Discovery Communications is such a part of TV culture — with popular features such as Shark Week and Oprah’s “Master Class” — that it’s hard to imagine it almost didn’t happen. The challenge was mighty: How do you finance an operation that ties together cable networks, satellite communications and a sprawling mission to “satisfy curiosity”? John Hendricks’s book, “A Curious Discovery: An Entrepreneur’s
Story,” chronicles his efforts to build one of the Washington area’s
biggest companies. He describes moments of pure joy, such as sitting with his small staff to watch the first signal burst onto the television screen. He also talks about the great and desperate chase for financing to keep his fledgling business alive. The following is an excerpt.
We were waiting for 3 p.m. That’s when Group W would beam the first Discovery Channel signal to the Westar V satellite positioned 22,236 miles above the equator. At that altitude, the $250 million satellite was in geostationary orbit, and its orbital speed exactly matched the Earth’s rotation. Since the satellite appeared to be “fixed” in the sky, cable-television operators across the country could receive the retransmitted television signals from the satellite through their own fixed dishes, just like the one mounted on our roof.
In Wireless World in 1945, Arthur C. Clarke first suggested that if just three satellites could be placed in a geostationary orbit, then the planet would be blanketed with retransmitted signals from space — and would usher in a world of instantaneous global communications.
However, in 1945 no rocket could lift a satellite even into low Earth orbit. In America, that feat would have to wait until Jan. 31, 1958, when the powerful Jupiter C rocket lifted the nation’s first satellite, Explorer I, into orbit. In 1975, Satcom I transmitted the television feed of Home Box Office, an event that marked the birth of cable-satellite programming. Now, a decade later, we were taking our place in the sky aboard Westar V.
At precisely 3 p.m. the crisp signal with the animated Discovery Channel logo burst onto our television and the room erupted in cheers. We were transfixed.
It had been a team effort, and now the team wanted to stay in that room and share our success. Hundreds of hours of programming — from the BBC, from TVOntario and from other suppliers around the world — had been acquired by Suzanne Hayes. It was enough to fill our schedule for months, if not years.
But we had not been able to confirm if any operators were launching our service simultaneously with the first satellite transmission — so there was the possibility that we were the only people in America watching. We settled down like a big family to watch the first show, “Iceberg Alley,” a documentary about the frigid waters of the North Atlantic.
Within minutes, the phone in the lobby began to ring . . . and ring. Our office receptionist was standing with us watching “Iceberg Alley.” Her eyes met mine and she quickly dashed out to answer the phone. I assumed it was someone calling to congratulate us.
The receptionist returned. “Who is it?” I asked. “Some teacher in Kansas,” she replied. “She wants to know if she can tape ‘Iceberg Alley’ on her VCR and show it to her class.”
A grin formed on every face in the room. We did have viewers.
In fall 1985, I traveled to New York, Los Angeles and anywhere else there was a potential investor. In meeting after meeting, people were polite but just not interested.
I soon understood why. Even though the Discovery Channel was getting great reviews and climbing above 4 million homes in distribution, word had spread that basic networks were a poor investment. Even though some relief in the deregulation of cable rates was expected in January 1987, the long-term success of cable networks still looked like a challenge.
Advertisers certainly weren’t flocking to pay for the meager audiences of the new cable networks. And buying cable was a lot of work for advertising agencies. An agency could make three calls, place a $10 million order on ABC, CBS, and NBC, and earn its 15 percent agency commission. Conversely, the agency could spend a lot of time meeting with 15 cable networks to place that same order amount for that same commission, with no guarantee of equivalent ratings. Which would you pick?
Although I hoped we’d have to sell only 20 percent of our company to secure the $6 million second-round investment, Allen & Co. felt that it was a stretch to argue that Discovery was worth more than $15 million. Allen was right, and in August 1985, we lowered our sights — and decided to sell 40 percent of Discovery for a measly $6 million. (That 40 percent equity stake is today worth about $9 billion.)
Even at this depressed (and depressing) company valuation, there were no takers.
By October, the balance remaining from the first round was dangerously low — just $600,000.
In late November, our cash was down to the last $100,000, and the unexpected happened once again. Dick Crooks called: “You’re not going to believe this. E.F. Hutton just called and said they have a client who wants to fund the entire $6 million round.”
