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The U.S. Cable Television Industry, 1948–1995: Managerial Capitalism in Eclipse

Published online by Cambridge University Press:  13 December 2011

Thomas R. Eisenmann
Thomas R. Eisenmann
Affiliation:
THOMAS R. EISENMANN is an assistant professor in the Entrepreneurial Management/Service Management Unit at Harvard Business School.
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Abstract

Alfred D. Chandler, Jr., observed that under managerial capitalism, salaried managers tended to pursue policies that promoted the long-term stability and growth of their enterprises. The U.S. cable television industry provides a case study of how managers responded when stability and growth were mutually consistent objectives, and when they were mutually exclusive. From the late 1950s through the early 1980s, agent-led newspaper publishers and television broadcasters invested aggressively in the cable business. Beginning in the mid-1980s, however, investing in cable implied a tradeoff between stability and growth objectives. As a wave of mergers swept the cable industry, agent-led companies avoided acquisitions that might dilute earnings and depress stock prices. Confronting an increasingly turbulent competitive environment during the first half of the 1990s, agent-led companies were much more likely to divest cable assets than owner-managed firms. In agent-led companies, managers believed that their cable units would require massive capital investments, and they were reluctant to “bet the company” on a business facing so much competitive, technological, and regulatory uncertainty. Owner-managers, emotionally attached to the cable industry and to the firms they had built, and often harboring dynastic ambitions, were more reluctant to sell: they were willing to gamble on growth.

Type
Articles
Information
Business History Review , Volume 74 , Issue 1 , Spring 2000 , pp. 1 - 40
Copyright
Copyright © The President and Fellows of Harvard College 2000

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References

1 Nielsen ratings data cited by the Cabletelevision Advertising Bureau in Cuble TV Facts, 1985 through 1996.

2 Chandler, Alfred D. Jr, The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 9–10.Google Scholar

3 Drawing on agency economies, theorists have offered two reasons why companies run by owner-managers may be more inclined toward risk taking than agent-led firms. First, according to Amihud, Yakov and Lev, Baruch (“Risk Reduction as a Managerial Motive for Conglomerate Mergers,” Bell Journal of Economics [1981]: 605–617CrossRefGoogle Scholar), in contrast to owner-managers, who are secure in their positions by virtue of their direct control of a majority of shareholder votes, agent CEOs face a risk of termination by their Boards if they sponsor risky strategies that subsequently fail. Assuming that both agent CEOs and owner-managers are risk averse with respect to corporate investment decisions that may affect their personal wealth, Amihud and Lev expected that agent CEOs, facing greater levels of human capital risk, would be more likely than owner-managers to support conservative strategies. Second, Demsetz, Harold and Lehn, Kenneth (“The Structure of Corporate Ownership: Causes and Consequences,” Journal of Political Economy [1985]: 1155–1177CrossRefGoogle Scholar) argued that in turbulent environments, it is more difficult lor outside shareholders to assess the merits of their agents’ investment decisions, so agents can more easily abuse their authority by approving projects that advance their personal interests at shareholders’ expense. Concentrating governance rights in an owner-manager, whose personal interests should be better aligned with those of other shareholders, serves to reduce such agency costs: consequently, owner-managed firms might have an advantage in raising capital for risky strategics. Contrary to these predictions, Faina, Eugene and Jensen, Michael (“Separation of Ownership and Control”, Journal of Laic and Economics [1983]: 301–324)Google Scholar asserted that companies run by owner-managers might pursue more conservative strategies than agent-led firms, because owner-managers’ investments in their firms’ equity frequently represent a large share of their personal wealth. Empirical researchers have (airly consistently found a positive relationship between management equity ownership and risk taking. See Amihud and Lev; Agrawal, Anup and Mandelker, Gershon, “Managerial Incentives and Corporate Investment and Financing Decisions,” Journal of Finance (1987): 823–837CrossRefGoogle Scholar; Hill, Charles and Snell, Scott, “External Control, Corporate Strategy, and Firm Performance in Research-Intensive Industries,” Strategic Management Journal (1988): 605–621Google Scholar; Zahra, Shaker. “Governance, Ownership, and Corporate Entrepreneurship: The Moderating Impact of Industry Technological Opportunities,” Academy of Management Journal (1996): 1713–1735Google Scholar; and Estv, Benjamin, “Organizational Form and Risk Taking in the Savings and Loan Industry”, Journal of Financial Economics (1997): 25–55Google Scholar.

