2008 CABLE SHOW: Cable @ 60: The 1970s

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2008 CABLE SHOW: TV & BEYOND: CABLE@60
“Television during the second half of the 20th century changed the world more profoundly than any invention since the printing press,” wrote Thomas Southwick in his history of cable, Distant­ Signals: How Cable TV Changed the World of Telecommunications. “Yet television did not reach its full potential until the development of cable and its related businesses, satellite-distributed programming­.”

How cable revolutionized the TV industry and in the process transformed telecommunications is one of the great, but often ignored stories of business, technology and culture in modern American history. As cable celebrates its 60th anniversary at the Cable Show, the editors of Multichannel News decided to take a look back at the industry’s rise.

This history illustrates how cable has fundamentally altered the way people access entertainment, news and movies. It also provides insight into many of the major issues and problems facing the industry today.

To tell the story of cable television between 1948 and the end of the 1990s, Multichannel News has obtained rights to print a condensed version of Southwick’s book, which was published by PRIMEDIA Intertec in 1998. The first section, which begins below, covers the late 1940s and 1950s, subsequent chapters follow the story, decade by decade to the end of the 20th century. Excerpts were selected and edited by Multichannel News contributor George Winslow. Executive editor of content Kent Gibbons carries the story from 2000 up to the present.

To further enhance the feature, Leslie Ellis has produced a series of videos, available at www.multichannel.com.

The Cable Center, which has a huge library of oral histories and photos, has generously supplied material for the print and video versions of the history.

The Hangover and the Cure

The industry’s woes in
the late 1960s and early 1970s not only pushed a number of operators to the brink of financial disaster, they also claimed one of the industry’s most prominent entrepreneurs­.

In 1971, TelePrompTer’s Irving Kahn was convicted of bribing local officials in Johnstown, Pennsylvania, to get the operator’s cable franchise renewed, and he was sentenced to three to five years in jail.

“Kahn has been cable TV’s chief visionary and evangelist” and his conviction “cast a pall over the entire cable industry” Business Week reported at the time.

And that was only the beginning of the company’s troubles. Shortly before going to prison Kahn had cut a deal to acquire Jack Kent Cooke’s cable company, H&B American Cablevision, which was the largest in the country. With Kahn behind bars, however, Cooke reversed the tables and engineered a takeover of TelePrompTer.

What they found was a financial mess. “The company was virtually bankrupt,” recalled Bill Bresnan, who had been named chief operating officer of TelePrompTer by Cooke.

Other operators were in equally bad shape. By 1973, the cable stocks were hitting record lows and the new urban franchises were also struggling. TelePrompTer claimed to have 65,000 subscribers in New York City but when Bresnan took a closer look, he found only 34,000.

Charles Dolan’s Sterling Communications was also racking up huge losses in its attempt to wire parts of Manhattan. Dolan concluded that the system would thrive only if it offered programming that potential customers couldn’t get anywhere else.

But the FCC had prohibited the importation of distant broadcast signals and Sterling’s cable franchise deal with the city prohibited entertainment programming that wasn’t from broadcast stations.

Fortunately, the Federal Communications Commission had issued new rules mandating local programming by cable operators and allowing pay TV, and Dolan managed to convince city officials that the money-losing system needed new programming to stay afloat.

In 1970, he paid Madison Square Garden $24,000 to show Knicks and Rangers home games and other Garden events that were blacked out for local broadcasters. Then, in 1971, Dolan convinced top Time Inc. executives to spend $300,000 to develop a sports and movie channel that would evolve into HBO.

The new unit would be a breeding ground for top executives at Time Inc. and later Time Warner. Gerald Levin, who would later run Time Warner, got his start at HBO.

Initially, the project looked more like a career destroyer than builder. The team struggled to find a good name and eventually came up with Home Box Office, which no one really liked. Levin worried it would become known as “Home B.O.”

The studios were also reluctant to provide movies, fearing that it would upset theater owners who had already wrecked a number of pay TV projects, and Levin struggled to find distribution for the channel, which was initially unable to obtain rights to product for New York City.

Finally, they convinced Universal to supply theatrical films, and in November of 1972, HBO launched outside of New York on Service Electric’s Wilkes-Barre, Pa., system.

