Chapter 9: Big Money

Passage of the 1984 Cable Act ushered in the Golden Age for the cable industry. The new law ended regulation of rates and provided assurance of franchise renewals. And a series of legislative, judicial and business victories followed that propelled cable to the forefront of American business. All of a sudden this sleepy little industry became a darling of Wall Street and a financial and programming powerhouse generating billions of dollars of revenue and threatening to topple the broadcasters from the position of dominance they had held over television since the 1940s.

But before the fruits of the Cable Act had ripened, some of the biggest corporations that had entered the cable operating business at the beginning of the decade made an exit, demonstrating that just because a company has a well-known name doesn't mean it necessarily has an exquisite sense of business timing.

The exit of American Express, Westinghouse Electric Co., General Electric Co. and Dow Jones & Co. from cable system ownership enhanced the power of those companies that remained in the business for the long haul. These included the biggest MSOs such as Tele-Communications Inc., ATC and Warner. And the departure of some big names also spurred the growth of mid-sized companies such as Continental Cablevision, Century, Falcon and Comcast.

The story of Comcast in the last half of the 1980s illustrates how a mid-sized MSO parlayed rate deregulation, urban franchises, deft financing, a willingness to bet the farm over and over, and a deep belief in the long-term prospects of cable to enter the ranks of America's biggest companies. At the heart of the Comcast story were three men: Ralph Roberts, Dan Aaron and Julian Brodsky.

Julian Brodsky is a big man. He has big eyes, a big nose, a big voice and a big laugh. And he likes to do big deals. In 1984 he would do the biggest deal of his life, one that would double the size of his company and catapult it into the ranks of the nation's largest cable operating companies.

Twenty years earlier Brodsky's size almost cost him his first job in the cable business. He had applied for work with Ralph Roberts, a businessman who had just sold his men's accessories company and was in the process of buying his first cable system. When Brodsky came to see Roberts about a job, Roberts didn't know how to respond. There just didn't seem to be a way to squeeze a man of Brodsky's dimensions into the tiny office where Roberts was working.

"That's okay," Brodsky said. "I'll make do."

He arrived for his first day on the job with a folding card table and chair which he set up in the hallway. Brodsky wasn't about to let this chance pass him by.

To join Roberts, Brodsky had left a Philadelphia accounting firm where he'd done tax work for several Pennsylvania cable companies and had helped Roberts sell his business. "I loved the cable business," Brodsky later recalled, "and I loved Ralph Roberts. When the chance came to put the two together I wasn't going to let it go by. I went to Ralph and said, 'You aren't doing this without me.'"

Roberts was born in New Rochelle, N.Y., and grew up in Philadelphia. He always wanted to be a businessman. After graduating from the Wharton School at the University of Pennsylvania and serving a stint in the Navy, he started a business making golf clubs. That folded when somebody forgot to heat the shafts of one shipment of drivers, causing them to bend in the shape of a pretzel when the golfer first teed off.

Roberts then worked for an ad agency in New York and later for the Muzak Corp. He founded his own men's accessories business, selling belts, suspenders and cufflinks. But two new developments -- the Sansabelt pants and the button shirt sleeve -- convinced him in the early 1960s that the time had come to get out. The sale left him with a handsome profit but no business to run.

"Then one day," Roberts later recalled, "in walks Dan Aaron." Aaron was a former Philadelphia newspaper reporter who had taken a job with Jerrold Electronics writing manuals and later moved to the cable operations side of the business. He was calling on Roberts in an effort to sell him one of Jerrold's cable systems in Tupelo, Miss.

Robert agreed to buy the system on one condition: that Aaron agree to join him to run it.

Roberts, Aaron and Brodsky made an unlikely looking trio. Brodsky was a huge bear of a man, Aaron a small wiry type and Roberts a dapper, courtly, fellow. Brodsky was always looking to expand and to find new ways to finance expansion. Aaron was more concerned with making the existing systems work and with not overloading the Comcast staff. And Roberts came down somewhere in between.

As Brodsky later recalled, "I had my foot on the gas, Dan had his foot on the brake and Ralph had his hands firmly on the steering wheel."

They structured each cable system as a separate entity so, according to Roberts, "If one went down the tubes, the whole company wouldn't be in jeopardy." Roberts, a child of the Depression, also insisted that the company always keep a large sum of cash on hand, just in case.

And in the early days he didn't put all his eggs in the cable basket. He became a major franchisee of Musak and kept a small men's fragrance business. The men's accessories business, he recalled 30 years later, still seemed much more exciting than cable which, although profitable, seemed to him "dull as dishwater." (Years later, some Comcast employees would discover a stock of the cologne in a back closet when Comcast moved its headquarters.)

The first systems were financed by local Philadelphia banks where Roberts had done business, by Jerrold Electronics and by finance companies that would loan Comcast money at four to five points above prime.

In 1965 Brodsky discovered what he later called his "Holy Grail" of financing. It was a deal with Home Life Insurance Co., one of the first insurance companies to lend to cable, that provided 12-year loans at 6%-7% fixed interest.

Later Brodsky would make an even sweeter deal. To finance the acquisition of a system in Flint, Mich., Comcast arranged a 16-year loan from the John Hancock Insurance Co. with the stipulation that there be no principal payments, only interest, for the first 11 years.

For a cable operator, where the big construction costs come in the first three or four years of operation in a major market and profits often don't appear until 10 years after the system launches, this was a near-perfect financing vehicle.

Brodsky made use of limited partnerships and took the company public in 1972, just before the bottom dropped out of cable stocks. (Comcast opened trading at $7 a share in June of 1972 and had dropped to $5.50 by the following month. It would hit 75 cents a share at bottom, which Brodsky recalled as the days when the Comcast investor could swap a share for a bottle of beer.)

Brodsky also made use of new developments on the tax front. In the 1970s after a long search, he was finally able to find a law firm that would issue an opinion that the revenue from industrial revenue bonds would be tax-free to the investor. Comcast made use of seven such arrangements (saving 200 basis points in interest rates) until the law was repealed for entertainment companies (after Congress discovered that industrial revenue bonds were being used to finance, among other things, porno movie houses.)

In 1980 Congress, in an effort to spur capital spending, enacted a new law that allowed companies with excess tax write-offs to sell those write-offs to other companies that could use them. Through GE Capital Corp., Comcast was able to sell millions of dollars of prospective tax write-offs to such companies as Ford, IBM and GE itself. It would then use the money to construct or acquire cable systems that would generate even more tax losses that could be sold for even more cash.

The deal only lasted two years before Congress realized that it was losing billions in revenues. But Brodsky loved it while it existed. "You hit the ball where it is pitched," he recalled with a laugh.

By 1983 Comcast had become the 18th largest cable company in the country, with some 500,000 subscribers. But it still wasn't in the ranks of Group W, TCI or ATC.

Then Brodsky got a call from a friend at Merrill Lynch. Comcast was about to become a bit player in a much larger business drama of the 1980s involving such players as Kohlberg, Kravis & Roberts, Drexel Burnham Lambert, Shearson Lehman Bros., Merrill Lynch and other huge New York investment firms.

KKR in particular had mastered the technique of joining with the management of a company, borrowing huge sums of money and then buying out the shareholders to gain control of the enterprise. Drexel, under the leadership of Michael Milken, had pioneered the use of junk bonds -- high yield instruments that were used to buy out companies. (Brodsky, although he never used junk bonds, admires Milken as a brilliant finance mind and has as his on-line names, "Highyield" and "Junquer.")

These were the days later depicted in the book and movie Barbarians at the Gate. The competition between the investment houses to do deals had become white hot by early 1985 when Storer Communications, one of the biggest MSOs with some 1.5 million subscribers, went into play.

Cable companies were logical targets for corporate raiders. Their big debt payments, huge construction costs and tax write-offs for depreciation depressed their earnings and with them the price of their shares. But they also generated huge internal pre-tax cash flow. And, after passage of the 1984 Cable Act that would deregulate basic cable rates in 1986, the Wall Street firms could see future increases in revenues.

Low stock prices, high cash flow and the prospect for big jumps in revenue made those companies where the majority control could be purchased on the open market tempting takeover targets. Many cable companies -- Jones, Comcast, TCI, Cablevision Systems, Cablevision Industries, Cox -- were structured so that control was in the hands of a single individual or a small group, usually including management.

But some others were vulnerable. Among them was Storer. Like many cable companies in the early 1980s Storer had won some big franchises and was busy upgrading other systems. Construction costs, depreciation and interest had depressed earnings and the company had posted a loss of $40 million in 1983 and $16 million in 1984.

The stock price by the middle of 1985 was $65 a share versus the $92 a share that Paul Kagan estimated the company would be worth if it were broken up and sold.

For the Wall Street sharks these numbers were blood in the water.

Coniston Partners opened the drama with a bid to buy out the company in partnership with Peter Storer, the son of the founder. But it wasn't long before KKR and others joined in the fray.

When KKR got in, Merrill Lynch was determined not to let this deal slip into the hands of its Wall Street rival. But it needed a partner who knew something about cable.

Comcast had begun a relationship with Merrill Lynch in the early 1980s when Brodsky, at Merrill Lynch's invitation, became one of the first cable CFOs to sell bonds in Europe to raise capital.

Merrill Lynch and Comcast figured Storer would sell for around $1.2 billion. It would be a huge leap for Comcast, a company that itself was worth only about $500 million. But Shearson Lehman, Comcast's investment banker, assured Brodsky the deal could be done. Merrill Lynch offered to raise $900 million, using its own balance sheet as collateral, and Comcast would have to raise the rest.

In the end the Merrill Lynch/Comcast team was outbid by KKR, which purchased Storer for $1.6 billion (and sold it three years later for $2.8 billion to a partnership of TCI, Knight Ridder andComcast).

Though the bid fell short, for Comcast it was like a trip to the majors for a AAA baseball player. It had given them a taste of what the big leagues were like and given other teams a chance to see them in action. It would not be long before they were back.

"We came in from no place," Brodsky recalled, and almost pulled off what was, at that time, the largest cable purchase in history.

Comcast's chutzpah was not lost on the other cable operators. A few weeks later, in July 1985, Brodsky was sharing a taxi out to the airport with Stewart Blair, the Scottish-born investment banker who had been hired as a top aide to TCI president John Malone.

Blair mentioned the rumors that Group W Cable, then the third largest MSO in the country, would come up for sale.

"Why don't we get together on this," Blair said. When Brodsky asked "Why us?" Blair replied, "Because you're the last guy I want to see coming down the alley the other way on this deal."

An excited Brodsky quickly called Ralph Roberts who reported that he also had an interesting conversation that day. His was with Nick Nicholas, executive vice president of Time Inc., asking if Comcast would like to join with Time in bidding for Group W's 1.9 million subscribers.

The Group W deal marked a major departure from previous cable system sales. Traditionally a seller would put his company up for sale and then select the highest bid from several that were submitted. Potential buyers would compete against one another.

But the Group W deal was different. Westinghouse Electric Co., Group W's parent, was facing some difficult times in 1985. Its manufacturing division was producing less than stellar results. Its investments in new technologies, including a robotics company, had flopped. And the investment in cable had been a disappointment as well.

Group W had gotten into cable by buying TelePrompTer Corp. in 1981 for $764 million. But it had found the going tough. Many of the TelePrompTer Systems needed major upgrades and improvements in customer service. (When the Group W brass visited one TPT system the local newspaper ran an editorial asking "Who are you if you missed the last part of President Reagan's inauguration speech, the last quarter of the Super Bowl and the middle innings of the World Series? Answer: a TelePrompTer cable subscriber.")