4 Many scholars have argued that division managers in diversified companies are more likely to exhibit risk aversion than their counterparts in firms focused on a single line of business; for a summary of this view, see Hoskisson, Robert and Hitt, Michael, “Strategic Control Systems and Relative R&D Investment in Large Multiproduct Firms,” Strategic Management Journal (1988): 605–621CrossRefGoogle Scholar. According to Hoskisson and Hitt, corporate executives in diversified firms, lacking deep knowledge of the strategic issues facing individual divisions, rely on short-term financial measures such as return on investment to allocate resources and evaluate division managers’ performance. To improve the odds that they will meet their performance targets, division managers are seen as being more likely to pursue conservative strategies, for example, avoiding risky investments in research and development. In contrast, Oliver Williamsons theories imply a positive relationship between diversification and strategic risk taking behavior (see Chapter 8 in Markets and Hierarchies: Analysis and Antitrust Implications, New York, 1975Google Scholar). Williamson asserted that the internal capital market within a multi-divisional corporation might allocate resources more effectively than the external capital market, because its senior executives should be better able to gather information from business units and thereby avoid problems of moral hazard. Because they cannot reallocate cash flows between divisions, single line-of-business firms are more dependent on external capital than diversified companies, and may face constraints in funding risky investments. Two empirical studies (Hoskisson and Hitt; Baysinger, Barry and Hoskisson, Robert, “Diversification Strategy and R&D Intensity in Multiproduct Firms,” Academy of Management Journal [1989]: 310–332Google Scholar) have found a negative relationship between diversification and risk taking.

5 On the Cable: The Television of Abundance (New York, 1971)Google Scholar was the title of the report prepared by the Sloan Foundation's Commission on Cable Communications. The Commission was chaired by Edward Mason, the Dean Emeritus of Harvard's Graduate School of Public Administration. Among its other members were the former mayors of Atlanta and Boston; IBM's chief scientist; Professor James Q. Wilson of Harvard: and the presidents of The Brookings Institution, The Urban Institute, The University of Chicago, The Rockefeller University, MIT, and the RAND Corporation. After reviewing the technological potential and social implications of cable television, the Commission concluded that federal regulation should be changed to encourage the industry's growth.

6 This account is drawn from the first installment of a three-part series on the cable TV business, published by Thomas Whiteside in the New Yorker (20 May. 27 May, and 3 June 1985). Simon Applebaum, “The Great Cable Controversy: Who Launched First?” Cablevision, 4 May 1998, 16, described an ongoing dispute oxer which of four entrepreneurs (including Walson) actually launched the first cable system. Additional information on the early history of the U.S. cable industry is available in “Cable Television: The First Fifty Years,” a series of monthly supplements to the 1998 editions of Cable World, and from a website (www.cablecenter.org/) maintained by the National Cable Television Center and Museum (NCTC&M).

7 Although RCA's National Broadcasting Company (NBC) began broadcasting television signals in New York in 1939, diversion of electronic components for military use limited the industry's growth until after World War II. See Smith, Sally Bedell, In All His Glory: The Life of William S. Paley (New York, 1990), Ch. 17Google Scholar, and Barnouw, Erik, A History of Broadcasting in the United States, published in three volumes (New York, 1966, 1968 and 1970).Google Scholar

8 Cable channels originate from a “headend,” where over-the-air signals are captured by antennas, then modulated (assigned a channel number) onto coaxial copper lines. The basic principles of cable TV technology are described in Ciciora, Walter S., An Overview of Cable Television in the United States (Boulder, Colorado, 1990)Google Scholar, published by CableLabs, the cable industry's research and development consortium.

9 Barrington, John R., “Pay Cable—An Old Idea Whose Time Has Come,” in The Cable Communications Book: 1977-1978, ed. Hollowell, Mary L., (Washington, D.C., 1977) described these early efforts. Whiteside (I, 48-58) also related an account of the most ambitious project, Subscription Television Inc., which launched a cable-delivered pay TV service in California in 1964. The venture, backed by Dun & Bradstreet and by the electronics firm Lear Siegler, obtained broadcast rights for the Los Angeles Dodgers and San Francisco Giants baseball games. However, the service had problems contracting for Hollywood films, and theater owners in California sponsored a successful referendum banning pay TV in that state. Subscription Television Inc. went bankrupt after five months of operation.Google Scholar

10 This section draws on George H. Shapiro, “Federal Regulation of Cable TV—History and Outlook,” in Hollowell. Other sources offering summaries of cable TV's regulatory history include Willis Emmons and David Grossman, Note on Cable Television Regulation, Harvard Business School case 9-391-022, 1993; Whiteside, I, 46-60; MacAvoy, Paul W., ed., Deregulation of Cable Television (Washington, D.C., 1977), 5–9 and 25-33Google Scholar; and Kalba, Kas, Cable Meets the City: A Case Study in Technological Innovation and Community Decision-Linking (Cambridge, Mass., 1975), 52–57Google Scholar.

11 The FCC had long considered localism and diversity of programming to be priorities when shaping broadcast regulation. The Commission was particularly concerned about network domination of TV broadcasting. To check the networks’ power, the FCC authorized a large number of new television stations, mostly in the UHF band (channels 14-83), which is more prone to interference than the VHF band (channels 2-13). Congress passed FCC-sponsored legislation in 1962 requiring TV set manufacturers to add UHF tuners to new sets. Having invested political capital in an integrated set of policies to promote local broadcasting (see Barnouw, II), the Commission was sympathetic to protests about the impact of cable TV.

