Interview Date: February 11, 2001
Moderator: Jim Keller
Panel: Roy L. Bliss, Ed Hewson, Les Hilliard, Jim Hirshfield, Mary Hirshfield, Bob James
Abstract
Jim Keller is the moderator of a discussion about cable in the Pacific Northwest. He describes the panel as small and medium-sized cable operators in the Northwest who will discuss the development and current operations of their systems. He notes that cable television did start in the small and remote areas of the United States, and recognizes the panelists’ major contribution to the industry.
Roy Bliss introduces himself first, and explains that his father built a cable system in rural Wyoming in 1953. Next up is Bob James, who works for a law firm in Washington, D.C. that has represented smaller and some larger cable companies. Jim Hirshfield entered the business in 1966 after obtaining a Master’s degree in business. Ed Hewson also began in the business in 1966. He was with King Broadcasting Company, and they started by buying small cable systems on the coast of Washington State. Leslie Hilliard is next. He got his start in cable with his father in 1953. In the late 1960s, he and his brothers bought their own cable systems. Mary Hirshfield, who is the former co-owner of Summit Communications, explains her start in cable by marrying Jim in 1968, when they applied for their first franchise in King County, Washington State. Jim Hirshfield affirms that initial foray into the industry as independent operators, although he had been involved in cable for two years already, working for Telecable out of Seattle. He describes how he and Mary obtained the approval of the county. Hewson explains how King Broadcasting got started and why they got into the cable business, although they were broadcasters. He goes on to say that the company wanted to extend their signal. King was the first commercial television broadcaster north of San Francisco and west of the Mississippi. He also states that expanding into cable was a way to protect their market, and they could see that it would be a growing business. But he recalls the Second Report and Order, 1966, that allowed the FCC to extend its current regulations.
Keller asks Hirshfield about the shadow areas of Seattle, i.e., where signals were harder to receive. Hirshfield replies that the further behind the hill, the less able you were to get signals without building taller antennas. Keller then comments that those shadow areas played an important part of the development of cable systems in Seattle, and caused some concern at the FCC. He goes on to say that the broadcasters loved the cable operators as long as they stayed out in the more rural areas, but not within the broadcasters’ own coverage areas. Hewson agrees, and adds that they wanted to bring in a distant signal.
James remembers that in 1966, the FCC imposed a freeze on cable companies bringing in signals from distant markets and relaying them in by microwave, because the Commission wanted to protect the broadcasters. The FCC prevented the operators from bringing these signals in for a number of years. But Hirshfield reveals that in Seattle, the operators started to offer the Canadian stations which weren’t included in the definition. He observes what the situation was in the rest of the state. James notes how some cities could bring in signals from Canada, but others were restricted from very close signals.
James acknowledges that much of the FCC regulation was economic in nature to protect the broadcast industry in those days, but it was also largely a political decision. Keller mentions former Senator Warren Magnuson and his connections to the broadcasters. He contends that things started to loosen a bit when independent stations were permitted to be delivered in some markets that didn’t have an independent station.
Bliss describes how, after 1972, he started delivering WGN from Chicago via microwave to cable systems all over the Midwest. The discussion returns to the issue of Canadian signals, and goes into the prohibition of U.S. signal importation into the Canadian markets themselves. However, systems in tiny markets could carry Canadian signals, particularly along the border. James mentions the 1976 Copyright Law, which ended up governing what signals could be carried. Even in light of that law, Hilliard describes how he microwaved Canadian channels down into Montana. The panelists compare the restriction of signals in Canada and the U.S. Bliss explains the Canadian interest in “protection.”
Bliss moves on to the Carter Mountain lawsuit decision, and describes how it was the original regulation for cable operators. Carter Mountain was one of the antenna relay sites. He describes how it affected his father’s business, which had been attempting to bring Idaho Falls television signals into Worland, Wyoming, via microwave transmission, which was not regulated at the time. However, the FCC ultimately ruled against him. Hirshfield makes the comment that a lot of television stations were actually put into business by cable because as soon as you got to the UHF frequencies they suddenly had parity as far as their distribution as the FCC rules gave them parity. Keller says that UHF was supposed to be the savior of “free” television in the United States. (UHF is defined as ultra high frequency (UHF) radio for over-the-air transmission of television signals.)
James summarizes the complexities and effects of regulation on cable over the years. He cites the freeze on bringing in distant signals to local systems as a retardant to the development of the industry. He explores the Cable Acts of 1984, 1992 and 1996, as well as the Copyright Act of 1976. Hirshfield agrees, and adds that the Cox Report, the 1966 freeze and the 1972 Second Report and Order slowed down the growth of cable. The legislation to regulate, introduced by Senator Pastore in the late 1950s, is also mentioned. Hirshfield notes how regulation also inhibited the development of broadband services after 1992. Mary Hirshfield contends that in the 1992 timeframe, little distinction was made between large and small operators. Bliss clarifies the fear around government regulation and rules changes. Hilliard asserts that the market goes up and down based on what the FCC or government, whether federal or local, rule.
Jim Hirschfield makes it clear that one of the reasons they sold their company was that it simply didn’t generate enough money at the rates they were able to charge in order to service debt, their present capital, and do what needed for future capital. In addition, he says that operators never made any money when they were running the business. They made money if they sold part of the business because someone valued the future prospects. Then more regulation would come, and the value of those future prospects would change. The conversation moves on to the issue of cash flow vs. profit.
Hewson explores the problems with programmers, who all want to get carried and cross promote, forcing an expansion of capacity. He cites issues with MTV. Hilliard points out the discrepancies between what the large cable companies like TCI and Cox pay for programming, and what the smaller companies have to pay.
In answer to a question about the first channels the panelists put on that were transmitted by satellite, Bliss mentions WGN, and Hilliard claims WTCG, Ted Turner’s system. He goes on to explore issues with aligning satellite dishes. James relates an anecdote about Hub Schlafly’s transportable dishes. Bliss talks about how expensive microwave transmission was, and how the satellite changed that. He and others remember “bicycling” tapes, and the costs of various receivers. Hirshfield tells an interesting anecdote about how a system in Barrow, Alaska, had to install a dish in the Arctic Ocean because they couldn’t ground it in the permafrost.
The discussion returns to the issues of the economics of cable television systems. They talk about how financing was obtained when banks refused to lend. James describes the frustration of having to try to generate enough cash flow to pay the debt, at the same time that profits are not being generated. He acknowledges that companies were building assets, yet with one financial problem after another, it took very tough, resilient people to stay in the business. Hilliard remembers doing a lot of the work himself on the physical plant because they could not afford contractors. Hewson recalls installing strand himself on a pole and tells an amusing story.
The issues around selling companies comes up. They state the importance of depreciation in its relationship to taxes. Hirshfield explains why sales can be forced. Debt continues to accrue when systems are upgraded, and this is difficult for small operators. Hewson comments that he has to continue to make capital investments, which don’t generate any cash flow. The conversation moves on to how banks have changed over time. But Keller asserts that the bankers finally began to realize that operators have a predictable income flow, and they can just about determine how much they are going to be able to pay back on what current income flow is, knowing it’s going to be there every month. He comments that very few other businesses have that capability.
Next, the panelists discuss highly leveraged transactions (HRT), which refers to bank loans granted to a company already carrying an exceptionally large amount of debt. Yet Hilliard counters that small operators never got to the point of obtaining such loans. Hirshfield explores the relationship between subscriber and cash flow, but adds that there is a lot of uncertainty in charging customers. He also worked as a bank comptroller, and notes the use of balance sheet lending and profit lending. He and Mary Hirshfield talk about equity development. Additionally, he explains classified loans as any loans deemed by the lender to be in danger of default of both principal and interest.
The panelists move on to a discussion about the factors that were important in the development of their systems in the Northwest. Hilliard answers that state cable associations were very significant in the protection of the systems, and lobbying against regulations. Then Keller asks the group how they view the FCC preempting regulations by local city councils. Hirshfield replies that as soon as the operators started to run their businesses based on what the regulators said, that was a formula for disaster because the operators were the businesspeople, and the regulators weren’t the ones at risk, didn’t have their own money invested, and essentially, as he puts it, didn’t have their lives on the line.
Mary Hirshfield remembers their first franchises, and the frustration they endured being a small system She confirms that they had a reputation of living up to their franchise agreements and developing the system within the expected timeframe, as compared to the larger systems. Regarding the issue of franchises, Hewson notes that the satellite companies don’t pay franchise fees. James comments that those companies are protected from paying those fees. Hewson elaborates on how traditional systems use city rights of way, require building permits, etc. He emphasizes that this doesn’t seem to be equitable. Keller inquires about onerous provisions in the fees. Hewson responds that one issue is the requirement to reopen a franchise at any time. Other panelists affirm additional problems. James explains the rationale for franchising in the first place, noting the necessity for cities to regulate the rights of way, and as a revenue source for municipalities. He addresses the fee issue.