Group W poured $800 million into building new franchises and upgrading existing systems. But the slow response of subscribers in the big cities hurt cash flow and earnings. And it stumbled badly when it attempted to get into the programming arena. Satellite News Channels, its effort to take on Ted Turner, was a failure. It sold off its interest in Showtime to Viacom after Westinghouse executives decided they didn't want their company to be associated with a network that offered R-rated films.

"I didn't realize it would be as difficult as it was," Group W chairman Dan Ritchie told Business Week in early 1985.

Like Storer, Westinghouse had found that the cable division was a huge drag on earnings. And like Storer, Westinghouse was vulnerable to corporate raiders. In 1985 the company, according to Business Week, had a market capitalization of $6.7 billion but a breakup value of more than $9 billion. It would be a huge deal for any hostile takeover artist to attempt, but not out of the question in the go-go '80s.

So Westinghouse chairman and CEO Douglas Danforth decided to dump the cable division. And he wanted to sell it in one piece, by the end of the year and to a buyer who would be certain to close the deal. To handle the transaction, Westinghouse hired a group of high profile New York investment bankers rather than a firm with more experience in cable.

Brodsky remembered the meetings to go over the deal. "We had no advisors, just a couple of lawyers, led by (TCI counsel) Jerome Kerns. On the other side were dozens of lawyers and investment bankers" representing Group W.

By placing so many strict conditions on the transaction, Westinghouse essentially invited the prospective buyers to get together to offer a single bid instead of bidding against each other. No single cable company could afford to buy all of Group W. Had Westinghouse sold its systems off in clusters or been willing to wait longer, it might have received a far better price than the $911 per subscriber it actually got. In fact, within six months of the Group W deal, a half dozen cable system transactions would be concluded at prices in excess of $1,400 per sub.

At $1.7 billion the selling price barely represented an increase over what Group W had invested in TelePrompTer: $764 million to buy the systems and another $800 million to build and upgrade them. Depending on how the accounting was done, some analysts speculated at the time, Group W may have been the only major company in history to have lost money by investing in cable systems.

But the deal gave Westinghouse what it wanted: a single sale by the end of the year to a buyer that was on firm financial footing. And it left the company in the cable programming business. As distributor of the Nashville Network and later Country Music Television, Group W would make millions in cable programming.

The deal also enabled TCI, Time and Comcast to add about 500,000 subscribers each at a bargain basement price (the three sold off additional pieces to Century Communications and to Daniels & Associates).

Westinghouse was not the only big name to exit the cable business in 1985 after less than a decade in the business.

American Express and Warner Communications had joined together in the mid-1970s to create cable operating and programming companies. But Amex quickly developed cold feet, especially when Warner Amex Cable began to win big city franchises that required huge sums to build. Warner's swashbuckling chairman, Steve Ross, was more bullish on cable, but by 1985 had his back to the wall after the failure of Warner's Atari video game system.

American Express figured that with Ross facing a possible hostile takeover from Australian media baron Rupert Murdoch, the time was ripe to make Ross an offer he couldn't refuse for a company that served 1.2 million cable customers and had interests in MTV and Showtime.

Amex offered Ross $850 million in cash and assumption of $500 million in debt or $1,125 per sub for the cable operating company. It then made a side deal with ATC and TCI to sell the two of them the operating company for exactly that amount. Amex also would purchase the programming services and sell them off.

With all the skids greased, Amex then triggered a put-call clause in the Warner Amex partnership agreement that allowed either partner to name a price and the other partner to become a buyer or a seller at that price.

Amex thought they had Ross in a corner and that he would be forced to accept what was a lowball offer. But Ross had some cards of his own to play. He sent Warner Bros. president of pay TV Ed Bleier over to see Viacom president Terry Elkes. Bleier was a major seller of programming to HBO and Showtime and had an interest in seeing a good competition between the two.

"I told Terry that if Viacom didn't step up and buy Showtime and The Movie Channel my name at HBO would be 'take or leave it,'" Bleier said. Viacom agreed to buy Warner Amex's two-thirds of MTV and 19% of Showtime/TMC for $500 million in cash and $18 million in warrants.

@

@

1

The deal enabled Warner to turn the tables on Amex, choosing to become the buyer rather than the seller at the price Amex had set: $1,047 a subscriber. Within four years Warner would sell those same subscribers to Time Inc. for a price Paul Kagan estimated at $2,295 a sub.

But, like Westinghouse, American Express got what it wanted: an exit from a business it had not fully understood and which drained its earnings and hammered its stock price.

Dow Jones' departure from the cable operating business was less spectacular. As an investor in Amos Hostetter's Continental Cablevision it had never really been a full-fledged cable operator. By the mid-1980s it was much more interested in developing its information delivery systems. Dow Jones had invested in a company called Telerate that delivered financial information to personal computers via telephone lines.

Anxious to delete the Continental debt from its books, Dow Jones sold back some of its interest in Continental to the company in 1985 for a price Paul Kagan Associates pegged at $989 per subscriber. Dow Jones had bought into Continental in 1981 for $757 per sub, so it made a tidy profit on its excursion into cable. But it could have done even better. By 1992 Continental would sell a portion of its company to Boston Ventures for a price Kagan estimated at $1,774 per sub.

General Electric's exit from cable operations was forced by its purchase of RCA Corp., parent of the NBC television network. FCC rules prevented GE from owning both cable systems and a broadcast network. It sold its systems in November 1985 to United Artists for $985 a sub. But GE clearly understood where the future of television lay. To run NBC, GE tapped Bob Wright, a former president of Cox Cable. Wright quickly began to explore how NBC might enter the cable business.

Capital Cities was also forced out of the cable operating business when it bought the American Broadcasting Co. Cap Cities sold its systems to The Washington Post Co. for $1,000 a subscriber. (Cap Cities CEO Tom Murphy said at the time he was heartbroken to have to sell his cable systems.) But Cap Cities/ABC remained very much in the thick of the cable programming business as the owner of ESPN and an investor in Hearst ABC Video Enterprises.

To the corporate titans who ran American Express, Westinghouse and Dow Jones, 1985 seemed like a good time to get out of the business. But it would prove even better for those who stayed in. TCI, Comcast, Continental, ATC, Century, Cox and others grew enormously as urban systems were built, system extensions and better marketing brought more customers to existing systems, and as other companies, big and small, sold out.

Such growth demanded major changes in the way these companies were operated. At ATC, which served 821,000 customers in 1980 and four million by 1988, the growth prompted chairman Trygve Myhren to institute changes that would almost completely transform the company his predecessor, Monroe Rifkin, had founded and built into the nation's largest MSO.

Myhren's father had immigrated from Norway and gone to work doing technological research for the New Jersey Zinc Co. in Palmerton, Pa. There the young Myhren's best friend was the son of the man who ran the local cable system.

Myhren was something of an Eagle Scout type: president of the high school student body, editor of the newspaper, champion skier. He graduated from Dartmouth College and its Amos Tuck business school in a total of five years. At Dartmouth his major was philosophy and political science. In business school he focused on marketing.

After a stint in the Navy, a job at Procter & Gamble and a spell running his own marketing company, Myhren had been recruited to work at ATC when Rifkin decided his company would need a cadre of well-trained marketing executives to take it into the era of pay television.

As vice president of marketing at ATC, Myhren oversaw much of the ATC's premium service strategy, including the implementation of multipay. He developed an in-house pay service, Cinema Plus, to give ATC leverage in dealing with HBO. He launched a pay-per-view service, EvenTV, that would prove the predecessor to Viewer's Choice. And he brought to ATC the head of the Literary Guild Book Club, Jerry Maglio, who would be responsible for some of the most innovative marketing techniques in the industry over the next decade for ATC, Daniels & Associates and United Artists.

(When Myhren brought Maglio in to see Rifkin for his first interview, Rifkin opened with a question: "My wife has canceled her subscription to The Literary Guild Book Club a dozen times. Why do you keep sending her books?" Maglio asked if she was paying for the books she received. Told she was, Maglio said "Why should we cut her off as long as she is still paying us money?" He got the job.)

After Time Inc. bought ATC in 1979, Rifkin tapped Myhren to be his successor as chairman/CEO, teaming him with Joe Collins who served as president and COO.

As Myhren took over the CEO duties at ATC he set about to remake the company to deal with its enormous growth, putting more power into the field where individual system managers were closer to their customers and better able to make decisions than corporate headquarters.

Myhren set up a training program for system operators. He brought them to Denver to learn how to do full budgets, plan for capital spending, design and implement marketing campaigns, improve customer service, develop local ad sales, handle public relations, deal with franchise authorities and undertake countless other tasks that had previously been handled largely by the headquarters staff. To run the training program for the ATC managers, Myhren selected one of ATC's first employees, June Travis.

"We had a highly centralized company that had grown like topsy," Myhren said. "We had begun to lose touch with the customer."

He instituted annual surveys to measure the public image of each ATC system. And he tied part of the bonuses paid to each system manager and staff to the results of that survey. By improving customer service and their system's public image, ATC employees could also fatten their own paychecks.

The decentralization strategy also enabled ATC to trim its headquarters staff, largely through attrition. By cutting several hundred jobs, mostly in Denver, the company saved $41 million a year. (The amount that ATC saved through this downsizing plan was more than 10 times the company's annual revenue when it launched in 1968.)

Myhren also launched a campaign to develop clusters of ATC systems around major urban areas. The concept was that if cable were to compete effectively with other media for viewers and ad dollars all the cable systems in a particular area needed to be under common control. Television stations, newspapers, radio stations and telephone companies served areas that might have dozens of cable systems, each with a different owner and a different programming lineup.

Clustering systems in a single metropolitan area under a common ownership made it easier to mount effective marketing, program promotion and local ad sales campaigns. It also enabled ATC to cut costs by eliminating staffing and offices.

ATC's strategy, adopted by most other major MSOs, was to acquire systems in areas where ATC already had operations. One of the first such efforts was in Rochester, N.Y., where the purchase of systems owned by Burt Harris gave ATC ownership of both the city and the suburbs.

Maglio, at ATC and later at Daniels, helped introduce more sophisticated marketing techniques to the business. He developed a formula to measure the amount that could be spent to acquire a new subscriber. (For example: a subscriber might last 36 months on a system, generating $10 a month in revenue, half of which would be operating cash flow. Thus, an investment of $20 to acquire a new subscriber would generate a return of 800%. Those kinds of numbers gained the attention of financial officers when it came time to set the annual marketing budgets.)

While ATC was restructuring its systems and gearing up for a new era of cable, just up I-25 in Denver the folks at TCI were undergoing some transitions of their own. In particular TCI began to make substantial investments in programming in the mid-1980s.

TCI's first programming investment had come in a typically casual way.

In the late 1970s one of the vice presidents of the NCTA was a young, articulate, ambitious quick study named Bob Johnson. The son of Illinois factory workers, he had attended the University of Illinois and the prestigious Woodrow Wilson School of Diplomacy at Princeton University. His dream (which he still held 30 years later) was to become an ambassador.

After the Wilson School, Johnson set out for Washington, D.C., where he landed a job doing public relations for the Corporation for Public Broadcasting. He later moved over to Capitol Hill, working for D.C. delegate Walter Fauntroy. At NCTA he had been in charge of the pay television division, working with HBO and Showtime and major MSOs to help fend off government regulation of pay TV.

There he got to know TCI president John Malone who told Johnson to call if he ever had an idea for a business.

In 1978 Johnson "got this idea," as he later recalled, for a cable channel with programming geared to minorities, particularly African Americans. Although he had no business training or experience, he began to scout out what programming might cost and got UA Columbia chairman Bob Rosencrans to pledge some time on the satellite transponder being used to transmit USA network.

