And a startled Lamb was speaking, live and on air, with the President of the United States who had been watching the show and wanted to clarify a point.
It was one of the few times Lamb showed any emotion on camera. His trademark is a deadpan expression even when listening to the most partisan and passionate political diatribes by guests or callers. He manages to hide whatever political views he has. His interviewing style, learned in high school in Indiana, is the antithesis of the broadcast networks where the interviewer is often more important and better known than the person being interviewed. He listens intently, allows his guests to finish their answers and almost never offers a comment himself.
This careful attention to non-partisanship has been a key to the success of C-SPAN, which has earned a reputation across the political spectrum as a genuinely even-handed institution.
C-SPAN and CNN broke the stranglehold the three broadcast networks had maintained over the delivery of news for decades, a lock that had forced all news to be compressed into a 24-minute show and delivered once a day at a fixed time.
On CNN viewers could watch the news any time of night and day including in-depth reports on issues the broadcast networks barely touched. On C-SPAN they could witness the entire debate in Congress, the full speech of a political candidate or the entire proceedings of a congressional committee without commentary or interruption. And neither network, at least at the outset, had the kind of media star/anchor who on broadcast television was often treated as more important than the newsmakers.
If information is power, CNN and C-SPAN did more to empower the voters of America than any development since the American Revolution. And together they made it imperative for those interested in public affairs to watch cable, including most public officials, candidates for office, newspaper editors, TV news directors, and citizen activists. Cable wasn't just entertainment any more.
But CNN and C-SPAN were only one indication of the kind of programming diversity that cable could provide.
By the end of the decade, just four years after HBO had first launched on the satellite, some 27 programming services were being carried by Satcom I.
Pay programmers included HBO, Showtime, The Movie Channel, Home Theater Network and Galavision.
SuperStation WTBS had been joined by Chicago broadcast station WGN, carried by United Video of Tulsa, Okla.; New York City independent WOR, distributed by Eastern Microwave; and Oakland, Calif., station KTVU, uplinked by Warner.
Sports was covered by ESPN, Madison Square Garden Network, and Total Communications Service (offering Canadian football games).
Religious programmers included Christian Broadcasting Network, PTL (for People that Love) and Trinity Broadcasting Network.
In the news and information arena, C-SPAN and CNN were complemented by the Appalachian Community Services Network, an educational service that was an outgrowth of a federal program to provide educational programming for people living in that mountain region. UPI and Reuters offered alpha-numeric networks with the latest news bulletins.
Children's programming was offered by Warner's Nickelodeon and UA-Columbia's Calliope service.
Southern Satellite Systems, distributor of WTBS, had launched a smorgasbord network, called Satellite Programming Network, that carried a variety of programming from different producers ranging from religious shows to fishing programs. Programmers leased time on the network.
This programming bonanza was attracting more and more Americans to cable. By the end of the 1970s, 14.5 million homes, or 20% of U.S. households, were receiving their signals through a cable. After years of barely scraping by, cable operating companies finally had some financial breathing room. Some were even reporting profits. Cable revenue in 1978 exceeded $1.5 billion, a jump of 25% in single year.
Nowhere was the change more apparent than at TelePrompTer, the nation's largest cable operator with some 1.2 million subscribers, of which some 355,000 were also subscribing to Showtime, in which TPT had acquired a 50% interest.
TelePrompTer had risen from a loss of $9 million on revenues of $81 million in 1974 to post net income after taxes of $14.2 million on revenue of $146 million in 1978. Operating profits in the cable division soared 22% in 1978 to $9.2 million.
In three years the company chopped $50 million off its total debt load, reducing its debt-to-equity ratio to less than 1-to-1. By restructuring its debt in 1978 it was able to shave $4.3 million a year off its interest payments and achieve a long-term credit structure that assured the company of the funds it would need for expansion and construction well into the next decade.
Wall Street also began to catch on to the game. Between November of 1979 and April of 1981 the average price of a share of cable company stock more than doubled.
The hard-pressed hardware suppliers were beginning to see daylight. General Instrument posted sales of $95 million in 1979, up 34% from the previous year, and profits of $9.6 million, up 129%. Scientific Atlanta, building earth stations as fast as it could, went from $250,000 in profits on $16 million in sales in 1972 to $5 million in profit on $94 million in sales in 1979. C-COR, building much of the equipment for Warner Cable's interactive systems, saw its revenues and profits soar.
All of this success was bound to attract attention, and the late 1970s and early 1980s saw the entry into, or expansion of existing cable businesses, by a group of companies with well-known names: General Electric, Westinghouse, Times Mirror, The New York Times, Hearst Publishing, Time Inc., Newhouse and American Express.
Time Inc., which had traded its cable systems for a 9% stake in American Television & Communications Corp. in 1972, gradually upped its stake first to 12%, 15% and then 27%. In 1978 it purchased the entire company in a tax-free exchange of stock. The new company combined ATC's 750,000 subscribers with Time Inc.'s 100,000 Manhattan Cable TV subscribers. It also completed the transformation of Time Inc. from a company where the primary business had been print to one where the bulk of the revenues came from electronic media.
Times Mirror, owner of the Los Angeles Times and a group of broadcast television stations, purchased Communication Properties Inc. in January 1979.
The New York Times in 1980 bought systems serving some 55,000 subscribers from Irving Kahn.