He also weighs in on regulations and rules. He states that rules are ultimately intended to benefit consumers, but they actually do not. He believes that the rules retarded the development of the industry, costing the consumer as well as the cable industry, while other competing industries are able to avoid these regulations.
Keller concludes with a question about competition, specifically from telephone companies. Bliss recounts the history of the development of satellites in delivering television signals. Hirshfield observes that satellite systems, like DirecTV, are heavily subsidized. He also comments on the future of small cable systems. Hewson describes expensive programming fees, but also discusses high-speed access on the Internet will be superior to what satellite systems can offer. He adds that he could make a good living having subscribers just as Internet customers. Bliss agrees that broadband is the answer, the future of cable. Hilliard predicts that video streaming through the Internet is going to begin. He describes the “telephone of the future.”
Interview Transcript
JIM KELLER: This is a panel discussion about cable television in the northwest U.S. Cable television in the northwest has a long and distinguished history and many say perhaps the first system in the country, up in Astoria, Oregon. That is still debatable right now but our purposes for my discussion today, it seems like it was the first system. You could definitely, if it wasn’t the first system, it sure was part of the cradle of cable television. This morning discussion will center around the development and current operation of primarily the small cable operators within the northwest. The major operators are AT&T, Cox, Comcast and some of the others that operated in the area are not here today and these men and women at the table represent the smaller and medium sized cable operators in the northwest. A group that is so often overlooked in the history of our industry. We have to remember that cable television did start in the small and remote areas of the country and I think we have to recognize that these people have made a major contribution to the industry. I hope this will be brought out in our discussions this morning.
We are at the Sun Valley Lodge in Sun Valley, Idaho. The date is February 11, 2001. The moderator this morning is Jim Keller. I’m going to start by asking each of you to introduce yourself and identify yourself. Roy, you want to start please?
ROY BLISS: Good morning. My name’s Roy Bliss. My dad built a cable system in rural Wyoming in 1953. That was my beginning in cable.
KELLER: Bob?
BOB JAMES: My name is Bob James. I’m with a law firm in Washington, D.C., Cole, Raywid and Braverman and I started there out of law school 30 years ago and we represented smaller cable clients and some larger ones too.
JIM HIRSHFIELD: I’m Jim Hirshfield. I entered the cable business in 1966 upon graduating from, getting a master’s in business. Our lawyers in the company that I went to with were Bob James firm and I’ve been in the cable business ever since.
ED HEWSON: I’m Ed Hewson. I started in the cable business in 1966. I was with King Broadcasting Company and we started by buying some small systems on the Washington coast.
LESLIE HILLIARD: I’m Leslie Hilliard, started in cable with my father in 1953 running his Dumont camera chain. After the service and after college, my brothers and I finally bought our own cable systems in the late 1960s.
MARY HIRSHFIELD: I’m Mary Hirshfield, I’m wife of Jim Hirshfield and former co-owner of Summit Communications and I got my start in cable by marrying into it and going with Jim on the return of our honeymoon in July of 1968 to apply for our first franchise in King County, Washington state.
KELLER: King County was in the Seattle area, is that correct?
HIRSHFIELD: That’s correct.
KELLER: Jim was that your first system? First franchise operation or what? Did you get the franchise?
HIRSHFIELD: Well, actually we did. That was our first thing as an independent operator. I’d been two years in the business and I think we can back from our honeymoon Sunday and Monday morning, Mary’s up holding the charts and these three county commissioners I think sort of liked these young people who were getting going. Of course, as always happens, the larger company in the area, Brad Harrison’s outfit, I forget the name, Northwest Cablevision, came into the county the same time and took “Oh no, we’ll build that area” but the county in their wisdom allowed us to do it. Also, the fact that I had knocked on every door in that 500-home area. One of the homes was occupied by the assistant to the head of the council. So you do your homework and sometimes things would work out.
KELLER: Had you been operating systems prior to that?
HIRSHFIELD: I’d been two years or year and half in the business but working for Telecable, Inc. About 15,000 customers out of Seattle and that was one of the largest operations in that time but nowhere near as big as Teleview Systems, Homer Bergren’s operation in Seattle. So we had two pretty large companies in Seattle but when I left Telecable and started my own company, yes, this was our first franchise.
KELLER: Ed, what or how did King Broadcasting get started and why did they get started in the cable television business being broadcasters?
HEWSON: Well, they did everything first of all to try to make money, an honest living but broadcasters looked at cable as cable antenna systems and we wanted to extend our signal within our ADI of King Broadcasting or of Portland or of Spokane or wherever we operated.
HIRSHFIELD: Wasn’t Spokane about the first licensed granted in the Pacific Northwest.
HEWSON: King was the first commercial television broadcaster north of San Francisco, west of the Mississippi.
HIRSHFIELD: So that was the station that the cable system in Astoria was trying to pick up when Ed Parsons build it in 1949.
HEWSON: I wasn’t there, Jim. (Laughter)
HIRSHFIELD: Tried to trap you.
HEWSON: No, but that’s true.
KELLER: Primarily though to protect your own markets is the reason you got into it.
HEWSON: To protect our market plus we could see that it would be a growing business and the first systems that King actually negotiated to buy were outside of our markets I understand but they didn’t complete those. It was before my time. Deals fell apart. It could have been Pendleton, Oregon.
KELLER: Which turned out was one of the very early systems and could have turned into a very profitable organization.
HEWSON: Right, but there was as I recall there was something called the Second Report and it said that every viewer was worth maybe 60 bucks a year to a broadcaster, so if you could grow your viewers you could get a direct return but first you want to make a profit running a system.
HIRSHFIELD: When I came to Seattle in 1966, I think that the three commercial broadcast stations had 99% of the TV market in the city of Seattle. That’s another interesting nuance. You had this great concentration of viewers.
HEWSON: That’s true and then there was an independent channel, 11?
HIRSHFIELD: It had no viewers.
HEWSON: Viewers to speak of. I think the educational channel; Channel 9 may have had more market penetration than Channel 11.
HIRSHFIELD: Yeah. So you guys were involved with Teleview systems which built Seattle as Master Cable TV, right?
HEWSON: Teleview owned I believe, Homer Bergren came to the three broadcasters, put his hat on the table and said “Why don’t we make a deal?” So we worked out a deal where King, Cairo and Como would each have 24% I think it was of Master Cable Systems and Teleview would have 28% and Jim McKenzie was the manager.
HIRSHFIELD: He got a topical map of Seattle and he put a little light bulb on top of Queen Anne Hill where the towers were and then he marked on a plat map everywhere there was a shadow.
HEWSON: I believe Ken Hermanton made that and we brought it to over to the Teleview offices to show them where a cable system could build profitably.
KELLER: Please explain that. It’s probably very, very common to Seattle…
HIRSHFIELD: Oh, it is common.
KELLER: …but it may not be to other parts of the country. Explain that, the shadow areas of Seattle.
HEWSON: Well, Seattle is formed like Rome with 7 hills except I think they washed one down in the back and television didn’t get into the valley so the deeper, the further behind the hill you were the less able you were to get signals without building taller and taller antennas and they used to look around Seattle and it looked like Japanese flag ships with the cruise antennas on them and so you could predict where it’s profitable. You’d get a 100% penetration of television systems sent over and everybody didn’t own a television sets before that in 1966 and if you got up into the sunlight, less and less probability and so you could say that people with cable in the clear were sort of stupid. (Laughter).
[Interruption]
KELLER: We were discussing the shadow areas in the Seattle area which did play an important part in the development of the system in Seattle and Bob it gave the Commission’s some concern also didn’t it about what was happening in the Seattle area as opposed to some of the other major metropolitan areas in the country.
JAMES: Yeah, at that time the FCC was regulating broadcasting as they still do and licensing amendment but anxious for the broadcasters to get good coverage so that was the very early days before the FCC got involved in restricting cable, they were interested in what cable could do in some of these pockets. But that very quickly changed to a more competitive environment between cable and broadcasting at least in the regulatory areas of the FCC.
KELLER: It’s interesting to note that the broadcasters loved the cable operators as long as they stayed out in the boondocks. As soon as they came in to within their own coverage area then things got a little bit different.
HEWSON: Or wanted to bring in a distant signal.
KELLER: Or wanted to bring in a distant signal, right.
HIRSHFIELD: That was the freeze. Was that 1966?
JAMES: 1966, the FCC imposed a freeze on cable companies bringing in signals from distant markets and relaying them in by microwave because they wanted to protect the broadcasters and they literally froze the cable operator, prevented them from bringing these signals in for a number of years.
HIRSHFIELD: And as I recall it, if I have this right, Seattle had a little time warp, the Seattle area because they defined the stations you couldn’t bring in from the U.S. table of authorized stations and Seattle, we started to bring in the Canadian stations which weren’t included in the definition.
BLISS: I think it was all of the border towns worked that way.
MHIRSHFIELD: I can remember having grown up in Longview, a southwest Washington town at that time, we were allowed to receive signals from the Portland stations and therefore were much more oriented to Oregon news and what was going on as opposed to what happened later when Seattle stations were allowed to transmit into that market and people, residents became much more aware of what was going on within the state. It’s that simple. It was regulated.
