Chapter 8: The Deregulation Era
In the autumn of even-numbered years, the lights burn 24 hours a day in the U.S. Capitol building. For sponsors of legislation this is the moment of truth.
Each Congress lasts two years, and every new Congress starts with a clean slate and dozens of new members. Legislation that does not pass in one Congress must start the process all over in a new one, with hearings, markups, conferences, floor votes and amendments all subject to the actions of a new set of congressmen and very often a new set of committee and subcommittee chairmen.
Any member of Congress who hopes to get a new law enacted must do it within a two-year time frame or risk an entirely new set of circumstances with a new legislature.
Such was the case in 1984 with a bill to deregulate the cable industry.
The notion that the country needed a law to govern cable television had been kicking around Capitol Hill since the late 1950s when the industry was first subject to legislative hearings.
But various attempts to pass such a law had failed, most notably in 1960. Cable television affected a lot of powerful players - phone companies, broadcasters, Hollywood studios, city and state officials, and the cable industry itself. And within each of these groups there were several factions, often warring with each other.
That factor alone made it difficult to pass legislation governing cable because, under the American system of government, it is much easier to play defense, blocking a new law, than it is to play offense, getting a new law passed. With such powerful players, the political reality was that a compromise acceptable to everybody had to be crafted if legislation were to be passed. And the deal that had been crafted in 1984 was so fragile that it was unlikely it could be reconstructed if it were not passed in 1984.
Thus it was that in early October 1984 the lights were burning bright late at night at the Capitol, including at the office of Rep. Timothy Wirth, a young Democrat from
Colorado who had become chairman of the House Telecommunications Subcommittee.
Wirth was a different kind of Democrat. Elected in the Watergate landslide of 1974, he represented a marginal district which could just as easily have elected a Republican. And he had been elected with the support of several executives of cable television companies based in Colorado.
For the first 30 years of the cable industry's history, Democrats in Washington had most often taken the view that the best way to ensure diversity of programming was to encourage the growth of broadcast television stations. And to do this, they believed, the federal government needed to restrict the power of cable. Because the Democrats during all that time controlled the Congress and for much of it the White House and the FCC as well, their views were important.
But Wirth took a different view. In the eight years since the launch of satellite-delivered programming, a slew of new cable television networks had been born, including C-SPAN, Nickelodeon, Disney, Black Entertainment Television and A&E. Wirth believed cable, not broadcast, was most likely to provide the kind of programming diversity he would favored, particularly public affairs programming and programming for children, minorities and fans of the arts.
And something else had happened that changed the political landscape. In 1980, Ronald Reagan, a devout opponent of government regulation, had been elected President and the Republicans for the first time since the Truman administration took control of the Senate.
All of these factors provided a political landscape fertile for the passage of legislation that would lift many of the regulations governing cable television, particularly the regulations cities imposed on cable rates and franchise renewals.
Wirth and a group of other congressmen and Senators had worked hard for several years on the issue. The Senate had passed a bill in 1983 but it took another year before the House was able to do so.
Agreements between the cable industry and organizations representing the nation's cities had been forged and fallen apart three times in the previous two years. Both groups were split over the wisdom of supporting legislation.
But by the first week in October, the two sides had agreed to a compromise and the bill appeared headed for passage. Then, just hours before Congress was slated to adjourn, another thorny issue arose.
At the urging of a group of African-American congressmen, led by Mickey Leland of Texas, Wirth had inserted into the House version of the bill a measure designed to increase the number of minority employees in cable companies. It specified that each cable system would employ a percentage of minorities and women to reflect their presence in the community the system served. Wirth had given his word to Leland that the provision would not be dropped from the bill.
But two conservative Republican members of the Senate - Orrin Hatch of Utah and Jesse Helms of North Carolina - objected to the provision on the grounds that it would set racial quotas for hiring, something they opposed. Both sides were locked in on a matter of principle. The stalemate seemed insurmountable.
As the clock ticked past 10 p.m. on Oct. 10 most of the lobbyists involved in the bill and most of the congressmen as well concluded it was dead. NCTA president James Mooney later recalled going home that night with little hope that the bill would pass. But the lights were still on in Tim Wirth's office.
There, the chief counsel of Wirth's subcommittee, Tom Rogers, had an idea. He went in to see Wirth to ask him to make one last effort.
The Cable Act of 1984, like so many developments in American culture and politics in the 1980s, had its genesis in California. The nation's most populous state had long been a proving ground for developments that affected the industry. A landmark California decision in the late 1950s had prevented the industry from being regulated as a public utility. One of the early experiments in pay television had been defeated in a public vote in 1960. Most of the major cable companies had at least one system in the state.
Most of all, California had an energetic, imaginative and forward-thinking state association led by a remarkable man named Walter Kaitz.
Born in Russia, Kaitz and his parents had fled the chaos of the Russian revolution and settled in South Boston. Kaitz won a scholarship reserved for newsboys to go to Harvard College. After service in World War II he earned a law degree and settled in California where he established a business as a lobbyist for real estate companies, for broadcasters and for public employee groups.
In the late 1950s he was approached by a group of California cable operators who asked him to help them lobby the legislature for a measure to legitimize the franchising process in the state. The result was a law that formally authorized California cities to grant cable television franchises. And out of that effort, the California Cable Television Association was born.
Kaitz built the association from the ground up and he did it as a family affair. His first wife, Idell, served as secretary-treasurer for the group, and their children all played roles as well, helping to register attendees at the California Cable Convention, the so-called Western Show, which came to rival the NCTA convention as the premiere cable industry gathering. Eventually Kaitz's son, Spencer, would succeed him as head of the CCTA.
"What made Walter so remarkable," recalled Ray Joslin, who ran the Continental Cable systems in California in the 1970s, "was that he treated everybody as an equal. And he had a great affinity for people who had been born on the other side of the tracks. He really organized us and brought us all together in a common effort."
Joslin recalled that when he first came to California, his boss, Continental president Amos Hostetter, was not popular with the California cable operators. Hostetter, as chairman of the NCTA, had worked out an agreement on pole attachment rates with AT&T which the California operators felt was too onerous.
But Kaitz, Joslin said, "went to great extremes to get to know me and to introduce me to other operators. He asked me to serve on a foundation that was designed to help minorities get employment in the cable industry." Joslin would eventually serve as chairman of CCTA.
As Spencer Kaitz later recalled it, by the end of the 1970s cable operators in California were faced with an increasing number of cities demanding upgraded cable service but refusing to grant rate increases.
"It wasn't every city," he later said, "and it wasn't even a majority." But some of the cases were pretty serious. In Los Angeles, during a period in which the city and 10 other neighboring municipalities each granted at least two rate increases, the city of Beverly Hills refused to permit a single increase. In San Jose, where Al Gilliland had built one of the first dual cable systems in the country at enormous expense, the city council refused for four years to approve a rate increase.
"We had talked for some time about how to deal with this," Kaitz recalled later, "and we approached a member of the legislature, Bruce Young from Cerritos, who suggested that we make an effort to enact a bill to end city regulation of cable rates."
What followed was a "knock-down battle" with the California League of Cities, which bitterly opposed the measure. Finally, Marc Nathanson, who had just recently left TelePrompTer to start Falcon Communications, suggested the association hire Monroe Price, a professor of law and friend of California Gov. Jerry Brown to work on the bill.
Price rewrote the measure from top to bottom. Instead of providing for automatic deregulation, the new measure allowed cable companies to choose to deregulate. If they chose that alternative, they would be required to contribute a portion of their gross revenues to a statewide fund for production of public service programming.
The idea attracted Brown's support, and the measure was enacted into law in 1979.
The new law did not usher in a rash of huge rate hikes. In fact, many cable systems chose not to deregulate. But they were able to use the law as leverage in negotiating with their local cities for rate increases. Their argument was that if they were denied reasonable rate increases they would opt for deregulation and would have to contribute to the state programming fund. Cities preferred to grant rate hikes and keep the money for programming at home.
As John Goddard, then head of California-based Viacom Cable, later said, the act was a cable television bill of rights.
Even more important, the California bill provided a model for other states - Massachusetts and New Jersey - to follow in adopting their own deregulation measures. And it provided a precedent for the U.S. Congress in fashioning national legislation. Perhaps most important, it effectively neutralized the huge California delegation to the Congress. With deregulation already in place in their home state, California lawmakers had little objection to passage of a similar bill for the nation.
When a new law is to be passed in the United States all the stars need to be aligned just right. With a new cast in the Congress and the FCC, a Republican President and Senate, and the example of California's deregulation law, many of the heavenly bodies in the legislative firmament were lining up just right. So were the economic factors and public perceptions that also play a role in the pressures Congress feels.
Cable by 1984 was no longer an economic darling. During the previous three years the news media had been full of articles about expensive financial disasters in programming, operations and technology. At the same time a series of new programming distribution systems were providing real competition to cable television for the first time in its history.
In the early 1980s all three of the broadcast networks attempted to get into the business of programming for cable television. They had watched from the sidelines as a slew of new programming services had launched in the late '70s and early '80s. Wall Street analysts had begun to lob negative comments at the big three for failing to enter the fray.