Hearst formed a cable division headed by Continental Cablevision's Raymond Joslin to acquire and manage cable systems. Joslin had been one of the first employees of Continental Cablevision. He met Irv Grousbeck when the two were neighbors in Findlay, Ohio, where Grousbeck was looking for franchises and Joslin was handling sales for the Jones & Laughlin steel company.
Joslin ran systems for Continental in Ohio and later in California. At Hearst, he later recalled, his mission was threefold: to build a cable operating company with some 500,000 subscribers, primarily through acquisitions; to translate the Hearst magazines into television programming; to develop an electronic publishing strategy for the company.
Hearst CEO Frank Bennack was a friend of ABC chairman Leonard Goldenson, who by 1980 was also seeking ways to get his company into the cable business. The two suggested that their cable deputies, Joslin for Hearst and Herb Granath for ABC, get together. ABC had been working on a plan for a cultural network, to be called the Alpha Repertory Television Service (ARTS). Hearst, meanwhile, had been doing some preliminary work on a service, to be called Daytime, that would make use of some of the same material covered by the Hearst magazines. The two companies joined to form Hearst-ABC Video Enterprises. By the middle of the decade ARTS had become the A&E Network and Daytime had merged with Cable Health Network, started for Viacom by Jeff Reiss and Dr. Art Ulene, to become Lifetime.
And by the mid-1980s, Joslin had achieved his goal to create an MSO with over 500,000 subscribers.
Other media companies also were building their cable portfolios. In February 1980, Newhouse, through its subsidiary Metrovision, started by ex-Cox Cable CEO Henry Harris, purchased systems from Daniels Properties serving more than 116,000 subscribers for a price that TV Digest estimated at between $80 million and $100 million.
Getty Oil Corp., in March 1979, paid $10 million for 85% of the Entertainment & Sports Programming Network, a fledgling network started to carry games of Connecticut colleges.
In late 1981 Tribune Co., publishers of the Chicago Tribune and owners of a string of broadcast television stations, formed an alliance with United Cable Television to bid for franchises in Sacramento, Calif., and Montgomery County, Md.
Dow Jones & Co., publishers of the Wall Street Journal, purchased a 24.5% stake in Continental Cablevision in October 1981 for $80 million. The move came after Dow Jones and its partner Knight Ridder had lost an attempt to purchase UA Columbia Cablevision and its 450,000 subscribers.
The joint venture lost out to a veteran of the cable business in Canada, Rogers Cablesystems Inc. Rogers bid $152 million for a 51% share of UA Columbia.
Rogers, chaired by Ted Rogers, the 48-year-old son of a broadcast television pioneer, was the largest cable operator in Canada, with some 1.2 million subscribers. But Canada had imposed severe limits on the industry, prohibiting pay television, for example. Rogers in 1980 posted profits of $1.4 million on revenue of $70 million from 1.2 million subscribers while UA Columbia posted profits of $4.8 million on $55 million in revenues from only 400,000 subscribers. UA's profits were more than triple Rogers with only about one third of the customers.
Rogers and other Canadian companies had been casting their glances south for several years. Limited by the government in terms of national programming, the Canadian operators had become masters at local programming. When they entered the franchising battles in the U.S., the Canadians were able to point to innovative and long-standing local programming ventures at their home systems that could not be matched by U.S. cable companies.
By the time of the UA purchase, Rogers was already operating systems in such U.S. cities as Syracuse, N.Y., Orange County, Calif., and Portland, Ore.
Its successful entry into the franchising fray ignited a debate over whether U.S. cable companies should be owned and operated by companies based outside the country. Various members of Congress introduced legislation to ban foreign ownership of cable systems, and in such cities as Minneapolis, the notion of a non-American owning the cable system cost Rogers the franchise. But overall the company did very well in the U.S., hiring to run the American operations former Continental Cablevision system manager Bob Clasen.
American Express Co., in October 1979, purchased a 50% interest in Warner Cable for $175 million. At the Warner-American Express Co. joint venture, the duties were split into two parts. The programming section, Warner Amex Satellite Entertainment Co. (WASEC), was put under the management of former CBS executive Jack Schneider. The cable operating division was left to Gus Hauser to run. It was called Warner Amex Cable Communications.
American Express brought a lot to the table besides its huge financial resources. Steve Ross, who had been tainted by allegations of wrongdoing in connection with a theater operation in Westchester County, N.Y., was looking for a partner who would be a "real white shoe with an unimpeachable reputation," as Hauser later recalled. Such an alliance would prove particularly valuable in the struggle for big city franchises.
American Express, on the other hand, was looking for a way to diversify and figured its entry into cable TV would give it a head start in the era of electronic commerce that was fast arriving.
Also in October 1979, General Electric Co., signed to purchase the broadcasting and cable properties owned by Cox Communications.
As the new corporate entities came into the business, they brought with them a new management style. Although the Cox-GE merger was derailed when, after months of regulatory delays, Cox insisted on a sweeter price, GE did send a new management team in to run the company for the period between the announcement of the deal and its collapse. Heading the team was an executive from GE Capital Corp. and a protégEof Jack Welch, Bob Wright.
Wright brought with him another GE executive, Arthur Dwyer, a Massachusetts native with degrees in journalism and business from the University of Missouri.
When the Cox-GE deal fell apart, Dwyer stayed and brought to Cox some of the management techniques that were transforming GE.