JAMES: So much of the FCC regulation was economic regulation to protect the broadcast industry in those days and it was largely a political decision. The cable industry was very small and that was just the political reality of it.
BLISS: And the broadcasters were very strong. They always have been. Still are.
KELLER: They had Warren Magnuson in their pockets (Laughter) and the Central Telecommunications Committee.
JAMES: They had the FCC convinced that they had to protect the broadcast license for free over the air television and that seems in today’s climate very foreign but it really was restricted and it led to lots of dislocation such as the kind of thing you were talking about where some cities could bring in signals from Canada and others were restricted and couldn’t bring in signals that were actually very close. So it took a number of years before the FCC backed off from that policy.
HILLIARD: Did they totally back off? I think we’re just switching from analog to digital now. (Laughter)
KELLER: It started to soften a little bit when they permitted independent stations to be delivered in some markets that didn’t have an independent station and that’s where Roy came in I believe.
HIRSHFIELD: And that was 1972, Second Report and Order in ’72?
BLISS: Right. Then it was a hodgepodge of rules about big you were. You could carry one; if you were bigger you could carry two.
HIRSHFIELD: About 50 markets, wasn’t it?
HEWSON: The big ones couldn’t carry but one. The smaller being could carry three.
BLISS: A couple of hundred. Next 50 and if you’re outside of all markets.
KELLER: How did you get started delivering WGN around the country, Roy?
BLISS: Well we were in the microwave business early on and right after 1972 we had a little old bitty microwave system in Illinois that was carrying some Chicago network stations. Just signal improvement to people who could already get them off air, cable systems but we had a couple hops of microwave and got them back and after the 1972 order, we had filed a bunch of applications, microwave applications to carry Chicago all over Illinois and clear out into Iowa on the assumption that the rules would eventually soften up. And so we started building microwave carrying WGN clear out into Iowa and down to St. Louis and other distant, primarily independents, into cable systems all over the Mid-West.
KELLER: You know, Bob, that situation about importing or not importing Canadian signals into the Northwest market, Vancouver primarily – how did that finally shake out?
JAMES: I’m not sure how that it ended up really…
KELLER: I know going the other way the Canadian broadcasting regulators prohibited the import of U.S. signals into those markets. How did it operate the other way?
JAMES: They would….Excuse me.
HIRSHFIELD: I think the first break in it was we also had a thing called syndicated exclusivity in addition to complete TV station. If you owned certain programming and you sold it to a TV station in a market then there was a restriction on bringing that programming in and so that’s how they started to pick on the Canadian signals coming into the northern tier. The stations who had the programming say in Seattle or Spokane would say you can’t carry My Favorite Martian on the Canadian station and so we were then forced to blacking out an hour here, a half hour there. Which didn’t work. You started to get this Swiss cheese type of operation.
KELLER: It was 30 days either side of the programming wasn’t it?
HIRSHFIELD: I think it was. Yeah.
KELLER: Down to 7 days and then it was simultaneous non-duplication. What a mess that was.
BLISS: But, if you were in a little tiny market you could carry Canadian signals. I think in Canada they could carry WGN in some areas.
KELLER: I think along the border they did.
HILLIARD: When did they put restriction? If you were 100 miles, 200 miles of the border then you could carry it but if you were farther south you couldn’t.
JAMES: That came in the copyright act of 1976, where the copyright law ended up governing what the signals you could carry.
HILLIARD: Yeah, that’s right.
BLISS: That’s it Les.
HILLIARD: We had it deep in Montana and then they put this restriction in but those of us who already had it were grandfathered into the thing. So we had stuff, we had Canadian channels microwaved down into Montana. Way beyond the 100-mile mark and we got grandfathered.
HIRSHFIELD: You know an interesting twist on that. The same thing happened using Seattle as a big city that they only grandfathered for it for that area that had been built at the time this ruled passed so you would have one area of the city that had a Canadian channel on the cable but right across the street you have another area that wasn’t allowed to have it. So again, this was our government protecting us.
KELLER: Oh yeah. Did King Broadcasting like that kind of protection? (Laughter)
HEWSON: You’re talking… I imagine it was their business; they didn’t like it and did everything ethical to stop it. But yet a number of things extended all the way up to Vancouver, to Calgary, I believe it carried to Edmonton. It’s said the most widely distributed signal in the northwest so the cable guys were our friends and we really did not want to offend them.
BLISS: They were a different kind of broadcaster than most. They were very forward thinking. Way ahead of their time.
HIRSHFIELD: What were most of them like?
BLISS: Most of them were not that way. (Laughter) But since we’re talking about regulation. The original regulation was the Carter Mountain case which we talked about yesterday.
KELLER: Please explain that Roy.
BLISS: 19 – I think the late ‘50s, 1958 when they, the FCC didn’t have any rules about cable, couldn’t really grapple with cable. Cable had grown in tiny little markets from the early ‘50s, the late ‘40s I guess. Grown very rapidly because it was the only way to get television if you were in these pockets or just a long ways from television but people – and my dad was one – starting talking about bringing signals quite a ways on microwave. One or two or three hops into a town and in Worland, Wyoming we had the littlest television station in the United States and they started fighting my dad who was trying to bring Idaho Falls television into Worland by microwave and the way they got to him because they didn’t have any cable television regulation but they didn’t regulate microwave transmission. So they ultimately ruled that he could not bring these signals into Worland, Wyoming.
KELLER: The original freeze was the station in Thermopolis?
BLISS: I can’t remember if it was. I think he was trying to do several cities at one time. It was the license to get it to that area.
KELLER: That station was a one lone station that operated out of someone’s house as I recall.
BLISS: Yeah, it was basically a repeater…
KELLER: But it sure put a big….
BLISS: All the broadcasters, all the bad broadcasters not King (Laughter), They all rallied around this teeniest little TV station like they were all barely surviving which they weren’t. A lot of them were making huge amounts of money and acted like you know this was an enormous TV station which it wasn’t. Probably should have gone out of business way back.
KELLER: Carter Mountain was one of your antenna relay sites, wasn’t it?
BLISS: Yes, it was the name of the mountain that the signal was coming from.
JAMES: Hmm.
HILLIARD: That TV station does not exist today, does it? I don’t think so.
BLISS: I don’t know.
HILLIARD: I don’t think it does.
JAMES: Must have been put out of business by the cable operators. (Laughter)
HILLIARD: Because I don’t think that there are any broadcast stations in the basin there of Wyoming. I think the closest broadcast…
BLISS: After college I left.
HIRSHFIELD: You look at Bob’s joke or maybe that was put out of business by cable but a lot of stations were actually put into business by cable because as soon as you got to the UHF frequencies they suddenly had parity as far as their distribution and the FCC rules gave them parity. I was trying to count… doesn’t Los Angeles have 17 or 18 or 20 TV stations…
HEWSON: 22 I believe.
HIRSHFIELD: 22 TV stations.
KELLER: UHF was supposed to be the savior of quote free television in the United States. They were going to open up every market with at UHF station, the FCC that is and they found out it didn’t work. It wasn’t going to work and without cable, they weren’t going to be able to extend the stations to the point where they were going to make it. Another big blunder by regulatory agencies was the Central Communication Commission, is that right Bob?
JAMES: Yeah, and the interesting thing that you had mentioned before was comparing it to Canada, there were restrictions in the U.S. where really economic based between the broadcast interests on the one hand and the copyright interests on the other hand and the cable and we always like to say that the cable operators and the public together on opposing these giant industries but it really was politics.
BLISS: The public definitely wanted cable. Yeah, they wanted more signals.
JAMES: But everyone argues about the public interest is on their side but in Canada it was very different in that the restriction of bringing U.S. into Canada was much more… they were government but they were based on cultural fears as oppose to…and content as opposed to economic.
BLISS: They still are.
KELLER: Oh yeah. They don’t want those sitcoms up there.
BLISS: But I sit on the board of directors of a Canadian broadcaster, their weather channel up there and they say it’s cultural but it’s also very economic oriented.
HIRSHFIELD: You mean the protections?
BLISS: The protections, yeah. Their afraid the U.S. would take over everything.
JAMES: The whole entertainment industry, yeah.
KELLER: Bob, could you give us a thumbnail sketch of the progression of regulation in the industry?
JAMES: Well, I would say that it’s almost impossible to give a thumbnail sketch because there’s been so much regulation and so much paper and so much complexity has gone into regulating this industry. It’s just been… it’s absolutely incredible and you know the great majority of people…
BLISS: Give you a good life.