Then Johnson went out to Denver to visit John Malone.

"I told John what I wanted to do, and he like the idea," Johnson later recalled. "He asked me: 'How much do you need?' And I told him it would cost $500,000 to get started."

Malone said he had been thinking about a minority channel as well to help draw new cable subscribers, particularly in the ethnically diverse major cities.

"So he turned to me and said 'I'll buy 20% of your company for $100,000 and I'll loan you the rest. What do you say?' " Johnson recalled. "When I agreed, he called in his lawyer who drew up a one-page agreement and his treasurer who handed me a check for half a million dollars. The whole thing took about 45 minutes. It was more money than I had ever seen. It was more money than I had ever imagined existed. And what John didn't know was that I would have done the deal with the numbers reversed (80% for TCI and 20% for Johnson). But I think he just liked the idea and the idea of helping somebody out."

As Johnson walked out of Malone's office he turned to the TCI chief and said, "You know, John, I really don't have any business training or experience. Do you have any advice for me?"

And Malone, Johnson recalled, replied "Just keep your revenues up and your expenses down. You'll be fine."

Twenty years later Black Entertainment Television and its spin-off networks, BET on Jazz and Action Pay Per View, would be reaching more than 50 million subscribers in the U.S. and millions more abroad. Johnson would be one of the country's most successful programming executives and one of the most successful African American businessmen in any business. The company he had founded with the spur-of-the-moment backing from TCI would be generating around $80 million a year in operating cash flow on revenue of $160 million and be worth, according to Paul Kagan Associate's Cable Program Investor newsletter, in excess of one billion dollars.

More than that, BET created opportunities for hundreds of African Americans to gain and demonstrate business skills that could then be transferred to other arenas and other businesses.

But TCI's involvement in programming remained limited until four years later when Malone made a dramatic speech at the NCTA convention. He noted that many of the cable programming networks were foundering, and many were seeking financial support from cable operators. And he reasoned that just as the oil refineries needed to ensure a supply of oil, and got into oil drilling, so must cable operators get involved in supporting cable networks. Without the cable networks, he said, the industry would have nothing to sell.

To spearhead TCI's involvement in cable programming, Malone tapped John Sie, fresh from renegotiating the Pittsburgh franchise. Sie worked on two fronts: to rescue foundering cable networks and to develop what he called "punch-through" programming that would give cable a high profile with viewers.

At the top of the list of foundering programming networks was the creation of a boyish-looking dreamer and romantic named John Hendricks.

Hendricks was born in 1952 in a coal mining town in West Virginia where his father was a builder and contractor. When John was six, the family moved to the booming town of Huntsville, Ala., one of the nation's new centers of activity in space exploration.

"It was a town," Hendricks later recalled, "full of dreamers." He was one of them. He went to school with the children of engineers who built rockets that went to the moon. His sister married the head of the team that built the first Lunar Rover. Hendricks recalled once sitting in on a meeting in his sister's living room when the group decided to use piano wire for the spokes of the lunar vehicle. It was a magic time, and it instilled in Hendricks a love of learning and adventure that never left him. Watching television, he gravitated to the few documentaries that existed, particularly on PBS.

After graduation from the University of Alabama, he took a job at the University of Maryland as director of grants. An acquaintance of his had produced a documentary on the common roots of the world's religions, called "The Children of Abraham." It had been shown on a Washington, D.C., TV station, and Hendricks was asked to help it get broader distribution.

He never did. But the effort prompted him to wonder why there wasn't a home for such documentaries, a channel that would be devoted entirely to films about exploration and science and adventure: "I became obsessed with it."

He visited with Winfield Kelly, head of the cable system in Maryland's Prince George's County, to ask how to start a cable television channel. Kelly hooked him up with Ken Bagwell of Storer Cable. Storer had just come out of the Spotlight pay service and because of that experience and bank covenants preventing entry into additional programming services, took a pass. But Bagwell told Hendricks the idea was a good one.

On the plane back from Miami, Hendricks toyed with some ideas for a name: He wrote down Horizon, Explorer, Vista, Journey and Discovery.

"I just thought Discovery was a name people would like better," he said.

His stockbroker introduced him to some of the people at investment company Allen & Co. They like the idea and urged Hendricks to develop a full business plan.

"So I went to the library and found a book on how to do a business plan," Hendricks said. The Allen folks had asked him to focus on three issues: access to programming, distribution and advertising.

Hendricks put together a series of letters of intent. The British Broadcasting Corp. and TV Ontario in Canada offered to provide low cost programming from their libraries. Group W executive Harlan Rosenzweig offered to put up a sneak preview week of programming on its transponder on the new Galaxy cable satellite.

At the Western Cable Show in 1984 Hendricks set up a rudimentary booth to promote the sneak preview. He sent letters to cable system operators asking them to watch and, if they liked what they saw, to send in a letter saying so. He received 900 responses. He took those with him on a trip to Madison Ave. to seek advertisers.

Pretty soon he had "letters of intent" covering all of the elements Allen had asked for: advertising, distribution and programming. None was binding, but it was enough for Allen & Co. to write him a check for $250,000 and raise another $2 million.

That got him started, but wouldn't keep him going. As Hendricks worked to get his service on the bird, Allen scrambled to raise the money to cover the $800,000 a month Discovery would lose in its first few years of operation. (It was free to cable systems and had essentially no advertising revenues. Major costs were $250,000 a month for a transponder and $250,000 a month for programming.)

Then a financial angel appeared in the form of the Chronicle Publishing Co., owner of The San Francisco Chronicle newspaper and Western Communications, a mid-sized cable system operator. The man in charge of looking for new investments for Chronicle was very positive about Discovery and would recommend to the Chronicle board that it buy 40% of the new network for $6 million. His name was Leo Hindery.

Hendricks was ecstatic. He had been fending off creditors, promising them almost daily that a check would soon be in the mail. When Hindery made the commitment, Hendricks called the BBC, to whom he owed $500,000 for programming, and promised they would have a check by Tuesday.

Then the Chronicle board changed its mind, overruling Hindery and deciding not to invest in Discovery. (Had they done so, their $6 million investment in 1985 would have been worth roughly $2.5 billion a decade later).

Hendricks was crushed. "I was very down," he recalled. "For the first time in my life I thought 'this thing is falling apart.' My wife still calls it 'Black Tuesday.'"

But financier Herb Allen had one more card to play. He called TCI president John Malone and explained what was up. "John said, 'We can't let anything happen to Discovery. I'll send John Sie down to meet with Hendricks.'"

"We thought Discovery was a great idea," Sie recalled. "It had legs." But he didn't want TCI to be the only investor. He wanted three or four other MSOs to get involved, to provide distribution and to share in the risk.

Sie developed the idea to put together a consortium of cable operators to fund the network. Each would put in an equal amount, and Hendricks would use the money to finance long-term deals with programming suppliers, capping the cost of product. The network also would have to charge cable systems a fee to ensure the revenue it would need to cover expenses. "The strength of cable networks had always been the dual revenue stream," Sie recalled. "We wanted to apply that to Discovery."

But Sie added a twist. If per-sub revenues fees would cover the network's expenses, he reasoned, any advertising revenue would be profit. Part of that, he decided, should go to the cable operators who had agreed to back the network. He set up a deal in which Discovery agreed to rebate part of its profits from the sale of advertising to those operators who signed on as charter affiliates.

It was a complex and innovative scheme, one that reflected Sie's experience on both sides of the operator-programmer relationship.

He quickly drafted a list of MSOs to be contacted. The first call was on Newhouse Communications president Bob Miron.

As Hendricks later recalled, "We met with Miron during the NCTA convention in Dallas at some Chinese restaurant John had picked in one of those suburban shopping centers. We explained the concept to Miron, and he jotted some numbers down on the back of a napkin: 20 million homes times 5 cents per home per month. It would be enough to cover Discovery's operating expenses until advertising kicked in. And the advertising revenue would then all go to the bottom line and to the charter affiliates. Miron put down his pen and picked up his chopsticks.'This will work,' he said. 'I'll pay a nickel for it.'"

Discovery, Miron reasoned, provided "good, wholesome" programming and could help attract families to cable as well as counterbalance the image cable had in some areas as a service that offered R-rated movies and other programming that was objectionable to some segments of the population.

2

Sie and Hendricks charged on. Comcast and Continental said no. United Cable signed on. The final meeting was with Cox at the international terminal at JFK airport in New York. At the end of the presentation, Hendricks recalled, Cox president Jim Robbins "kind of nodded. He would recommend it to the board."

The deal gave each of the four MSO partners 10% of the company for a total investment of $6 million. Each would ensure Discovery carriage on most of their systems, guaranteeing a huge subscriber base and per-sub revenue. That, in turn, could be used to entice advertisers.

The concept, as Sie later explained, was to "flip" the normal cable system relationship with programmers in which the system paid a fee and the network kept all the ad revenue. The Discovery arrangement would allow the operator as well as the network to share in the dual revenue stream of subscriber fees and advertising.

To help Discovery and other cable networks gain the viewers they needed to attract advertisers, Sie persuaded TCI to abandon the practice of charging extra money for additional sets hooked up to cable in a single home. This cost systems revenue since operators would typically charge as much as $3 per set for an additional outlet even though it cost them nothing to provide the service once the installation was completed. Sie reasoned that with more people watching in more rooms of the house, more sets would be tuned to cable networks, enabling them to charge more for advertising and enabling cable systems to gain more for local ads. Rate hikes instituted in the wake of the Cable Act allowed TCI to regain much of the lost subscription revenue.

Sie's quest for "punch-through programming" that would give cable something really big to sell on its basic service led to the door of the National Football League. NFL football had been for more than a decade the most-watched programming on television. It was also some of the most expensive.

Sie persuaded a group of other MSOs to join TCI in a consortium to bid for a package of NFL games that would be shown exclusively on cable TV on Sunday night. Sie convinced both Turner Broadcasting and ESPN, the most likely bidders for the package of NFL games, not to get into a price war with the consortium. The MSOs would buy the games and then divide them up among the networks or carry them themselves.

When Warren Buffett, Cap Cities/ABC's largest shareholder, found out about the arrangement he told ESPN president Bill Grimes that ESPN had to have the rights. When Buffett spoke at Cap Cities, the executives listened. Grimes called Sie and told him that ESPN had to make its own bid. The cable operator then decided to back off so as not to ignite a bidding war. ESPN also had extra leverage because ABC already had the rights to Monday Night Football. ESPN offered $135 million for a package of Thursday night games for which it imposed a 25 cents per subscriber surcharge on top of its normal affiliate fee.

The price was high, and some cable operators balked. But by the following decade the concept of the NFL on cable had become well accepted.

The concept of an MSO consortium to rescue a programmer came to its apex in 1987. After fending off the challenge of Satellite News Channels, Ted Turner entered a period of enormous prosperity, with both WTBS and CNN generating profits. But for Turner success was dangerous. It only whetted his appetite for the next adventure, and the next one had to be bigger and more dangerous than the last.

Turner was fully aware of all the huge corporate mergers and leveraged buyouts, many financed by junk bonds, going on around him in the mid-1980s. And he was eager to play. His first effort was a bid to buy CBS, an offer that was so thinly financed it actually sent CBS stock down on the day it was unveiled.

Turner lost his bid for CBS after the company bought back a huge amount of its own stock. The effort left CBS so weakened it was soon bought by Loews Corp. chairman Laurence Tisch. (All three broadcast networks underwent ownership changes in the mid-1980s. ABC was acquired by Capital Cities, NBC by General Electric and CBS by Tisch. GE and Cap Cities had both been in the business of owning cable systems, and each had a strategy that involved more investment in cable programming. Tisch understood nothing about cable, and little about television. He would cut off CBS completely from cable.)