"When I got there every system was doing its own purchasing," Dwyer recalled. "All the control was at the system level. We had 100 different deals for trucks."
All the programming decisions were made at the local level as well. In doing a deal with a programmer, Cox could not guarantee how many subscribers it would deliver. And the programmers had to deal with each Cox system manager individually to gain carriage.
"I remember one day getting a call at 7 a.m. from Ted Turner telling me that San Diego had just taken TBS off the air," Dwyer recalled. "That cut it."
Cox consolidated all its purchasing at corporate headquarters, assuming control of the major contracts for equipment and programming. The result gave the company far greater clout with its suppliers, gave the suppliers a chance to make a single sale rather than dozens and dramatically reduced costs for Cox.
It was only one example of the kind of corporate management techniques that were to be instituted in the cable companies as they matured beyond their entrepreneurial phases.
In October 1980, Westinghouse Electric Co. announced the biggest deal in cable
history: the purchase of TelePrompTer Corp., for $646 million in cash and the assumption of $200 million in debt, or about $650 each for TelePrompTer's 1.3 million subscribers. Westinghouse put the cable operations under the management of its Group W Broadcasting subsidiary headed by Daniel Ritchie. Group W already owned eight cable systems with about 50,000 subscribers.
The entry of so many huge corporations into the cable business guaranteed the industry the funding it would need to wire the nation's major cities and to upgrade the thousands of older, small-town systems, many of which had only 12-channel capacity. TelePrompTer alone had estimated its need for capital at $600 million in 1979 to meet its newbuild and upgrade obligations.
The cable industry also got another boost in the late 1970s and early 1980s from the folks in Washington, D.C. The thaw in the hostile relations between cable and the government had begun in 1972 when the FCC, at the prompting of Cable Bureau chief Sol Schildhause and with the political support of the Nixon White House, had relaxed the 1968 ban on distant signal importation, allowing limited use of distant signals in most cable systems. This is what made it possible for Ted Turner to launch WTBS.
The FCC action was followed by a series of legislative and judicial victories for cable, including passage of the copyright and pole attachment legislation. The court victories included the Midwest Video case, which struck down an FCC requirement that all cable systems provide original programming. The court also ruled against the FCC regulations limiting the types of films that could be aired by pay television networks.
But in 1980 the FCC provided the industry with an even more sweeping victory.
President Jimmy Carter had installed as his FCC chairman a dyed-in-the-wool Democrat, former Secretary to the Senate Charles Ferris. But Ferris had proven to be a very different breed from the Democrats who had dominated the Commission under Presidents Kennedy and Johnson and who continued to be influential through much of the Nixon Administration. Ferris was more inclined to allow competition to resolve the issues between cable and broadcast than to attempt to dictate the relationship from the FCC headquarters on M St.
Since the 1960s the FCC had been regulating cable on the assumption that without regulation - particularly limits on the importation of distant signals - cable would prove economically harmful to local broadcast stations. But there had never been any definitive studies to determine if this premise was correct. In 1979 Ferris ordered the FCC staff to conduct such an inquiry to find out if this fundamental underpinning of the FCC regulatory structure had any basis in fact.
The study was completed in 1980 and concluded that there was no reason to believe that the importing of distant signals would harm broadcast stations in anything more than the most minimal way.
Another main reason for the FCC regulations, the desire to protect copyright holders, had been made moot by the passage of the Copyright Act, the study found. Both the broadcasting and cable industries were healthy and growing and the FCC did not need to protect one from the other, the report found.
The study provided the basis for an FCC vote on whether to eliminate the syndicated exclusivity and distant signal limitation rules. The former had required that cable systems black out TV shows carried on distant broadcast signals if they duplicated programming aired by local stations. The latter rule limited the number of distant broadcast signals any cable system could import into its community.
Broadcasters lobbied hard for the regulations, but the commission voted 4-3 to support chairman Ferris' contention that "these rules lack the slightest hint of justification."
While the vote was a huge victory for cable, the industry had in fact moved far beyond the stage where it depended on the importation of distant broadcast signals for its livelihood. Most cable systems were carrying as many satellite-delivered, cable-exclusive networks as they could and had little room to add distant broadcast signals, which carried copyright as well as distribution fees.
But the FCC decision was the signal that the era of regulation was finally at an end and that a new breed of Democrats would be prepared to lift regulation even more in the coming decade.
And the hardware suppliers were busy concocting new equipment that would significantly expand the programming and other services the cable systems could offer. Motorola in 1979 introduced a 53-channel amplifier priced at $30, the same as the older 35-channel model. Jerrold unveiled its 400 MHz system at the 1979 Western Show.
Dallas-based equipment manufacturer TOCOM offered a 55-channel addressable converter at the NCTA convention in 1980 that would sell for $150-$200. The devices demodulated the signals down to baseband and up again. Veteran cable engineer Archer Taylor said the technology had the potential to be as revolutionary as the satellite delivery of signals. Taylor told TV Digest that his only reservation was "whether the equipment can work as well as proposed when produced in mass quantities." It was a legitimate concern.
Scientific Atlanta, which had begun making antennas and then expanded down the cable to the headend and distribution system, unveiled its entry into the addressable converter market. C-COR offered an addressable converter in the fall of 1981 which allowed customers to order or cancel services without having to wait for a truck roll.