JAMES: Absolutely, most people in the country don’t realize the kind of regulation and the complexity of it was just incredible but I would say it really started in a big way with the FCC in the…I guess it was the early or late 1960s with freeze on bringing in distant signals and then gradually that started to fall but that period took a number of years and cable would have developed much faster had it not been for the restrictions on bringing in distant signals into local cable systems. And after that they had, there were reports after reports on all kinds of areas and more and more groups became interested in cable and in restricting cable or in getting some benefit from cable. So over the years the FCC had a series of regulations and some of which contradicted the prior ones, back and forth and then there were 3 major laws that Congress passed. The 1984 Cable Act which was de-regulated a lot of cable television. The 1992 Cable Act which regulated cable television, regulated rates and all kinds of things and then the 1996 Telecommunications Act which had less impact on cable directly but was intended to have all of the telephone, open up the telephone markets, the local markets to competition. So and on top of that you had the Copyright Act of 1976 which really also restricted cable as well.
KELLER: Can you refer to the Ken Cox report? What bearing that had on the FCC and the industry? Before he became a commissioner?
JAMES: Yeah, well that was very…he’s very well-respected in Washington.
KELLER: Not this industry.
JAMES: No, but in Washington he was and that was the basis for a lot of the early restrictions on cable. That this would be, it could be the end of the broadcast industry and that would be harmful to the public and that was the rationale of years and years of very restrictive policies.
HIRSHFIELD: And you know, I think there’s a repeating of a pattern because some of the early restrictions, the Cox Report, the 1966 freeze, the 1972 Second report and all of those things which slowed down the growth of cable TV, I think a similar thing is happening since the 1992 Act which really I thought it was putting us out of business for a year or two. I had a lot of sleepless nights. I thought that was it and I had no retirement. But what that did by slowing down the industry was really inhibit the development of broadband services. So now we have this great demand for internet high speed data and it’s not built out and I think the reason it’s not built out is because the industry was crippled again in 1992. So this pattern just recurs where the other economic interests come politically after this industry and I think to the detriment of the American people.
M. HIRSHFIELD: And Jim I would also add in this regulation during the 1992 time period really took little distinction between the large and the small operator…
JAMES: That’s a good point.
M. HIRSHFIELD: And that’s what made it so potentially devastating for us as smaller operators and why Jim spent many hours in Washington, DC as I suspect other operators around this state.
HIRSHFIELD: And you did as well.
M. HIRSHFIELD: Well, I kept the home fires burning. (Laughter)
HIRSHFIELD: I remember a visit with you to the FCC.
M. HIRSHFIELD: Yes, that’s true.
KELLER: Many people were concerned about what was going to happen in the 1992 Act; especially 1991 was a real downer for the cable television industry. But those people who recognized no matter what the FCC did and they weren’t too much concerned about even the new rate regulation gave them the opportunity to buy out their limited partners on a very, very minimal basis and a lot of the limited partnerships were disintegrated during that period when they started to panic. But the guys who really knew and some of the people around this table were also the same way, that it wasn’t going to affect the industry that much and as a result it came back stronger than ever and I think right now the industry is stronger than ever. Although some people still recognize and still feel that we shouldn’t have to pay copyright. We shouldn’t have to pay any fees at all. In fact we can go back to the Pastore fiasco in the late 1950s when Senator Pastore and with the request of the cable television industry through the National Cable Television Association requested that there be some regulation of cable television. And Senator Pastore submitted a bill and when it was just about ready to go the Senate floor to be passed, the industry backed out and we made one real, real enemy at that time. That was in the late 50s, early 60s and I’m not sure we ever recovered from that point.
HIRSHFIELD: We had a little bit more of that in the late 80s and early 90s where some of the large companies in the industry were at odds at what we could support in legislation and maybe could have had some milder legislation passed. I would probably disagree a bit on what happened after the 1992 Act. Cable TV and this was one of the reasons we sold our company, simply doesn’t generate enough money at the rates we’re able to charge in order to service your debt, service your present capital, do what you need to do for future capital. And I think it’s evident even in the large companies because a lot of large companies have come out of the business. An example would be we now have AT&T Cable but that used to be TCI. Those owners sold that company. Many of the other large companies as well as the small companies sold. There’s been a consolidation but not…to a large part not with the existing owners. Cox is one that stayed in there. A couple have stayed in but largely have gone out. I think that is still with us. There’s a perception somehow that cable TV makes a ton of money. Well, I remember Mary saying in the 1980s if we’re doing so well why we don’t have any money. (Laughter)
HEWSON: Dave says that to me today. (Laughter) It’s still true.
HIRSHFIELD: And that’s the truth, cable you never made any money when you were running the business. You made money if you sold part of your business because somebody valued the future prospects and then more regulation would come and the value of those future prospects would change.
HILLIARD: That’s what John Malone said, you’ve never met a rich cable operator, you’ve only met rich ex-cable operators.
KELLER: Ed, would you start back in your reactivation to the statement Jim made about the 1992 Act and how it affected economically the cable operators?
HEWSON: Well, Jim’s point and I agree with him entirely, I think that was cash flow wasn’t profit. You have to continually put cash flow back into the business just to stay modern enough to keep customers. You never make a profit. If you look at the different cable, big cable companies, I look through there and I don’t see profit still and yet politically we’re castigated for raising our rates, for being I don’t know, monopolists, whatever the politicians care to call us but I don’t remember entirely what I was saying….
KELLER: Talk about the Ellensburg situation.
E: Well, in Ellensburg for example, you go to renew the franchise they want and you need a rate increase. So you ask for a rate increase. City of Ellensburg had the power, telephone, whatever their local utilities were, the city owned, they raised the rates 15-20% and when it came to our turn, one of the council people stood up and said “Well, listen we’ve got to hold the line somewhere.” No. So then you, you know…
BLISS: The line at the guy who’s outside.
HEWSON: Yeah and heck, you know this industry has gone from 330 to 440 to 550 to 750 to 1000, whatever they are.
BLISS: MHz.
HEWSON: MHz (Laughter) and I was not an engineer, you know a finance guy. Okay and when you do that for all this new technology, there’s got to be a profit factor come in at some point so that you can run it and stop being bedeviled by politicians and by programmers too. Because programmers all want to get carried and as soon as they get carried they cross promote and that leads me to you – you can talk about that because that’s one of your pet peeves.
HILLIARD: Well, you start out and you’re 450 MHz and you put on as many channels as you can get on, then all of a sudden ESPN comes along with ESPN2 and so they cross promote and you know, if you don’t have it, call your local cable operators, so you get all these [calls] and then you’ve got to run back out and figure how to expand your capacity and you know…
HEWSON: And if you don’t carry it, they raise your rate on your single service because you’re not carrying the other one.
HILLIARD: Oh yeah, oh yeah. And probably the worst one for this is MTV. If you don’t carry all of their programming, then you know, Nickelodeon comes at you with $1.50 per subscriber. You know whereas, the big guys are getting it for 35₵, you know.
HEWSON: Right.
HILLIARD: And so you know, it just continues and then with all your programming contacts, they are all, they’ve got all these privacy things and you cannot disclose what you’re paying and so, you know sure that God made little green apples that TCI or Cox or these people aren’t paying what you and I are paying. We’re paying a ton of money for these things and you know, this is the same way with Disney. Disney came along and said you put Disney on basic or you’ll pay like a dollar, dollar five per subscriber but if you put it on basic, you’ve only got to pay 85₵ but you start figuring out, compared to the number of subscribers you got paying for Disney on a pay service and then you put it on your basic service at 85₵, you’re actually – the only people who are making money out of that is Disney.
HIRSHFIELD: And it’s a declining product.
HILLIARD: Oh yeah. It’s very declining.
HIRSHFIELD: What was the first channel you put on from satellite or similar, some outside…
BLISS: WGN.
HILLIARD: No. (Laughter) Actually, we made application and we were issued for a small dish. We used to have the big dishes and we got a 5 meter dish and we got license number 5 issued to us and our SA dish arrived and we put it together and it has to this day serial number 10 on it of the dishes that were built. And the first one that we put on was WTCG, which was Ted Turner’s system. And we were one of the first ones to put on the Inspirational Network and we had HBO on and running before TCI had it running in Billings.
HIRSHFIELD: Where was that in Laurel? Laurel, Montana.
HILLIARD: And I remember when we had our dish there, they sent out and engineer to align our dish and we made a big fuss about aligning the dish. Well, they didn’t have anything to align it to because HBO did not run, didn’t start until like 6 or 7 o’clock at night, so the guy called up HBO and said “Hey, could you through up some color bars?” They threw up some color bars and that’s how we aligned our first dish.
HIRSHFIELD: You know, I remember in 1979 we put a dish into our cable system in Buhl, Idaho which is south of here, 100 miles up and they sent an engineer out – I had forgotten this – and he and I went skiing up here at Sun Valley while our company people actually aligned the dish. (Laughter) That was pretty good duty being an SA engineer.
HILLIARD: Well, this SA engineer came in and set everything up in our headend. Our headend in our office were all one and the same and he had all, he must have had $20,000 worth of electronic gear to align this thing and we’re talking to the guy out there and he would crank it up and he would crank it down and he would turn it sideways and we were going back and forth. And I can remember my secretary said “Well, what are you looking for?” And he said “We’re looking for the satellite.” And she says “Right up there on the TV is your color bars that you want” and he says “Oh good.” So forgot about all his $20,000 worth of gear that he hauled all the way out there but you know…
HIRSHFIELD: That was what, late 1970s?