But the broadcasters didn't really know how to do cable programming. The culture of the broadcast networks encouraged huge expenditures on programming and relied entirely on advertising for revenue. This formula didn't work for cable.
Nevertheless first CBS then NBC and later ABC entered the fray. And like lemmings, they followed each other off the same financial cliff.
CBS was first. It launched its CBS Cable cultural service in October of 1981, treating cable operators the following spring to a lavish party in a huge tent located in the desert outside Las Vegas during the NCTA convention. The theme was Desert Oasis and the musicians, waiters and entertainers were all dressed in Middle Eastern costumes. It was one of the most expensive parties ever produced at a cable convention.
But when the party ended, thousands of cable operators had to stand in the rapidly cooling desert night, with the wind whipping up the sands, while an inadequate number of busses attempted to take them back to Las Vegas. It would be in the minds of many, the most memorable entertainment event of any NCTA. It was also a metaphor for CBS Cable itself, a lavish beginning with a disastrous end.
CBS promised high class, well-produced programming ranging from dramas to opera to concerts, more than half of it originally produced.
But within a year the network shut down the service after losing some $30 million. With five million subscribers, CBS simply was not able to draw the advertising revenue it had expected when it launched. And its progress in cable carriage was impeded by its decision to transmit on the Westar satellite, rather than Satcom I or III where most other cable programmers were berthed. This meant that to pick up CBS Cable many cable systems would have to install a second satellite dish.
The CBS enterprise may also have been a victim of the internal politics of the network. It was axed by CBS president Thomas Wyman within weeks after he took office.
The next broadcast network-backed service to bleed to death in the brave new world of cable was The Entertainment Channel, a joint venture of RCA (parent company of NBC Television Network) and Rockefeller Center Television and headed by former CBS president Arthur Taylor (CBS presidents came and went quickly in those days as CBS chairman William Paley installed a revolving door in the office of his number two and presumed successor).
Like CBS Cable, The Entertainment Channel was to be a high-brow service offering Broadway shows, foreign films, jazz concerts, adaptations of great novels such as Great Expectations and Gulliver's Travels, and programming produced by the British Broadcasting Co. Unlike CBS Cable, TEC was to be a premium network relying entirely on revenue from subscribers for its income. But The Entertainment Channel ran into a brick wall when it came to carriage on the cable systems.
Years of aggressive marketing by HBO, Showtime and The Movie Channel had ensured that most cable systems were already carrying what they regarded as a full complement of premium services. When The Entertainment Channel launched, it reached less than a dozen cable systems. It folded in nine months, after losing nearly $10 million, and merged with the ARTS network being run by Hearst/ABC Video Enterprises. The result was the Arts & Entertainment Channel, headed by Warner Amex Satellite alumnus Nick Davatzes.
A&E and Charles Dolan's Bravo, which also launched in the early 1980s, proved that cultural programming could work on cable. But both also proved that the best way to do it was to make use of inexpensive, already produced programming rather than spending millions to produce original programming themselves.
"The Entertainment Channel would spend $800,000 to produce a live broadcast of La Traviata while we would find a tape of the same opera, at La Scala, for $1,000," recalled Ray Joslin, head of Hearst's cable division.
In addition to merging their ARTS service with The Entertainment Channel, the Hearst ABC joint venture merged its Daytime service with Viacom/ Jeffrey Reiss' Cable Health Network. Each had launched in 1982 and each had found it difficult to gain carriage and advertising. The merged service called Lifetime, was headed by former RKO Radio president Tom Burchill.
But by far the most widely publicized programming casualty of the early 1980s was joint venture of ABC Video Enterprises and Group W Cable, Satellite News Channels.
The concept was to use the news gathering capabilities of ABC News, together with a group of local broadcast stations (some owned by Group W and some by ABC), to produce two 24-hour cable news channels. One would offer updated news every half hour while the second would combine longer features and in-depth reports. The two services would be offered free to all cable systems and the venture offered to pay an incentive of 50 cents per subscriber for any cable system that signed on.
The announcement of SNC in August 1981 was a huge blow to Turner Broadcasting System, whose CNN was just beginning to see a chance for profitability. But it was exactly the kind of challenge that the company's boss, Ted Turner, loved. Here he was, in his favorite spot as the underdog - the lone Confederate fighting the huge Union Army, the Greeks at Thermopolae, David versus Goliath. The big broadcasters had thrown B'rer Ted into a briar patch.
Turner immediately counterattacked. At a hastily improvised press conference at the CTAM Convention in Boston he announced he would launch his own second news channel, Headline News, six months before SNC was to start service. And he derided the broadcasters, calling SNC "a second-rate, horse-shit operation" and claiming ABC would never pass up the chance to report a scoop on its broadcast news in order to report it first on SNC, an allegation that the SNC staff later conceded was correct.
The press conference was more like a pep rally, with operators standing and cheering and offering to sign up on the spot.
But when the cooler heads back at MSO headquarters began to examine the situation, the SNC offer looked pretty attractive. Most of the cable operators, particularly John Malone at TCI, liked having two suppliers competing with each other. It gave the cable operators the chance to play off one against the other and to hold down costs.
Bringing the broadcast networks, particularly long-time cable foe ABC into the cable fold, would be a bonus, operators reasoned. And the lack of a per sub fee contrasted nicely with the 10 cents per sub per month CNN was charging. Finally, the offer of 50 cents per subscriber just to launch SNC would give the MSOs, always strapped for cash, a nice boost on the bottom line.
When SNC launched in June 1982, it had some 2.3 million subscribers and 12 national advertisers.
Turner played on his long-standing support for the cable industry, reminding operators in trade ads and posters (of Turner standing before a dish farm dressed in overalls) that "I was Cable before Cable was cool."
Still, SNC kept on coming. By December the situation at CNN headquarters resembled Valley Forge. The financial picture was that Turner could operate with two cable news networks for only about 90 more days, TBS executive vice president Terry McGuirk recalled.
Then the Turner folks got a piece of good news.
"We heard that ABC and Group W closed their offices for Christmas," recalled McGuirk. "They went on vacation for two weeks. They would be defenseless in the marketplace."
Like George Washington crossing the Delaware, Turner planned a Christmas offensive when his opponent was least expecting it. "We decided to offer one dollar a subscriber per year for the next three years to any operator willing to sign up before the end of 1982 and guarantee that they would take CNN and Headline News as the first two news services on each of their systems. We blitzed the entire industry and everybody signed up. When the SNC folks came back from vacation they gave up almost immediately."
By November of 1983, Group W and ABC agreed to accept a payment of $25 million from Turner in return for withdrawing from the business, dropping all lawsuits (both sides had filed against each other) and handing over 7.5 million SNC subs to TBS.
The joint venture had lost in the area of $100 million in less than two years of operations.
The lesson was that the concept of cable networks supported by advertising revenue alone would not work. CBS Cable and SNC were both offered free to cable systems. But they were unable to sell enough ads to support their huge programming costs. Turner, in contrast, was able to defeat much larger opponents because he had two sources of revenue: per subscriber fees and advertising.
Another lesson was that it was very difficult to take on an existing cable service. CBS Cable and The Entertainment Channel both were competing against existing services: ARTS and Bravo. And CNN had already been well established before SNC entered the cable news business. With limited channel capacity, cable operators saw little need to offer more than one news channel or more than one cultural service. Even if they did, they would tend to offer complementary services from a single provider and which they could buy at a discount rather than two competitive services that were likely to duplicate each other.
This was a lesson that Turner himself would learn the hard way. In October 1984 he launched a rival to MTV, called Cable Music Channel. Inexplicably, Turner adopted the same strategy against MTV that SNC had attempted against CNN. He offered CMC free of charge, while MTV, with more than 24 million subscribers, was charging between 10 and 15 cents a sub per month. And MTV followed a strategy similar to Turner's crusade against SNC: it launched its own second channel, VH1.
Turner also shot himself in the foot with MTV's core audience. He announced that CMC would be a softer version of MTV and would not have the hard rock and sexual innuendo of the raucous network that teenagers had come to love. MTV, Turner said, was a "bad influence" on young people. And he announced all this in an interview with Rolling Stone magazine, the Bible of the hard-rock crowd.
It took Turner far less time than SNC to realize he had made a mistake. He shut down CMC in November 1984, less than five weeks after it launched. At the ACE awards ceremony the following month he ran into Jack Schneider, chairman of MTV parent Warner Amex Satellite Entertainment Co. Turner dropped to his knees, pulled out a white handkerchief and began waving it.
The venture cost Turner only about $2 million. It earned him the gratitude of cable operators who had used the threat of CMC to pressure MTV to agreed to more favorable deals. And it gave him a look at a new employee, Scott Sassa, who would return to TBS and help build it into a major programming powerhouse in the late 1980s and early 1990s.
Premium television services, whose growth had been phenomenal in the late 1970s and early '80s began to suffer some setbacks as well as the decade progressed.