The addressable systems enabled cable operators to offer all kinds of new services. Among them were such exotic services as electronic reading of gas and electric meters in customers' homes, banking and shopping at home and, most exciting in the early 1980s, home security.
With new capital, plenty of attractive programming, exciting new services, a favorable regulatory climate and new technology, cable was ready by the late 1970s to launch its version of the Normandy Invasion: an effort to franchise and build the nation's largest urban markets.
In the space of three years, from 1978-1983, the following major cities awarded cable franchises: Boston, Chicago, Cincinnati, Detroit, Dallas, Denver, Houston, Indianapolis, Kansas City, Miami, Milwaukee, Minneapolis, New Orleans, Omaha, Pittsburgh, the outer boroughs of New York City, Tampa, and Washington D.C. Thousands of other communities, particularly the lucrative suburbs of the major urban centers, awarded franchises at the same time. And countless other towns with existing cable systems watched the process, anxious to upgrade to the most advanced systems as soon as their franchises expired.
Franchising in itself became a big business. Expenses just to bid for a franchise in a major city could exceed $1 million. Major cable operating companies hired teams of franchisers - many of them with good political credentials - to set up camp in a city and work it until the award was made.
A city typically would appoint an employee to oversee the process and then hire a consulting group, such as the Cable Television Information Center, to advise it on the franchising process. CTIC and other similar consultants had been involved in the franchising process in other cities and were adept at ensuring their clients received the most advantageous bids possible from each bidder.
The city would then issue a request for proposals inviting companies to bid. The RFP would outline the city requirements covering such issues as the expected number of channels, the number that would be devoted to government and public access, schools and other purposes. It might also suggest a level of acceptable rates and ask for an upfront payment of franchise fees (which had been capped at 5% by the FCC and which were supposed to be used entirely to pay for city regulation of cable). The RFP might also suggest that the bidders involve local citizens in planning the system.
In most cities the bidding companies would form alliances with politically influential local citizens, offering them a share in the system for little or no money down. Many of these locals stood the chance to make millions of dollars if the franchise were awarded to the company they backed. These individuals became known as "rent-a-citizens." Because many of them were related or connected to members of the city councils that made the franchising decision, their involvement was depicted in local press reports as little short of bribery.
In fact, however, most cable franchising personnel were very careful not to cross the line into anything that was illegal. The memory of Irving Kahn going to jail in the Johnstown, Pa., franchise case was still fresh. And most of the politicians who ran the franchising operations understood that if they were ever caught trying to do something illegal they would ruin their chances of winning franchises in other cities. Besides, most of them had plenty of more sophisticated ways of influencing the process aside from the old-fashioned cash in an envelope.
Cable companies used the press to play up their own strengths and point out the weaknesses of the opposing bids. In Denver, for example, the franchising process pitted three bidders: United Cable Television Corp., which operated in the suburbs of the city; an alliance of ATC and Daniels & Associates; and TelePrompTer Corp. The bidding was especially vicious because Daniels, United and ATC were all headquartered in Denver. The CEOs all knew each other (Bill Daniels and United CEO Gene Schneider had built the Casper, Wyo., system together in 1953). The contest took on personal as well as business overtones. 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.
The Daniels/ATC bid had included the promise that the system would carry the fledgling Playboy Channel, sure to draw fire from the city's more puritanical crowd. One of the two rivals ginned up press accounts about the controversy, which was neatly defused when Bill Daniels appeared before the city council to announce that yes, his system would carry Playboy, he was damned proud of it, nobody who didn't subscribe would receive it, there would be security to ensure no children could watch and if anybody didn't like it they could just vote against him, but he wasn't going to back down.
It was a classic Daniels performance, and the attempt to damage his bid backfired.
Then, just before the franchise was awarded, the Daniels/ATC team turned the press on to another story. United Cable had said in its bid that it could get a jumpstart on construction of the Denver system because it had already wired the suburbs and could simply extend its wires into Denver.
But on the weekend before the council vote, the Daniels team took the press on a tour of the city limits, pointing out that in many areas the United wires were nowhere close to the Denver borders. United had no chance to reply to the negative stories. Daniels/ATC won the franchise.
Without a doubt the most successful franchising operation in the nation was that of Warner Cable, later Warner Amex. To run the franchising operation Warner Cable president Gus Hauser and his boss, Steve Ross, hired Richard Aurelio, an ideally qualified person for the job.
Aurelio, the son of Italian immigrants, grew up in Rhode Island and Massachusetts. His father was a policeman and involved in local politics for as long as the younger Aurelio could remember.
Aurelio graduated with a degree in journalism from Boston University and after a stint in the Army in World War II and Korea went to work as a reporter for Newsday on Long Island. He covered the police beat, local and state politics and in 1960 became the administrative assistant to New York Senator Jacob Javits, running two statewide campaigns for the Senator.
In 1968 he left Javits to work for John Lindsay, then the Republican mayor of New York City. Aurelio engineered Lindsay's upset bid for reelection in which he won the office as a candidate of the Liberal Party after losing the race for the Republican nomination. Aurelio served as New York City deputy mayor under Lindsay and was also manager of Lindsay's unsuccessful campaign for the Democratic presidential nomination in 1972, an experience that took him into politics around the country.
Aurelio's background in politics in the nation's largest city as well as the nationwide contacts he had made through Sen. Javits and the Lindsay presidential campaign gave him a great base to run the Warner franchising operation, which was, above anything else, a political adventure. He also looked the part of the local pol: gravely voice, heavy smoker, fair drinker, back slapper, workaholic.