“They won’t say until we have a meeting,” Crooks replied.
The next day, the two young investment bankers from E.F. Hutton explained they represented the Chronicle Publishing Co., in San Francisco.
The celebration was brief. We were now out of cash, and we still had to work fast to close the transaction. Otherwise the creditors would be chasing us — and if we went dark it might be impossible to start again.
E.F. Hutton’s lawyers pored over our agreements with cable affiliates, advertisers and program suppliers. At Discovery, we called all of our vendors and asked them to be patient. We promised we would get a check out by Dec. 31.
Due diligence dragged on into the new year. By mid-January, the patience of our vendors was exhausted. Many threatened legal action. We were just days from programs being pulled from our schedule.
Then Group W threatened to pull us off its satellite. We had not paid three months of transponder lease payments and the bills for other services, and we owed them more than $1 million.
Finally, E.F. Hutton informed us that the Chronicle would be ready to close the investment Tuesday, Feb. 18, 1986.
Crooks came down from New York for the closing. We arrived early and waited for Leo Hindery and the bankers. They seemed to be running late, so Crooks, John McCarthy and I walked over to the Four Seasons for coffee and waited.
Back at the office in Maryland, our finance staff was gathering the bank wiring instructions for the funds that we would promptly transfer to grateful vendors at 9 a.m. the next day.
Eventually a hotel staffer walked through the lounge announcing, “Phone call for Mr. Crooks!”
“I guess they’re here,” I said as Crooks left to take the call.
We were gathering our briefcases when he returned. His face was ashen.
He could barely speak. “E.F. Hutton said the Chronicle board didn’t approve the investment. The closing is off.” Crooks slumped into his seat and said, “No one is coming.”
It was the darkest day we had.
When morning came, I began searching for a solution. There had to be someone who would help. I could not let this be the end of Discovery.
On the drive to work, I remembered a brief interview in a cable trade magazine. A reporter had asked John Malone, the leading force in the cable industry, for his thoughts concerning the date, still a year away, when cable operators would be able to adjust their rates upward, reflecting what the market would bear.
Malone replied that the industry would be wise to invest some of its increased revenue in content, because “people don’t buy cable service for the coaxial cable, they buy it for the programming.”
I had filed his comment away in my mind, but now it took center stage. I had to get to John Malone.
Like everyone else connected to the cable business, I knew all about him. He led industry giant TCI. I also knew that a programmer soliciting channel space rarely got an audience. Rather, John Sie, his senior vice president, dealt with programmers.
Malone had earned degrees in electrical engineering and economics at Yale and his PhD in operations research at Johns Hopkins. From all accounts, he had an intimidating intelligence.
Malone had to be one of the world’s most curious individuals. Surely he would value the Discovery Channel.
I told Crooks about the interview. Maybe Malone might be interested in helping us.
“Let me talk to Paul. I’ll call you back,” he said.
Paul Gould had joined Allen & Co. in 1972 and had risen as one of the company’s top dealmakers. The phone rang a half-hour later.
“Yeah, Paul knows John Malone,” Crooks said, “and he just got off the phone with him.” I held my breath. “Malone told Paul: ‘We can’t let Discovery go dark.’ ”
Malone was putting John Sie on a plane to Washington.
Within the week, Sie arrived. We talked for several hours about the Discovery Channel. He evinced an almost superhuman curiosity about every detail of our operations.
Turning to a possible investment by TCI, I told Sie that I couldn’t survive a long due diligence process. I needed to send checks out that week, even just partial payments, to suppliers. I showed him the list.
I needed $500,000. Sie said he would talk to Malone and see if he would approve a wire transfer.
Looking back at this meeting, in which I was admitting to having led my company down the path to failure, and in which I was asking for — almost demanding — a gigantic sum of money with the claim I could fix that failure, I am astonished at my fearlessness.
Sie and I then discussed the amount of the next round of financing. I professed my hope that, with TCI’s help, we could raise $20 million so that we could focus on growing the business, not fundraising.