In 1980 the Premiere pay service, backed by four Hollywood Studios and Getty Oil, was killed when the Justice Department opposed it on antitrust grounds. But the end of Premiere didn't end the hostility some cable operators and most Hollywood studios felt towards Home Box Office, still by far the dominant player in pay television and increasingly using its clout to dictate prices to film producers.
Michael Fuchs, the vice president of programming for HBO, came in for special hatred in Hollywood, reflected in a series of press articles along the theme of an Esquire profile entitled "The Man Who Ate Hollywood." Fuchs, an attorney, had a background in politics serving as an advance man for Sen. Edmund S. Muskie (D-Me.) in the 1972 presidential primaries. He later worked for the William Morris talent agency in New York. His sometimes abrasive style was not what Hollywood moguls, not lacking in the ego department themselves, were used to. None of the studios, in fact, had ever been confronted with such an awesome power as HBO.
Cable operators as well feared HBO's power, particularly after it launched its Cinemax sister service and escalated the war with Showtime. In 1981, after the demise of Premiere, a group of cable operators (TCI, Cox, Times Mirror and Storer) launched their own premium service dubbed Spotlight. To run it they hired John Cooke.
But Spotlight didn't do very well. Most of the really big marketing efforts for pay television were coordinated and largely paid for by the big pay services, HBO and Showtime. Among the MSO's the marketing efforts ranged from spotty to non-existent. At TCI, in particular, the marketing budget was sparse. Nor could Spotlight get any carriage on the MSOs which owned HBO or Showtime or the Movie Channel: ATC, Group W Cable, Viacom Cable and Warner Amex Cable.
And the Spotlight partners even found it difficult to persuade their own systems to be very enthusiastic about the service.
As John Sie, then senior vice president of Showtime, later recalled, the MSOs found it "too hard to force the systems to carry in-house brands."
When the Spotlight partners decided to bail out there was a heated race for the subscribers. "I arranged a deal where (the MSOs) became phantom equity owners in Showtime," Sie recalled. "Under our arrangement, the more successful they became (in selling Showtime subscriptions), the lower their license fee would be. It was almost like they had equity in Showtime."
And the MSOs bit, selling Spotlight, with its 750,000 subscribers, to Showtime, which by that time had merged with The Movie Channel.
But while HBO would have liked to get the Spotlight subs for Cinemax, it was facing much more troubling issues by the end of 1984.
Pay television, which had been exploding for the better part of a decade, hit a brick wall in 1984. The total number of pay subs had jumped from 1.6 million in 1977 to 9 million in 1980 to 15 million in 1981 to 29.9 million in 1984. There it stalled. The category grew only 3 million units in 1983 and a heart-stopping 600,000 in 1984.
"It's not a disaster, but there is certainly not the euphoria that existed two years ago," Time Inc. executive vice president Nick Nicholas told Business Week. It was an understatement as far as Wall Street was concerned. When HBO reported its first-quarter numbers in 1984, the stock of Time Inc. dropped by almost 15% in a single day.
Most disturbing was the fact that there was no consensus about the cause of the slowdown.
Some blamed the duplication of product between the premium services. Customers who had been persuaded to take both HBO and Showtime, and even The Movie Channel as well, sometimes found that two or three services would be running the same movie in the same month, sometimes at the same hour of the same day.
Another obvious suspect in the slowdown of pay TV sales was the videocassette recorder. From its debut on appliance store shelves in the mid-1970s, the VCR was in 20% of American homes by 1984. In a single week that year some 250,000 videocassette recorders were sold. The number of VCRs increased from 6 million in October 1984 to 20 million a year later and 26 million the year after that.
Paul Kagan Associates correctly predicted that soon Hollywood would be getting more revenue from videocassette rentals and sales than from any other source. And Hollywood, chafing at the bit to find a way to break HBO's power, opted to release its films on home video before licensing them to the pay services. Customers wanting to watch a hit movie at home would find that the quickest way to do it was to rent it and play it on the VCR. They would have to wait another six months to watch it on premium cable.
Eventually HBO would compensate by running more of its own original programming. But when it first confronted the problem, "our knee-jerk reaction was to pooh-pooh it," recalled Bill Grumbles, then an affiliate rep for HBO. "Then we tried to run ads against it, telling people: 'Don't drive to the video store when you can stay at home and see great movies.' But we found out people liked to go to the video store. And price didn't matter. For the price of a month of HBO a consumer could rent only about four movies at the video store. It didn't matter."
The screeching halt in subscriber growth in 1984 coincided with a huge backfire in the pre-buy strategy that HBO had been employing in Hollywood to lock up the exclusive rights to films. The scheme had been engineered by Frank Biondi, a former investment banker and Princeton graduate.
Biondi's greatest triumph in this arena was the establishment of two new motion picture production companies. Tri Star Pictures was a joint venture of HBO, CBS and Columbia Pictures, and Silver Screen Partners was a public company that would raise millions to produce new films that could be run exclusively on HBO.
By 1984 Biondi, at the age of 39, had been named chairman and CEO of Home Box Office, leapfrogging over Fuchs, who had brought him into the company. But the slowdown in premium subscription sales and the huge costs that Biondi had incurred with his commitment to pre-buys combined to hit HBO like a two by four. The division, which had been a huge cash cow for Time Inc. since 1977, suffered three successive quarters of earnings declines in 1984. By Halloween Biondi was gone, replaced by Fuchs as chairman/CEO and ATC executive Joe Collins as president.
Programmers were not the only ones to suffer setbacks in the early 1980s. Cable operators who had competed in the franchising wars for urban markets had been forced to promise services they could not deliver or which were unprofitable. It was not long before they had to find a way out of the obligations they had undertaken.
The biggest winner in the franchising wars had been Warner Amex Cable Communications. With the lure of its interactive QUBE systems, Warner Amex had hooked franchises in such major urban areas as Dallas, Pittsburgh, Milwaukee and the outer boroughs of New York City.
The franchise wins obligated the company to huge expenditures to construct the systems. And the costs were proving greater than the company had anticipated. In Pittsburgh the cost to build the system had been estimated at $47 million when the franchise was awarded in 1979. By 1983 the price tag had hit $80 million and was still heading north. Selling subscriptions was also proving more difficult than anticipated. The Dallas system a year after it was launched was attracting only 20% of homes passed.
Warner Amex Cable was bleeding. It lost $40 million in 1982 and by 1983 would lose another $99 million. By the middle of 1983 it would amass $875 million in debt.
And the losses came at a difficult time for the parent companies. Warner Communications, never heavily capitalized, was suffering enormous losses from its Atari video game division (which fell $122 million in the red in the third quarter of 1983 alone). The stock tumbled. Warner chairman Steve Ross was at risk of losing control of his company to a hostile takeover. At American Express, meanwhile, chairman Jim Robinson was looking for ways to stem the losses to help him in his power struggle with anti-cable Shearson Lehman chairman Sanford Weill.
In January of 1983 American Express forced Warner to agree to replace Gus Hauser as chairman of Warner Amex. To run the company they brought in Drew Lewis, who had been serving as President Reagan's Secretary of Transportation and who prior to that had run a company that specialized in turning around troubled businesses.
Lewis didn't waste much time getting to work. He ended the franchising effort, demolished the QUBE system in Columbus, laid off half the headquarters staff and set off to visit Pittsburgh, Milwaukee, Dallas and other cities to deliver the news that Warner Amex would either demand a change in the franchise agreements or be forced to sell the systems. "We promised too much," Lewis bluntly informed the cities.
Lewis told the city council in Dallas that the cable system would cut back the number of channels to 47 from the 76 it had promised, build four rather than nine local origination studios, and cut substantially the number of local origination channels, pledged at 24. Lewis also proposed the city allow Warner to bypass installations of apartment buildings unless the apartment owners paid for the installations or guaranteed all residents would subscribe.
In New York Warner and five other franchise winners - Cablevision Systems, ATC, Cox, Queens Inner Unity, Vision Cable and Continental Cablevision - joined to petition the city for permission to scrap plans to build a dual-cable system and instead install a single 450 MHz plant with the promise to upgrade it to 550MHz when the technology proved feasible. Noting that the change would not mean fewer channels for customers, New York City franchise bureau director Morris Tarshis backed the plan which he said would save the cable companies $20 million in construction costs.
Within a year Lewis had renegotiated the franchise agreements in Dallas, Milwaukee, New York and a dozen other communities. In Pittsburgh he opted to sell the system to TCI, which owned systems in many of the surrounding suburbs.
TCI president John Malone had embarked on a new strategy earlier that year. Although TCI had remained on the sidelines in many of the urban franchise fights, Malone decided that a new sense of reality was coming into place in the cities and that it might now be possible to run urban systems that could make money. The first place the strategy was to be tested was in Pittsburgh. To implement it, Malone turned to his former colleague at Jerrold Electronics, John Sie.
Sie was at Showtime, but had become convinced that he would never get the top spot (when Showtime CEO Jeffrey Reiss departed, Showtime parent Viacom replaced him with a former broadcast network executive, Mike Weinblatt).