With the blessing of Hauser and Ross, he set up a nationwide operation, masterminded by a 30-person "boiler room" in New York. At any given time Warner would have as many as 100 franchise applications pending in 30 different states. The company bid for most of the major cities: Pittsburgh, Dallas, Houston, Milwaukee, Boston. By the end Aurelio's record was 82 wins and 30 losses. (At times the very size of the franchising operation could be a problem for Warner. Aurelio recalled he needed to study hard to remember which cities had been promised which services and the names and backgrounds of all the hundreds of local politicians with whom he was dealing. On one occasion the boiler room messed up and put the numbers for the Dallas system into the bid for Omaha and vice versa. Because a company could not change its bid once it had been submitted, Warner was forced to find justifications when the consultants asked about the cockeyed numbers. But none of the consultants or city officials ever figured out what had happened. Warner lost in Omaha, but won in Dallas.)
Warner made full use of its well-publicized QUBE operation in Columbus, shuttling officials from cities with franchises up for grabs into the Ohio city to view the cable system of the future. It also made the most of its Hollywood connections, bringing movie premieres and closed-circuit boxing matches and other entertainment events into the towns where Warner was seeking a franchise.
Typically the company would hire a local coordinator to run the franchise and bring in support from Warner consultants including lawyers, public relations experts and political operatives. Above all they worked like dogs: Saturdays, Sundays, holidays, nights.
In Pittsburgh, which Aurelio remembered as the first big "Super Bowl" of the urban franchise era, American Television & Communications offered free basic service and locked up support from many of the city's leading businessmen and opinion makers. But Warner ran a grass-roots effort, giving away 20% ownership of the system to a coalition of 17 community groups that included the National Association for the Advancement of Colored People, the United Negro College Fund and the Pittsburgh Urban League. Competing against TelePrompTer, ATC and TCI, Warner won on a vote of 8-1.
Warner didn't bid in every city. It passed on New Orleans and St. Louis, because, Aurelio later recalled, the politics weren't right. And it pulled out of Tucson, Ariz., when the city insisted that the franchise winner allow the city to buy the system at any time for its "book value."
But in most areas Warner forged ahead, offering more and more services at lower and lower prices. In Pittsburgh it had proposed a 60-channel system with basic service priced at $5.35 for 13 channels. By the time it came to bid for Dallas a year later, Warner won with a bid of a 100-plus-channel, dual-cable, interactive system with 24 channels for $2.95, 48 channels for $7.50 and 80 channels for $9.95. The system also promised to provide 52 channels for an institutional network linking the city's schools and government agencies. Hauser pledged it would be the most advanced cable system in the world.
As Warner-Amex racked up more and more wins and took on greater and greater obligations for construction, the American Express management began to get cold feet. They voiced ever louder concern that Warner-Amex had overbid and would be financially overextended. At the urging of American Express, Hauser and Aurelio adopted a more "realistic" approach when they bid for Boston, only to lose the franchise to Charles Dolan's Cablevision Systems Corp., which offered a basic service for free. (In Boston the franchising decision was made by the mayor, Kevin White. Just before the decision was to be made, Cablevision sent out to all Boston voters a brochure promoting its system. It looked like a piece of campaign literature. On the cover was a photo of the Mayor with the quote, "'Boston will have the finest cable system in the World' - Kevin White.")
The TelePrompTer franchising operation was similar to Warner's. To run it, Bill Bresnan and Russell Karp hired Pennsylvania's former Secretary of Commerce, Norval Reece. Reece had been a top aide to Pennsylvania Governor Milton Shapp, the founder of Jerrold Electronics.
Starting in 1979, TelePrompTer developed a strategy designed to double the number of homes it passed in five years, with particular attention to those areas where TelePrompTer already had systems. It achieved its goal in three.
Reece found he had to wage a continual battle within the company against the experienced operators who didn't believe that dual-cable, hundred-plus channel systems would ever be able to make money. "They felt I was giving away the store everywhere," Reece recalled. The company adopted a standard that if the system could not achieve a 15% internal rate of return on the investment it would not bid. And TPT did pass on some contests.
The engineers, Reece recalled, were particularly suspicious of dual- cable systems, fearing interference and problems with electronics. Many of the dual systems, he later guessed, were built with only one active cable. The other "shadow" cable was strung but never activated. By the time some of these dual-cable systems needed the extra capacity of a second cable, fiber optics had come along.
Sometimes the local politics could get surprisingly complex. In St. Paul, TelePrompTer hired as its local coordinator the well-respected former president of the city council. After a couple of months the fellow, Bob Sylvester, simply disappeared. His wife couldn't find him, he didn't answer his phone or show up at his office. Reece figured he would never come back.
Then, a couple of months later he showed up - transformed by the magic of modern surgery into: Kimberley Simpson. TelePrompTer wasn't quite sure if the former he, now a she, would continue on the franchising operation.
But when they had a meting of the local partners there was a knock on the door and there was Kimberley. After a couple of minutes of silence TelePrompTer president Bill Bresnan got up, escorted Ms. Simpson to the table and held the chair for her as she sat down.
TelePrompTer lost the franchise.
Not every cable company entered the franchising frenzy to the same degree as Warner Amex, TelePrompTer and ATC.