Sie said that he and Malone had talked briefly about forming a partnership with other operators. In particular, Malone had told him that Bob Miron of Newhouse had to be the first potential investor we talked to. Malone knew that Miron’s involvement would provide a valuable endorsement.
Before I left, Sie suggested that we next meet in Dallas at the National Cable Television Association convention. It was a few weeks away. “Bring Suzanne Hayes along, and I’ll set up a meeting with Bob Miron,” Sie said. Then with a grin, he added: “We’ll have Chinese food.”
Within 48 hours, TCI had wired $500,000 into our company account. The loan was a lifesaver, but even as we started paying our bills, I was already starting to worry about the Texas meeting. What if Miron didn’t want Newhouse to invest in Discovery?
I navigated my rental car through Dallas trying to find the Chinese restaurant. We were running late. I parked, and we scampered inside.
John Sie and Bob Miron were already seated.
Sie proceeded to dazzle us with his orders of Chinese items, almost all of them off-menu. We soon got to work. Like Sie, Miron went right to the details. He and Sie grilled Suzanne on program supplier relationships and on how each contract might be improved. I could tell that both men were searching for competitive advantages that we could secure through program exclusivity and long-term “output deals.”
“If these producers knew that TCI and Newhouse were going to invest in Discovery, your programming costs would skyrocket,” Sie gestured upward. Miron agreed.
As we began to talk about cable carriage, I noticed that Miron looked to his left and grabbed a paper napkin off an empty table next to ours. He pulled a pen from his coat pocket and began to scribble.
Soon we were deep into an analysis of all U.S. cable systems. It was so exciting to be working with industry insiders at this level that I almost forgot my troubles. We looked at the various owners of the cable systems and the chances of us convincing each one to give increased carriage to Discovery. I explained that we needed 15 million subscribers before Nielsen would provide ratings data. Many ad agencies simply refused to buy unmeasured media. Discovery was growing, but we would still finish the month just shy of 8 million homes.
Miron finally announced, “Let’s go through your expenses one more time. Item by item.”
Knowing our costs by heart, I ticked off the transponder lease payment, uplink and master control costs, editing costs, personnel costs, marketing, and programming costs. We had just increased the programming costs to account for new incentives, which we hoped would convince suppliers to sign up. Miron then looked up from his napkin and said: “That’s about a million dollars a month in costs.”
We then talked about the dismal revenue situation. Cable operators were not yet free from regulation, and so subscription fees, derived from rate increases to consumers, were nonexistent. Like other start-up networks in this period, Discovery Channel had offered free carriage to the industry. Our hope was to survive until deregulation, then renegotiate our cable-distribution agreements and secure a modest subscription fee. We had precious little income from advertisers — less than $75,000 per month. Miron winced.
We could tell he was vigorously working on that napkin. The conversation paused until he looked up.
“You need 20 million homes and a nickel per sub,” Miron announced. “Is that possible? That’s the question on the table.”
I knew in an instant that he was right. If we could get 20 million subscribers, and get paid just 5 cents each month from cable operators for each subscriber, it would create an income stream of $1 million a month. “Anything you get extra from advertisers would then be profit,” Miron added.
“Look,” I offered, “if we get to 20 million homes we should be selling $250,000 of advertising per month.”
Back to the napkin Miron went. He started to list cable companies. By each name, he listed a number. Sometimes he would glance over at Sie and ask a question, like, “How many subs do you think we can get from Cox?”
I could tell that he was heading for some kind of decision point. As he looked up from the napkin, he said: “People will want Discovery in their homes. Even if they don’t watch it, they will say they watch it. Discovery has a ‘wholesome’ quality about it.” He then told us that his wife, Diane, was a teacher and that she would love the service.
Miron glanced back down at the numbers on the napkin, as if to confirm his calculations one last time, then back up to meet my eyes. “I believe we can get that 20 million homes and that nickel,” he said. “I’m in.”
Years later, standing in the Discovery boardroom, after we had passed 100 million U.S. homes in distribution, 400 million international homes in distribution, and $4 billion in annual revenues, Miron winked at me and said, “We should have saved that napkin.”
Excerpted from “A Curious Discovery: An Entrepreneur’s Story” by John Hendricks, courtesy of Harper Business, a division of HarperCollins Publishers.