12 Shapiro, 6.

13 Noll, Roger G., Peck, Morton J., and McGowan, John J., Economic Aspects of Television Regulation (Washington, D.C., 1973), 158–159Google Scholar. According to these Brookings Institution researchers, investment in cable plant was largely fixed, so profits were sensitive to penetration rates. Penetration was defined as the number of homes subscribing to the basic tier of cable service divided by the total number of homes “passed” by cable lines on their street. Penetration rates were determined by the quality of off-air reception (which was related to distance from station transmitters, transmitter strength, and interference from hills or large buildings); the number of over-the-air broadcast signals available locally; the number of distant signals imported; pricing; the quality of the cable operators marketing and service efforts; and community demographics. At 75 percent penetration—a typical figure outside of the top 100 markets—a system could earn a 46 percent pretax return on the average book value of its assets. Given the fixed nature of cable plant investment, an otherwise identical system with 45 percent penetration would earn returns in the low 20 percent range.

14 The terms “wired cities” and “wired nation” were used beginning in the late 1960s to describe a vision of communities interconnected through two-way broadband (“broad band-width”) communications networks. See for example an article by Ralph L. Smith, “The Wired Nation,” in The Nation, 18 May 1970, 582-606, later expanded into a book with the same title (New York, 1972).

15 DeLuca, Stuart M., Television's Transformation: The Next 25 Years (San Diego, 1980), 191–193Google Scholar, offered a brief history of the ideas that influenced a group he called the “media freaks,” and chronicled their rising power within the FCC and the broader policy arena during the early 1970s. McLuhan was famous for observing that “the medium is the message,” and speculating that electronic media would transform human societies into a “global village” in which computer technology would someday render human language obsolete. See Gary Wolf, “The Wisdom of Saint Marshall, the Holy Fool,” Wired, Jan. 1996.

16 According to the NCTC&M website, several technological developments boosted the channel capacity of cable systems in the 1960s, including the use of solid state electronics in amplifiers and the introduction of set-top converters that processed signals in frequencies above the 12 channel VHF band. By the early 1970s, 35-channel systems were the industry standard, and 100-channel systems seemed feasible. Data on changes in cable system channel capacity are provided in Baer, Walter S., “Telephone and Cable Companies: Rivals or Partners in Video Distribution?” in Video Media Competition, ed. Noam, Eli (New York, 1984)Google Scholar. “The Vast Wasteland” was the title of a speech delivered by FCC Commissioner Newton Minow to the National Association of Broadcasters on 9 May 1961. Minow said, “There are many people in this country, and you must serve all of us. You will get no argument from me if you say that, given a choice between a Western and a symphony, more people will watch the Western. I like Westerns and private eyes too—but a steady diet for the whole country is obviously not in the public interest.” Cited in Noll, Peck, and McGowan, 2.

17 Two-way cable allowed customers to push a button on a hand-held remote control, sending an electronic signal back to the cable system headend. With two-way technology, customers could register a preference in a referendum; authorize delivery of “pay-per-view” programming; or purchase merchandise from home shopping services. “On-demand” services were envisioned as an extension of two-way technology: such services would deliver unique information and entertainment programming to individual households upon request, operating much as the Internet does today. Scott, James D., Bringing Premium Entertainment into the Home via Pay Cable TV, Michigan Business Reports #61 (University of Michigan Graduate School of Business Administration, 1977), 5Google Scholar, noted that as of June 1972, 16 cable systems had tests of two-way services underway.

15 The RAND Corporation prepared two reports on cable TV in 1970: The Future of Cable Television: Some Problems of Federal Regulation, RM-6199-FF, Jan. 1970; and Richard A. Posner, Cable Television: The Problem of Local Monopoly, RM-6309-FF, May 1970.

19 DeLuca, 193. During this period, Nixon's Justice Department also prohibited equity participation by ABC, CBS, and NBC in the production of primetime entertainment programs. Shapiro, 9-14 documented the FCC actions described in the balance of this paragraph.

20 Prior to the FCC's 1972 action, franchise fees typically ranged between 1 to 6 percent of the cable operator's revenue, according to Shapiro, 10. Leonard Tow, CEO of Century Communications, said that cities and towns sometimes negotiated franchise fees as high as 35 percent, leaving the cable operator little or no profit margin (personal conversation, 25 Aug. 1995). The terms of franchise agreements tended to range between 10 and 35 years, according to Posner, 6.

21 Whiteside, II, gave an account of the franchising process in Milwaukee, where several cable companies offered unseemly investment opportunities to prominent citizens to secure their support. Kalba presented a case study of the franchising process in Cincinnati, Ohio, which began in 1972. He described how conflicting community interests led to shifting priorities and indecision. At the end of 1974, when Kalba finished his study, it still was unclear when Cincinnati would award its cable franchise. In the appendix to “Franchise Bidding for a Natural Monopoly,” Ch. 13 of The Economic Institutions of Capitalism (New York, 1985)Google Scholar, Oliver E. Williamson described how the terms of the Oakland franchise had to be renegotiated during the early 1970s to resolve the franchisee's economic problems. Williamson's objective was to refute proposals made by University of Chicago economists, who had suggested that with a natural monopoly like cable TV, franchises should be awarded to the party offering the largest lump sum or the lowest price to consumers. Using the Oakland case study, Williamson showed that in a turbulent environment, it was difficult to draft complete contracts that specified each party's rights and obligations under all possible contingencies. Williamson concluded that regulation, while problematic, was superior to rigid franchise bidding.