Continental Cablevision, Comcast, United Cable and other MSOs whose pockets were not quite so deep picked their targets selectively and concentrated on a fewer number of bids.
And Alan Gerry at Cablevision Industries had success with his tactic of focusing only on smaller communities where he could make the argument that his company would give them special attention that bigger MSOs, preoccupied with building the big cities, could not.
For each franchise application Gerry would produce a 10- to 12- minute video with a section about Cablevision Industries and a part showing a town where Cablevision operated, which was similar to the community considering a franchise. The video would include interviews with the mayor, with customers and with leading citizens, all praising Cablevision.
And Gerry himself would spend weeks in the town. "They wanted to meet the man," Gerry later recalled, "not some suit." By playing up his down-home, small-town roots, Gerry was able to beat some of the bigger companies. "The biggest mistake they made," he later recalled, "was to tell the towns how big they were. We were able to convince people that even though we were smaller, we had a commitment they (the larger companies) didn't have."
Tele-Communications Inc., meanwhile, tried a few franchising forays - most notably in Pittsburgh. But it largely remained on the sidelines as franchising battles in such communities as Dallas, Cincinnati, Minneapolis and Denver upped the ante to levels which TCI president John Malone felt were unacceptable.
"We just didn't want to join the liar's club," Malone would later recall about his decision to forego competition for many of the larger urban franchises.
Instead TCI embarked on a strategy of buying up smaller systems, many of them classic, independent operations. The owners had in most cases long since paid off the debt of building the system and had used up the investment tax credits and other tax benefits that came with building a system.
Malone had earned his degree in industrial management where a key tenet of the business was economies of scale: once a factory was built the more widgets it churned out, the cheaper each one would be. He adapted this philosophy when building his cable company.
Typically, he later recalled, TCI was able to structure a deal so that it paid 10% down and then paid the rest out on an installment plan. (All the deals were done for cash since TCI's stock was still worth so little).
"If we could improve the cash flow of the system enough, we could generate enough additional cash to pay the installments," he later said.
And TCI had plenty of ways to improve cash flow. Because of its size it could command lower prices for equipment and programming than smaller operators. And as it found systems in adjacent areas it could consolidate operations, combining several systems under a single manager and engineer. Many tiny TCI systems were left to run on automatic with a technician checking in at the deserted headend every few weeks just to make sure things hadn't collapsed. If there was a problem, the subscribers would let the manager know.
And TCI could upgrade the system to add such services as pay television, boosting revenue and cash flow.
Finally, when TCI purchased the systems it would trigger the depreciation allowance, allowing the company to write off the cost of the system on its taxes.
The tax breaks, economies of scale and the tight-fisted management led by chief operating officer J.C. Sparkman enabled TCI to squeeze enough fresh cash flow out of the newly acquired systems to cover the installment payments. And the additional subscribers provided additional leverage to borrow more money to pay the down payments on even more systems.
TCI had little competition in this endeavor. Most of the other major cable companies were so focused on winning and building the big cities that they paid little attention as TCI gobbled up a system a week during the late 1970s and early 1980s. While Westinghouse was paying $650 a subscriber for the TelePrompTer systems, TCI was buying smaller classic systems for $300 or $400 a sub.
The growth was phenomenal. TCI went from just under 600,000 subscribers in 1978 to more than 1.6 million subscribers by the start of 1982. Revenue during the same period increased to $180 million from $63 million.
But TCI never during this time reported any profits. "The scheme of this company is to go contrary to what they teach in business school which is to earn money, pay taxes, pay dividends and then have your shareholders pay 70% taxes on them," Malone told Business Week in 1981. "We think that's stupid."
To ensure the company was not vulnerable to a hostile bid, he created a new class B Stock which had 10 votes per share versus the single vote per class A share. Management was able to exchange their class A shares for class B, ensuring that they retained control of the company. When a deal proved too large to fund alone he brought in partners, including publishing/broadcasting companies Taft and Knight-Ridder, and formed joint ventures to buy systems.
To help him out in managing so many deals, Malone brought on board a group of new employees. Among them in 1981 was a recent graduate of Harvard Business School who had offered to work for TCI for free for six months just to prove his worth.
Peter Barton was born in Washington, D.C., and graduated from Columbia University.
After college he traveled out West, working as a ski instructor and later earned a few bucks as a professional freestyle skier, jumping off cliffs and doing acrobatics while wearing Hexcel skis. He even took a job for a few months as a craps dealer in a Las Vegas casino.
He came back east and got involved in politics, founding his own political consulting firm, Partisan Artisan. He worked on Hugh Carey's successful campaign for governor of New York and stayed on to serve as a top aide to Carey, including a stint as deputy commissioner of agriculture where he became an expert on potato diseases and helped write the Farm Winery Act of 1975.
Figuring he would never make any money in politics, he applied to Harvard Business School. As he approached graduation in 1982, Barton decided to look for work in places he wanted to live. San Francisco, Boston and Denver were at the top of the list. He decided he wanted to work for entrepreneurial companies headed by "somebody who was smarter than I am" and be involved in major transactions.
He wrote to dozens of companies, offering to work for free for three months and then to leave if the deal didn't work out with no financial obligation by the employer. His resume listed his work as a daredevil skier, craps dealer and his Harvard Business School degree. He got a call from, among others, John Malone, who started the conversation by telling Barton, "I hate guys from Harvard."