HILLIARD: I don’t remember when it was…when that…
HIRSHFIELD: When did you guys put WGN up?
BLISS: Late 1970s, ’78. Fall of ’78.
MHIRSHFIELD: What I remember about that time period is going to one of the conventions and I believe it may have been the West Coast Convention down in Anaheim and had gone to some of the other ones along the way which were as an industry still very small conventions with a heavy technology orientation. Basically your headend sites and all the equipment that went with that and all of a sudden this was a convention which was including Hollywood and Disneyland…
BLISS: Entertainment.
MHIRSHFIELD: And giveaways big time and people in suits were showing up. People in suits were… (Laughter) and to me this was no longer the mom and pop industry. That there had been a real explosion and I know it was technologically driven but it looked a lot different in terms of the marketing that was going on.
BLISS: The satellite changed it dramatically.
MHIRSHFIELD: Yes, exactly.
JAMES: Well, this may have been a convention a little before Hollywood got into it so much but I remember in I believe it was one of the conventions in Anaheim where they had an experimental transportable satellite dish and it was one of the first FCC authorizations and Hub Schlafly was convinced that this would work and you could put these dishes anywhere. And he had the dish out there at the convention site and you could go in the trailer and see these signals, pictures coming down from the satellite and it seemed unbelievable. And within, three years after that, you could see that this was really going to change and I never saw how much it was going to change the industry. What dramatic, total dramatic change that’s been for smaller operators and larger operators but suddenly made access everywhere.
HILLIARD: Well the beauty of the Western Show was that it was so tightly confined there in Anaheim with the hotels and everything else, you know you’d see somebody on the floor and say “Ray, let’s have a drink afterwards” and so you’d get in a bar over there and discuss all of the technology that you’d seen and there were deals done and cable systems bought and sold right there in Anaheim.
HIRSHFIELD: In these years, it was at the Disneyland hotel, right? So the dish was sort of in the parking lot and I remember a meeting with Nick Nikolaus and Gerry Levin and one other name I’m forgetting in just a little small hotel room up there – that what’s this HBO stuff?
JAMES: Right.
HIRSHFIELD: All this coming out.
BLISS: An interesting thing, being in the microwave business, we, in the early 1970s, did a lot of studies on trying to do what HBO did on the satellite. Bringing Hollywood product by microwave clear out to Tulsa specifically which was losing its shirt because it didn’t have anything to really sell. They were selling the four local stations and a Dallas station and a Kansas City station so basically two independent systems just didn’t work and we just did all kinds of things trying to figure out how to bring quality movies primarily or sports, sporting events in there and the microwave system to do that from long distances just didn’t work. Just tremendously expensive. Satellite just changed that.
HEWSON: With people [?] bicycle tapes of movies?
BLISS: We tried that.
HEWSON: It was an incredible…
BLISS: A huge hassle.
HEWSON: It was a huge hassle.
KELLER: Les, do you remember what you paid for your five meter dish?
HILLIARD: I paid $25,000 for the dish and $5,000 for each of the two receivers that we had. We had a bill of $35,000 to bring two signals in.
HIRSHFIELD: And each receiver had a solid state source that was about as big as your fist and that was a couple of thousand dollars’ worth. Now it’s just on a little board.
KELLER: That was a long way from what they paid for the first 10 meter.
BLISS: We were building out for $125,000. We build Tulsa.
KELLER: And it just came down and down and down until we could afford it.
BLISS: Has anybody got into DirecTV lately? You talk about all of the technology of aligning your dish and everything. Now it cost $250 and the guy goes out and click and you’re locked in.
HEWSON: Yeah.
BLISS: It’s just incredible.
HILLIARD: You don’t need those engineers.
BLISS: You use a little teeny field strength meter that costs him a hundred bucks.
HEWSON: Actually, you don’t need anything. You just sit there and go [space sounds]. It’s 72% good enough. (Laughter).
KELLER: We used to orient our antennas.
HIRSHFIELD: Yeah, the guy who came out and put a DirecTV dish in our place said he had tried to get on with the cable company and he couldn’t so he, I think it was his driving record because he was pretty confident. (Laughter) When you mentioned bicycling tapes, what I thought of was Alaska and wasn’t that the late 1960s, early 1970s, people in Seattle, Merle Davis I think was one of them, started recording the local networks and then they would fly – and they were the big 1 inch video tapes at that time – and they would fly those up to these cities that they built in Alaska and they would run them all on one channel so you like at prime time, ten hours a day. And run them all on one channel and that became an exception to the Copyright Act in the late 1970s because Alaska and I think Guam were allowed to actually tape which you couldn’t do anywhere else.
JAMES: And Hawaii, yeah.
HIRSHFIELD: But the lengths to which the industry went in order to get product to people who wanted to watch product. Actually I was thinking of this when you were talking about dishes because in the…about 1973, I appraised the cable system in Barrow, Alaska for the North Arctic Regional Corporation and they were bicycling tapes in but they were going to use a dish. And they had a 10 or 12 meter dish there that RCA had put in and the expense was enormous and they had to go a mile out into the Arctic Ocean in order to get a ground for the dish.
JAMES: Oh my …
HIRSHFIELD: Couldn’t get a ground in the permafrost and the dish had a look angle of about 10 degrees above the horizon. A giant dish in order to look through all this atmosphere and yet they went through all of that and they ended up with owning a cable system with the use of this dish having good product, lots of product on the cable system. You sit in a major city in the U.S. and watch TV and you just can’t imagine what a town like this went through.
KELLER: I’d like to get back again to the point we were discussing earlier with the economics of a cable television system and as you pointed out your cash flow is not profit and in effect, we’ve been accused of and in fact did live on depreciation in all of these years. It was the only way you could show any positive results in the business itself but the bankers recognized that too. You know, you go to a former banker right now and Jim, I’ll ask you, where did you get your first financing?
HIRSHFIELD: My first financing was $10,000 from the local bank because he thought I could pay it back I guess. I’m not sure why and when I built that system and then merged it into a larger system actually couldn’t get enough of a bank loan to build that and we went to Home Life Insurance Company. And I had mentioned this before, a guy named Jim Straley, who ran the investment department at Home Life Insurance Company and he was actually making institutional loans.
KELLER: Had you known him?
HIRSHFIELD: I had known him maybe just a few months before then. He wasn’t an old friend but what do you do?
MHIRSHFIELD: I remember going to dinner with Jim and Jim Straley and it was…the conversation was around an institutional loan and was this for Crystal Cable?
HIRSHFIELD: Yeah, on Capitol Hill.
MHIRSHFIELD: And he actually turned to me and he said “I am really making this loan decision on the basis of good faith. I just believe it’s a good guy” and that was really how that was happening.
HIRSHFIELD: But I think he made a lot of loans like that because they were a big lender to the cable industry and there was no basis, the bankers wouldn’t lend. If a bank made a loan, the examiners would come in and classify it almost immediately and so many classified loans you had to stop. So he was one of the first. There were several other institutions but they jumped in and that was 1969 probably through early seventies that they did a lot of that. Teacher’s Annuity was another one. Connecticut Mutual I think. These guys came in where you really couldn’t get bank loans.
KELLER: Where did you get your first loan, Les?
HILLIARD: Well, we got our first loan by having the former owners carry back a note. So we’d go in and put down $10-20,000 and have them carry back a note and we started paying them off so we…most of my acquisitions were through carrybacks and we did it but later on when the notes got bigger and we had to buy systems outright, you know, my first loan was U.S. Trust. And so, I had to fly back to New York and meet those people and I got a rude awakening as to what the banking business was all about because we had a noon meeting, my wife and I and we went into the bank and I couldn’t figure why we were having a noon meeting. But we went up to a private dining room and it was about the size of this thing here and we had about 6 loan officers and my wife and I and we sat around there and we ordered off a menu and they served us. They had a person serving us and then we got done and we ordered dessert off a menu and there 8 of us in the room there and the guy went around and offered all of the gentlemen cigars and luckily no one took it because I’m very allergic to cigars. And then when we got all done they said this will be fine and we went down and they ordered a limousine to take us back to the airport.
HIRSHFIELD: Did they make a loan?
HILLIARD: Oh yeah, [tape garbled] what people. Oh I don’t know. It was only like $3 million, or something like that. It wasn’t a big loan but you know I had, to me my eyes were this big around looking at all this…everything was so posh. I couldn’t believe it. I never have lived in this kind of atmosphere in New York City and to order up a limousine to take us to the airport. And I thought somebody’s got this whole thing backwards. (Laughter) And of course somebody says “They’ll get their money. Don’t you worry they’ll get their money.”