"So John (Malone) one day asked me if I would like to come to Denver and make some real money," Sie later recalled. Sie took a 50% cut in pay and moved to Colorado in February of 1984. There he joined a new team including Harvard Business School graduate Peter Barton and investment banker Stewart Blair, that Malone had assembled to take the company to the next level. Sie had no firm agreement with Malone on compensation or advancement. In fact, he had no specific duties. It was all done on a handshake and trust, Sie later said.
Sie's first assignment was to make sense out of the mess in Pittsburgh. Sie, a physicist by education, had held top positions at Jerrold and played a central role in the growth of Showtime. But he had never been involved in a franchising war and had no experience in politics.
The 73,000-subscriber system, Sie soon discovered, "was bleeding like a stuck pig."
Malone had agreed to buy the system from Warner Amex for $93 million. Sie's task was to make the deal work by wresting from the city an agreement to allow TCI to run a system considerably less elaborate than the one Warner had promised when it won the franchise in 1979.
The job, he later said, was "to convert a Cadillac into a Volkswagen."
Working seven days a week and 18 hours a day, Sie laid siege to Pittsburgh. He met with all the local officials, debated on the radio and television, testified before the city council and gave countless interviews to the press. He forged a working relationship with Brother Richard Emenecker, the priest who was head of the city office of telecommunications.
After seven months of negotiations, the city council voted unanimously to transfer the system to TCI. The deal allowed TCI to eliminate the 20% minority ownership provisions of the original franchise agreement, to build a system with 44 rather than 63 channels, to turn the public access programming division over to a non-profit agency, and to phase out the institutional network. TCI also won approval to junk the QUBE system, selling the interactive boxes back to Warner for $30 each. TCI did agree to add a surcharge to the cable bills to fund local programming.
"Our strategy," Sie later recalled, "was to demonstrate that less is more." It worked, largely because the city and the voters recognized that the elaborate system Warner had pledged to build was deep in the red and some cutbacks were necessary if the city was to have an economically viable system.
"We knew (the system) was in trouble," Pittsburgh's deputy city solicitor said at the time. The deal with TCI, he said, would give the city "a comparable system" to what Warner had built but with the assurance that it would be economically viable.
The sale of Pittsburgh and the cutbacks in Dallas and other cities generated enormous publicity about the risks of cable. "Warner Amex Chokes on Cable," said Newsweek. "Is Cable Losing its Luster?" asked US News & World Report. And Fortune told its readers "Why Cable is a Risky Investment."
But there were still cable operators who were willing and eager to prove the pundits wrong. One was a small venture that had been started by former TelePrompTer vice president of marketing and programming Marc Nathanson.
Nathanson had virtually been born into the cable industry. His father, an advertising executive, was a close friend of cable pioneers Burt and Irving Harris. Marc's first go at the industry came at an early age. While an undergraduate at the University of Denver he had a chance to go to a e cable convention in that city and decided he wanted to buy a system.
So he paid a call on Daniels & Associates where he found the price quoted by Monroe Rifkin for a 2,000-subscriber system in Elk City, Iowa, a little too high.
After college, Nathanson went to work for Burt Harris at Cypress Communications. Harris made him manager of a small system in California where, Nathanson later recalled, "I learned that the engineer really runs the systems. The manager handles PR and government relations and some marketing. But the engineer runs the system."
After Cypress was sold to Warner, Nathanson left and went to work for Jack Kent Cooke at TelePrompTer. There, along with Jeff Marcus and 2,000 new sales personnel, he masterminded a marketing campaign that added more than 200,000 new subscribers to TPT rolls in a single year, helping rescue the company from near bankruptcy.
He also won an internal argument within the company, persuading Cooke not to start his own pay TV service, but instead to become the first big MSO to commit to a nationwide affiliation deal with HBO.
By the mid-1970s Nathanson had decided to pursue his college dream of owning systems himself. He went in to tell Cooke he was leaving.
"Marc," Cooke replied, "if you leave me I will make sure you never work in the cable industry again."
Nathanson replied, "Well, Mr. Cooke, I just want to do what you did, start my own company."
Cooke paused a minute and said, "Oh. Well, that's different. Let me know and I will invest."
Starting with a couple of systems and unbuilt franchises owned by his father and Burt Harris, and a million dollars in equity from his father-in-law, Nathanson in 1975 founded Falcon Communications.
The company's specialty was classic cable systems in geographic clusters. This was the kind of system that Nathanson had grown to know at Cypress and TelePrompTer. While most of the big MSOs were battling over the big cities, Falcon kept its nose to the grindstone, delivering service in small towns and cities in Southern California.
One company that paid very little attention to its smaller systems was Warner, which was pouring all its money and attention into the big urban newbuilds. Many of the smaller Warner systems had been owned by Cypress and Nathanson knew them well. And he knew what had happened to them after Warner took control.
In 1985 Warner Amex president Drew Lewis decided to unload 18 of these systems serving some 50,000 subscribers. Nathanson heard about the deal and called Warner Amex to ask if he could bid.
"You're too late," he was told. "We have already agreed to sell them." Nathanson asked if he could not at least make a bid. The answer was no.
So he contacted an old friend, Martin Payson, who had been a camp counselor at the summer camp Nathanson had attended as a boy and who was now conveniently a member of the board of Warner Communications. Payson advised him to decide what the systems were worth and send a letter making his bid to Drew Lewis with copies to Warner Chairman Steve Ross and American Express president Jim Robinson.
The tactic blew the deal wide open and with a bid of $50 million or $962 per subscriber, Falcon won the systems. It almost doubled the size of the company.
But with some simple techniques and a lot of tender loving care, Falcon transformed what had been an albatross around Warner's neck into a golden goose.
It didn't take rocket science to make the transformation. Falcon added channels, upgraded customer service and raised rates. It slashed corporate overhead. And it built line extensions. Many of the systems had not been upgraded since Warner bought them. The communities they served, meanwhile, had grown. By extending the cable lines to serve the newly built areas, Falcon was able to capture thousands of new customers at very little cost.
Most of all Falcon was a sales demon. At one California system the company bought in the early 1980s Falcon was able to take penetration from 20% to 48% in the first year, effectively cutting in half the $2,000 per subscriber price it had paid for the operation. There was nothing very fancy or revolutionary about Falcon's marketing: door-to-door, direct mail, telemarketing, tie-ins with local businesses. But it was done relentlessly. "This is a marketing company," Nathanson told Forbes magazine in 1985, "and I am a marketing man."
Falcon and TCI weren't the only companies to benefit from Warner Amex's troubles. Other MSOs found they could always point to Warner Amex when seeking to cut back on the promises made during the franchising wars. Companies such as ATC were given some shelter when they had to go in and renegotiate their own franchise agreements in such cities as Denver. After all, if the mighty Warner Amex was finding it too expensive to keep its promises, how could anybody fault ATC?
And ATC was finding some difficulties in meeting its franchise obligations. Like other MSOs which had won urban franchises, it discovered that the cost of building the systems was often greater than anticipated. This was particularly true in older urban areas where underground construction sometimes ran into unexpected sewer or gas pipes or, even worse, historical discoveries that could delay construction for months.
Cities' requirements that cables be laid underground increased the cost of wiring dramatically. One of the biggest headaches for ATC came in Rochester, N.Y., where sub-zero weather delayed construction and the city required that all homes be served. To meet the franchise requirement for universal service, ATC had to build 25 miles of underground plant just to reach four homes.
In Kansas City, the system had to cross the interstate highway system at five different locations. Each required a rerouting of the plant in order to use existing conduits over the roadways. And in such cities as Miami, the need to cross waterways and rivers added to the cost. In some urban areas the cost of wiring a mile of plant could zoom to $50,000 or more.
Make-ready was sometimes more expensive than imagined. In Denver the price of preparing telephone company poles for cable was 25% more than ATC had projected in its franchise proposal.
"The phone companies are asking for double and triple the make-ready charges of just a couple of years ago," Warner Amex senior vice president of
engineering and construction Roosevelt Mikhail told Cable TV Business Magazine in 1984. "It's very obvious they are jacking up the prices on us and there's no way these high charges can be justified."
MSOs also sometimes underestimated the capacity of underground utility ducts to carry additional wires. "When the franchise bid is developed everybody just assumes that the cable operator will be able to use that duct system," Mikhail said. "But nobody really knows its condition because it hasn't been field tested. What often happens is that the ducts simply don't have the volume we need to run as many as six cables through. When you discover that the space isn't there you have no choice but to seek an alternative route - one which is invariably going to cost more money."
Just figuring out what to do with the dirt from digging up the city streets proved to be a big problem in such states as California, which had strict anti-dumping laws.
Construction contractors such as Burnup & Sims and Cable Services Co. became more and more adept at calculating costs. They also made use of new techniques to reduce expenses and speed construction. One new device that came into use was the rock saw, first used in constructing the Boston system. The rock saw cut a six-inch-wide trench through asphalt or concrete roads into which the cable could be laid. The cut could then be filled in and the entire process completed in a single day, far faster than the old technique of digging up the roadway with a backhoe or trencher.
