The cable television industry is in a position to dictate its future and perhaps that of the nation's communication systems.
"Basically, the cable industry is free to do whatever it wants," said Willard Nichols, chief of the Federal Communications Commission's Cable Bureau.
"We ought to rely on the marketplace. But it's not our job to make the cable industry profitable. If they don't make it, they don't make it. The only reason we ought to care is to make sure the public doesn't lose services," he said.
"Cable has to be left to do its own thing, and we will if we avoid regulation," said Gustave Hauser, chairman of Warner Amex Cable Communications Inc. "We are building cable now about as fast as human and technological resources are available. The question is where the industry will get the money, but we will do it now that the industry is perceived as a sound one. It's going to cost billions of dollars. You can't wire America for nothing."
The development of cable television systems is extraordinarily expensive simply because of the high cost of installing the cable. It can cost as much as $50,000 per mile to connect homes in a municipality that requires underground utility wiring, and a city can require the installation of hundreds if not thousands of new miles of cable.
The public has been hearing considerable rhetoric about the blooming of the cable industry for 10 years. Yet, in 1981, much of the talk about the coming of the cable may be accurate. With accelerating speed, large cities, such as Dallas, Pittsburgh, Cincinnatti, Omaha and Portland, Ore., previously thought to be too expensive for cable because of construction costs of at least $100 million, are granting hotly competitive cable franchises.
The reasons for the matching of the rhetoric with the reality of cable television are numerous, and the history of the industry indicates that the cable boom is a demonstration of the meshing of technological and political change.
From its inception in the late 1940s until about 1976, cable television was little more than what it was initially called, community antenna television (CATV).
In the industry's infancy, citizens of communities without their own stations generally joined together to build large antennas at high elevations to pick up signals from nearby towns with local stations. Those signals were then fed into the home, bringing clear reception and multiple channels into places where distance had limited the impact of television.
With the subsequent development of microwave relay systems, more cities were able to pick up signals, and therefore more people could plug into cable systems. Until 15 years ago, the expansion of cable was essentially limited to small towns or to cities such as New York with reception difficulties stemming from high-rise buildings, or cities such as San Diego, which wanted television signals from Los Angeles.
Then, in 1966, the Federal Communications Commission entered the picture in a major way for the first time, barring cable systems in the largest 100 markets from bringing in any more distant television signals.
In 1968, at a time when there were about 3.6 million cable subscribers, the commission blocked construction of any new systems in those big cities, as the broadcasting industry began aggressively asserting that cable was unfairly bringing in those signals without adequate payment.
Four years later those restrictions were lifted, and the industry, with a frenzy associated with its current boom, aggressively sought franchises in major cities, particularly in cities in the lower half of the top 100 markets.
But the mid 1970s proved to be a difficult time for the industry. Most of the cable firms were small, and many agressively sought franchises they could not afford to construct, particularly when interest rates shot up to then-record levels. "At that time, you were talking about pure fundamental risk," one cable investor said.
Penetration rates, the rates for which cable was able to sign up new subscribers in cities with systems, were low, generally less than half, and the companies were charging rates which, despite inflation, were at levels barely above those of the last two decades.
"In the late 1960s and early 1970s, we believed our own hopes and overextended ourselves," said Thomas Wheeler, president of the National Cable Television Association.
In fact, TelePrompTer Corp. lost $37 million in 1973, even though, because of its major share in New York City systems, it was and remains the largest cable system in the country in terms of subscribers.
But then, as interest rates dropped, the industry's growth began. Subscribers rates began to rise. Slowly, FCC rules went out the window, partly because of an aggressive cable industry lobbying campaign and partly because of the nation's increasing dissatisfaction with federal regulatory activities, an ideological change shared by outgoing FCC Chairman Charles Ferris.
Among the rules that were lifted were those that limited cable companies to showing films released less than two years and to showing only one film a month that was 10 years old or older.
As a result of improved technology and another FCC decision to allow use of smaller, cheaper earth stations to receive satellite signals, Time Inc.'s Home Box Office (HBO) decided in 1976 to offer pay television transmitted by satellite, a nearly immediate link between cable systems that until that point had been missing.
Programmers like HBO could now beam their services to a stationary satellite, which then relayed those signals virtually simultaneously and directly to the receiving dishes of hundreds of cable operators.