JAMES: But the hard thing I think and I’m not a financial expert at all but just having watched a lot of this, is that so much of the day to day where you’re trying to generate enough cash flow to pay the debt but you’re not generating profit…
MHIRSHFIELD: To make payroll.
JAMES: To make payroll to do all these things. In hindsight now, you can see that you were building assets but at the time there was one problem after another and it took some very tough, resilient people to stay in that kind of a business where you really…it had to be hard to see that you were building value and I would just all of you guys, what I mean….
HILLIARD: The interesting thing is my wife reminds of this is you’re in debt right up to here and you’re working hard and you didn’t want to hire contractors to do anything, so you were out there doing it yourself and she said I’d be working on things and one day I went in and had coffee with my insurance agent and he said “Les, you must doing a whole lot better. You’re not wearing dirty levis anymore.” (Laughter) You did get out there and put the cable in the trenches. You did get out there work the things, you climbed the poles and did these things back then and you built your assets a little bit at a time, a little bit at a time to the point where you could say “Hey, we can get a contractor in here to do this.” You hired a contractor to put it in and you know it just, little stuff all the way up the thing.
JAMES: But did you feel like at the time you were just staying ahead, staying even? But to see the value for the future and seeing the value that was eventually was built up, could you see it all along the way with every problem?
BLISS: I think that what was always the scariest part is government regulation.
JAMES: Right.
BLISS: Which regulation will stomp on you one day and check your business. Change the rules and…
HEWSON: Quite willing to trade your equity for a lot of votes. My wife said don’t forget to tell them, tell them about when you started Ocean Shores I had two partners and I went down 42 weekends. I slept in a Volkswagen bus on weekends. Now this is a Harvard Business School graduate, okay. (Laughter) I went down there and actually we did that at Ocean Shores which we still own today and I climbed 5 poles, only 5 poles but on the first pole I climbed these guys loaded me up with everything, strand, everything you could carry. I go up the pole in the middle of this little tiny town, my pants fell down. (Laughter) and all they did was stand around and they laughed and drank beer until I got reorganized and came down the pole. Later I learned that you had to climb to 22 feet and that poles were hard and the first time I tried it, I put the gaffs on the wrong side of my boots. (Laughter) I learned a little bit, it did work. I never learned a pole but that was…you’re building equity and you turn around and some politician would be perfectly willing to trade you because you’re one person.
HILLIARD: I’d like to quote my United States senator, Senator Conrad Burns, bless his little pea pickin’ black heart (laughter). He got up in front of a meeting in Billings, Montana and a little old lady said “But Mr. Burns, what are you going to do about our taxes?” and Senator Burns says “There’s nothing I can do about reducing your taxes but I can get your cable rates reduced and we will get your cable rates reduced.”
JAMES: That was before the 1992 Act.
HILLIARD: Yeah, and hell, why he’d give away my equity for votes.
JAMES: Which is still the problem the industry faces. Not just at the federal level but at the local level as well, it’s a political…
MHIRSHFIELD: Yes, and right up to end when we sold Summit Communications and we were having and have always had a very challenging relationship with the city of Seattle and their franchising requirements and perhaps less so, but did exist with King County and I can remember Jim saying because we had real existing competition with overbuild of other franchise companies now in one community in Seattle and you said “Just let me compete. I can compete in the marketplace.” It’s all these government regulations or lack of action on franchise requirements that have always been the albatross. That have always been [?].
KELLER: Just let me compete was sort of a cry in the wilderness.
MHIRSHFIELD: Yes.
HILLIARD: The one thing they say in, teach you in Harvard Business School, you can always compete but if there is a major technology change or major political change, those two things can kill you.
HIRSHFIELD: Well [Sandy Lean] used to say if you don’t get up to bat then you don’t get a base hit.
HILLIARD: That’s right.
HIRSHFIELD: You can’t compete if you’re not allowed out there. But I was thinking of your question Bob, I think we thought we were building that value to the cable customers worth 3 or 4 dollars a customer, we’d then do the math and subtract our debt and we’d say we created this, but the big thing that kept you up all night was what’s a cable customer worth? Because that in itself is a marketplace and that number moved around a whole lot. I remember a meeting within the two years of when we sold our company with my major partners telling them that we weren’t sure the company was worth any more than the debt in it. Turned out that wasn’t the case, but the market…
JAMES: But it changed that quickly.
HIRSHFIELD: Yeah, changed that quickly.
JAMES: It was going up and down and it’s still doing that.
HILLIARD: Market goes up and down based on what the FCC or government rules.
HIRSHFIELD: Well, that’s part of it. That’s part of it. These people wanted out and I think that’s the thing small business has, your investors or you lenders want, want to be paid back or they want out. So if the market is not right, you may not want to sell but you may not have choice because you have other constituencies, your investors, your banks, your lenders – that want you to get out. So you’re always sort of worried about well gee, how do I ultimately make money and we’re back to this point that you weren’t making money each month. Not like a lot of businesses where each month you make a little bit of money.
KELLER: When do you sell?
HEWSON: Well, Dorothy Bullock used to say…
KELLER: That’s a good one.
HEWSON: She, who owned our company and is a grand old lady who, she would just say do what’s right but when she talked about investments, one of her favorite thoughts was there’s trading salmon and there’s eating salmon. You shouldn’t try and eat your trading salmon so when do you sell? I think it takes a great deal of timing and you’ve got to know what product you have in the cans.
KELLER: A long time, especially in the early days, people would sell when they ran out of depreciation.
HEWSON: Yes.
KELLER: Then they’d sell to another company that they had other interests in and then re-depreciate it again. Is that still the case today?
HILLIARD: Oh, yeah. Depreciation’s a big key and then how much depreciation you’ve got left based on what your interest rates are and their [?]. You know lately interest rates have been going up, up, up and then all of a sudden it turns and starts down again.
HIRSHFIELD: Let’s talk like a CPA for a minute. The reason depreciation is important is when you run out of it; you start to have to pay taxes.
KELLER: There you’ve got it.
HIRSHFIELD: I mean you’re generating profits and you don’t often have enough cash to pay that tax because you never were generating profits, you were actually living off your cash flow. So you’ve taken future value let’s say and spent it at present and that’s why it forces a sale.
HILLIARD: That’s right.
JAMES: But how does it tie in with for example, where you’ve upgraded like the system you just sold in Texas. You really upgraded those systems and put a lot of money into doing that.
HILLIARD: And that creates depreciation.
JAMES: That created more depreciation and also more value too. That was another option. You constantly had to do that.
HILLIARD: If you raise your asset values, in other words you take it from 450 to 750 and you change it from a one way to a two way system and you enhance it by putting fiber in it and everything, all of a sudden this structure will then run for 7 to 10 years without having to have a lot of upgrades done on it. So that you can produce it. The beauty is now if you put in your analog system but you’ve got your digital system and you can do a two way arrangement there where you can do Pay-Per-View and everything, just on Impulse Pay-Per-View. Impulse Pay-Per-View is a lot more, produces a lot more revenue than just dialup.
HIRSHFIELD: But translate that. Does everything that you just mentioned and went through generate enough profit to give you sufficient return on investment? I think it doesn’t. I think it’s still just generating cash flow isn’t it?
HILLIARD: Well, it’s generating cash flow but what I’m saying is you have more product going over the same infrastructure.
HIRSHFIELD: Yeah, but my thought is that even after all that investment and all that work, the profit you’re making is pretty minimal.
HILLIARD: Oh yeah, oh yeah. Like you say, it’s mainly cash flow and here you are sitting with this big debt that you put in to upgrade this thing, so it’s one of these things where you just keep adding.
BLISS: We all know ahead of time.
HEWSON: Where you’ve got to make a decision. If you’re a small operator, am I going to put more money in this? Let’s say I’ve got a system worth $1700 a customer, if I put in $600 a customer to upgrade the system, am I going to be able to sell for $2300 a customer or more or am I just doing this to maintain the $1700.
HILLIARD: Well, you get out the dice and roll the dice.
HIRSHFIELD: And there’s another important part, you’re point is by the time I finish putting the $600 in will the $1700 market be back down to $1000 or because there’s a market place for that now.
HEWSON: Or will the government be telling me that I have to carry every broadcaster, two channels of every broadcaster and that I have to carry a new UHF Siamese religious channel. Something like that happened in Los Angeles.
HIRSHFIELD: No offense.
HEWSON: No offense, but whatever and I have to continue to make capital investments which don’t generate any cash flow.
HILLIARD: Well, I’ll give you an example of a kind of a backwards government requirement. We’re looking at the Geiger Correctional Center. They want cable and so okay, fine, we’ll bring cable into you. We don’t want to have to build like 3,000 feet of ½ inch [?], so the economics are the same and look good, but one thing is the Federal agencies require a Spanish channel. So there’s a Spanish channel inside this correctional center. You know being up in Spokane, Washington we don’t have that great a Spanish population that we put on a Spanish channel. Well, all of a sudden here comes this Federal rule that all Federal prisons have to have a Spanish channel and so we’ve got to put on a Spanish channel.