The landmark distribution agreement with Service Electric set the pattern for future pay TV affiliate programming deals. Under the deal, HBO and the operator split the monthly revenue, with $3.50 going to HBO and $3.00 to Service Electric. The revenue split, Levin later explained, was a key ingredient to HBO’s ultimate success because it gave operators an incentive to promote and sell the channel.

But success was years away. One year after launch, HBO had only 8,000 subscribers nationally, down from a peak of 12,000.

Nor did HBO’s launch save Dolan’s investment in Sterling Communications. Losses mounted and in early 1973, Time’s equity and convertible debentures entitled it to 80% of Sterling Communications­.

Time bought out Dolan’s stake and tried to dump all its cable investments. It traded its other cable systems to American Television & Communications for about 9% of ATC’s stock and tried to sell the Manhattan systems to Warner Communications for $20 million. Warner executives backed out of the deal, however, when they got a good look at the franchise documents­.

Dolan, meanwhile, remained bullish on cable. He managed to raise enough money to buy Time Inc.’s Long Island franchises for $900,000, with a down-payment of only $100,000, and set up Cable­vision Systems.

Then, to finance the construction of the new systems, Dolan turned to General Instrument Corp.’s Jerrold Electronics, which was at the time virtually the only source of money for struggling cable operators. When it came time to sign the papers, a 32-year-old executive named John Malone showed up to close the deal.

After graduating from Yale with a degree in electrical engineering and earning a doctorate in operations research at John Hopkins University, Malone worked for AT&T’s Bell Labs and the business consulting firm McKinsey & Co. before landing at General Instrument, which had just acquired Jerrold Electronics in 1970.

Told to fix the problems at Jerrold, which had been hard hit by cable’s downturn, Malone quickly cut costs by outsourcing many of the company’s operations to cheaper vendors and by moving its manufacturing operations offshore. Within 18 months, Jerrold’s profit margins jumped to the mid 50s.

As Malone traveled around the country to meet with clients, he met Bob Magness, who lured him to Tele-Communications Inc. in 1973 as president and CEO.

It was a risky move. Besides taking a substantial pay cut, Malone had joined a virtually bankrupt company.

In the early 1970s, Magness had gone on a shopping spree, financing its purchases with bank debt that he planned to repay with the sale of additional stock. When the stock crashed, he faced financial ruin. TCI had $132 million of debt but only $18 million a year in revenues and was in violation of virtually all of the financial covenants on its debts.

In a contentious meeting with the bankers, Malone dismissed the idea of refinancing the debts with a higher interest rate and tossed the keys to TCI’s offices on the table. “If you guys think you can run this thing better, run it,” he told the bankers. Then he walked out.

The next day the banks blinked and gave TCI a waiver on the covenants, giving Malone enough time to raise $76 million from a group of insurance companies.

But the cable industry needed more than short-term refinancing deals. Fortunately, a long-term solution to its problems would come from an unlikely source — satellite technology.

In the late 1940s, science-­fiction writer Arthur C. Clarke had proposed using satellites placed at a “geostationary” orbit 22,300 miles above the earth to beam radio, television and telephone signals over vast areas.

In the 1960s, Irving Kahn and his lieutenant Hubert “Hub” Schlafley also began promoting the idea of satellite-delivered programming. They even asked the FCC for permission to launch a satellite.

But, at the time, there was no commercial satellite industry in the U.S. Fortunately, as the Nixon administration studied the idea of opening up the sector to private enterprise, Canada launched the Anik I satellite. Schlafley immediately put out a request for proposals to build a portable earth station that would capture programming beamed to cable headends.

Scientific-Atlanta won the contract and in the spring of 1973, the company, along with TelePrompTer, brought the new system for satellite-delivered programming to the NTCA’s convention. Their demonstration of a live satellite-delivered address by speaker of the House of Representatives Carl Albert went perfectly, but operators refused to buy the earth stations. There was, after all, no U.S. satellite to deliver programming, and no programmer had yet agreed to put their network up on satellite.

In 1974, however, RCA won permission to launch a domestic satellite and Gerry Levin convinced Time Inc. to spend $8 million to lease a satellite transponder to deliver HBO.

On Sept. 30, 1975, HBO telecast its first live satellite-delivered event, the Muhammad Ali-Joe Frazier heavyweight fight, to the Vero Beach system of Bob Rosencrans’ UA Columbia Cablevision.

The pictures were so good, “it looked like they were fighting in the next room,” Rosencrans recalled.