22 According to Scott. 4, in rural areas, the cost per mile for aerial construction of cable plant (i.e., attachment to telephone poles) was about $3,500. In urban areas, where congested city streets slowed construction, aerial construction averaged $10,000 per mile. Underground construction, frequently required in urban areas where utility lines were buried in conduits, could cost $75,000 per mile.

21 Warburg, Paribas Becker data reprinted in Exhibits 1 and 2 of “Cable Cross-Section.” Cablevision, 30 Aug. 1976.

24 Personal conversation with John C. Malone, TCI's CEO. 25 Sept. 1996.

25 The “Cable Developments” section of the National Cable Television Association website (www.ncta.com) presents data on the number of cable systems.

26 In owner-managed firms, the CEO's shareholdings are large enough to: one, align his or her personal financial interests with those of other shareholders; and two, ensure the selection of supportive directors, allowing the CEO to sponsor strategies free from concern that he or she could be terminated if the strategies were to fail. Following Morck, Randall, Schleifer, Andrei, and Vishny, Robert W., “Management Ownership and Market Valuation,” Journal of Financial Economics 20 (1988): 293–315CrossRefGoogle Scholar, who asserted that control of 20 to 30 percent of a firm's equity typically is sufficient to thwart a hostile takeover bid, CEOs were defined in this study as owner-managers when they owned 20 percent or more of the equity in a firm with a single class of stock. In firms with a “B” class of stock with superior voting rights, CEOs were denned as owner-managers when their shareholdings entitled them to at least five percent of dividends and to elect a majority of directors. Finally, the CEOs of limited partnerships were defined as owner-managers, because they typically had a “carried interest” that entitled them to a share—often 20 percent—of any distributions paid by the partnership, and could only be removed by a majority vote of the limited partners. In firms separating the positions of Chairman and CEO, a Chairman's equity was added to the CEO's in determining whether the firm was owner-managed, provided the Chairman's job represented his or her principal occupation. Equivalent to “dominant” firms in Rumelt's classification (Strategy, Structure and Economic Performance, [Boston, 1974]). “focused firms” were defined in this study as earning at least 70 percent of their revenues from cable system operations and cable programming services.

27 This paragraph is based largely on face-to-face conversations with eight senior executives of seven owner-managed focused firms, and two attorneys who both had specialized in cable transactions since the 1970s. Interviewees included Leonard Baxt, a senior partner at the law firm Dow, Lohnes & Albertson (23 Apr. 1997 and 3 June 1997); Julian Brodsky, Vice-Chairman of Comcast (10 Oct. 1997); Amos Hostetter, CEO of Continental Cablevision (3 May 1995 and 14 Feb. 1997); Glenn Jones, CEO of Jones Intertable (18 Feb. 1997): Jerry Kern, a senior attorney at the law firm Baker & Botts, and a Director of TCI (18 Feb. 1996 and 4 June 1996); Gerry Lenfest, CEO of Lenfest Group (25 Sept. 1996); John Malone, CEO of TCI (25 Sept. 1996 and 18 Feb. 1997); Fred Nichols, President and COO of TCA Cable (24 Sept. 1996); Brian Roberts, President of Comcast (13 Feb. 1997); and Leonard Tow. CEO of Century Communications (25 Aug. 1995). The NCTC&M website also provides information on the motives and methods of early cable entrepreneurs (see “Oral Histories” within the “Library” section, and “Hall of Fame,” “Legends,” and “Pioneers” within the “Museum” section).

25 Two of the MSOs on the top 50 list were owned by small newspaper companies that held no broadcasting interests. Five of the remaining seven diversified firms, including Time Inc. and Warner Communications, owned other types of media properties.

29 In addition to the Nieva de Figueiredo study cited below, this section is based on personal conversations (face-to-face unless noted) with fourteen senior executives of eight diversified companies that owned cable systems and with Leonard Baxt (cited above). Interviewees included Frank Batten, Chairman of Landmark Communications and TeleCable (telephone conversation 26 June 1997); Glenn Britt, EVP of Time Warner Cable (telephone conversation 5 Aug. 1997); William Burleigh. CEO of E. W. Scripps (12 Aug. 1996); Daniel Castellini, CFO of E. W. Scripps (12 Aug. 1996); Jack Fontaine, President and COO of Knight-Ridder (23 Jan. 1997); Stephen Hamblett, CEO of Providence Journal (18 Dec. 1996 and 3 Oct. 1997); Gerald Levin, CEO of Time Warner (9 Jan. 1997); Robert Miron, CEO of Newhouse Broadcasting (telephone conversation 13 Nov. 1996); Trygve Myhren, President and COO of Providence Journal, and formerly CEO of ATC, Time Inc.'s cable subsidiary (17 Feb. 1997); Anthony Ridder, CEO of Knight-Ridder (23 Jan. 1997); James Whitson, EVP and COO of Sammons Enterprises (25 Feb. 1997); Al Ritter, CFO of TeleCable (12 Dec. 1996); Dick Roberts, CEO of TeleCable (12 Dec. 1996); Alan Spoon, President and COO of Washington Post (27 Jan. 1997). Also, Whiteside, “Cable -I,” 60-69, offered an account of Time Inc.'s early vacillations in the cable business, and Brack, Connie, Master of the Game: Steve Ross and the Creation of Time Warner (New York, 1994), 67–69Google Scholar, described factors that motivated Warner Communication's entry into cable.