HIRSHFIELD: If you want the business.
HILLIARD: If we want the business, yeah.
HIRSHFIELD: And if you don’t want the business, you’ll be in the newspaper for not serving these people and being the bad guy.
HILLIARD: That’s right. So you’re damned if you do and you’re damned if you don’t. Here’s a government regulation.
MHIRSHFIELD: I will say that early on it was hard to find a banker who truly understood the way these systems were being financed…
[?]: Oh yeah, as Jim indicated.
MHIRSHFIELD: And Jim would talk about going and…yes, right over their head and you really had to educate and cultivate.
HIRSHFIELD: The first thing you had to do was find a smart one. (Laughter)
MHIRSHFIELD: And you always had to have a suit to go to the banker in your wardrobe.
BLISS: The early bankers who did it was on friendship. They believed in that person because they didn’t understand the business. I believe in you and I’ll take it on trust that you can make this thing work.
HEWSON: The banking industry has changed so much that you don’t have personal bankers.
KELLER: That’s true, that’s true. No one understands what you’re doing even if you want to go in and open an account.
HEWSON: Right.
BLISS: Well part of it is they say you are never going to make a profit. Where’s the profit?
HILLIARD: But a lot of it, your banking…so many of the bankers have been taught asset banking. Show me the asset. In Montana we say if it doesn’t have a roof over it or say moo, they won’t loan you anything and they want assets. They can get their hands on and take to the auction and sell it.
HEWSON: I don’t blame them.
BLISS: But that’s just what they understand. Yeah, those assets can evaporate as well. Then your moo can die.
HILLIARD: Oh your moo can die or moo can go down in value just like your subscribers can go that way but for some unknown reason they see that as something they can get a hold of and load it in a truck and take it to the auction house. That cable strung up there, what the hell is that thing? And you get into these things where – in the Air Force they wanted us to take down all of the cable and put it underground. Well, can’t you take it down and roll it up and put it back in the underground? Well, you don’t do that with aluminum cable. There’s a lot of things even to this day, they don’t understand and they just don’t understand the industry and what it is or how it works.
MHIRSHFIELD: I know I had friends who didn’t understand is that our company was growing and we had more office space so we were becoming more than just operating out of the bedroom. We actually had an office and then the office got bigger and there were more employees and there were trucks. There was physical evidences of this big business which to people without business background thought you must have really made it. You must be rolling in it and the only thing in my layman’s approach to explain this was this is like owning your house and you’re always fixing up your house and you’re not getting anything out of it until you sell and that’s the best analogy I could come up with.
JAMES: That’s a good analogy.
KELLER: Talk about how you – what was your position in the early days, the very early days of your startup business.
MHIRSHFIELD: My position as partner in this was mainly to keep the home fires burning however I did have a background in PR and I did for a number of years as our company grew do an in-house company newsletter for employees. Our companies because of a non-compete clause that we had from a sale of an earlier property in Seattle, Jim, if he wanted to continue in the business had to develop everything pretty much out of state or at least out of the county. So was gone for weeks at a time developing those properties and when they were developed, our employees were scattered all over. So it was hard to get a physical identity of this company. So our newsletter became quite useful to build those connections. It was a wonderful way for me to find out really what was going on and I can tell a story in the very beginning of getting those franchises outside the greater Seattle area, he took what we had was a used Buick, big guy, big car. They didn’t have four wheel drives that we knew about in those days and he drove that car up on small mountain tops for direct line of site, headend positioning in areas in Idaho and near where we are today in Sun Valley such as Buhl, Idaho and Shoshone and then went after franchises on the Oregon coast and so anyway that was really the very beginning. In terms of actually assisting a little bit of putting the company together, I do remember episodes of sitting watching TV and assembling wall plates. As Jim would say, I was paid piece work like 13₵ to 20₵.
KELLER: Sweat labor.
HIRSHFIELD: She wouldn’t work for free.
MHIRSHFIELD: So then I also did accounts receivable for a couple of these small systems as they grew while we had small babies at home. I did that a little bit and I’m not sure if I was helping the company or keeping my sanity but anyway I was there at the beginning and it certainly gave me an understanding for what we were building in terms of value.
KELLER: Did you have that feeling that you were building value and accomplishing?
MHIRSHFIELD: Yes, you could see the subscribership coming up and there came a time when that part of the work was going to grow far beyond the hours and the interest that I had to put in it, so that’s when you start hiring the real bookkeeper, accountant and those people then are not able to work in the bedroom down the hall, they need to go into an office.
KELLER: I think you touched on something, right there. One thing that we haven’t discussed before and that’s the bankers finally began to realize that we have a predictable income flow and you can just about determine how much you’re going to be able to pay back on what your current income flow is and you know it’s going to be there every month. Every month, in and out. Very few other businesses have that capability. Did any of you ever have any problems when they did away with the high leverage business when we used to be able to highly leverage our operations and the FCC, not the FCC but the IRS and Congress took away our ability to highly leverage anything?
HIRSHFIELD: I actually think that started with the controlling of the currency of classifying HLT, Highly Leverage Transactions. It really started with that part of the regulation. We never carried a large amount of debt and that really didn’t affect us. I don’t know about other folks.
HILLIARD: The thing was as small operators we never got to that point where we had highly leveraged things. You know, your local banker, you went to the US Trust and they were just getting into the cable financing business. They didn’t do it either and so I don’t know that that really affected the small operator as much as it did the big operator.
HIRSHFIELD: Yes, I think it affected the big operator because if you turn the question around, it was the Drexel approach to junk bonds, aren’t quite junk, there’s something good about them that really funded the growth of this industry.
KELLER: I forgot about it.
HIRSHFIELD: That was a big driver in the 1980s. So when that slowed down and then we had the 1992 Act, you sort of had a double whammy and when stuff hit the big companies, it ended up being a problem for us smaller people as well. I mean we didn’t get some of the benefits for being big, but we seemed to get all the negatives.
KELLER: I think that’s generally true in what’s happened in the business.
HILLIARD: When they write rules and regulations, you know, they theoretically say well, we can’t discriminate so we’re going to beat the hell out of this guy and we see what’s down here at the bottom because the regulations…
BLISS: Well, it’s a one size fits all. It’s what the federal government does all the time.
HIRSHFIELD: I had an occasion, I was on a 3 or 4 day thing at the Aspen Institute that Reed Hundt happened to be on and I happened to end up sitting next to him for a day and we talked a bit about small cable operators and it was 1995, I think about 1995 and so he as he left, I think he was only there for a day, said “I’m going to send you this thing we’re about to enact.” He said, “Will you give me your input.” And he sent me…I forget the issue but it was something they were trying to do to ease the burden on small cable operators and I read it through and I called him up. He actually called me back from my home. He was pretty responsive at least and I said “This is irrelevant.” “What do you mean?” “Well when you go through all the calculations and all the reading and all the several hours to sort of figure this out and apply it to my company, it does absolutely nothing.” And I think there was a lot of that — that they just didn’t get it but at least they worked and I think by the time 1996 came, they did start to get some of it. But you’re in that period where they didn’t get and you have a rule that’s sitting out there, it’s pretty scary.
KELLER: And it scared bankers. You know there’s no question about the financial institutions, it really did.
HIRSHFIELD: It scared me.
KELLER: Something we didn’t talk about, you keep talking about the value of a subscriber, what the value is. [Jim] don’t we or didn’t we rather look at what the multiple cash flow was from each subscriber as opposed to what the value as a subscriber was.
HIRSHFIELD: Yeah, the rule of thumb so much per subscriber was really a multiple of cash flow but that was just as uncertain as how much a customer because you don’t know what multiple was going to be applied and you really didn’t know what the cash flow was. People that may not have created their accounting would have higher or lower cash flow; you don’t know what multiple the buyer would have attached to it. You don’t know where that multiple went, next year’s cash flow or last year’s cash flow, so yeah, what the value was very uncertain.
BLISS: Just like the stock market, where the key ratio slips around depending on the mood.
HILLIARD: Well, when we first started and we were bringing just cable. The ordinary cable and you charged $10 or $12 a month, you had x number of subscribers, you charged x amount, you had so much a subscriber [tape garbled] had to find a different way to value not by subscriber but by cash flow. How much cash flow do we commit? Then all of a sudden this applies to additional services that were being put over and so this idea of what a cable subscriber worth, this is an old, old, old theory of valuing.
HEWSON: There was even cash flow in the 1960s.
HILLIARD: Oh yeah, the point being the minute we brought in pay services the idea of per subscriber has gone. Well you had to figure out….
KELLER: I don’t know if you remember this but I surely do, in fact [tape garbled] after a while a certain amount of predictable income and what your cash flow is going to be from that but then you added the revenue from pay subscribers, HBO or whatever else it was going to be. At first they were reluctant to give us the value of what that revenue was going to be and at first it was they said no and then they said we’ll give you a quarter [tape garbled] figured that we could get it. It was a big turnaround I thought [tape garbled].
