To hear former Fairfax supervisor Alan Magazine tell it, he accepted a share of a cable television company largely because he wanted to serve his community. Cable television, he says, offers him a rare opportunity to improve communications among citizens in his sprawling 409-square-mile county.
What the 36-year-old Magazine rarely mentions is that his 8 percent share of a Storer Broadcasting Co. subsidary -- which did not cost him a cent -- could earn him several million dollars if Storer wins a Fairfax franchise.
His profits, many financial experts say, ultimately would come out of the pockets of suburban Washington television viewers willing to pay up to $20 a month for the prospect of sharper TV reception and a chance to watch first-run movies in their living rooms.
Magazine is just one of many prominent local citizens around Washington and the nation who have become cable TV lobbyists and stand to gain lucrative stock payouts if they can convince community leaders to give their companies exclusive wiring rights. These individuals -- called "rent-a-citizens" by their critics -- reject any suggestion that they are seeking financial gain, but cable analysts estimate their very presence as nonpaying stockholders add as much as 25 percent to monthly cable subscription fees in communitites around the country.
"If they (cable companies) are giving away 10 percent of their company to the local citizens, they could have presumably done the whole thing 10 percent cheaper," says George Wiegers, a partner in the Wall Street investment banking firm of Lehman Brothers Kuhn Loeb. "That's all arithmetic, and you can't argue with arithmetic."
Not surprisingly, Magazine and others in the cable industry are reticent about discussing their potential windfalls. "There aren't many people in this world who aren't interested in making money," says Magazine, an Environmental Protection Agency administrator who long disdained special interest politics in suburban Fairfax. "I've got to put food on the table like anybody else . . . but that's not my main concern."
For cable companies, the benefits of the rent-a-citizen game are obvious. Because localities control the streets along which the cable is laid, it is up to the local governing bodies -- not the Federal Communications Commission -- to pass out franchises that guarantee the companies a monoply on the local cable market. Without well-known politicians and civic leaders to exert subtle pressure on decision makers and plot local strategies, many companies fear their proposals will get lost in a morass of technical jargon about coaxial cables, megahertz and other esoteric topics.
Local politicians have proved more than willing to help cable firms with this thorny question. Among the ranks of those who have jumped on the cable bandwagon here are former Prince George's County Executive Winfield M. Kelly Jr. and former Fairfax County Executive Carlton C. Massey, who like Magazine represent subsidiaries of the giant Storer, Virginia Delegate Vincent F. Callahan, Maryland legislators Frank Komenda and Kay Bienen, and Fairfax developer John T. Hazel Jr. All are well aware that they will not make a nickel if their lobbying efforts fail.
Their appetites have been whetted by recent technical advances that have made it possible for cablecasters to do on a large scale what broadcasters cannot: use a satellite to offer a wide range of otherwise unavailable programs, and get many viewers to pay up to $10 a month -- over and above a $10 "basic" monthly fee -- for the privilege of watching them.
Cable TV revenues nationally are expected to top $2.85 billion this year -- more than three times the $900 million level recorded in 1975 -- and the industry hope is that two-way communications and such services as cable burglar alarm systems and video banking will boost those revenues still higher. Currently more than one in five American households with television is served by cable, and the industry estimates that new systems now being planned will drive penetration rates as high as 70 percent.
A simple computation will show what makes the cable industry look so attractive to Magazine and his fellow local "investors." In the area around Philadelphia, The New York Times Company recently paid $82.7 million for a group of small cable franchises, a purchase price that amounted to approximately $1,000 per subscriber.
Under that formula, a company wiring a rapidly developing suburban community of 200,000 homes such as Fairfax could be worth -- conservatively -- almost $53 million within 10 years, making Alan Magazine's 8 percent share worth $4.24 million. Even Magazine, who would rather discuss programming than profits, concedes that his company believes that 1 percent of its local operation will be worth $250,000 within a decade -- giving the former supervisor stock worth a minimum of $2 million.
The example of Storer -- the only one of more than 20 potential Fairfax bidders which has thus far revealed the extent of equity held by its local "investors" -- offers a graphic insight into the way the consumer will have to foot the bill for their involvement in the operation.
Storer's Fairfax subsidiary, Trans County Cable, sought out Magazine, 10 other prominent local citizens, and two organizations, and gave them 20 percent of the company's equity and 50 percent of its local management control. All the Fairfax "investors" share one trait with Magazine: they got their stock without paying any cash. They say they are making an "in-kind" contribution of time and effort toward preparing the Fairfax proposal instead of helping to underwrite the estimated $30 million to $60 million in capital expenditures necessary to build a working cable system in the county.
At 8 percent, Magazine's portion was far greater than the 1 and 2 percent shares held by the others.