"That's okay," Barton replied, because he didn't want to work for any company with a lot of Harvard MBAs in it anyway.
For the job interview, Malone invited Barton to sit in on a discussion about a complex deal for cable systems in which the sellers were proposing some tricky and maybe not entirely above-board schemes. When the meeting broke up Malone asked him what he thought. Barton said it seemed to him that what was being discussed was illegal. Malone laughed and agreed, and the two hit it off.
The interview with TCI chairman and founder Bob Magness followed. The two had lunch and talked about horse diseases and the difference between raising milk cows and beef cattle (Magness was a major rancher and Barton was drawing on his experience as New York's deputy secretary of agriculture). Magness downed first one and then a second double martini. Barton, despite being a little woozy from the altitude, tried to keep up.
They went back to TCI's spartan, threadbare office. "Well, old Pete," Magness said, coining the nickname he would call Barton for the rest of his life, "Let's talk about you." And the chairman of TCI leaned back, propped his cowboy boots up on his desk and hauled out a huge cigar. Barton, allergic to smoke and a little under the weather with the drinks and the lack of oxygen, was horrified. What happened next horrified him even more.
Magness proceeded to take his trademark bite out of the cigar, chew and swallow it while listing to Barton's story.
"I thought to myself 'This is the toughest man I have ever met.' He had me," Barton later recalled.
A few days later Barton got a call from Malone inviting him to come to work for TCI. No mention was made of title, duties or salary and nothing in writing ever appeared. When Barton was driving out to Denver with all his belongings in the back of his car, he suddenly got a sinking feeling that maybe he hadn't heard things right.
He pulled into a truck stop and called Malone. "I got the impression he had forgotten he had hired me," Barton later recalled. "I had a little moment of disquiet at that Phillips 66 in Iowa City." But Malone then decided to remember and told him to come ahead.
When he got to Denver, Malone was about to leave for his annual three-month summer vacation in Maine (he drives there every year since his wife does not like to fly). Barton had no place to sit, so he took Malone's office and learned the ropes from Sparkman and Donne Fisher, the company's chief financial officer.
Barton cut his teeth on deals for smaller systems. But it wouldn't be long before the winners of some of the major urban franchises would get cold feet and the TCI gang would be buying up some much bigger properties.
While Barton was adapting to the TCI style of Wild West capitalism, some of the entrepreneurs who had started the cable business were chafing under the rules of much bigger, East Coast style corporate structures.
Monroe Rifkin, who had founded and served as CEO for ATC, spent two years working for Time Inc., but left thereafter to start his own cable operating company, Rifkin & Associates. Rifkin later expressed admiration for the executives of Time Inc. and said they had treated him very well, allowing him latitude to run the company and providing such amenities as a corporate jet. But he missed the old days and the old ways.
"Suddenly everything was meetings," he later recalled. "I was never very big on meetings. We were an entrepreneurial company. After a while it was starting to wear a little heavy."
Bill Bresnan had the same experience under the new regime at Group W and left in 1984, like Rifkin forming his own cable operating company with his own name on the door. So did Ben Conroy, one of the founders of Communications Properties Inc., the company sold to Times Mirror. After the sale Conroy formed his own cable company, Conroy Management Systems, and began to build systems in small towns in Texas. And Robert Hughes, another key executive of CPI, founded Prime Cable.
Rosencrans also found life difficult under a new ownership structure in which Rogers had a 51% interest and United Artists Theaters 49%.
"Once you own your own business it's not easy to be subordinate and get told, 'You just take care of management, we'll take care of ownership.' I could never get that through my head," he recalled.
Rogers and United Artists Theaters found they could also not get along and divided up the assets. UA divided the cable systems into two groups with roughly equal value and Rogers got to pick which half it wanted. Then UA formed a partnership with General Electric, which had been shut out of the Cox deal.
But the new owners insisted on a much more centralized operation than Rosencrans had run. And they resisted his efforts to allow company employees to share in the success of the firm, through a stock ownership plan for example. (Top UA-Columbia employees such as Marvin Jones had been given a financial stake in the company and were able to walk away with hundreds of thousands, or even millions of dollars when it was sold.)
In the end Rosencrans, one of the first to take a cable company public, the founder of USA Network and C-SPAN, the first cable operator to use satellite transmissions of programming and by anyone's account one of the classiest, most honest and most progressive men in the cable industry, was summarily fired by United Artists.
"It turned out to be the best thing that ever happened for me," Rosencrans later recalled. Together with his long-time partner, Ken Gunter, and other veterans of UA-Columbia, Rosencrans formed his own cable operating company which by the mid-1990s had well over a quarter of a million subscribers. They called it Columbia International.
Another MSO chief who experienced difficulty operating in a new corporate culture was Warner Amex Cable president Gus Hauser.
Hauser found himself caught between the riverboat gambler style of Warner chairman Steve Ross and the Byzantine corporate politics of the much more conservative American Express.
American Express had entered the business with almost no experience in television or entertainment, Hauser later recalled, "They didn't understand anything about cable. Zero."
Within American Express the cable investment became a football in the power struggle between company chairman Jim Robinson and Sanford Weill, president of Amex subsidiary Shearson Lehman. Weill, Hauser later recalled, launched an effort to undermine confidence in Robinson's decision, including planting stories in the press about how bad an investment cable TV had been for American Express.