Legal and financial problems also plagued some franchises. In Denver a lawsuit by the conservative Mountain States Legal Foundation challenged the ability of the city to award an exclusive franchise. The threat that the suit might succeed caused the bankers who had pledged to fund the construction of the system to seek to renegotiate the loans. Mile Hi Cablevision, a joint venture of ATC and Daniels & Associates, was forced to ask the city for permission to cut back on $30 million of capital commitments at least until the suit could be settled.
Cable operators also were plagued by the failure of some of the new equipment they had pledged to use in their systems. Suppliers, anxious to provide the latest state-of-the-art technology, sometimes rushed new devices into production before they were fully ready. And sometimes even when the new devices worked, the markets they were expected to serve failed to materialize.
As ATC president Trygve Myhren cautioned in 1984: "When you are on the cutting edge of technology you want to be just behind the blade."
One of the companies that suffered some cuts from the blade was Scientific-Atlanta, the high-flying firm that had started in cable by supplying antennas and then helped revolutionize the industry by building the earth stations used to demonstrate the first satellite delivery of cable programming.
S-A had grown like crazy in the decade following the launch of HBO on satellite. From a business that did $1 million in revenue a year in cable in 1972 it had grown to $300 million a year by 1980. It posted 40 quarters in a row of improvements in sales and earnings. And it had vastly expanded its product line down the cable plant. Starting with antennas, S-A had moved to supply headend and later distribution equipment.
S-A CEO Sid Topol was very taken with the model of IBM which supplied all the computer and data processing needs of its customers. He wanted to make S-A into such a one-stop shopping supplier for cable operators.
The only major gap in S-A's product line was converters, and there seemed no reason to believe the company couldn't find a way to make a better line of converters.
"At that time S-A could do no wrong," recalled Alex Best, now senior-VP, engineering, Cox Cable, "Everything we touched turned to gold."
Topol later recalled that he was approached by ATC chairman Monroe Rifkin who urged S-A to get into the converter business because, Topol said, ATC was not fully satisfied with many of the high-channel capacity, interactive converters then on the market. This was true despite the fact that half a dozen major manufacturers, including Jerrold Electronics, Zenith, Oak, Tocom and Texscan, were making converters.
S-A had built a reputation as a company that produced high-quality, if sometimes more costly equipment. The converter they designed, the 6700 was, according to Best, the first 400 MHz, solid-state, 54-channel converter on the market.
It worked beautifully, in the prototype. When it came to producing the device in mass quantities, it was another story.
"We were used to producing 100 items a month," Topol recalled. "All of a sudden we were trying to produce 100,000 a month."
The high production schedule proved a major problem. The tuners on the converters were exceptionally delicate because of all the channels they carried. A small slip in the tuner would cause interference for several channels. S-A could build a reliable tuner in a few boxes, but not in thousands. Once they got into the field, after a few months, the tuners began to go awry.
Nor were the economics very good even if the device had worked. "We were producing them for $90 each and selling them for $70," Best recalled.
Not long after the first shipments of 6700s went into the field, the calls came about problems. Eventually S-A had to recall all of them, and Topol moved the manufacturing of the product from Georgia to a specially built plant designed just for this product by the Matsushita Corp. in Japan. The result was a much more reliable converter, the 8500. But it was also a major financial setback for S-A.
In 1982, the company reported a flat first quarter, the first time in a decade it had failed to post improved quarterly earnings. S-A stock, which had been selling at 36 times earnings in 1981 plunged to 12x earnings by the following year.
The setbacks didn't dim Topol's enthusiasm for cable or his energetic salesmanship.
(When he was ready to pitch the 8500 to TCI president John Malone the TCI folks suggested he join Malone, a big time sailor, on a cruise from Key Largo, Fla., to Ft. Lauderdale. Topol boarded the sailboat in the morning. TCI vice president Peter Barton prepared the brunch, including hash browns, bacon, sausage and eggs, all lathered in grease.
"I ate well, figuring it would be an easy trip," Topol later recalled. All the TCI folks on board were drinking and laughing. But then Malone headed out to sea, to catch the Gulf Stream, and its deeper swells. "We weren't out there 12 minutes and I wanted to die," Topol recalled. The irrepressible S-A chief spent the rest of the voyage doubled over in agony below decks. But when they landed, he won Malone over, proving if you can make the sail, you can make the sale.)
The slower-than-expected pace of construction in the big cities and the cutbacks on some of the franchise promises hit the cable technology sector particularly hard. It had always been true that when the cable operators caught cold, the hardware suppliers got pneumonia. Never was this more true than in the period from 1982-1985.
And S-A wasn't the only company to suffer.
Times Fiber Corp. in 1981 had introduce the most revolutionary concept in cable system design since the start of the industry. It was called the mini hub.
Traditional tree and branch cable systems relied on a network of trunk cable, with amplifiers boosting the signal power every few hundred yards. A tap would connect the trunk cable to the drop cable which would run into the house. In the systems with more than 12 channels, the drop cable would be connected to a converter that would plug into the TV set.
The mini-hub concept relied on fiberoptic cable to link the headend to a series of hubs, each of which might serve a group of homes. By using fiber, the system eliminated the need for amplifiers. Each hub housed a computer that would direct the appropriate signals to the subscriber's home. In its initial design the mini hub computers also would receive and process signals from the subscribers' homes ordering pay per view and other services.
It was enormously efficient compared to the tree and branch system, but it was also far more expensive to install. When PPV and other ancillary services proved less productive than cable operators had anticipated, Times Fiber introduced a scaled back version of the system, Mini Hub II, to offer only one-way service. Still the higher upfront costs dissuaded most cable operators from adopting the new architecture. By the middle of the next decade, mini-hub-type-switched network systems would become more viable. But in the mid 1980s the mini hub was just another technological development that proved to be ahead of what the market would support.
Home security was another example of a service that was technologically possible but a market failure. By 1983 Warner Amex Cable, the leader in home security, had signed up only 13,000 customers in five major cities for its service, and other cable operators were finding it difficult to operate a business that was very different from the core business of selling video services. Tocom, which had bet heavily on the home security business, was forced to sell to General Instrument after a disastrous 1983.
Oak Industries, which had invested heavily to get into the addressable converter market, suffered as the major urban franchises were built more slowly than planned. The company reported a loss of $166 million in 1983 compared with a profit of $4.1 million in 1982. RCA, long a supplier of cable equipment, announced it would exit the business. GTE Sylvania sold its cable equipment unit to Texscan.
Not only was the cable industry suffering from some internal illnesses, but it was also, for the first time in its history, facing some real competitors in the business of delivering multichannel television services to the consumer. In the early 1980s, four alternative delivery systems would rise up to challenge cable's de facto monopoly on the multichannel TV market: direct broadcast satellite (DBS) service, multichannel multipoint distribution (MMDS) systems, satellite master antenna systems (SMATV) and over-the-air subscription television (STV).
By 1982 there were some 150 single channel microwave operations in the U.S. serving 750,000 subscribers. Although they provided some competition to cable, because they could deliver only a single channel, they more often served to whet the appetite for cable service in the cities before the systems had been constructed. Moreover, the system suffered because consumers had to be in a line of sight of the transmitter in order to receive the service.
But in February of 1982, Microband Corp. asked the FCC for permission to construct a nationwide, five-channel MDS system that it said would cost no more than $35 million and could be built in two years. Low-cost reception equipment, developed in the early 1980s, allowed consumers to receive the service with an antenna that retailed for about $100.
The following year the FCC adopted new rules that allowed MDS operators to gain access to frequencies that had previously been reserved for educational institutions but which in many communities were unused. In effect the FCC was allowing MDS operators in major urban areas to offer up to 10 channels of service. The agency also authorized much stronger signals, giving the MDS systems the chance to reach customers as far as 50 miles away from the transmitter.
Subscription television, which had long been a dream of broadcasters and had been attempted at various times in the prior three decades, came into its own in the early 1980s. By 1983 there were some 27 STV operations serving some 1.5 million customers. The two largest operations, both based in Los Angeles, were ON TV with some 600,000 subscribers and SelecTV, with half a million. The two offered single-channel services with a mix of movies and local sporting events.
In 1982 the FCC lifted regulations that had confined STV operations to communities with at least five broadcast television signals, and the technology prepared to invade additional U.S. cities.
That same year the commission gave the green light to a group of would-be operators of direct broadcast satellite services. The first to launch, in 1984, was United Satellite Communications Inc., a joint venture of General Instrument Corp. and Prudential Insurance Co., which offered subscribers in the upper Midwest five channels of programming for $39.95 a month plus a $300 installation fee for the 2.5- to four-foot antennas needed to pick up the signal from the Canadian Anik satellite. Customers willing to shell out $995 to buy the dish could get a year's programming for free.
It was followed later that year by Satellite Television Corp., a unit of Comsat, which offered a five-channel service to the northeastern U.S.
Cable operators took the competition seriously. "There is no question that DBS will probably present the most serious competition the cable industry and particularly the non-urban cable industry has ever experienced. Be prepared," warned CATA president Steve Effros.