Rebuffed by CBS, Turner turned his attention to the next best thing to a broadcast network; a Hollywood studio, in particular the ailing queen of the studios, MGM.

MGM was owned by financier Kirk Kerkorian, and its banker was the king of the junk bond; Drexel Burnham Lambert's Michael Milken). Milken convinced Turner that by using junk bonds it might be possible for TBS to purchase MGM. Milken, representing both the seller (Kerkorian) and the buyer (Turner) in the deal, devised a complex scheme under which Kerkorian would loan Turner some $2 billion to buy the studio and then Turner would repay the sum by issuing highly leveraged bonds. If Turner could not make the payments, the agreement stated, he would have to surrender stock in his company.

Turner, eager to marry his cable networks, particularly WTBS, to a producer of television programming and movies such as MGM (with a huge library of classic films and television programs), agreed. But the deal took over a year to get done, during which time MGM issued a series of box office flops. The junk bonds looked less and less attractive. After a desperate attempt to raise cash (including selling some of the MGM assets back to Kerkorian for less than he had paid for them) Turner realized he was, as he later recalled, "over-leveraged like crazy."

The major cable operators had been sour from the outset on the idea of having Turner buy MGM. Just prior to the Western Show in 1986, Turner invited a group of cable heavyweights out to the MGM studio lot to explain the deal. Among them were Time Inc.'s Nick Nicholas and TCI's John Malone.

The studio lot, Malone recalled, "was threadbare and dusty and so empty you could have shot off a cannon and not hit anybody."

The group met in the Louis B. Mayer suite. As Malone recalled, "Ted's in there telling us what a fabulous deal this is for the industry and how we all ought to invest in it. He has a set of numbers scribbled down on the back of an envelope. There was a huge negative cash flow." The operators left scratching their heads. There seemed no way to make this deal work. Turner, desperate to raise the cash needed to pay back Kerkorian, began to consider selling assets.

A few weeks later Turner called Malone at home and announced that Time Inc. had offered to buy 51% of CNN. That got Malone's attention. The TCI chief at the time was very protective of the balance of power in the industry and feared giving too much clout, particularly in programming, to HBO parent Time. "Ted," he said, "You can't do that. That's the crown jewels."

"Well," Turner replied. "Either it's that or it will be the KNN (Kerkorian News Network)."

It was, Malone recalled, "crisis time." The TCI chief called a meeting of all the major MSOs in New York and laid down the law. (One can only imagine the scene from The Godfather where the heads of the five families meet to iron out their differences.)

"To bail out Ted we each need to pony up $650 million," Malone told the group. "We don't have a lot of time to do a lot of negotiating. Anybody who's not serious about this get the fuck out."

"We came out of that room with the money signed up," Malone said. TCI, Continental, Warner Cable, Viacom and Times Mirror had each agreed to kick in. Viacom and Times Mirror, Malone later said, had agreed to contribute only on the condition that Time Inc. not be included. Like TCI, they were wary of giving too much power to Time.

But just weeks later Viacom went into play when Sumner Redstone, owner of a major string of movie theaters, made a bid for the company, topping a proposal for a leveraged buyout made by Viacom's management. "Redstone didn't want to make the commitment," Malone recalled. "We lost a $100 million player. I had no choice but to call Nick up and say 'Okay, you're in.'"

The consortium was expanded to include what finally became 31 different cable companies taking a total of 37% of Turner Broadcasting System Inc. The operators were given seven of the 15 seats on the board of directors. But any major activities of the company, including approval of the budget, had to be approved by 12 of the 15 board members. Effectively the MSOs could veto anything Turner wanted to do. Moreover, to ensure the balance of power between TCI and Time Inc., the two agreed that if either one voted "no" on any proposition before the board, the other would vote the same way. In effect, Time and TCI each had to agree before Turner could go forward with any major new plans.

Turner's days of freewheeling, unrestrained swashbuckling were over. Under the new structure he would need approval from the group of cable operators before he did practically anything. Ted, at last, was chained. Or so it seemed.

But like so many times before when he had been tossed into a briar patch, Ted Turner emerged not only unscathed, but stronger than before. In point of fact he had been a partner of the cable operators from the day he put WTCG on the microwave. His entire business was dependent on the support of the cable operators who paid hundreds of millions a year in affiliate fees and ensured that the TBS networks would have enough viewers to entice advertisers.

What the MSO buyout of Turner did was simply to formalize and cement a relationship that had been in de facto existence for years. For Turner it provided a sounding board where he could try out ideas on his best customers. It gave the operators a direct stake in the success of TBS and an understanding of its workings they had not had before.

Within five years after the buyout Turner would launch a dozen new cable network, both in the U.S. and around the world. Many of them -- TNT, Cartoon Network, Turner Classic Movies -- would make use of the library of films that Turner had acquired from MGM. And the company that had revenues of about $250 million a year in 1986 would grow to a conglomerate with $3.5 billion in revenues by 1994.

Premium television, which had suffered badly in the early 1980s, began to find its feet in mid-decade. Stung by the competition from home video, the premium services began to shift the emphasis away from reliance on theatrical motion pictures more toward original fare. This was particularly true at HBO where Michael Fuchs, who had been HBO's first director of original programming, became chairman in 1984. The first made-for-pay movie, The Terry Fox Story, premiered on HBO in 1983. And HBO's made-for-cable productions were gaining critical acclaim and a widespread reputation for production excellence. In 1987 an HBO documentary about the homeless, Down and Out in America, became the first cable program to win an Academy Award.

More and more Hollywood stars lent their talents to HBO, attracted by the creative freedom it offered and by the chance to work on subject matter that the broadcasters were afraid to touch. By the end of the decade HBO had clearly taken on the mantle once worn by CBS as the network most willing to take on controversial, politically-sensitive topics.

While Fuchs was changing the programming fare, Joe Collins, who had come over from ATC in 1984 to stem the HBO bleeding, reorganized the operations. He cut 125 jobs and overhauled affiliate marketing. He introduced "time-locked marketing" to entice the cable systems to spend their marketing dollars at the same time as HBO.

"HBO had been spending lots of dollars on advertising when operators weren't ready to sell it," Collins later recalled. "We organized the market, telling operators that if they ran a sale on HBO and were ready with the phones and telemarketing, we would help with the marketing costs." All the efforts were geared to particular times of the year so HBO could maximize its nationwide publicity just when the operators were ready with local campaigns. The only catch was that the systems had to direct their campaigns only to selling HBO and Cinemax, not other premium services. Showtime howled, but the scheme worked.

Within a year HBO was able to persuade 75% of its affiliates to sign up for the time-locked marketing campaigns.

Premium services were also helped by the rate changes that took place after the passage of the 1984 Act. As operators began to raise rates, they needed to find a way to prevent the total cable bill from growing so large that subscribers would cancel their pay services to pay the higher basic rate.

Many systems dropped the rates they charged for pay services, and more commonly, offered premiums to attract new customers. Operators began to bundle services, offering additional pay channels for a few dollars more than a single channel might cost.

Maglio, by then at Daniels, pioneered in this effort, creating a package he called Showcase and training his customer service representatives to pitch the package first and only sell premium services a la carte if the customer insisted. The strategy created a demand for low-cost premium services dubbed mini-pay.

Bill Daniels and Charles Dolan, two veterans of the cable wars of the 1960s and 1970s, joined together to start a programming company they called Rainbow. They launched two mini pay services: Bravo, a cultural channel, and Escapade, an adult service. Eventually Escapade was taken over by Playboy and became the Playboy Channel while Bravo became the foundation for Dolan's programming empire.

Dolan had always loved movies, as he had demonstrated when he developed the idea for Home Box Office. But HBO concentrated on presenting recently released films. Older films, Dolan reasoned, also had an audience and would be cheap to license.

In 1984 he launched American Movie Classics. To run it he hired a young University of Colorado track star and advertising major named Kate McEnroe. After graduation McEnroe worked for a fledgling enterprise that was attempting to start a women's professional basketball league. One of the people she pitched was Bill Daniels. "Honey", he told her, "you couldn't give me another sports franchise."

But Daniels took a liking to the spunky young woman and recommended her to Maglio who brought her on board to market Bravo and Escapade. By 1984 Dolan had put her in charge of AMC.

AMC was innovative in several respects. It was neither a pay service nor a basic. Like a pay service it had no commercials. But like a basic network it carried a very low per subscriber fee (15 cents per sub per month at launch). AMC left it to operators to decide how to use the service. Some used it as a bonus to basic, offering it to subscribers for "free" as a way to cushion a rate increase. Others used it as an incentive for subscribers to take more pay services, offering HBO, Cinemax and AMC in a package that was less costly than simply getting HBO and Cinemax a la carte.

And AMC developed a style of guerrilla marketing, getting as much for its marketing dollars as any other network. Under McEnroe and marketing vice president Noreen O'Laughlin, AMC hauled out of retirement some of the biggest movie stars of the 1940s and 1950s, taking them on tours of the country. In a given city they would do a dinner for cable operators, appearances on local talk shows and visits to college cinema classes. It was great for the operators, the communities, the actors and most of all for AMC which reaped huge free publicity.

The first to make the trek was Douglas Fairbanks Jr., who visited 50 cities on behalf of AMC. Others who participated included Omar Sharif, Debbie Reynolds and Jennifer Jones. AMC renovated old movie palaces and led the effort to preserve deteriorating films made in the early part of the century. It was all cheap compared to what the broadcast networks, or even the big cable services, spent on marketing. But it did a brilliant job of positioning AMC as the leader in the classic movie arena.

Other programming services also developed clear market niches and became household names in the 1980s. MTV coined a nationally recognized phrase with its "I want my MTV" slogan. It gave away not just money, like radio stations, but such publicity-generating prizes as an island in the Caribbean and singer Jon Bon Jovi's boyhood home. Lifetime's grandmotherly sex advisor Dr. Ruth Westheimer became a cultural icon, reminding people in her squeaky voice and European accent: "Always use a condom."

To recognize the growing array of cable-exclusive programming the NCTA board voted in 1978 to create a National Academy of Cable Programming to present Awards for Cable Excellence (ACE) to the best programming. The broadcaster-dominated Academy of Television Arts and Sciences had decided that only shows that reached at least 51% of all U.S. TV homes could be considered for Emmys. This effectively blocked all cable shows from consideration since cable penetration did not reach 50% of cable homes until 1987.

The first ACE awards were presented at the NCTA convention in 1978 in the basement of the Chicago Hilton. (The first award went to HBO for its Bette Midler special. Presenter Burt Harris had neither seen the special nor heard of Bette Midler.)

By the mid-1980s the ceremony, under the direction of former NCTA director of research Char Beales, had become a major event. In 1983 Turner Broadcasting System senior vice president Robert Wussler arranged for the show to be carried live on WTBS and agreed to foot the bill for the event.

By 1988, Beales recalled, the ACE program had achieved its purpose: to force the Television Academy to allow cable shows to be considered for Emmys. By 1998 cable programming was winning so many Emmy and Academy Awards that the Cable Academy voted to discontinue the national ACEs.

No new programming concept in the history of television created as much frenzy in the financial community as the home shopping craze of 1986. Home Shopping Network had started by accident. Two owners of a central Florida AM radio station -- lawyer and real estate investor Roy M. Speer and record store owner and former disc jockey Lowell Paxson -- had found themselves stuck with thousands of can openers when an advertiser on their station went broke and was forced to pay in-kind. The two decided to sell the can openers over the air. It was a huge success, so much so that they began to buy up other products to sell on their radio station.

