HBO

"In a cable television system, the largest category of cost (40 percent of total operating expenses) is the fees paid to programmers (HBO, MTV, ESPN, etc.). Larger cable operators are able to negotiate lower programming costs per subscriber, and the more subscribers a cable company has, the lower its programming cost (and the higher its cash flow) per subscriber. These discounts continue to grow with size, providing powerful scale advantages for the largest players. Thus, the largest player with the lowest programming costs would have a sustainable advantage in making new acquisitions versus smaller players—they would be able to pay more for a cable company and still earn the same or better returns, thereby creating a virtuous cycle of scale that went something like this: if you buy more systems, you lower your programming costs and increase your cash flow, which allows more financial leverage, which can then be used to buy more systems, which further improves your programming costs, and so on ad infinitum. The logic and power of this feedback loop now seems obvious, but no one else at the time pursued scale remotely as aggressively as Malone and TCI."

"Satellite technology would solve this problem with efficiency and simplicity. A geostationary communications satellite moved in orbit at the exact same speed as the rotation of the earth, while appearing to “hover” in one spot, thereby reaching every antenna in a given area. Cable-TV networks could for the first time transmit high-quality signals to cable operators nationwide, bypassing the limitations of microwave or even terrestrial broadcasting. We had gotten our first peak at a live demonstration of satellite TV at the 1973 cable show in Anaheim, California. What really convinced everyone was the commercial demonstration in September 1975, when HBO aired the “Thrilla in Manilla” fight between champion Muhammad Ali and Joe Frazier, live from around the world, to a handful of cable systems who had agreed to buy and install big dish earth stations. Driven by a young executive named Gerald Levin, Time Life’s HBO struck a deal with RCA Americom to lease a transponder on Satcom I—which was to launch at the end of 1975."

"HBO was a premium service, around $10 a month, but most others were free to consumers, and ad-supported, like TBS and USA. I had always expected nominal fees from networks, but, until hearing about MTV’s plans, I never had imagined that cable networks would have the market power to create a dual revenue stream: fees from the distributors carrying their network, on top of the money that advertisers paid to air commercials on it. All this time, I had valued the *distribution* part of the company, and now more of the future value might well lie in *content*."

"JC and I had an early meeting at the convention center, and we walked the show floor before. What we saw opened our sleepy eyes—workers setting up booth after booth for new channels, including HBO, Showtime, ESPN, Nickelodeon, and MTV—more than we had ever seen before and nothing like we had expected. No longer would cable TV be a community antenna service merely bringing in the Big Three broadcast networks (ABC, CBS, and NBC). These companies were coalescing into a completely different business, an unprecedented platform for networks of all kinds: movies, music, news, history, education, food, and so much more. Millions of TV homes in America would want more choice in the channels they watched."

"I could see what was coming: once Warner got everyone hooked on free content with MTV, it was going to increase the price down the road. So I needed to throw a monkey wrench into their IPO plans for MTV. So I wrote a letter to Warner that stipulated that, absent a mutually acceptable agreement, we were dropping MTV from all of our systems. I knew this would interrupt the MTV prospectus (the offering document for the IPO), because it would be considered a material change if the largest distributor planned to discontinue carriage. Drew, whom I liked, was on the plane and sitting in my office the next day, and Warner and TCI struck a long-term deal that protected us against the increase in rates. Quality content would become much more valuable. Already cable was outgrowing its amateur-hour status compared with the broadcast networks. CNN was now in 26 million homes, with a George Peabody Award in journalism. HBO would win its first Emmy in 1988 with a documentary."

"The combination of the Warner Bros. studio, Time’s magazines (including *Time, People*, and *Sports Illustrated*), HBO, and Ted’s networks, including CNN, TBS, and TNT, was an impressive medley of assets, but it offered little true synergy beyond financial machinations, in my opinion. Time had barely proven the validity of its merger with Warner Communications, five years earlier, in 1990. Jerry was scrambling to get the stock price up, even as he was trying to quash the internal infighting that would become a hallmark of Time Warner’s corporate structure."

"By 1982, TCI had built itself into the nation’s largest cable company, but the biggest deals were yet to come. More scale equals more savings, which gave us more buying power to buy more systems and build more scale, which equaled more savings—a virtuous growth cycle. When I wasn’t raising money in the 1980s, I was flying from city to city, making promises to politicians where we owned cable-TV franchises, or where we were trying to buy them. Big established media companies were now elbowing in to buy or build cable systems—not in the rural towns where the industry was born but in the big cities where urbanites were eager to explore the new national networks like HBO and TBS."

"Ted explained that he had agreements in place with a new channel called HBO to share space on Satcom I, a new communications satellite going up later that year. With assurances from HBO president Gerald “Jerry” Levin, Ted told us, “There’s room on the bird for us.”"

"In September 1995, Ted had made up his mind, and Time Warner agreed to pay $7.5 billion for Turner Broadcasting, creating the largest entertainment company in the world. Jerry Levin would keep his CEO/chairman title and Ted would be vice chairman, responsible for the cable networks of both companies, including HBO. When the deal finally closed, and the TBS shareholders exchanged each TBS share they owned for three-quarters of a Time Warner share, Ted, overnight, would become a billionaire, with his personal holdings in TBS stock worth north of $2 billion."

"subscribers]. It was hard to overpay for cable because revenues were constantly going up. HBO was going up on the satellite, Ted Turner was adding content, and court decisions were going our way. So revenue was going up fifteen or twenty percent a year regularly. You could add a channel and raise [monthly] rates by a dollar and do it again the next year and raise rates again.""

"Since banks loaned at a multiple of cash flow, every new dollar of cash flow expanded a cable company's borrowing power. At first the multiple was 4.5, so a bank would lend $450,000 on cash flow of $100,000 a year. The multiples grew, eventually reaching eight times cash flow. An operator could increase his cash flow, and thus his borrowing ability, by consolidating costs such as billing offices and maintenance crews and obtaining volume discounts from HBO, CNN, and other providers. A company with 500,000 customers paid CNN 7 c" a household per month, while a company with 2 million paid 5#, for example. In other words, the bigger you got, the bigger you could get. At McCaw, "we understood we had to grow or leave the business," says Perry."

"The impact of satellite programming on cable systems' revenues was enormous. Many customers were willing to pay twice what they had before. Cable operators had to split the added revenue with HBO and other providers, but the new revenue boosted cash flow—that is, income after expenses and before depreciation and taxes—the standard by which banks lent money."