30 In 1969, the television broadcasting industry, in aggregate, earned a 20 percent pretax operating return on revenues, and had a pretax return on tangible book value of 73 percent, according to Noll, Peck, and McGowan, 16.

31 Figueiredo, Elizabeth Maclver Nieva de. Pressing Change: The Consolidation of the American Newspaper Industry, 1955-1985 (Ph.D. Diss., Harvard University, 1994)Google Scholar.

32 Pay TV provided one source of unique programming for cable operators; ad-supported “basic cable” networks, included in the “basic tier” of broadcast channels, eventually would provide another. In addition to advertising, most of the popular basic cable networks received payments directly from the cable operator, which accounted for roughly one-third of the revenues earned by established basic cable programming services. Several ad-supported services were launched between 1976 and 1983. including Getty Oils ESPN; USA Network, a joint venture of Paramount, MCA, and Time Inc.: and Warner-Amex's MTV and Nickelodeon. See Waterman, David and Weiss, Andrew A.. Vertical Integration in Cable Television (Cambridge, Mass., 1997)Google Scholar, Table 3-1 for cable network launch dates.

33 According to Whitcside, I, 63-64, Time Inc.'s decision was a gamble: RCA charged $6.5 million for a five year transponder lease. Furthermore, prospective affiliates would need to spend about $100,000 for earth stations to receive signals from the satellite. However, technological advances and changes in FCC regulations soon drove the cost of earth stations down to $20,000. affording considerable cost savings, compared to microwave distribution.

34 Scott, 22-33.

35 The franchising gold nish peaked in Boston in 1982. According to Dennis Leibowitz, Cable Industry Viewpoint. Donaldson. Lufkin & Jenrette, Oct. 1982. 26, Cablevision Systems’ winning bid promised basic cable service for $2 per month. Unlike past “lowball” bids, which had included only local broadcast stations in a limited basic tier, Cablevision's $2 tier contained 52 channels, including most of the popular ad-supported cable networks. Cablevision's bid for the Boston franchise had two other unique provisions. First, Cablevision set aside five percent of revenues to fund “public access” programming to be produced by Boston residents and not-for-profit institutions, in addition to the normal three percent franchise fee. Second. Cablevision offered all Boston residents the right to purchase $25.000 worth of bonds paying a guaranteed interest rate of 16 percent.

36 This paragraph is based on Whiteside, I, 70. and III. 101, except as noted.

37 In 1979, American Express became Warner's partner in the cable business, contributing $175 million in capital for 50 percent of the business, according to Bruck, 217-222.

38 MDS employed microwave frequencies to deliver a single channel of programming. Microwave reception required a clear line of sight between the transmitter and the subscriber's rooftop antenna, so MDS faced handicaps where the terrain was hilly. In 1983, the MDS industry had only 600,000 customers nationwide. However, analysts expected that the modest threat to cable from MDS could escalate if the FCC approved MDS operators’ requests to employ additional frequencies, permitting them to deliver several channels of programming. See John Cooney, “Cable's Costly Trip to the Big Cities,” Fortune, 18 Apr. 1983, 87.

18 SMATV used a satellite dish on top of an apartment building or hotel to deliver roughly the same package of satellite-delivered programming services as a cable operator. Such dishes cost about $5,000 in the early 1980s, so SMATV was cost effective only for large complexes. In 1983, the SMATV industry served several hundred thousand homes, and was growing rapidly. See Cooney, 87.

40 Videocassette recorders were introduced in the United States by Sony in 1975, according to Harold Vogel, Entertainment Industry Economics (Cambridge, U.K., 1990, 2nd ed.). 82–83Google Scholar; they were in 9 million American homes by 1983 (Richard Bilotti, Jr., Drew Hanson, Richard J. MacDonald, The Cable Television Industry: New Technologies, New Opportunities and New Competition, vol. 1, Industry Review and Outlook, Wasserstein Perella Securities. Inc., March 8, 1993, exhibit 10). As with over-the-air broadcasting, cable's economic relationship with the VCR was a complex blend of substitute and complement. Since VCRs allowed their owners to “time-shift” programming and view it at their convenience, VCRs served as a complement to cable's wide range of program offerings. But the rental of videocassettes also posed a substitution threat to cable's high margin pay TV business.