The most pesky competitors to cable in the early '80s were satellite master antenna television systems. These were mini-cable systems serving a large apartment building or a privately developed community. They were constructed just like a small cable system, with a dish and headend and trunk and drop cable. But because their wires did not cross city streets they did not need city franchises to operate and so were free from city regulation.
SMATV systems could not operate without permission of the apartment owner and would typically split revenue with the landlord in exchange for access to the premises. Often a franchised cable company would have difficulty gaining access to such apartments to offer service in competition to the SMATV, even in the apartment tenants wanted service.
SMATV received a boost in 1982 when the Supreme Court ruled that franchised cable operators had no automatic right to serve tenants without the permission of the landlord. New York landlord Jean Loretto had sued to challenge a New York State law that capped the amount a landlord could charge for access to tenants at $1 per apartment. The court rejected arguments by Group W Cable, seeking access to Loretto's apartments, that tenants could not be denied access to programming without violating their First Amendment rights. But the court ruled that the Constitutional ban on unjust taking of property was at stake and that "an owner suffers a special kind of injury when a stranger directly invades and occupies the owner's property."
One way the cable operators attempted to battle alternative distribution systems was to sign exclusive distribution contracts with programmers, forbidding cable networks from offering their services to SMATV or MDS or DBS systems that competed directly with franchised operators. Programmers, with cable as their primary market, generally went along, spawning a host of restraint-of-trade suits (except, of course, in those cases where the franchised cable operator itself built SMATV systems to gain revenue while the main cable system was still under construction.)
As ESPN vice president Andy Brilliant stated in 1984, "ESPN is in the business of distributing programming to the cable industry. We deal with the operator where there is a cable franchise."
That would remain the policy for most cable programmers until the alternative technologies began to gain enough customers, and clout in the courts and Congress, to put them on a footing more nearly equal to cable.
The combination of new, competitive technologies, cutbacks in the major urban franchises, setbacks in the technology arena, all combined to provide cable with the aura of an underdog by the time Congress came to consider the Cable Act of 1984.
At the same time, many of the industries that had been cable's nemesis during the previous three decades were otherwise occupied at the time, giving the industry a relatively free hand to work out a piece of legislation.
The National Association of Broadcasters was engaged in a bitter internal battle to determine who would head the organization and a fight for a broadcasting deregulation bill in the Congress at the same time. It regarded cable legislation as primarily a matter affecting the cities and the cable industry that would have relatively little impact on broadcasting. It was a miscalculation.
The Motion Picture Association of America was engaged with the cable industry in a bitter battle over copyright fees. After passage of the Copyright Act in 1976 the FCC had moved to lift many of the regulations on carriage of broadcast signals by cable systems. The issue of how cable systems would pay for the rights to carry those signals was left to a new federal agency, the Copyright Royalty Tribunal, to determine.
In 1982 the Tribunal had shocked the cable industry with a ruling that most systems would have to pay a fee equal to 3.75% of their entire gross revenues for each distant broadcast signal carried on the system.
The money would then be put into a fund that would be divided among the major copyright holders.
The ruling effectively increased copyright fees for some cable systems by as much as 500% and ignited another battle over the issue on Capitol Hill.
Cable systems began to drop distant broadcast signals, dealing blows to such companies as Turner Broadcasting System, whose WTBS Superstation was the most widely distributed distant signal, and to United Video, which was the common carrier for several distant broadcast signals, including WGN from Chicago and WPIX from New York. By 1984 the NCTA estimated distant broadcast signals had lost some 10 million viewers because cable systems had dropped them to avoid having to pay increased copyright fees.
Turner and United Video lobbied on the Hill vigorously to try to get Congress to pass legislation to reverse the CRT ruling, but to no avail as the MPAA and the broadcasters fought back in defense of copyright fees.
The effort was shortsighted on the part of the broadcasters. As cable operators dropped distant broadcast signals, they added cable exclusive programming, boosting the viewership for CNN, ESPN, MTV and the other cable networks which owed no copyright fees.
Embroiled in these other legislative battles, the MPAA and the NAB largely left the issue of cable legislation to the cities and the cable operators to work out.
There is no particular moment or incident in the years prior to 1984 that one can pinpoint as the beginning of the cable industry's effort to pass a comprehensive law governing the industry. Congress had been kicking around the idea for decades and one bill or another had been introduced in every Congress since the late 1950s.
But if one wanted to find a beginning for the process that culminated in passage of the bill in October 1984, a leading candidate might be a meeting that took place in early 1975.
NCTA president Bob Schmidt and executive vice president Tom Wheeler were paying a courtesy call on Tim Wirth, the newly elected Democratic congressman from Colorado who came to Washington on the heels of Watergate and who had just been named to the House Telecommunications Subcommittee.
As they sat down together in the ornate Rayburn Room just off the House floor, Wirth began a tirade of criticism. He was a natural ally of the cable industry, he told Schmidt and Wheeler. Several of the largest cable operating companies were based in Colorado and their executives had contributed to his campaign. And Wirth believed that lifting the regulations on cable would promote diversity of programming so that the viewers, not the broadcast networks, could make the decision on what kind of shows were seen.
But cable, he said, had done a miserable job of sending its message to the Hill and was widely regarded in Congress as unreliable, greedy and ineffective. "I'd like to be with you," Wheeler remembers Wirth telling them. "But you are totally incompetent."
Wheeler recalls that as he and Schmidt walked out of the Capitol that evening they looked at each other and vowed "Okay, buddy. We're going to show you you're wrong."
Schmidt and Wheeler set about to transform the NCTA. Before Schmidt had come aboard, the organization had been in disarray for the better part of 20 years, lurching from one president to another, unable to form a common policy and going for months at a time without any leadership at all.
Schmidt, young and energetic, began to lay down the law with the NCTA board, insisting that he be allowed to run the organization with direction from the board of directors but without day-to-day interference. Wheeler recalled that a defining moment came when the board was invited to the White House sometime in the mid-1970s.
As the group gathered at NCTA headquarters, the members began to bicker about who would say what, what message they would want to convey to the President and the other officials who would be there. After a while Schmidt asked for quiet. Then the former USC football star began to give them a locker room-style lecture.
"Okay you guys, how many of you have ever been to the White House before?" he asked. When nobody raised a hand, Schmidt continued, "Well I have, and I want to be invited back. So when we get there I will speak for this organization and nobody else is going to say anything unless I tell you to." It worked. As time went on the highly individualistic members of the NCTA board slowly began to grant more authority to Schmidt and Wheeler and to limit the board's involvement in the NCTA's day-to-day activities.
Wheeler was a master of marketing and positioning. He was naturally flamboyant, tall and good looking with dark hair and a dark mustache and a deep resonant voice. He had been only 33 years old when he left the National Grocers Association to join the NCTA. He recognized early that the problem the cable industry had was that it approached every legislative and regulatory issue from the point of view of what this meant to the cable industry. Instead, Wheeler understood, the industry needed to make its case based on what this would mean for the consumer. The trick was to persuade the members of the federal government that regulation of the cable industry stifled the development of new, diverse programming services that would provide more choice for the consumer.
To drive that message home, Wheeler turned showman. He enlisted the cable programming services to host premieres of some of their original programming to which he would invite members of Congress, the FCC and key staffers. Warner's QUBE system in Columbus would tape every home football game at Ohio State University and ship the tapes to Washington where Wheeler, a native of Ohio, would host a party for the Ohio delegation to watch the game, not available otherwise in D.C.
When the pole attachment bill was up before Congress, the NCTA learned that one telephone company in Tennessee had cut down the cable it found on its poles and chopped it into foot-long pieces. Wheeler got hold of the cut-up coax and sent a piece to each member of Congress with a message stating that "this is what the telcos are doing to the cable companies."
And when the pole attachment bill passed, NCTA vice president Bob Johnson called a friend at C&P Telephone, purchased a telephone pole, had it sliced into inch-thick pieces and mounted a bronze plaque on each piece with a message of gratitude for each sponsor of the bill.
Johnson, a graduate of the University of Illinois and the Woodrow Wilson School of Diplomacy at Princeton University and a former press aide to D.C. Delegate Walter Fauntroy, was one of a cadre of energetic young lobbyists Wheeler and Schmidt brought on board at the NCTA.
Others included Bob Ross, an attorney for Southwestern Pacific Communications (a forerunner of Sprint), Brenda Fox, who had been assistant general counsel for the NAB, and Char Beales, who came to NCTA from a Washington broadcast station.
Wheeler promoted Kathryn Creech and eventually moved her into a spot running the Council for Cable Information, a Wheeler idea for an industry wide advertising campaign to improve cable's public image. (The group died after only a partial effort when several large cable companies, led by TCI, refused to participate.)
The NCTA staff, which had been almost exclusively white and male, began to look more diverse.
And after Wheeler succeeded Schmidt as NTCA president in 1979 he hired as the vice president of government relations Jim Mooney. Mooney had been the top aide to the House Democratic Whip, the third-highest-ranking position in the House. Mooney had been recommended to Wheeler by Tim Wirth. He was the first NCTA staffer ever hired who had had extensive experience on the Hill.