Satellite fundamentally changed the economics of cable programming. By the end of 1977, HBO finally moved into the black with more than 1.6 million subscribers, up from about 20,000 in June 1974.

Operators also saw tremendous results. If a system could attract only 1,000 HBO subscribers, the operators could pay for the cost of a $100,000 dish in just two years. After that, there would be virtually no cost, unlike microwave transmission, which was a hefty ongoing expense.

Even better, the new programming could boost overall penetration rates. Rosencrans noted that penetration rates in suburban markets where consumers had easy access to broadcast signals quickly doubled and tripled from only 10% to 20% to the 30% to 40% range.

Other programmers also jumped on the bird. After purchasing WJRJ-TV in Atlanta for $2.5 million in 1970, Ted Turner immediately began looking for ways to expand the audience of the station, which ranked fifth in the Atlanta market and was losing about $1 million per year.

After the FCC loosened rules on importing distant signals, Turner bought rights to Atlanta Braves baseball and Atlanta Hawks basketball games and expanded the renamed WTCG, which Turner liked to say stood for “watch this channel go,” into a regional network, distributed outside its home market via microwave to about 500,000 cable homes.

After seeing news accounts of HBO’s launch, Turner realized that satellite would give him a chance to develop a national audience for his money-losing station. On Dec. 17, 1976, WTCG went live on Satcom 1 as the first ad-supported cable network.

Meanwhile, Bob Rosencrans’ UA Columbia Cablevision formed a partnership with Madison Square Garden to launch a Madison Square Garden Network, not to be confused with today’s regional sports network. In 1980, the original MSG Network was renamed USA Network­.

Kay Koplovitz, who Rosencrans hired to run the channel, put together a groundbreaking business plan that asked operators to pay 10 cents per subscriber per month to cover basic costs. Profits would come from advertising.

Operators quickly embraced the idea and at launch in 1977, the network reached 750,000 cable homes.

In backing MSG, Rosencrans understood that new programming services would transform the cable business. By adding new networks, cable operators could attract new subscribers and raise the rates they charged existing customers, thus increasing revenue more than the cost of additional programming.

The dual revenue stream also gave cable networks a huge advantage over broadcast networks, which were entirely dependent on advertising, and a number of other companies quickly jumped into the cable programming arena.

Steve Ross’s Warner Communications acquired its first cable system in 1972 and hired Gus Hauser to run them. While Ross didn’t know anything about cable, he and Hauser were convinced that cable had one central problem: programming. “Cable had no product,” Hauser recalled.

As part of an experimental two-way interactive system in Columbus, Ohio, Warner launched a variety of new programming services, including pay per view, children’s network Pinwheel, which would evolve into Nickelodeon, and the Star Channel, later renamed The Movie Channel. They also began airing music clips, which evolved into MTV: Music Television, which bowed on Aug. 1, 1981.

Viacom International, which had inherited CBS’s cable systems and programming library after the FCC forced the broadcast network to get out of the cable and syndication business, was also developing new programming. Unhappy with the high churn rates for HBO, the company launched Showtime on a cable system in Dublin, Calif., in June 1976.

As cable began offering better programming, it also found a friendlier regulatory climate in Washington. At the end of the Ford administration, Congress passed a copyright law governing the broadcast signals carried by cable operators. In return for paying fees set by the Copyright Royalty Tribunal, cable operators got a compulsory license, which prevented broadcasters from carrying their signals.

Another major issue that had been hanging over the cable industry since its inception was resolved in 1978, when Congress passed legislation allowing the FCC to set rates paid by cable operators to utilities for the use of their poles.

Meanwhile, cable revenue grew by 25% to over $1.5 billion in 1978 and cable stocks even began to recover from a decade-long swoon. Between November 1979 and April 1981, the average price of a cable stock more than doubled.

In the late 1970s and early 1980s, cable’s renewed prosperity attracted the attention of some of America’s largest companies and a host of new companies, including Westinghouse, Times Mirror, American Express and General Electric, entered the business. Together with existing operators, these investors would launch the telecommunications equivalent of the Normandy invasion to wire some of the country’s largest urban centers.

The history of cable up to the 1990s is entirely based on Thomas Southwick’s Distant Signals: How Cable TV Changed the World of Telecommunications


For more news from NCTA's The Cable Show '08, click here.

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