41 Victoria Gits, “Cablevision Interviews: Paul Bortz,” in the PLUS supplement to Cablevision. 14 June 1982, 5.

42 Cooney, 85.

43 Leibowitz, 54-55. and Gits, 6. According to Leibowitz, only one STV operator earned high profit margins: Oak Industries’ station in Los Angeles, which had 400,000 subscribers. Other STY operators broke even or lost money, in part because the FCC had licensed two or more STV stations in several cities.

44 This section is based on Leibowitz, 63-65.

45 Since TelePrompTer and Westinghouse both were agent-led diversified companies, their transaction had no impact on the market shares cited above. Purchase dates and prices are from an unpublished 1996 Lehman Brothers document titled, “Selected Cable System Sales.”

46 The cable network VH-1 regularly aired music videos from the 1980s under the banner. “The Big 80s.” Promotions for these videos featured images of Wall Street deal-makers and Reagan Administration figures. The subtitle seems apt for the cable industry in this era, when radical deregulation and junk bond financing helped nearly triple the value of cable systems.

47 Except as noted, this section is drawn from Emmons and Grossman, 9-16.

48 See, for example, Cable Television: Promise versus Regulatory Performance, by the staff of the Subcommittee on Communications of the House Committee on Interstate and Foreign Commerce, Jan. 1976, reprinted in Cablevision, 29 Mar. 1976, 60-105.

49 Williamson, 362-363, points out that it was politically risky for a city to terminate or transfer a franchise. Such action might reflect poorly on the bureaucrats who had made the award in the first place; was bound to involve protracted and expensive litigation; and might disrupt a service valued by city residents.

50 CPI data are from Exhibit 2 in Emmons and Grossman, 19.

51 Raymond L. Katz, Cable Television in Transition: A Tale of Two Wires, Lehman Brothers, 22 Sept. 1993, 6.

52 Cable operators focused on operating cash flow (earnings before interest, taxes, depreciation and amortization, or EBITDA) rather than operating income (EBIT), because the opportunity to “write-up” the cost basis of assets (to current replacement value) acquired through an acquisition made firm-to-firm comparisons of depreciation levels difficult. Related to this point, cable operators’ rates of return on assets typically were reduced by the good-will added to their balance sheets through acquisitions. Hence, as the industry consolidated, operating cash flow as a percentage of total assets declined steadily.

53 These share changes were not skewed by the moves of a few large companies. Of the 20 owner-managed focused firms on the 1983 top 50 list, nine firms more than doubled their subscribers between 1984 and 1989 (45 percent). By contrast, of the 27 diversified firms—both owner-managed and agent-led—only three doubled their subscribers (11 percent). Among the owner-managed focused firms, 20 percent exited the cable industry between 1984 and 1989, compared to 37 percent for the owner-managed and agent-led diversified firms. The fact that diversified firms were less likely to expand aggressively than owner-managed focused firms between 1984 and 1989 represented a marked departure in behavior, compared to the 1975-1983 period. Seventeen of the 30 diversified firms (57 percent) on the 1975 list of the top 50 MSOs had doubled their subscribers from 1975 to 1983; five had exited (29 percent). Among the seventeen owner-managed focused firms on the 1975 top 50 list, seven had doubled their subscribers (41 percent), and two had exited (29 percent).

34 This section is based on the personal conversations cited in footnotes 27 and 29, and on numerous articles from the trade publication Cablevision (e.g., “Wheeling and Dealing in the Hot Cable Market,” 3 Feb. 1986, 38-46; “Acquisition of Cable Systems Remains Growth Focus for Cable Operators,” 24 March, 1986, 37-40; “Lenders Look at Driving Forces in the Acquisition Market,” 1 Sept. 1986, 52-58; “Valuing the Cable Industry: Many Factors, Many Views,” 15 Sept. 1986, 66-71). Quotes are from the conversations cited above.

55 A simple illustration shows why most cable acquisitions were dilutive. Say a company acquired cable assets for cash, paying 11.1 times their operating cash flow of $180 per subscriber, or $2,000 per subscriber (a typical purchase price during the late 1980s). After writing up the book value of the assets to their replacement cost of $1,000 per subscriber, depreciation (straight-line over 15 years) would be 867 per subscriber. The remaining $1,000 would be amortized over 40 years as goodwill, resulting in amortization charges of $25 per subscriber. Assuming 100 percent debt financing and a 10 percent interest rate, interest expenses would be $200 per subscriber. Thus, the acquired assets would generate a pre-tax loss of $112 per subscriber, even though the acquisition might well have had a positive net present value, based on projected cash flows. According to interviewees, “pure-play” cable companies were not subject to downward pressure on their stock prices due to EPS dilution, because they almost never had positive book earnings to begin with. Instead, Wall Street analysts valued pure-play cable companies on their operating cash flow.

56 Jack Howard, who ran Scripps Howard's Broadcasting Division, was especially vocal in his challenge, and as a member of one of the company's founding families was well placed to register his disapproval with trustees.