Wheeler also instituted a program of regular visits by cable company CEOs to the editorial boards of major newspapers such as the New York Times and Wall Street Journal to get the message about cable across to the opinion makers of the media.
The NCTA leaders also began to pay closer attention to local politics in the districts of key members of Congress. After his meeting with Wirth, Wheeler began to show up at the young congressman's campaign events, both in Washington and in Denver, on a regular basis, making sure Wirth knew he was there. NCTA urged its members to get to know their congressmen and worked with key state organizations to bring cable operators to Washington on lobby to a regular basis.
CATA, under the leadership of Steve Effros, also stepped up its Washington presence, with regular Cata-grams to members keeping them informed about D.C. events, and the APIL awards, which Effros named after a favorite saying of House Speaker Thomas P. "Tip" O'Neill: "All Politics Is Local."
In 1980 cable industry's support of Tim Wirth paid off big time. Lionel Van Deerlin (D-Calif.), who had been chairman of the House Telecommunications Subcommittee, lost his seat in the Reagan landslide. Wirth, only in his fourth term, was elevated to the post.
As the chief counsel of the subcommittee Wirth chose a young communications lawyer from New York, Tom Rogers. One of the first fights Wirth picked was over the funding for public television, making bitter enemies of the commercial broadcast networks in the meantime.
"In the drive to allow diversity of programming, cable became the white knight," Rogers recalled. "We recognized that we needed to do something to protect the emergence of cable as a pro-competitive force. There was a serious issue of whether cable could ever reach its full potential if you let every franchise regulate it in a different way."
Wirth had been particularly impressed with the creation of Nickelodeon, C-SPAN and Black Entertainment Television as examples of the kind of programming diversity cable could provide if left to its own resources.
And there was plenty of evidence that continued regulation by the cities would prevent cable from reaching its full potential.
Cities were constantly trying to deny franchise renewals to incumbent cable operators in an effort to strike a better deal with a new operator or to take over lucrative cable systems themselves.
The threat that a city could yank a franchise at any time or deny a renewal was proving to be a greater and greater hindrance to cable operators, and a major stumbling block in obtaining financing to upgrade systems. The same was true with regard to rate increases, which, except in California, had to be approved by each city.
It was a vicious circle. The threat that a city would deny a franchise renewal or a rate increase made it difficult to borrow money to upgrade the systems, which made it more likely that the city would deny the next request for a renewal or rate increase which then made it even more difficult to secure additional financing. And no city council member liked to be the one to champion a rate increase.
Even when cities did grant franchise renewals or rate increases, they often imposed new regulations at the same time.
Everybody was influenced by the franchising frenzy of the late '70s and early '80s in which major cities were able force cable operators to promise huge complex systems with a host of ancillary services. And every small town wanted just the same, if not better.
Sacramento included as a condition of its franchise the right to buy back the system after the franchise expired for the amount of capital that had been invested in it.
Fairfax, Va., insisted on the right to raise the franchise fee from 5% of gross revenues to 8% at any time and with no warning. Tucson wanted the right to buy the system at any time for book value. Boston at one point asked for the right to run its own pay television service, with all the revenue going to the city.
An NCTA study in 1982 found that a typical 35-channel system in a metropolitan area would have to spend 22% of its revenue to cover the costs imposed by local, state and federal authorities. This included franchise fees, copyright payments, expenses for local origination, government and educational channels, the cost of filling in forms and the odd other requirement such as planting trees or building a fire house (both of which were included in actual franchise agreements).
The report noted that competing distribution systems such as MDS, DBS and SMATV did not have such costs. "How can the cable industry compete if we have to give 22% of our revenues away for regulation and others do not?" the NCTA report asked.
In 1983 the U.S. Senate passed a bill that would have ended the ability of the cities to regulate rates charged by cable operators and placed the burden on the cities to prove that the incumbent cable operator had failed to provide decent service before a franchise renewal could be denied. The measure also would formally have recognized the rights of cities to grant franchises and increased the amount they could charge for franchise fees up to 5% from the ceiling of 3% the FCC had been imposing.
The Senate bill had been endorsed by the National League of Cities. But when its details became known the NLC backed off and insisted on major concessions in return for support for a measure in the House.
There the cities had much better strength since most big city mayors were Democrats and the House was controlled by the Democrats.
But Wirth was determined to fashion a bill that would pass. Slowly he began to put together the pieces.
To win the support of the Congressional Black Caucus, Wirth agreed to include a provision to require cable systems to hire minorities and women in the same proportion as they existed in the communities the cable systems served. He "crossed the aisle" to win support from deregulation-minded Republicans, and crafted a majority on his subcommittee for the bill.
And he wooed the powerful chairman of the Commerce Committee, which would have to approve the bill before it went to the House. John Dingell, an old-line Democrat from Michigan who had followed his father to Congress, was inclined to support the city position. But he recognized that the tide was moving in favor of legislation. He preferred to take credit for a new law on the books than to block legislation a majority of his own committee favored.
He urged the two parties to the deal - cable and the cities - to work out an agreement. As chairman of the committee, Dingell had a reputation as one who could intimidate witnesses and strong-arm lawmakers and lobbyists alike. He wasn't reluctant to do the same with regard to the cable bill.
In the late summer of 1983 Dingell agreed to appear in Colorado at a fundraiser for Denver congresswoman Pat Schroeder. Invited to hear him speak, and to make campaign contributions, were the leaders of some of the cable industry's largest companies.
Dingell had been on a hunting trip in Wyoming, and he appeared before the group dressed in work boots and a plaid flannel shirt. He looked like he hadn't shaved in a week.
Peering over his glasses, in deliberate, measured tones, he told the group that if the cable industry and the cities failed to reach an agreement on a bill, he was prepared to write his own and to send it to the floor of the House for a vote. And the bill he might draft, "I would observe to you," might not be one that the cable industry much liked.
He delivered the same message to the cities, and throughout 1983 and 1984 the two sides spent hours at the bargaining table attempting to work out a compromise.
Wheeler, Mooney and NCTA attorney Chuck Walsh led the cable side and New York City Council president Carol Bellamy, Pittsburgh Mayor Richard Caliguiri, and Tucson mayor Tim Voltz represented the cities.
By the spring of 1984, after several false starts, the two sides had at last crafted an agreement which they felt could win approval from their boards of directors. The measure watered down considerably what had been passed in the Senate. Instead of immediate rate deregulation, it allowed cities to continue to set rates for a period of five years (during which time cable operators were entitled to raise rates by 5% per year). Even after the five-year period, the compromise stated that the FCC could regulate rates in areas where there was no significant competition to cable. And the compromise also diluted the franchise renewal provisions of the Senate bill. Instead of giving the incumbent operator a presumption of renewal, it simply guaranteed that the operator would receive due process.
But the compromise would eventually lead to rate deregulation and would provide other benefits to the operators, even if not as many as the Senate bill had.
Wheeler took the measure to the NCTA board meeting in April and won a near-unanimous endorsement. It seemed a fitting end to Wheeler's tenure as NCTA president (he also announced in April that he would step down from his post in July to be succeeded by Mooney.)
Wheeler and Mooney unveiled the deal at the NCTA convention in Las Vegas the next month, and the measure was greeted by the trade press as a victory for the cable industry. That is the way most cable operators saw it as well. Until it was read by Leonard Tow.
A graduate of Columbia University and a professor of economics, Tow had been the senior vice president at TelePrompTer from 1965 through 1973 under Irving Kahn. After leaving TelePrompTer, Tow founded his own MSO, Century Communications, with the financial backing of Sentry Insurance Company. By 1984 Century was serving almost 300,000 customers.
Well over six feet tall with wavy hair, Tow was an imposing presence. And like his former boss, Irving Kahn, he wasn't shy about expressing his opinions. In an industry of rugged individuals, Tow was more rugged and individual than almost anybody else. He wasn't even a member of the NCTA.
At bottom he believed that the government, city, state and federal, had no right to regulate the cable industry at all except to ensure public safety. He believed that cable had an absolute right to freedom under the First Amendment to the Constitution which states that "Congress shall make no law abridging the freedom of the press."
Cable, Tow reasoned, was simply an electronic publisher and entitled to the same freedom as the publisher of a newspaper. Cities wouldn't dream of trying to regulate what a newspaper could charge or how it should be distributed or what its content might be. Nor, he felt, should they be allowed to regulate cable.
When Tow got a copy of the compromise agreement on the cable bill during the NCTA convention in Las Vegas in 1984 he was outraged. The industry, he felt, was trading away its fundamental rights.
"I got a copy, and I was astounded at what I read. I was very, very, very upset," he told Cable TV Business.
Tow led a personal crusade to undo the agreement. He took his case to members of the NCTA board some of whom, he later said, had not even read the agreement when they voted to endorse it. He took out full page ads in the trade press denouncing the legislation and he toured the country drumming up support among operators for his position. He filed suit against the NCTA and Wheeler personally, charging they had violated his First Amendment rights. He even charged they had violated the Racketeering and Corrupt Influences (RICO) law designed to help law enforcement agencies indict Mafia leaders.