The groundwork for the current cable boom was basically completed that year when Ted Turner, the Atlanta billboard, sports and broadcasting magnate, sent his Channel 17 around the country via satellite, making the station the first of the so-called superstations.
"Not until 1976, not until the day of the satellite, did they truly become an industry," said Willard Nichols, head of the FCC's Cable Bureau.
"I think that the main office difference between the industry now and 10 years ago is that it has a product to sell," said David Wicks, a leading industry analyst and financial developer as a managing director of Warburg Paribas Becker, a New York investment house. "Until then, all you could do is give a signal off the air."
The industry began to market its services in a more sophisticated way, and the penetration figures, then hovering around 25 percent, began to climb as the systems sold a combination pay and basic service option that began bringing in close to 75 percent of the potential subscribers.
In 1970 there were about 5.3 million cable subscribers, about 9 percent of the nation's 60 million television households. By 1976, the subscriber figure grew to about 12 million, or 17 percent of the homes with television sets.
By the end of this year, it is estimated, 20 million homes will subscribe to cable television, a full quarter of the television market, and most experts expect that figure to reach 50 million by the end of the decade.
But subscriber figures are not the only way to measure the new growth of cable television. Profits of the nation's largest cable firms rose by an average of 84 percent during 1979, according to a survey by Warberg Paribas Becker. In 1979, 123 banks responding to a survey by the same investment house reported outstanding loans of $629.5 million, up by $98 million over 1978 figures.
Those outstanding loans were predicted to jump to $1.08 billion by the end of 1980, with new loan volume expected to rise from about $321 million in 1979 to $595 million in 1980. Chase Manhattan Bank, which, according to the analysts' figures, is the industry leader, had outstanding loans of $83 million at the end of 1979, seven times the figure as of the end of 1970. A Chase official said the bank planned to provide about $500 million in 1980 alone for acquisition financing.
"It's damn important for us because it means a lot of new business," said Peter Farnsworth, a Chase vice president. "It's perfect for banks because it's construction.That is a bank's forte. This is a capital-intensive business, because with revenues you can lower the debt rather quickly. And to a certain extent it's all very predictable."
Thirty-one major insurance companiesd reported expected outstanding loans of $838 million in 1980 and new loans of about $102 million. John Hancock Mutual Life led that industry with $140 million in outstanding loans as of the end of 1979. All told, financial institutions, including intermediate term lenders, expected new loans of $731 million to the industry, raising total outstanding loans in 1979 to a total of more than $1.5 billion.
Another way to measure the business is to look at the new major players in the industry, large media and industrial concerns, who are gobbling up existing franchises and seeking new ones at staggering levels. in fact, the top 15 MSOs (multiple system operators) serve more than half of the nation's wired homes.
Westinghouse Broadcasting Co., for instance, stunned the industry with a $646 million purchasef of TelePrompTer last year, a merger trend which opened in 1978 when Time Inc. traded stock with an estimated worth of about $140 million to buy American Television and Communications.
In 1979, American Express Corp. paid $175 million for half of the operation that became Warner Amex, and last year the New York Times Co. paid more than $100 million for a set of New Jersey cable systems with about 42,000 subscribers. Getty Oil, the primary financier of ESPN, a sports programming network, is also a partner in the Premiere cable movie programming venture, which is treatened by a pending Justice Department antitrust suit.
But perhaps the clearest indication of the industry's emergence is the rapid-fire entrance of the major commercial television networks into the cable game. No longer warring with the cable industries, both American Broadcasting Companies Inc. and CBS Inc. are in the midst of major, expensive efforts to provide cultural programming for cable systems.
"Cable is here in one form or another," said Herbert Granath, who heads ABC Video Enterprises, the culmination of an ABC $1 million study of the cable industry. Granath's unit has joined forces with the programming arm of Warner Amex to provide a diet of music, theater, dance and profiles of a variety of performers and artists.
"This is a sensitive area for us," Granath said. "We're going into competition with ourselves. ABC has had the highest profile of any other network in pointing out the inequities involved in cable.
"Our view of cable is that it is an opportunity to do kinds of programming that commercial networks have not done a lot of. The definitive 'Laverne and Shirley' has been done. Mass audience programming is not the future of cable. That's why we're interested in it."