57 Fortune magazine reported (“The Inside Story of Time Warner,” 20 Nov. 1989): “Temple-Inland was a voracious consumer of capital, as was cable TV, and the two branches competed for the company's cash.”

58 Personal conversation with Leonard Tow, 25 Aug. 1995.

59 Vogel, 186, noted that cable system construction costs, which averaged $7.000 per mile from 1975 through 1978, escalated rapidly in the late 1970s, and averaged $16.000 per mile from 1979 through 1983.

60 In Life After Television: The Coming Transformation Of Media And American Life (Knoxville, 1990), George Gilder concluded that the convergence of television and computers would promote grass-roots democracy. He argued that convergence only would be realized if the government encourages local telephone companies to rapidly deploy high bandwidth fiber optic technology. Gilder saw cable as a barrier to this outcome, and stated, “The cable industry, beset on the one side by the power of fiber and on the other by the growing efficiency of direct-broadcast satellite, will survive only if the politicians continue to protect it” (78).

61 This discussion of the impact of HLTs is based on Burton C. Hurlock and William A. Sahlman, Star Cablevision Group, Harvard Business School case 9-293-037. The quote is from page 1 of the case.

62 According to Johnson, Leland L., Toward Competition in Cable Television (Cambridge, Mass., 1994), 6–11Google Scholar, basic service was defined in the Act in a manner that included popular ad-supported cable networks, such as ESPN, CNN and MTV. This provision of the Act came as a surprise to the industry: it had expected regulation only for a limited tier containing local broadcast channels.

63 Waterman and Weiss, Ch. 3, provided data on programming network ownership. They noted that MSOs had acquired their programming interests by launching programming ventures themselves, as Time, Inc., had done with HBO; securing equity from startup networks like QVC and Discovery Channel, when those networks were launched in a channel capacity-constrained environment; and collectively bailing out Turner Broadcasting in the mid 1980s when that company overextended its balance sheet in acquiring MGM's film library.

64 Johnson, 113.

65 Digital compression involved three steps. First, a digital signal was processed using algorithms that discarded duplicated information in successive intervals of the signal. Second, the compressed signal was transmitted in digital form, allowing the delivery of as many as ten digital channels over the bandwidth normally required for a single analog channel. Finally, the digital signal was decompressed (essentially, running the algorithms in reverse), and the digital signal was converted to analog format for playback.

66 According to Johnson, 19, the replacement cost for cable plant during the early 1990s was about $700 per basic subscriber, and many operators had purchased established franchises for values as high as $2,500 per subscriber. DBS infrastructure costs per subscriber were sensitive to penetration rates, due to the fixed costs of satellites. According to Johnson, 122-125, assuming 5 million customers, capital expenditures for satellites would equal $200 per subscriber. With mass production, reception equipment was expected to decline in cost to $300 to $400 per home.

67 According to Katz, 35, Hughes sold five transponders for $120 million to United States Satellite Broadcasting, owned by Hubbard Broadcasting, a family-run broadcasting group. Hughes also sold exclusive marketing rights in rural areas for $250 million to the National Rural Telecommunications Cooperative, which represented a group of utilities.

68 See Bilotti, Hanson, and MacDonald, 37, and Katz, 37-38 for pre-launch projections.

69 This section on IBN technology, regulation, and economics is based on Brotman, Stuart N., ed., Telephone Company and Cable Television Competition: Key Technical, Economic, Legal and Policy Issues (Boston, 1990)Google Scholar; John Hagel and Thomas Eisenmann, “Navigating the Multimedia Landscape,” The McKinsey Quarterly (1994): 3; Katz; Johnson; and Richard P. Simon, Barry A. Kaplan, et at, “Communicopia: A Digital Communication Bounty,” Goldman Sachs Investment Research, July 1992.

70 The most ambitious cable trials were Time Warner's Orlando project; TCI's movies-on-demand experiment in Denver with US WEST and AT&T; and Viacom and AT&T's Castro Valley, California project. For a list of trials, see Peter Krasilovsky, “Interactive Television Testbeds,” Benton Foundation, Communications Policy Working Paper #7, 1993.

71 Lucien Rhodes, “The Race for More Bandwidth,” Wired, Jan. 1996.

72 The provisions of the 1996 Act and its implications for cable operators are described in Chris Nolan, “A Box of Chocolates,” Cablevision, 14 Mar. 1996, 18-27.

73 Except as noted, the source for data on joint ventures, proposed acquisitions, and upgrade plans cited in this section is the “Cable History” section of the NCTC&M website.

74 Personal conversation, 25 Sept. 1996. See also David Kline's Wired magazine interviews with Malone and Bell Atlantic CEO Ray Smith, “Infobahn Warrior,” July 1994 and “Align and Conquer,” Feb. 1995, respectively.

75 Only Ameritech and Bell South were proceeding aggressively with overbuilds. The NCTC&M website notes that by 1996, Ameritech had permission to build cable systems in 27 municipalities, and was offering service in the Chicago, Cleveland, Columbus, and Detroit areas. Bell South had secured permission to build in 11 markets, and was offering cable ser-vice in the Atlanta area.