In 1982 they launched a television version of their shopping show (with Paxson doing some of the on-air work). In 1985 the service went on satellite free to cable systems that would carry its 24-hour-a-day pitches for cubic zirconium jewelry, porcelain figurines and other goods.

When HSN stock went public in March of 1986 its price soared from $18 a share to $42 a share on the first day. Within a few months it hit $120 a share and analysts were comparing it with Genentech, up to then the most successful new issue ever launched on the New York Stock Exchange.

3

Sie and Hendricks charged on. Comcast and Continental said no. United Cable signed on. The final meeting was with Cox at the international terminal at JFK airport in New York. At the end of the presentation, Hendricks recalled, Cox president Jim Robbins "kind of nodded. He would recommend it to the board."

The deal gave each of the four MSO partners 10% of the company for a total investment of $6 million. Each would ensure Discovery carriage on most of their systems, guaranteeing a huge subscriber base and per-sub revenue. That, in turn, could be used to entice advertisers.

The concept, as Sie later explained, was to "flip" the normal cable system relationship with programmers in which the system paid a fee and the network kept all the ad revenue. The Discovery arrangement would allow the operator as well as the network to share in the dual revenue stream of subscriber fees and advertising.

To help Discovery and other cable networks gain the viewers they needed to attract advertisers, Sie persuaded TCI to abandon the practice of charging extra money for additional sets hooked up to cable in a single home. This cost systems revenue since operators would typically charge as much as $3 per set for an additional outlet even though it cost them nothing to provide the service once the installation was completed. Sie reasoned that with more people watching in more rooms of the house, more sets would be tuned to cable networks, enabling them to charge more for advertising and enabling cable systems to gain more for local ads. Rate hikes instituted in the wake of the Cable Act allowed TCI to regain much of the lost subscription revenue.

Sie's quest for "punch-through programming" that would give cable something really big to sell on its basic service led to the door of the National Football League. NFL football had been for more than a decade the most-watched programming on television. It was also some of the most expensive.

Sie persuaded a group of other MSOs to join TCI in a consortium to bid for a package of NFL games that would be shown exclusively on cable TV on Sunday night. Sie convinced both Turner Broadcasting and ESPN, the most likely bidders for the package of NFL games, not to get into a price war with the consortium. The MSOs would buy the games and then divide them up among the networks or carry them themselves.

When Warren Buffett, Cap Cities/ABC's largest shareholder, found out about the arrangement he told ESPN president Bill Grimes that ESPN had to have the rights. When Buffett spoke at Cap Cities, the executives listened. Grimes called Sie and told him that ESPN had to make its own bid. The cable operator then decided to back off so as not to ignite a bidding war. ESPN also had extra leverage because ABC already had the rights to Monday Night Football. ESPN offered $135 million for a package of Thursday night games for which it imposed a 25 cents per subscriber surcharge on top of its normal affiliate fee.

The price was high, and some cable operators balked. But by the following decade the concept of the NFL on cable had become well accepted.

The concept of an MSO consortium to rescue a programmer came to its apex in 1987. After fending off the challenge of Satellite News Channels, Ted Turner entered a period of enormous prosperity, with both WTBS and CNN generating profits. But for Turner success was dangerous. It only whetted his appetite for the next adventure, and the next one had to be bigger and more dangerous than the last.

Turner was fully aware of all the huge corporate mergers and leveraged buyouts, many financed by junk bonds, going on around him in the mid-1980s. And he was eager to play. His first effort was a bid to buy CBS, an offer that was so thinly financed it actually sent CBS stock down on the day it was unveiled.

Turner lost his bid for CBS after the company bought back a huge amount of its own stock. The effort left CBS so weakened it was soon bought by Loews Corp. chairman Laurence Tisch. (All three broadcast networks underwent ownership changes in the mid-1980s. ABC was acquired by Capital Cities, NBC by General Electric and CBS by Tisch. GE and Cap Cities had both been in the business of owning cable systems, and each had a strategy that involved more investment in cable programming. Tisch understood nothing about cable, and little about television. He would cut off CBS completely from cable.)

Rebuffed by CBS, Turner turned his attention to the next best thing to a broadcast network; a Hollywood studio, in particular the ailing queen of the studios, MGM.

MGM was owned by financier Kirk Kerkorian, and its banker was the king of the junk bond; Drexel Burnham Lambert's Michael Milken). Milken convinced Turner that by using junk bonds it might be possible for TBS to purchase MGM. Milken, representing both the seller (Kerkorian) and the buyer (Turner) in the deal, devised a complex scheme under which Kerkorian would loan Turner some $2 billion to buy the studio and then Turner would repay the sum by issuing highly leveraged bonds. If Turner could not make the payments, the agreement stated, he would have to surrender stock in his company.

Turner, eager to marry his cable networks, particularly WTBS, to a producer of television programming and movies such as MGM (with a huge library of classic films and television programs), agreed. But the deal took over a year to get done, during which time MGM issued a series of box office flops. The junk bonds looked less and less attractive. After a desperate attempt to raise cash (including selling some of the MGM assets back to Kerkorian for less than he had paid for them) Turner realized he was, as he later recalled, "over-leveraged like crazy."

The major cable operators had been sour from the outset on the idea of having Turner buy MGM. Just prior to the Western Show in 1986, Turner invited a group of cable heavyweights out to the MGM studio lot to explain the deal. Among them were Time Inc.'s Nick Nicholas and TCI's John Malone.

The studio lot, Malone recalled, "was threadbare and dusty and so empty you could have shot off a cannon and not hit anybody."

The group met in the Louis B. Mayer suite. As Malone recalled, "Ted's in there telling us what a fabulous deal this is for the industry and how we all ought to invest in it. He has a set of numbers scribbled down on the back of an envelope. There was a huge negative cash flow." The operators left scratching their heads. There seemed no way to make this deal work. Turner, desperate to raise the cash needed to pay back Kerkorian, began to consider selling assets.

A few weeks later Turner called Malone at home and announced that Time Inc. had offered to buy 51% of CNN. That got Malone's attention. The TCI chief at the time was very protective of the balance of power in the industry and feared giving too much clout, particularly in programming, to HBO parent Time. "Ted," he said, "You can't do that. That's the crown jewels."

"Well," Turner replied. "Either it's that or it will be the KNN (Kerkorian News Network)."

It was, Malone recalled, "crisis time." The TCI chief called a meeting of all the major MSOs in New York and laid down the law. (One can only imagine the scene from The Godfather where the heads of the five families meet to iron out their differences.)

"To bail out Ted we each need to pony up $650 million," Malone told the group. "We don't have a lot of time to do a lot of negotiating. Anybody who's not serious about this get the fuck out."

"We came out of that room with the money signed up," Malone said. TCI, Continental, Warner Cable, Viacom and Times Mirror had each agreed to kick in. Viacom and Times Mirror, Malone later said, had agreed to contribute only on the condition that Time Inc. not be included. Like TCI, they were wary of giving too much power to Time.

But just weeks later Viacom went into play when Sumner Redstone, owner of a major string of movie theaters, made a bid for the company, topping a proposal for a leveraged buyout made by Viacom's management. "Redstone didn't want to make the commitment," Malone recalled. "We lost a $100 million player. I had no choice but to call Nick up and say 'Okay, you're in.'"

The consortium was expanded to include what finally became 31 different cable companies taking a total of 37% of Turner Broadcasting System Inc. The operators were given seven of the 15 seats on the board of directors. But any major activities of the company, including approval of the budget, had to be approved by 12 of the 15 board members. Effectively the MSOs could veto anything Turner wanted to do. Moreover, to ensure the balance of power between TCI and Time Inc., the two agreed that if either one voted "no" on any proposition before the board, the other would vote the same way. In effect, Time and TCI each had to agree before Turner could go forward with any major new plans.

Turner's days of freewheeling, unrestrained swashbuckling were over. Under the new structure he would need approval from the group of cable operators before he did practically anything. Ted, at last, was chained. Or so it seemed.

But like so many times before when he had been tossed into a briar patch, Ted Turner emerged not only unscathed, but stronger than before. In point of fact he had been a partner of the cable operators from the day he put WTCG on the microwave. His entire business was dependent on the support of the cable operators who paid hundreds of millions a year in affiliate fees and ensured that the TBS networks would have enough viewers to entice advertisers.

What the MSO buyout of Turner did was simply to formalize and cement a relationship that had been in de facto existence for years. For Turner it provided a sounding board where he could try out ideas on his best customers. It gave the operators a direct stake in the success of TBS and an understanding of its workings they had not had before.

Within five years after the buyout Turner would launch a dozen new cable network, both in the U.S. and around the world. Many of them -- TNT, Cartoon Network, Turner Classic Movies -- would make use of the library of films that Turner had acquired from MGM. And the company that had revenues of about $250 million a year in 1986 would grow to a conglomerate with $3.5 billion in revenues by 1994.

Premium television, which had suffered badly in the early 1980s, began to find its feet in mid-decade. Stung by the competition from home video, the premium services began to shift the emphasis away from reliance on theatrical motion pictures more toward original fare. This was particularly true at HBO where Michael Fuchs, who had been HBO's first director of original programming, became chairman in 1984. The first made-for-pay movie, The Terry Fox Story, premiered on HBO in 1983. And HBO's made-for-cable productions were gaining critical acclaim and a widespread reputation for production excellence. In 1987 an HBO documentary about the homeless, Down and Out in America, became the first cable program to win an Academy Award.

More and more Hollywood stars lent their talents to HBO, attracted by the creative freedom it offered and by the chance to work on subject matter that the broadcasters were afraid to touch. By the end of the decade HBO had clearly taken on the mantle once worn by CBS as the network most willing to take on controversial, politically-sensitive topics.

While Fuchs was changing the programming fare, Joe Collins, who had come over from ATC in 1984 to stem the HBO bleeding, reorganized the operations. He cut 125 jobs and overhauled affiliate marketing. He introduced "time-locked marketing" to entice the cable systems to spend their marketing dollars at the same time as HBO.

"HBO had been spending lots of dollars on advertising when operators weren't ready to sell it," Collins later recalled. "We organized the market, telling operators that if they ran a sale on HBO and were ready with the phones and telemarketing, we would help with the marketing costs." All the efforts were geared to particular times of the year so HBO could maximize its nationwide publicity just when the operators were ready with local campaigns. The only catch was that the systems had to direct their campaigns only to selling HBO and Cinemax, not other premium services. Showtime howled, but the scheme worked.

Within a year HBO was able to persuade 75% of its affiliates to sign up for the time-locked marketing campaigns.

Premium services were also helped by the rate changes that took place after the passage of the 1984 Act. As operators began to raise rates, they needed to find a way to prevent the total cable bill from growing so large that subscribers would cancel their pay services to pay the higher basic rate.

Many systems dropped the rates they charged for pay services, and more commonly, offered premiums to attract new customers. Operators began to bundle services, offering additional pay channels for a few dollars more than a single channel might cost.

Maglio, by then at Daniels, pioneered in this effort, creating a package he called Showcase and training his customer service representatives to pitch the package first and only sell premium services a la carte if the customer insisted. The strategy created a demand for low-cost premium services dubbed mini-pay.

Bill Daniels and Charles Dolan, two veterans of the cable wars of the 1960s and 1970s, joined together to start a programming company they called Rainbow. They launched two mini pay services: Bravo, a cultural channel, and Escapade, an adult service. Eventually Escapade was taken over by Playboy and became the Playboy Channel while Bravo became the foundation for Dolan's programming empire.

Dolan had always loved movies, as he had demonstrated when he developed the idea for Home Box Office. But HBO concentrated on presenting recently released films. Older films, Dolan reasoned, also had an audience and would be cheap to license.