But the cable era, brought about by the combination of changes in the regulatory, technological and financial environment, has created an unprecedented eagerness by industry management, hungry to garner lucrative franchises, and by municipal officials, hungry for modern, flashy communications systems and a source of revenue for financially strapped governments.
Under FCC rules, which also may be abandoned, municipalities can tax cable operators up to 3 percent of gross revenues and up to 5 percent of basic user fees.
"Many communities have been through cable television wars, and their officials understand the use of the term 'wars,'" wrote Thomas M. Utterback, director of the Missouri Municipal League, in an article distributed by the National League of Cities. "Some communities have distinguished themselves; others have not."
Only local officials can approve the granting of cable television franchises, although a number of states have commissions that regulate facets of rates and services.
But, largely in a effort to obtain local participation in the process, many municipalities have instituted a process that encourages "rent-a-citizen" programs, in which cable operators give local business and civic affairs leaders shares of stock, ultimately worth hundreds of thousands of dollars if the company is awarded the franchise, in exchange for the shareholders' acting as lobbyists and spokesman for the cable concern.
In many cities, governments are insisting on the operators' giving the community studios and other facilities in exchange for the franchise.
"Local ownership is fine when a citizen goes out and buys stock over the counter just like everybody else," Utterback wrote, in recommending that cities ban the process.
"'Rent-a-citizen' smacks of favoritism and cronyism, and exemplifies the very worst of the governmental process."
In city after city, news stories have stressed the potential and occasional real improprieties the system raises, and a grand jury in Houston is said to be examining the extremely controversial franchising process there.
Most everyone in the industry wonders how cable operators can hope to fill incredibly large numbers of channels on cable systems. One bidder for a suburban Los Angeles franchise recently pledged to build a 184-channel system.
In fact, almost no one in the industry will say he likes the direction of the franchising battles.
"All cable franchising is a less than healthy operation," said Wheeler of the national association. "But the kinds of scares that are being raised are the inevitable result of these two groups with two real sets of needs coming together to solve their problems within the political process. That in itself builds an imperfect system, but it is better than lotteries, auctions, federal licensing and municipal ownership."
Others, outside the industry, are less diplomatic.
"Every city wants to think that they are going to have the best system," Wicks said. "The cable industry is killing itself to get franchises, but the cities are demanding more than they need."
Henry Geller, outgoing head of the National Telecommunications and Information Agency and a longtime communications activist, called the franchising process a "rather deplorable development," and said he wonders about the economic consequences of industry pledges to local governments.
"If cable is giving away a number of channels to educators and to the cities, someone has to pay for all these channels. There are subsidies, and somebody has to pay for it. The local entities shouldn't do that. Cities are making ridiculous requests. There is no free lunch."
The FCC's Nichols is even more blunt. "There are a lot of things going on on the local level that I don't, on a personal basis, like," he said. "The giveaways may not be real. I expect they will raise rates, and the decision will be whether they want lower trash rates or lower cable rates."
On the other hand, Nichols and Geller agree that the franchising decision is a local process that should remain that way. "If there's one decision that's inherently local, it's the use of the local land," Nichols said.
But Geller also noted that the federal government has an interest in cable's development. "It brings diversity in broadcasting and local distribution," Geller said. "You can't just say it's bad, period, and we'll get over it. About the only thing the federal government can do is issue reports. The federal government ought to be sounding some kinds of notes."
One answer to the controversy about franchising and its results could be tests of either municipal or cooperative ownership of cable systems. Some smaller systems are owned under such a structure, and in St. Paul, a local citizens group has been fighting for the cable franchise bid for over a year.
By selling $10 memberships to local citizens, the group has raised money to participate in the franchise process, and it's members say that by using a loan from the National Consumer Cooperative Bank and money from sales of debentures, revenue bonds and loans from local financial institutions, it can cable the community.
"It's difficult for a co-op group because they do not have the resources to compete quickly," said Samuel Simon of the National Citizens Committee for Broadcasting, a group affiliated with Ralph Nader. "Our point is that the community ought to do it and decide what's on access channels and even other channels.
And, as Simon pointed out, with more channels being delivered daily to municipalities, the vital question is what subscribers actually will see.