By the end of 1982, Hauser recalled, he had had enough. He left and formed his own company, joining Rifkin, Conroy and Bresnan in the ranks of those former executives at major companies who started their own smaller MSOs with their own names attached.
Within the next 15 years nearly all of the big companies that entered the U.S. cable operating business in the early '80s would be gone, including American Express, Westinghouse, Hearst, Tribune, Times Mirror, General Electric, The New York Times, Rogers, Dow Jones. Time Inc. would remain and some others (Hearst, Times Mirror, GE) would continue to be heavily involved in cable programming.
Meanwhile, most of the entrepreneurs who sold out to the big companies, or took them on as partners - Bill Bresnan, Bob Hughes, Bob Rosencrans, Gus Hauser - would go on to form their own cable operating companies and many of them would continue to operate these with great success well into the '90s.
The big companies which found cable so attractive in the late '70s and early '80s simply didn't have the stomachs to take on the huge capital expenditures, the enormous risk of bidding for urban franchises and the huge dent in corporate profits that the cable business periodically required for those who wanted to remain in it for the long run.
This was particularly true for companies held by the public where the management was rewarded with bonuses tied to profits and where the companies were vulnerable to hostile takeovers. These companies found it difficult to bet the ranch over and over again on a new generation of cable television.
Most of the companies that remained the mainstay of the industry for the balance of the century were privately held or closely controlled: TCI, Continental, Jones, Cox, Comcast, Cablevision Systems, Cablevision Industries.
TCI president John Malone would later recall that when he first became involved in cable he felt it was not a game for any public company because it was such a capital-intensive business. In cable a successful strategy involved reporting minimal profits and making huge investments in technologies where there was often no track record and where the risk of failure was too high for corporate executives vulnerable to attack from shareholders or board members.
The premium television business continued to boom throughout the late 1970s and early '80s. From its beginnings in 1975 the satellite delivered premium television business grew to serve more than nine million subscribers in just five years. By 1982 cable systems had sold some 21 million pay TV subscriptions.
While Home Box Office, in particular, included more and more original programming in its schedule, the mainstay of all the premium services during this time were theatrical films, purchased from the major motion picture studios.
HBO, because it had a 70% share of the premium market, was the prime player in negotiations with Hollywood. The studios, although they earned huge incremental revenue for their films by licensing them to HBO, nevertheless grew to resent the power of this one pay service which could play one studio off against another in bidding for film rights. HBO's muscle in Hollywood increased when it began the practice of pre-buys. In a pre-buy, HBO would provide some of the funding for a film up front in return for a right to air the film exclusively on HBO for a period of time after its theatrical run.
To counteract the power of HBO, four major Hollywood studios in 1979 announced plans to form their own pay service, backed by the financial power of Getty Oil, already the owner of ESPN. The four studios - 20th Century Fox, Paramount, Universal and Columbia - agreed to give all their films to Premiere on an exclusive basis for a period of nine months before allowing them to go to HBO, Showtime or The Movie Channel.
The plan by the studios to hold back films from the established pay services would have been devastating, particularly for Showtime and The Movie Channel, which relied almost entirely on Hollywood product for their programming. "It would have put us under," John Sie, then senior vice president of Showtime, later recalled.
The Premiere threat united the pay services which had been bitterly jousting for most of the previous three years. (Sie recalled a series of debates he had at various trade shows with representatives of HBO, often Tony Cox. At one of them, Sie found a statement by the HBO executive particularly egregious. "I come from China," Sie replied. "In China we spent a lot of time following the water buffalo around in the fields. That experience taught me something that can apply here. I can recognize bullshit when I see it.")
To run Premiere, the studios turned to Burt Harris, former chairman of Cypress Communications. After Cypress was acquired by Warner Communications, Harris had served for a time as vice chairman of Warner Cable, then left to form his own new MSO, Harris Cable.
"The motion picture companies did not have a good rapport with the cable industry," Harris recalled. It was an understatement.
Motion picture producers were also producers of television programming which they sold to broadcast TV stations. For the better part of three decades they had been fighting to force cable systems to pay copyright fees for this programming. Passage of the copyright law did not lessen the prevailing view in Hollywood that cable systems were pirates. Motion Picture Association of America president Jack Valenti became a regular on the lecture tour, denouncing the cable industry as a parasite.
The extraordinary success of HBO and the other pay services added fuel to the fire, particularly as attendance at movie theaters began to decline.
As Harris recalled, "I had a good reputation in the cable industry and a name that they thought would get them further ahead very quickly with the cable operators."
Harris, and former Viacom president Chris Derrick, who was hired as Premiere's president, didn't have much of a chance. Shortly after the announcement, the Justice Department filed suit to block the project on antitrust grounds. It argued that by joining together to deny product to HBO and other pay services, the movie studios were acting in restraint of trade. Arguments were heard before a federal district court judge in New York.
"Each of the companies had one law firm, and Premiere had its own," Harris recalled. "We went to court with about 50 lawyers." The legal army didn't help. The federal court granted the Justice Department's request to block the launch of Premiere, and the pay service lost on appeal. The company was disbanded.
But the wounds the studios felt after their losing battle over Premiere would remain tender for years. And soon Hollywood would have a powerful new avenue into the home, one which did not depend on HBO or any other middleman. It was the videocassette recorder, and it was only one of several new technologies that would seriously challenge the cable industry's dominance of home-delivered video entertainment during the 1980s. 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.
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