In 1984 he launched American Movie Classics. To run it he hired a young University of Colorado track star and advertising major named Kate McEnroe. After graduation McEnroe worked for a fledgling enterprise that was attempting to start a women's professional basketball league. One of the people she pitched was Bill Daniels. "Honey", he told her, "you couldn't give me another sports franchise."

But Daniels took a liking to the spunky young woman and recommended her to Maglio who brought her on board to market Bravo and Escapade. By 1984 Dolan had put her in charge of AMC.

AMC was innovative in several respects. It was neither a pay service nor a basic. Like a pay service it had no commercials. But like a basic network it carried a very low per subscriber fee (15 cents per sub per month at launch). AMC left it to operators to decide how to use the service. Some used it as a bonus to basic, offering it to subscribers for "free" as a way to cushion a rate increase. Others used it as an incentive for subscribers to take more pay services, offering HBO, Cinemax and AMC in a package that was less costly than simply getting HBO and Cinemax a la carte.

And AMC developed a style of guerrilla marketing, getting as much for its marketing dollars as any other network. Under McEnroe and marketing vice president Noreen O'Laughlin, AMC hauled out of retirement some of the biggest movie stars of the 1940s and 1950s, taking them on tours of the country. In a given city they would do a dinner for cable operators, appearances on local talk shows and visits to college cinema classes. It was great for the operators, the communities, the actors and most of all for AMC which reaped huge free publicity.

The first to make the trek was Douglas Fairbanks Jr., who visited 50 cities on behalf of AMC. Others who participated included Omar Sharif, Debbie Reynolds and Jennifer Jones. AMC renovated old movie palaces and led the effort to preserve deteriorating films made in the early part of the century. It was all cheap compared to what the broadcast networks, or even the big cable services, spent on marketing. But it did a brilliant job of positioning AMC as the leader in the classic movie arena.

Other programming services also developed clear market niches and became household names in the 1980s. MTV coined a nationally recognized phrase with its "I want my MTV" slogan. It gave away not just money, like radio stations, but such publicity-generating prizes as an island in the Caribbean and singer Jon Bon Jovi's boyhood home. Lifetime's grandmotherly sex advisor Dr. Ruth Westheimer became a cultural icon, reminding people in her squeaky voice and European accent: "Always use a condom."

To recognize the growing array of cable-exclusive programming the NCTA board voted in 1978 to create a National Academy of Cable Programming to present Awards for Cable Excellence (ACE) to the best programming. The broadcaster-dominated Academy of Television Arts and Sciences had decided that only shows that reached at least 51% of all U.S. TV homes could be considered for Emmys. This effectively blocked all cable shows from consideration since cable penetration did not reach 50% of cable homes until 1987.

The first ACE awards were presented at the NCTA convention in 1978 in the basement of the Chicago Hilton. (The first award went to HBO for its Bette Midler special. Presenter Burt Harris had neither seen the special nor heard of Bette Midler.)

By the mid-1980s the ceremony, under the direction of former NCTA director of research Char Beales, had become a major event. In 1983 Turner Broadcasting System senior vice president Robert Wussler arranged for the show to be carried live on WTBS and agreed to foot the bill for the event.

By 1988, Beales recalled, the ACE program had achieved its purpose: to force the Television Academy to allow cable shows to be considered for Emmys. By 1998 cable programming was winning so many Emmy and Academy Awards that the Cable Academy voted to discontinue the national ACEs.

No new programming concept in the history of television created as much frenzy in the financial community as the home shopping craze of 1986. Home Shopping Network had started by accident. Two owners of a central Florida AM radio station -- lawyer and real estate investor Roy M. Speer and record store owner and former disc jockey Lowell Paxson -- had found themselves stuck with thousands of can openers when an advertiser on their station went broke and was forced to pay in-kind. The two decided to sell the can openers over the air. It was a huge success, so much so that they began to buy up other products to sell on their radio station.

In 1982 they launched a television version of their shopping show (with Paxson doing some of the on-air work). In 1985 the service went on satellite free to cable systems that would carry its 24-hour-a-day pitches for cubic zirconium jewelry, porcelain figurines and other goods.

When HSN stock went public in March of 1986 its price soared from $18 a share to $42 a share on the first day. Within a few months it hit $120 a share and analysts were comparing it with Genentech, up to then the most successful new issue ever launched on the New York Stock Exchange.

3

It wasn't long before others were in the business. Irwin Jacobs, head of a Minneapolis-based discount merchandiser COMB, called John Malone at TCI to suggest the two team up to form their own shopping service. In April Malone sent Peter Barton to Minnesota to get Cable Value Network up and running.

Barton devised a scheme which would give every charter affiliate of CVN an equity stake in the company according to how many subscribers the cable operators committed. Moreover, he offered each cable system a 5% share of the revenue from any sales CVN made to that system's subscribers.

To allay fears that TCI had some devious plan to outwit the other operators, Barton held a single big meeting of all the operators involved to sign the contracts, all of which were identical and all of which were available for anybody to see. "It was the first time the industry had been asked to trust somebody. It made them very uneasy," Barton later recalled. But it worked. When CVN launched, it had 41 million subscribers.

The network was a victim of its own success. It couldn't handle the volume of orders that flooded in from such a huge audience. Within hours of going on-air all its phone lines, its order-fulfillment system, its billing system and all the other back-office functions were totally jammed. "It was like a giant fire drill," Barton recalled. "This wasn't direct response. This was instant response."

Barton redesigned the order fulfillment system, setting the standard that 30 minutes after an order was placed, the merchandise would be out the door.

Within months CVN affiliates were earning an average of 15 cents per subscriber per month in incremental revenue from the sales made through their systems on CVN. And that revenue came without the need for rate hikes, without any marketing or back-office expenses, with no need for new equipment, without any overhead at all. It was free money, like finding the pot of gold at the end of the rainbow.

HSN soon followed suit with a profit-sharing scheme of its own, and other shopping services jumped into the fray (Sky Merchant, owned by Jones Intercable; QVC, backed by Sears; and Shop Television Network, owned by several other cable operators including Times Mirror and Cox.)

With all the new channels coming on line in the 1980s more and more consumers began to purchase satellite dishes to get the services directly off the satellite without having to buy cable. Initially a phenomenon in rural areas where cable would never be built, the concept of home dish ownership spread into the suburbs and cities as the price of dishes declined and consumers sought a way to get even more programming than the local cable system could provide.

Trygve Myhren, who served as NCTA chairman, told the board in 1985 that there were some 1.5 million dish owners in the U.S. and 60,000 new units being sold every month. Those who purchased the dishes were able to pick up the satellite signals of the cable networks for free while cable customers were being charged $10 a month or more for the same service. The price of a satellite dish, which had been around $10,000 in 1980, had dropped to about $2,000 by mid-decade and was likely to fall even further.

Most unsettling for the cable operator was the prospect that many of the new dishes being sold were purchased by customers not in rural, uncabled areas, but in areas where cable was available. They bought because the picture quality from a dish was better, because they could get more channels off the satellite than from the cable system and, above all, because they didn't have to pay a monthly fee.

Apartment building owners were also discovering that by installing a dish on the roof they could provide cable service to their tenants and keep all the revenue themselves. In Dallas alone some 150,000 apartment units were served by these master antenna systems.

Among the programmers, premium networks were the most concerned about the rising tide of home dishes. Ad-supported services lost subscriber fees, but gained audience, which could be sold to advertisers. Home Box Office, the biggest premium service, was concerned not just about lost revenue but about the issue of copyright payments they were making to studios for the rights to films, according to Jim Heyworth, who served as HBO president at the time.

As the issue of home dishes became more and more critical, the NCTA at first attempted to form a consortium to develop a technological solution to the problems. The answer was clearly to scramble the satellite signals in much the same way that signals were scrambled by cable systems, so that unauthorized dishes could not pick them up. But the logistics of scrambling satellite signals were nightmarish. There were some 5,000 cable headends that would have to be supplied with equipment that would descramble the signals, and that equipment had to be installed and tested before encryption began. There were also antitrust issues that would almost certainly be raised if a group of cable operators got together to deny programming to a competing technology.

While the NCTA members debated on how to proceed, HBO stepped up to the plate. In the summer of 1986 it announced it would scramble its satellite signals starting the following January. It elected to use a scrambling technology developed by defense contractor M/A Com of Burlington, Mass., soon acquired by the General Instrument Corp. The system reversed the color coding and mixed up the lines of the video signals. The audio signal was broken into digital bits and then reassembled by the decoder according to an algorithm that M/A Com assured the industry was as close to unbreakable as could be developed.

HBO agreed to pay for the $400 decoder that needed to be installed in each headend for each HBO signal. Other networks quickly followed suit, spurred on by the cable operators, particularly TCI's John Sie, who urged them not to allow their programming to be given away.

When HBO scrambled its signal it set off a firestorm of protest. Home dish owners were livid that they had spent thousands of dollars for equipment they had been assured would allow them to watch cable programming for free. Now they would be shut out or, at best, force to pay a monthly fee.

Dish salesmen, a feisty lot of mostly independent, largely rural and small-town entrepreneurs, saw their business in severe danger. They held "dealer rallies" in Washington to protest what they saw as their inherent, self-evident right as Americans to receive programming off the satellite for free.

Sixty members of Congress co-sponsored legislation to force a moratorium on scrambling. At the head of the congressional attack was Rep. Albert Gore, then running for the U.S. Senate in rural, mountainous Tennessee where thousands of dishes had been purchased.

Cable operators offered to sell programming packages to dish owners (TCI's package offered 15 channels for $28.95 a month) but the offer only further enraged the dish owners and dealers who saw cable as a monopolistic cabal.

Despite the outcry, scrambling went forward as scheduled. And it worked, at least in the months before computer hackers were able to clone the chips inside the decoders and sell them to other dish owners. HBO even signed up 50 small systems as new affiliates in the weeks surrounding the scrambling. These systems had evidently been picking up the satellite feed without telling HBO and then selling the service to their customers without having to send HBO a cut.

Congress rejected a bill sponsored by Gore to force cable networks to sell to dish owners and alternative distribution systems. But the issue would come back in the next decade to haunt the industry.

The political pressure induced HBO and other programmers to develop systems to sell their programming directly to dish owners, at first only those outside the cabled areas. The networks made use of a new division of General Instrument Corp., the VideoCipher Division, based in San Diego, to authorize via satellite signal the boxes of those customers willing to pay for programming. It was the beginning of an industry that would allow the programmers for the first time to deal directly with their customers without having to go through the cable operator.

As more and more networks launched in the 1980s operators began to run short of channels. Even on the huge urban systems of 54 channels and more, there were fewer and fewer open channels as the 1980s drew to a close.

Some programmers developed innovative ways to get around the channel crunch. One was United Video. Started in Tulsa in the 1970s as the microwave subsidiary of United Cable predecessor, GenCoE, United Video had been spun off as a separate company to distribute WGN-TV, the independent television station in Chicago. It had signed on to lease the last available transponder on Satcom I to distribute WGN.

United Video's executive vice president at the time was Roy Bliss Jr., son of the cable operator who had built one of the first systems in the Rocky Mountains. Roy Jr. had grown up climbing poles, changing tubes and selling cable door-to-door. After graduating from the University of Arizona and working for cable equipment manufacturer Ameco, Bliss, at the urging of his father, went to work for Gene Schneider at United Video.

By the mid-1980s United Video was reaching nearly 30 million subscribers with WGN and three other broadcast stations it was uplinking. But Bliss understood that transmission of the broadcast station on satellite used only a portion of the signal available. The remaining part of the signal, known as the sideband, could be use to carry additional audio or text services. These, in turn, could be transmitted to homes over the cable system without using the entire six MHz of bandwidth needed for an additional video channel.