The result of those stock grants, says Henry de Castillo, Chief Economist at Washington's Cable Television Information Center, is that Trans County must boost the price of its services by an amount equal to the percentage increase in its stock that it created for nonpaying "investors" -- in this case, 25 percent -- if it is going to preserve the profit margin of its cash investors.
"It's a simple premise," says Castillo, whose nonprofit organization advises local government on cable franchising questions. "If all kind of citizens get big lumps of money, that money's got to come from somewhere and you know it's not going to come from the subscribers."
In other words, says cable consultant Michael Botein, a cable company will be paying those stockholders as if they had contributed 20 percent of the capital costs of building the cable system. Instead, he says, they're going to receive the same return for their contributions as a paying stockholder.
"Because the consumers are willing, either voluntarily or unconsciously, to subsidize an uneconomic way of financing the capital construction costs of the system, then any local shareholder (the rent-a-citizen) is able to have a portion of the stock which he otherwise probably would not be able to afford," says Botein, a law professor and member of the New York Law School Communications Media Center.
Most national cable companies are currently giving away approximately 20 percent of their stock to local "investors," Castillo says, meaning that a sizeable portion of cable subscription fees across the nation is going toward propping up the investments of local "investors" like Magazine. He estimated that approximately $4.50 of a typical monthly subscriber fee of $18 could be accounted for by the presence of such unfunded stock.
While officials of national cable companies readily acknowledge their franchising tactics are often political because local government is political, they say the local "investors" are necessary to provide local input programming decisions.
But cable officials and some others associated with the industry reject the idea that the practice is improper or that it unfairly jacks up comsumer subscription costs. "When you're trying to win the hearts and minds of 10 city councilmen, you obviously want someone who knows them, looks good and so forth," says Gustave M. Hauser, President and Co-Chairman of Warner Amex Communications, a major cable system operator that is currently wooing local officials and reporters with advance movie screenings and promises of all-expense-paid visits to the company's flagship cable system in Columbus, Ohio.
"How else are you going to win their hearts and minds?" But that doesn't mean you're going to be paying somebody off."
The trend toward local cable investors began a few years ago, when some cities decided to require that cable firms show evidence of local input in the management of franchises. Today cable watchdogs and industry spokesmen alike agree that it is getting out of hand, but no one is quite sure how to stop it.
"The cable industry is doing quite well, thank you, and it doesn't need to give away substantial sums," says Robert Ross, senior vice president of The National Cable Television Association. "We're doing it more or less because we're forced by law or by competitive circumstances. If your opponent does it and he's going to get a pat on the back for it, then you best do it, too."
Ross admits there is a problem when localities begin to view cable firms, in his words, as a "shoddy bunch of slick crazies." But he insists that localities must work with the industry to establish a code of franchising techniques.
One such effort involving the NCTA and the National League of Cities, broke down recently when the cities walked out over the cable group's support of a proposed communications bill the cities said would limit serverely local control over cable.
Not everyone who is confronted with the chance to become a rent-a-citizen grabs at the bait. "I think it's a national scandal," says Omaha newspaper publisher Warren Buffett, who recently turned down an offer of a 5 percent share in an Omaha cable company.
"If it happened in gas, water or anything else, people would go out of their minds. But it's atomized. People never see the full picture."
Magazine denies suggestions that he is trading on his extensive political ties to enrich his bank account, and says he has never intended to lobby his old colleagues on the Fairfax Board of Supervisors when they choose between more than 20 interested cable companies early next year.
"I don't think the issue of how much a company makes or how much an individual makes is germane to the decision-making process," he says.
"What's important is which company can deliver the services that citizens want, which has the financial backing to deliver, which one has people who can best speak on behalf of the people in selecting local programing."
For their part, Fairfax County officials have declared they will not be swayed by local cable lobbyists, and recently approved a resolution that forbids them from discussing the cable question with any of the local investors. But the experience of other jurisdictions suggests that the influence of a community's most prominent civic leaders is so pervasive, and so subtle that such a resolution will probably not do much to dilute it.
John Tolbert, a town councilman in Leesburg, has gotten scores of calls about cable television since the town began discussing the award of a cable franchise. None of them came from one of the town's many local "investors," he said, but the lobbyists' mark was nonetheless clear.
"A lot of them (the calls) came from friends of the local directors," he said. "They didn't use names, but I've lived here long enough to know who they were."
Federal officials confirm that the rent-a-citizen practice is widespread, cropping up in franchise competitions from Houston to Pittsburgh, but recent trends toward cable deregulation make it appear unlikely that any national effort will be make to curb it. "The Vanderbilts were selling railroads at the turn of the century and they bought state legislatures," says Willard R. Nichols, chief of the FCC's cable television bureau. "Now they (the cable companies) are buying city councils. It's getting a lot of press, but I'm not sure it's much different from the way it's always been."