76 Raymond L. Katz and Robert G. Routh, Cable Calculus, Bear Steams Equity Research, 4 Apr. 1996, 62-66.

77 The five largest MSOs, TCI, Time Warner, Continental, Comcast, and Cox, completed acquisitions in 1994 and 1995 that equaled 21, 34, 33, 39, and 64 percent, respectively, of their total subscribers at the beginning of 1994. The source for data on acquisitions cited in this paragraph was an unpublished 1996 Lehman Brothers document, “Cable Television Systems Sold.”

78 In addition to the personal conversations cited in footnotes 27 and 29 with executives at Comcast, Continental, Time Warner, and TCI—four of the five largest MSOs, this section is based on numerous published interviews and accounts of the companies’ strategies, including, for Comcast, “Inteniew with Brian Roberts,” Broadcasting anil Cable, 2 Aug. 1993, 28-32, and Geraldine Fabrikant, “At Comcast, a Father and Son Head Off in All Directions,” yew York Times, 3 July 1994; for Continental, Michael Oneal, “Unfamous Amos No Longer,” Business Week, 14 Nov. 1994, 95 and “Interview with Amos Hostetter,” Broadcasting and Cable, 8 Apr. 1995, 32-40; for Time Warner, Laura Landro and Johnnie L. Roberts, “Time Warner's Levin Tries to Rise Above the Takeover Talk,” Wall Street Journal, 25 Mar. 1994, 1, Robert Lenzner and Esther Wachs Book, “The Testing of Gerald Levin,” Forbes, 27 Feb. 1995, 88-94, and Connie Bruck, “Jerrys Deal,” The New Yorker, 19 Feb. 1996, 55-69; and for TCI, Johnnie L. Roberts and Laura Landro, “King of Cable,” Wall Street Journal, 27 Sept. 1993, Ken Auletta, “John Malone: Flying Solo,” The New Yorker, 7 Feb. 1994, 55-67, and “Interview with John Malone,” Broadcasting and Cable, 28 Nov. 1994, 34-49.

79 In addition to the personal conversations cited in footnotes 27 and 29, this section is based on face-to-face conversations with Leo Hindery, Jr., CEO of InterMedia Partners (25 Sept. 1996), and Jeffrey Marcus, CEO of Marcus Cable (25 Feb. 1997), and on numerous published articles on companies’ strategies, including, for Landmark/TeleCable, “A Big Cable Outfit Finds it Just Isn't Big Enough,” The Virginia Pilot, 14 Aug. 1994, D1; for Marcus, Tom Kerver, “Big Man in Big D,” Cablevision, 8 Apr. 1995, 57-67; and for Providence Journal, “Interview with Trygve Myhren,” Broadcasting and Cable, 14 Nov. 1994, 38-46. Except as noted, quotes in this section are from the personal conversations cited above.

80 Personal conversation with Leonard Tow, 25 Aug. 1995.

81 Thomas Eisenmann, “Organizational Form and Risk Taking in the U.S. Cable Television Industry,” Harvard Business School Working Paper, 1998: #99-004. The author's unpublished doctoral dissertation, Structure and Strategy: Explaining Consolidation Patterns in the U. S. Cable Television Industry, Harvard Business School, 1997, provides additional interview data and analysis of the factors motivating expansion and exit decisions for a sample of eighteen MSOs.

82 Personal conversation with Alan Spoon, 27 Jan. 1997.

83 Personal conversation with Stephen Hamblett. 18 Dec. 1996 and 3 Oct. 1997.

84 Personal conversation with Jeffrey Marcus, 25 Feb. 1997.

85 Personal conversations with Gerry Lenfest, 25 Sept. 1996, and Brian Roberts, 13 Feb. 1997.

86 Bruck, 2.56. Nicholas served as co-CEO with Steve Ross.

87 “I'm Perfectly Willing to be Run Out of Town,” Business Week, 9 Oct. 1995, 38.

88 Knight, Frank, Risk, Uncertainty and Profit, (New York, 1921), 361Google Scholar.

89 Chandler, 10.

90 Leibowitz, 20, estimated that in 1982, only ten percent of U.S. households were in communities that had not yet awarded a cable franchise.

91 D'Aveni, Richard, Hypercompetition: Managing the Dynamics of Strategic Maneuvering (New York, 1994)Google Scholar.

92 See Thomas, L. G., “The Two Faces of Competition: Dynamic Resourcefulness and the Hypercompetition Shift,” Organization Science 7 (1997): 221–242CrossRefGoogle Scholar.

93 Clifford G. Holderness, Randall S. Kroszner, and Dennis T. Sheehan, “Were the Good Old Days That Good? Changes in Mangerial Equity Ownership Since the Great Depression.” Journal of Finance, forthcoming.

94 See, for example, McCraw, Thomas K., ed., Creating Modern Capitalism: Hoic Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions (Cambridge, Mass., 1998)Google Scholar.

95 Chandler, Alfred D. Jr, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass., 1990), 597.Google Scholar