United Video's first use of the sideband was to launch WFMT, a Chicago classical music radio station, as a satellite-delivered audio service. The station was picked up by both cable systems and radio stations. The latter made use of WFMT and additional radio services launched by United Video to eliminate the need for locally programmed service. By using satellite-delivered programming and automatic ad-insertion equipment, it became possible to operate a radio station with no personnel.

In 1981 Bliss developed an even more revolutionary idea for use of the WGN sideband. Guides for cable programming had been a major issue for operators ever since the launch of HBO. The premium services all had their own guides and ATC's Maglio had developed multipay guides that carried the listings for all the pay services carried by a specific system. Publishing companies such as TVSM produced monthly cable programming guides.

But newspapers were very slow in adding cable to their programming logs. And even when they did they often were not complete, partly because a newspaper might have a dozen or more cable systems, each with a different programming lineup, within its circulation area.

TV Guide was also slow to adapt to the cable era. Its first cover featuring cable programming did not appear until 1983 (for HBO's Passage to India special). And it had the same problem as the newspapers. TV Guide had traditionally printed a separate guide for each TV broadcast market. To serve cable customers it would have to print dozens of different versions of the guide within each city. And distribution was a nightmare. A single supermarket where TV Guide was sold might attract subscribers from a dozen different cable systems.

Ultimately the answer was for cable itself to transmit programming information about cable.

There had even been an effort in the late 1970s to start such an on-screen guide, developed by Scripps Howard and transmitted by phone lines to local cable systems. But that guide operated on a page format, with one page coming up on screen at a time and then being replaced by another. And the phone transmission was unreliable at best.

In 1981, Bliss met a fellow from Milwaukee who was using an Apple computer to generate a scrolling on-screen guide to TV programming. The programming information for each network was provided by TV Data, the same company that provides the information for many newspapers and other print guides to TV programming.

Each week United Video would download via satellite all the programming data for the cable networks for that week. Each cable system would then pick up the information for the channels it carried and use an alphanumeric generator to transmit the information to subscribers. To ensure accuracy, UV transmitted each week three separate times. If a given cable system did not receive three sets of identical programming information, it would send off alarm bells in Tulsa.

By the end of the 1980s the EPG had evolved into the Prevue Guide, still featuring the scrolling guide but with a window for video previews of programming as well, and serving some 44 million cable subscribers.

Another network which made use of the sideband to transmit information that could be customized by local systems was the Weather Channel, the brainchild of former broadcast network weatherman John Coleman and launched in 1982 with the financial backing of Landmark Communications. The Weather Channel used the sideband of its satellite signal to transmit thousands of individualized weather reports for individual cable systems. Each cable system could then take the national video feed and intersperse it with alphanumeric local weather forecasts.

As more and more urban systems came on line, the number of addressable converters expanded. Even TCI, which had long resisted addressability and continued to deploy what president John Malone called "plain vanilla" cable systems, became a convert to addressability when it launched the Disney Channel in 1983. (Addressable converters allowed the operator to change the programming in a given subscriber's home without having to visit the home.)

The expanded universe of addressable converters revived an old dream of the cable industry: to deliver programming on a per-show basis and charge viewers only for those programs they actually ordered. By the end of 1985 Paul Kagan told the Wall Street Journal, some nine million homes would have addressable converters. Many of those homes were already being offered pay-per-view services through stand-alone operations in which the movie studios would ship tapes to the cable systems which would then deliver them over the cable system to those homes that called to order the film.

It was an unwieldy operation. Yet in 1984, Kagan said, these makeshift systems had generated some $26 million in revenue. The time was ripe for somebody to come in and provide some order to this service.

Two did at almost the same time. One was cable entrepreneur Jeffrey Reiss, founder of Showtime and Cable Health Network and working at his new company, Reiss Media, by the mid-1980s. "A light bulb went off," Reiss later recalled, as he realized that the number of addressable homes had reached the point where a national service made sense.

With funds from his father-in-law, TV producer Norman Lear, and from Paul Kagan, Bill Daniels, John Saeman and Bob Rosencrans, Reiss launched a satellite-delivered pay-per-view service called The Exchange, later renamed Request TV.

Reiss rented out time on his satellite transponder to the various studios and took on the task of packaging and marketing all the films under a single brand name. He worked with operators to upgrade their back-office operations, encouraging them to install automatic number identification (ANI) systems. These would fully automate the order process so that when a customer called in, the system would automatically identify where the call was from, enter a request for a movie, have the film authorized within minutes and then add the cost to the customer's bill.

United Cable, which had pioneered the deployment of store-and-forward amplifiers, moved to the forefront of pay-per-view. Store and forward amplifiers allowed the same kind of service as ANI, but worked through the cable system. A cable subscriber would order a PPV program by punching a button on the converter box or remote. A signal would then go to the amplifier, which would forward the information to the headend.

Playboy TV, which had been languishing as a monthly premium service, found new life in a PPV format. And a group of six cable operators soon launched their own PPV service, Viewer's Choice, headed by QUBE veteran Scott Kurnit. Kurnit beat Reiss to the satellite by a single day.

By the end of the decade there were some 17 million addressable homes in the U.S. or 35% of all cable homes. Of those, some six million were PPV customers, generating about $210 million a year in revenue. Paul Kagan predicted that the total revenue for PPV would rise to $5 billion a year by 1998.

But all this hype generated yet another set of enemies for cable: the home video store and theater owners who feared that if PPV ever became widespread it would cut into their businesses. They began to work behind the scenes in Hollywood to make sure that films would have a long time in the theaters and video stores before they became available on PPV.

The launch of so many new programming services in the 1980s began to put a huge strain on the old tree-and-branch coaxial cable systems that had been the heart of the business ever since the first one was constructed in 1948.

Upgrading a system to add more channels required adding more and more amplifiers. A 35-channel system required an amplifier every 2,000 feet with a maximum of 40 in a row (or cascade). With 60 channels it was necessary to place the amplifiers every 1,500 feet apart and only 20 could be in a cascade. The farther the signal had to travel, the more amplifiers it had to pass through. Each amplifier degraded the signal, so that by the time the signal reached the home farthest from the headend the picture and sound were often badly distorted.

But new programming services kept launching, almost weekly at times, and cable systems were anxious to add to their lineups to justify the rate increases they were imposing under deregulation. City councils were continuing to demand as many services as possible in return for franchises and franchise renewals.

The solution came from several different sources. But the two key players in the effort to find a way out of the channel logjam were a former center for the Miami Dolphins professional football team and a former crew member on a charter sailboat that plied the waters of Hawaii.

It takes about 20 hours to sail a 50-foot trimaran sailboat from the island of Oahu to Maui. In 1975 Bob Khlopin, a recent graduate of Cornell University, was living out the dream of many a child of the '60s: making a living by taking passengers by sailboat between the Hawaiian islands. But he needed help, particularly for the long trip from Oahu to Maui. So he called one of his Cornell fraternity brothers, now a junior, and asked him to come join him. It was cold in Ithaca, so Jim Chiddix signed on, abandoning the chance to obtain an undergraduate college degree.

Chiddix spent a couple of years serving as crew, until the charter business went broke and he had to look for a job. He had studied electrical engineering at Cornell and signed on to help fix converters and other equipment for a 3,000-subscriber cable system on Oahu's leeward shore.

A few years later he was working for Oceanic Cable, the system in Honolulu headed by legendary system manager Don Carroll. Like many other businesses, cable in Hawaii was different from what it was on the mainland. Far away from any corporate directives or corporate help, Hawaiians had to innovate. Chiddix developed his own ad-insertion equipment to create a local ad sales business, later selling the technology to Texscan. He worked on home-grown pay-per-view and pay TV services and joined other systems on Oahu to install the state's first satellite dish in 1978. In 1980 Oceanic was purchased by ATC.

@

4

Oceanic was a fertile ground for innovation, and many of its employees -- Anne Burr, Carl Rosetti, Tim Evard -- went on to much bigger jobs on the mainland. Chiddix attributes this to Carroll, a man Chiddix calls "the Bing Crosby of the cable business," because of his laid-back style. "He liked to try new things and he gave us a lot of freedom," Chiddix recalled. "He attracted a group of very creative people."

Chiddix installed a fiberoptic link to hook up the Oceanic headend to the satellite dish on the other side of Oahu's formidable mountains. He installed an FM supertrunk, demodulating each signal and remodulating it as AM when it reached the headend. It worked fine, Chiddix recalled, for sending a dozen video signals from one point to another. But AM transmissions over cable were much more tricky, requiring a very "linear" signal that was not possible using the lasers then available.

In 1986 Chiddix moved to the ATC corporate offices in Denver and formed a research group with fellow ATC engineers Dave Pangrac and Louis Williamson. "We put a lot of our energy into fiber," Chiddix recalled.

The group came across a new kind of laser, called a distributed feedback laser, that produced a much purer optical signal. These had been developed by the telephone companies for use in the transmission of high-speed digital signals used to carry data and voice.

But Williamson used them to transmit 40 AM channels of television over 10 kilometers of fiber with no amplification. It worked. "The implications," Chiddix recalled, "were profound."

Chiddix and his group showed the new device to a meeting of the NCTA engineering committee in Denver in the fall of 1987. The group recognized immediately that the development would allow construction of cable systems capable of carrying many more channels than could be transmitted by the old coaxial systems. It also would make it possible for cable to compete with the phone companies in the delivery of data and even voice.

What Chiddix now needed was a supply of the new lasers. It was just about that time that the head of cable's largest distribution company, Anixter Pruzan, had decided that the time had come to make a radical transformation of his operation.

Anixter had its origins in a telephone equipment distribution company founded in Seattle after World War II by Jack Pruzan and his son Herb. In the 1950s the company moved into distribution of cable hardware, supplying much of the equipment used to build cable systems in the northwestern U.S. In 1969 it was acquired by Anixter Brothers, distributors of wire and cable primarily to telephone companies. The new cable division, Anixter Pruzan, was headed by Pruzan executive Gordon Halverson.

In 1974 Anixter hired as a regional salesman a Boston College graduate named John Egan. Egan, a physics and economics major, had spent two years playing center for the Miami Dolphins professional football team before joining RCA.

By 1980 he had become president of Anixter Pruzan and began to buy up competing distributors. "This is a relationship industry," Egan later said. "Our strategy was to buy up the companies with relationships. Then our only competition would be companies that had no relationships."

As the 1980s drew to a close, Anixter had become by far the largest distributor of cable equipment in the country, with a market share of about 75%. Its parent company also continued to supply equipment to the telephone business, where the Anixters and the Pruzans had their roots.

But the distribution business was becoming more risky as the cable industry consolidated. Cable companies typically needed to buy equipment from 40 or more different vendors. For a small company that might need only half a dozen converters or pedestals at a time, it was difficult to deal directly with big manufacturers who preferred to sell in large quantities. It was much easier for the typical small-system operator to buy all the equipment through a distributor who would carry products made by all the vendors and who would sell in any quantity.

But for a huge MSO it was possible to deal directly with the manufacturers and in effect to establish in-house distribution businesses. And the cable business in the 1980s was consolidating rapidly. So were the equipment manufacturers.

By 1987 "the role of the distributor was getting squeezed," from both ends, Egan later recalled. When he heard about what Chiddix was doing, he had an idea. He had seen the new lasers being manufactured for AT&T, which was still a major customer for Anixter's phone equipment distribution arm.