Tow was making his case while the NCTA was in between leaders. Wheeler had announced his resignation but not yet left. The outgoing NCTA board, which had approved the compromise, was headed by two people who no longer owned cable systems (chairman Monroe Rifkin, who had resigned his post at ATC, and vice chairman Gus Hauser who had left Warner Amex).
In an unprecedented move at its April meeting on Captiva Island, Fla., in April, the board failed to approve Hauser's elevation to chairman and instead elected Western Communications president Ed Allen to the post. (The conspiracy to oust Hauser was hatched by Sammons Communications vice president Bill Strange at a cocktail party the night before the NCTA meeting. The opponents of Hauser felt it would be bad for the industry to be headed by Hauser who, as head of Warner Amex Cable, had made many of the blue-sky promises to the cities that current Warner Amex CEO Drew Lewis was now trying to undo.)
Tow's effort picked up steam when the Supreme Court, in a unanimous decision, ruled in June that the state of Oklahoma had no right to ban liquor advertising on cable systems in the state. Cable, the court ruled, should be regulated by the FCC, not by local and state governments.
The FCC the previous fall had adopted a ruling that would have preempted state and local regulation of rates for basic cable service (except tiers with broadcast stations) and allowed cable operators to move channels into upper tiers to avoid rate regulation.
After the Supreme Court ruling, more and more cable operators were inclined to take their chances in the courts and at the FCC than to support the legislation worked out with the cities. Wheeler and Mooney could feel the deal beginning to unravel. Mooney warned the cable industry "not to lose its nerve and fall into a condition of peevish grumpiness." Tow, and his attorneys, Harold Farrow and Sol Schildhause, were ejected from an NCTA board meeting when they attempted to make their case against the bill.
The California Cable Television Association voted to withdraw support for the compromise agreement and the New England Association and CATA quickly followed. By the end of July the NCTA itself had voted to change position and oppose the bill.
Mooney took on the task of explaining the situation to Dingell. "With Dingell," Mooney later recalled, "it was very important to listen very carefully. He is very deliberate and formal and glowering. And what he calls you is very important. If he calls you 'My dear friend' you know you are in deep trouble. I made my pitch to him about the changed circumstances and our need to go back to redraft the bill. He wasn't happy. But I saw it as positive sign that at least he was calling me 'Jim' and not 'my dear friend.'"
Dingell agreed that the Supreme Court decision was a new element and promised Mooney that he would talk to the city representatives and ask them to come back to the table and to be reasonable.
But the city folks dug in their heels, insisting that they were prepared to push for a bill even without cable industry support. The NCTA wasn't about to back the measure that had been worked out before the Crisp decision in Oklahoma. Dingell wouldn't allow the bill to go to the floor unless the two sides agreed. The measure seemed dead.
"What are the chances of 4103 becoming law and establishing a national regulatory policy for cable?" asked an article in the Aug. 13 issue of Broadcasting. "Between Slim and none. And Slim just left town."
But then the NCTA began to give a little. Ed Allen, an affable, avuncular man who had been in the cable business for 30 years, was an ideal choice to smooth the frayed tempers of the badly divided board.
"Ed Allen," Mooney later said, "is a great man. He is, in his folksy way, a visionary. He understood that cable needed to be more than a regulatory stepchild. And he had a way of dealing with people that was persuasive without being insistent. He didn't come across like a hard charger, but he was a leader. And he was persistent. Once he got hold of something he wouldn't let go."
Allen took the position that if Congress did not pass a cable bill in 1984, it would likely never pass one. Moreover, he felt, if the legislation was going to die, he wanted it to look like the cities killed it and that the cable industry had walked the last possible mile to reach a compromise. He recalled the 1960 experience where cable had switched positions and managed to kill a cable bill in the Senate, but in the process alienated powerful members of Congress who later found ways to punish the industry.
In August the NCTA board voted to allow Mooney to reenter the talks with a laundry list of requests but with some flexibility and with the intent that the industry would make the strongest possible effort to reach a compromise. The National League of Cities, prodded by Dingell, went back to the table as well in September.
At the end of September, with the deadline for Congress to adjourn less than two weeks away, the cities and the cable industry sat down again to work out a compromise. On Sept. 25 they emerged with a deal and the NCTA board voted, by 20-2, to support it. Charles Dolan and Gene Schneider were the only 'nay' votes.
In the final set of negotiations Mooney had been able to win back much of what had been surrendered in the previous round. Rate deregulation was slated to take effect in two years after passage (a logical compromise between the five-year grace period in the previous compromise and the immediate deregulation in the Senate bill). In the meantime cable operators were allowed to raise all rates by up to 5% per year.
On franchise renewals, the compromise set up a specific timetable and process for renewal hearings. It also included a statement of purpose that the objective of the legislation was to prevent cities from unfairly denying franchise renewals to incumbent operators.
As the House session went into overtime, the staff members of the House and Senate committees scrambled to work out a version of the bill that could pass both chambers. By Oct. 5, Mooney was able to report to the NCTA board that all the communications issues had been worked out. But there was still a lot of politics in the way.
Roadblocks went up in the Senate, planted by Charles Dolan who had hired Charles Ferris, the former FCC chairman and former top Senate staffer, to kill the bill. Ferris worked hard to find opponents, and on the day before adjournment, Sen. Howard Metzenbaum, a firebrand liberal from Ohio, announced that he would filibuster the bill (effectively killing it) unless the franchise renewal process provided for automatic input from public interest groups.
As Mooney later recalled: "We were in the lobby outside the Senate and Metzenbaum came in with his Nader proposal." Mooney pointed out that reopening the entire renewal section of the bill would be impossible at this late date.
Eventually Metzenbaum indicated that he might be inclined to work something out if the NCTA would, as Mooney later recalled, "take a greater interest in some Ohio political races." The two worked out a deal that would state that the franchise renewal process would be open to input from all interested parties. Metzenbaum backed off.
But there was one more hurdle left to clear, as Wirth worked against the looming deadline for adjournment. The House version of the bill had included a section that would have required each cable system to hire minority employees in proportion to their presence in the community served by the system.
The provision had been inserted at the insistence of Rep. Mickey Leland, a Democrat of Texas, a member of the powerful Congressional Black Caucus, which was keeping a close eye on all legislation to determine how it might affect minority hiring practices. Wirth had given his word to Leland (and to Leland's administrative assistant Larry Irving) that the provision would remain in the bill.
But the Senate version had no such provision, and the conservative members of the Senate - led by Jesse Helms of North Carolina and Orrin Hatch of Utah - refused to allow a provision mandating what they viewed as "racial quotas" into the legislation. There seemed to be no way out.
By Wednesday night Oct. 10, Wirth returned to his office after yet another meeting with the Senate side. There were less than 24 hours left before Congress would adjourn. The Senate wouldn't give in. Wirth told his top aide, Tom Rogers, "There's no way. This won't happen."
As Rogers recalled, all the lobbyists had gone home, convinced the measure was dead. Mooney remembered leaving the Capitol late that night with the feeling that the bill "was in grave danger. I couldn't sleep." Time was running out.
"I went into a room with Howard Simons (co-counsel of the Telecommunications Subcommittee)," Rogers remembered. "We talked about how hard we had worked to get to this point. And we both knew that if the bill didn't pass now, it would never happen again. So I went in to see Tim and asked him to talk to Mickey and give us permission to negotiate" on the EEO provisions.
Wirth made the point that if the bill died there would be no progress on minority hiring, whereas if some compromise could be worked out it might be better than nothing.
"Mickey agreed," Rogers said, "and told Tim 'Just don't sell me out.'"
Wirth told Rogers: "See what you can do." Rogers phoned Senate counsel Ward White, waking him around midnight, and asked him to come down to see if they could come up with something each could support.
The two agreed to draft a new provision that would eliminate any reference to numerical quotas, but would beef up the FCC's equal opportunity enforcement mechanism. Rogers took the deal to Leland and made the argument that the compromise was "a major step forward," even if it wasn't everything Leland had wanted. Leland agreed.
If it hadn't been for Leland's willingness to compromise "to step up in a highly charged atmosphere and make a decision," as Rogers later described it, the Cable Act would never have passed.
The next day bleary-eyed members of the House and Senate both cleared the measure, just a few hours before the Congress adjourned.
The Cable Act of 1984, which had been cobbled together in the waning hours of the congressional session, changed the cable industry more fundamentally than any development except the satellite.
The legislation largely freed cable from regulation by the cities. It allowed systems to charge what the market would bear and to invest huge chunks of the new revenue from basic cable into the development of new programming networks, new technologies and new services. The bill gave cable operators enormous new clout with the financial community, which could make loans without having to worry about whether cities would permit rate increases or renew franchises.
But the Cable Act of 1984 also put the industry under the protection of the Congress rather than the Constitution or the courts, as people such as Leonard Tow had preferred. And what the Congress could grant, the Congress could take away, as the industry would discover less than a decade later.