The AT&T lasers were designed to handle digital transmissions, turning the light on and off to transmit the binary code of ones and zeros that make up digital transmissions. But Egan suggested the system could be modified so that the lasers could raise or lower the intensity of the light, delivering a range of signals that could emulate the AM transmissions used by television signals. (The difference is like the difference between a standard light switch, used to turn lights on or off, and a rheostat that can raise or lower the light level gradually).

Egan called the new device the LaserLink. It was exactly what Chiddix had been looking for. The first commercial installation of the new LaserLink fiberoptic transmission system took place at ATC's system in Orlando, Fla., in August 1988.

The fiber was designed to back up an AML microwave system that transmitted signals from the central headend to mini-headends around Orlando. Microwave signals in Orlando were prone to outages or interference because of the violent thunderstorms that frequently hit central Florida.

The first time the microwave went out and the signal switched over automatically to the fiber, the alarm on the microwave had failed, so the system personnel weren't aware of the changeover until they began to get calls from customers. "Don't know what you did, but don't change it," was the message from the consumer. The signals over the fiber were far better than what the microwave had delivered. And the consumers could notice it.

Egan realized that this was the beginning of a revolution, one that would, as he later recalled it, have three elements: "the transformation from copper to glass, from analog to digital and from simple to complex networks."

He proceeded to change his company from a distributor to one that would also become a leading manufacturer in this new environment. To signal the shift he changed the name to Anixter Technologies or ANTEC. And he separated it from the distribution division that would still handle equipment from all the manufacturers, even those with whom the new ANTEC manufacturing arm would compete.

Egan set off on another buying spree, gobbling up Powerguard, Texscan, Regal and other manufacturing companies to enable ANTEC to manufacture a wide range of equipment.

In the meantime Egan continued to work with Bell Labs, the research arm of the phone companies, to develop more reliable lasers. Of the first batch of new lasers produced, only one in a thousand worked properly, and each cost in the neighborhood of $100,000, far more than Chiddix and his cable system colleagues were willing to spend.

But soon ANTEC pared the cost of a system down to $20,000, close to what operators could handle financially. By the mid-1990s the cost of a laser was only about $3,000.

The lasers also were highly durable. The one that Egan installed in Orlando was still working 10 years later when Egan took it out, had it encased and presented it to Chiddix. The serial number was 000.

At that price, it was more cost-effective to install fiber than coax, even without the new services that fiber made possible. Fiber required no electronic gear which needed to be maintained. It could carry far more signals than coax and, because it needed no amplifiers that would degrade the signals, the quality of the picture at the far end of the network was just as good as what could be seen at the headend. (Fiber was used typically for only the trunk cable. The final couple of hundred yards to the home was still covered by coaxial cable with amplifiers. That way the signal did not have to be converted from light to electronic form at every home, but only at every node that served a cluster of homes.)

When Egan demonstrated the system to John Malone, the TCI president looked at him and, Egan recalled, said, "We must be on the side of the angels." Malone invited Egan to make a presentation at the next TCI shareholders' meeting and noted, when he introduced Egan that not a single one of the LaserLinks TCI had installed to date had failed.

Jones Intercable became the first to build an entire system using fiber for the backbone. The system was called the Cable Area Network and was first installed in Augusta, Ga. It cost about $250 per subscriber to install, or about $12,000 per mile. It included six FM fiber supertrunks linking mini-headends and 17 AM links to the coax, cutting amplifier cascades to 10 from the previous 42.

Jones, like many other operators, simply installed the fiber on top of the existing coaxial trunk cable, using the old coax to send interactive signals back to the headend from the home or as institutional networks.

Fiber not only revolutionized the existing cable business, it also raised the prospect that cable systems might be able to deliver data and voice services, previously the exclusive province of the telephone companies. In the late 1980s cable was a business with about $15 billion a year in total subscriber revenue. The phone companies were generating about $100 billion. If cable could snatch away even 5% of the phone company business, it would increase cable's revenues by 33%. The numbers were enticing.

But while telephony, data service, pay per view, advertising and other new services clearly were the growth areas of the future, basic cable rate deregulation was the locomotive that drove industry growth in the late 1980s.

The Cable Act of 1984 effectively ended rate regulation as of the fall of 1985 (in the meantime operators were allowed to take annual rate increases of no more than 5%).

Operators pounced on the opportunity to make up for years of what they viewed as artificially low cable rates. The average price for basic cable grew from $10.67 in 1986 (the last year of regulation) to $16.78 in 1990, according to Paul Kagan Associates. This represented a hike of 57% in four years.

At the same time the number of basic subscribers continued to increase, largely due to the completion of the new urban systems, line extensions of existing systems and better marketing. The total number of basic subscribers grew from 42 million in 1986 to 55 million in 1990, an increase of 31%.

With more subscribers and higher rates, total revenue from basic cable more than doubled in the last six years of the decade, to more than $10 billion in 1990. And a huge chunk of this new revenue made its way to the cable operators' cash flow line.

Pay revenues also resumed their upward path, driven by a 33% increase in the number of pay units sold. (The average pay service rate actually declined in the period, dropping from $10.25 in 1985 to $10.20 in 1989). Total revenue from pay services increased to $4.9 billion in 1989 from $3.8 billion in 1986.

The number of new cable networks also increased dramatically after passage of the 1984 Cable Act. Some 28 new ad-supported networks launched in the last five years of the decade. And more and more money was being spent on programming. Cable systems, according the NCTA, spent over $3 billion on programming in 1990, an increase of 50% over the 1984 level.

More and more people were watching cable as well. The total day share of audience for cable networks in cable homes doubled to 35% between 1984 and 1990. The broadcast networks' total day share of viewing in those cable homes dropped from 58% to 46% in the same period.

Cable advertising revenue leaped to $2.5 billion in 1990 from $800 million five years earlier.

The 1980s also saw the cable industry win an astonishing victory in the courts over the FCC and the broadcasters. Ever since the late 1960s the FCC had been forcing cable operators to carry all local broadcast signals on their systems. The theory was that such carriage was necessary to ensure the survival of broadcasting and that broadcasting was in the national interest.

But in 1985 the U.S. Court of Appeals in the District of Columbia struck down the must-carry rules. The case had been brought by a small cable company in Quincy, Wash., which had been forced to carry three broadcast network stations each from Seattle and Spokane, taking up half of the 12-channel system's capacity.

The system was represented in court by veteran cable attorney Jack Cole. Cole, a graduate of the George Washington University Law School, had worked for the FCC in the 1950s and then joined the law firm headed by Stratford Smith, first counsel to the NCTA. In 1966 Cole formed his own firm, representing many cable companies in proceedings before the courts and federal agencies.

In the Quincy case, Cole reasoned that a case brought by a small, independent cable company forced by the government to devote half its system to the huge broadcast networks would have a David vs. Goliath tinge to it that sometimes catches the eye of judges.

By the time the Quincy case was decided it had been joined to another filed by Turner Broadcasting which charged that must-carry violated its constitutional rights by giving broadcasters preference over cable networks in the electronic forum of a cable system. This, Turner stated, violated the First Amendment which states that Congress "shall make no law abridging the freedom of speech."

In a ruling that Cole later recalled "astonished everybody," the Appeals Court decided 3-0 in favor of Quincy and Turner. The three-judge panel included liberal Skelley Wright, conservative Robert Bork and moderate Ruth Bader Ginsburg. They all agreed that the FCC had failed to show that must-carry rules were needed to protect broadcasters from serious economic harm. In the absence of such a showing, the court said, the rules were not justified because they did infringe on the First Amendment rights of cable operators and programmers.

The decision presented a dilemma for the cable operators. It was a clear victory, but it also left the door open for congressional action to restore must-carry. And it propelled the broadcasters, petrified at the thought that they might lose carriage on cable, up to Capitol Hill to seek such legislation.

Moreover, most cable systems had no intention of dropping local broadcast signals. They simply objected to a blanket rule that forced duplication of the kind found in Quincy and the carriage of marginally watched stations in some cities.

So the NCTA board voted to seek a compromise with the broadcasters. The solution adopted by the two industries and the FCC hinged on a device known as an A/B switch, which allowed subscribers to switch between cable and off-air reception. The new rules adopted by the FCC and endorsed by the NCTA and NAB required cable systems to carry major local broadcast signals and to install A/B switches so that subscribers could easily receive other broadcast signals off-air.

But even this compromise was challenged, by Century Communications, and it was again rejected by the Appeals Court on a vote of 3-0. The court stated, "We conclude that the FCC has not demonstrated that the new must-carry rules further a substantial governmental interest as they must to outweigh the incidental burden of First Amendment interests."

Cole, who also represented Century in its appeal of the second set of rules, said later that the rulings in Quincy and Century, "went a long way to establishing full First Amendment rights for cable."

But the rulings didn't go all the way, and the issue had not yet reached the Supreme Court. What they had done was to stir the broadcasters into a frenzy of activity.

Although cable operators did not engage in wholesale dumping of broadcast signals in the wake of the must-carry decisions, many systems did drop marginal or duplicated signals. And others moved broadcast signals around on the dial, giving the more-watched lower-channel numbers to cable networks.

Broadcasters howled in protest. But cable operators, free at last from years of being forced to carry the broadcasters, were not always very sympathetic. TCI regional vice president Barry Marshall made headlines with a statement that cable operators had paid to build these systems without any help from the broadcasters and could therefore do what they wanted in deciding what signals to carry and where to place them.

The Quincy-Turner and Century decisions offered cable operators hope that they would one day enjoy freedom from government regulation similar to that enjoyed by newspapers. Satellite signal scrambling had ended the ability of home dish owners to pick up cable television network signals for free. Exclusive deals with programmers enabled cable systems to avoid competition from competing delivery systems such as MMDS. Rate deregulation boosted cash flows.

All this good news was reflected in cable system prices which had hovered around $1,000 a sub in the pre-Cable Act era and soared to $2,500 or more by the end of the decade. Stock prices climbed and banks were eager to loan.

There were a few storm clouds on the horizon. All of cable's many victories had earned the industry the opposition of a host of powerful interests.

Broadcasters feared that they would continue to lose viewers to the cable networks and that they might lose their carriage or channel positions on cable systems. Hollywood studios continued to grouse about not getting enough copyright payments for their product. Consumer groups and city officials gathered more and more stories about huge price increases and poor customer service. Telephone companies feared competition in the data and voice arenas and itched to get into the business of delivering video services themselves. Dish owners were angered by scrambling. Competitive delivery services such as DBS and MMDS complained about cable systems' exclusive deals with cable networks.

Some predicted that cable's party wouldn't last. Newly appointed FCC chairman Dennis Patrick told a meeting of the NCTA board of directors in May, 1988, that "There is a growing view that cable is an unregulated monopoly. One ought not to underestimate the prevalence of that view in Washington."

Sen. Howard Metzenbaum (D-Ohio), a liberal Democrat, held hearings on rate increases and the monopoly power of cable. Sen. Albert Gore (D-Tenn.) continued to push for legislation to require cable networks to sell to home dish owners and to alternative delivery systems.

And NCTA president Jim Mooney found himself the continual harbinger of bad news from Capitol Hill. "We must realize we have a real political problem that largely is premised on rate increases and a perception of poor customer service," Mooney told the NCTA board in September of 1988.

But the cable operators, while concerned about their growing list of enemies, felt that if they simply could tell their story better to the public their political problems would be greatly reduced. It was a public relations issue, most of them reasoned. And besides, cable had a friend in the White House, George Bush, who would almost certainly block any effort by the Congress to undo the 1984 Cable Act and reregulate the business. And even if the very worst happened and some kind of reregulation measure did become law to limit future price increases, it would certainly not roll back the rate increases that had already taken place.

It was a miscalculation of monumental proportions.

5

next ->

@

index ->

@