HIRSHFIELD: I think it was 1970s, early 1980s before banks really become comfortable lending because in I was in the mid-1970s comptroller of a large bank in Seattle while I was trying to support my family while I growing in the cable business right? And we didn’t do cash flow. We did balance sheet lending, we did profit lending. If you did a cash flow lending, you’d get classified, bang and it was only I think the late 1970s, really early 1980s and maybe even the Milliken thing is really what got you into that. They do it now.
MHIRSHFIELD: Later on in some of the financing, it seemed to me they really wanted equity investment as part of that package, is that right?
HIRSHFIELD: Yeah, what is a banker…say bankers are schizophrenic; they don’t want to give it to you unless you want to give it back and then they don’t want to take it back. (Laughter) They would like it to be all equity and then they would be some debt in.
MHIRSHFIELD: And as a result you did a fair amount of equity development for a while.
HIRSHFIELD: Yeah, and part of that was the risk profile. Rather than give away some of what we might build to somebody else, in order not to take as much risk and some of the risk was just the sheer ability to put together the money. You needed just as much money to build a system.
HILLIARD: And you had to put it together the best way you could.
HIRSHFIELD: Yeah and you had to put it together usually pretty quickly because you had to get down the road.
KELLER: Did you find that the multiple of cash flow value of your subscribers had to do with what the term of your loan was going to be from whatever the banks were, whatever financial institution you were taking it. Were you able to get a five year loan at first and then it was five times cash flow your subscriber was worth and ten years and so on. Did anyone ever find that to be the case?
HIRSHFIELD: I think that for us it was more what I would call the politics of lending. You get to a point where a bank or an institution is [tape garbled] that institution you’re at risk if you don’t produce and out of that arises a shared community of interest and the way to answer your question, if you need a little more money, if you need a little less amortization, if [tape garbled] do that. So it’s like getting olives out of a jar, once you get the first couple of olives out of [?]. You have more parity. You have the ability to exert some negotiating leverage and make those things happen.
KELLER: As a banker, how did you look at intangible assets?
HIRSHFIELD: Oh we didn’t look at them at all. I remember being at a loan committee meeting where one of the big branches had made a cable TV loan. It was a very good loan. It was the people I knew and I thought “Boy, why didn’t they give them twice as much?” And of course the internal committee, classified the loan internally, why wait for the examiners? This is a bad loan. So that was really the atmosphere. That was in the mid-1970s.
KELLER: For so many years we fought for the right to amortize our franchises which were intangible assets. Took us a long time before we finally got that through the IRS and I’m surprised that the banks didn’t finally realize it.
HEWSON: When you’re buying cable systems being able to right off your subscriber list.
KELLER: That too. That’s another intangible asset.
HIRSHFIELD: Well those were taxes more than lending issues maybe.
HEWSON: Well, that’s true.
KELLER: And value, value had to do with that too.
HIRSHFIELD: But as a bank you had two things: one you wanted to be paid back. Character capacity collateral right? Is there a character we can support that has the capacity to pay us back and if they don’t, is there collateral, can we sell the business and realize that? So the only way intangibles would play in is if they created value that you could sell and that ticked off one of those three C’s in bank lending, if you will but they really wanted to know if they would be paid back. The second thing they wanted to know was would it be classified? Because if the banker thought it was a good loan if the examiners came in and it didn’t meet the various rules and those rules changed each year, it would classify and as a bank, if you had too many classified loans, then your cost to fund would go up, your profitability would go down, the chairman would lose his job so there’s a lot of that going on.
KELLER: The loan officer first.
HIRSHFIELD: Yeah, and that’s just like in the big city. That’s a business everywhere. I think it affected us but I think it affected any business.
KELLER: What other things affected you most in the Northwest during the development of your systems? What single factors?
[HILLIARD]: Well, you always have politics and politics is always originated from home. I think the state cable associations were very, very important and we in Montana built a very strong association and assessed ourselves per subscriber basis to run our association and literally put I think our cable TV association for the last 10 years has had over a $100,000 in CDs so that if we ran up against a big major statewide regulatory problem, we could cash a CD, hire a lobbyist and go after them. In Montana, I can remember we had problems and as an organization we had crazy uniforms, gray pants, blue blazer and a bright red tie and all of us would get up there with our cable television badges and we would buttonhole our representatives and our senators and speak against these different bills for regulatory purposes they were going to regulate us every which way and we’ve been very, very successful in keeping a minimal amount of state regulations on our cable systems. To this day after 10 years, I still think we have over $100,000 in CDs waiting just in case.
HIRSHFIELD: I hope you have a little more after 10 years. (Laughter)
KELLER: You could make political contributions?
HILLIARD: No, we were surprisingly we didn’t. The one beautiful thing about Montana is Montana legislature only meets every other year and so we didn’t have to be there buying our lobbyist, buying our representatives every year.
KELLER: Not bag ‘em but make contributions to a campaign. You were buying them things.
HILLIARD: No we have and as of this coming Thursday night in Montana, we have our legislative dinner. The cable television association puts on this dinner. We have all of our reps come in from all the different programmers and we’ll be handing out caps and t-shirts and sweaters and everything else to these guys and they love it. They love this thing and we’ll put on this big dinner. We’ll buy these people dinner and everything else and as of this last reading of all the bills in front of the legislature, I don’t believe we have any major bills that we have to go up and defend but you know, it’s not a contribution but we do throw this dinner for our legislators.
KELLER: Both of you two guys were presidents of the Northwest Association, did you ever make…
HIRSHFIELD: I was not. I was actually president of the Washington but not the Northwest.
KELLER: Okay.
HEWSON: See and I was not either. I was…
[?]: I was.
KELLER: I know. Did you make political contributions?
[?]: No.
KELLER: Not personally but the association?
HEWSON: No. I don’t think that the…I don’t really know how it worked. I do remember people, politicians coming and saying “Look, you can’t legally make a donation…how about a few rolls of postage stamps?” I mean that’s pretty, getting down there pretty cheap. (Laughter) Being with a broadcaster, King did not make political contributions. Individuals could.
KELLER: Could make contributions otherwise?
HIRSHFIELD: Otherwise but we made contributions otherwise.
KELLER: Jim did the Washington Association make contributions?
HIRSHFIELD: The Washington Association for the last decade or more has had a PAC and in fact has made contributions and that PAC is financed by companies and companies can give to state elections but not to federal elections. I’ve personally give money to federal elections. Personally on more than one occasion had the pleasure of having an elected politician call me up and say “Well, Jim I need $150. I need $500.” What do you do? I mean you send them the money if you value your business. It’s an ugly business when they do that but…
HEWSON: But they’re not above doing it.
HIRSHFIELD: Oh, that’s pretty common.
HEWSON: It’s commonplace.
HIRSHFIELD: And they never call you Jim before and you’re not sure who they are except you know they sit on this committee or the city council is going to vote on your thing, so you write a check. You talked about business giving money but as a small businessman you really have no choice if you thought you were going to stay in business.
KELLER: How did you feel about the FCC preempting the regulations by local city councils?
HIRSHFIELD: Of rates you’re talking about? We had one city council that sent out a survey to every home in the city to see whether our rates should be raised. Now that’s the kind of regulation we had at the local level. I thought it was a pretty good idea. We not only had silliness like that where you actually needed a rate, your costs went up, your programming, you’re paying your people more but somebody that they couldn’t get re-elected if they allowed you to have it. A lot of the cities didn’t want to be in the business and we actually in many of our towns, certainly more than half, the franchises didn’t have rate control provisions because the politicians were smart enough of know that they didn’t want to be in that business.
KELLER: We use to make that point too.
HIRSHFIELD: But some of the bigger towns, they would get in there, the city of Seattle again, when the rate regulations snuck past, we said “Don’t come after us and make us make a showing because we think our rates are fair and here’s some evidence that says they are.” They never-the-less made us make a showing with about $100,000 cost to us to make the showing and the showing demonstrated that they would approve a rate that was about $7 a month higher than we were charging. But they would still go through the whole nine yards so taking them out of that business, I think was good for everybody. Certainly for the consumer.
HILLIARD: So how long did you wait before raising your rates under that?
[?]: A month and a half.
HIRSHFIELD: Well, we always worried about the marketplace. We always felt that our rates were what the politicians would allow us to charge. Our rates were what we wanted to charge in the marketplace. So we had this translation we had to do. We’d have to decide where we wanted to be and then we’d have to go back into the political process and figure out how to manage them so we could at least be where we wanted to be. What that did was give us about three years’ worth or three or four years’ worth of head room before we had to go back and do something. But as soon as you started to run your business based on what the regulators said, I thought that was a formula for disaster because they were regulators and we were the businessmen. They weren’t the ones that were at risk and had their money invested and had their lives on the line.
MHIRSHFIELD: You asked about one of the challenges of doing or developing business in the Northwest and Jim’s talking about the franchise process and I looked back to some of the first franchises that we went after and particularly some that we didn’t get and I think there was a frustration in being a smaller system in that there seemed to be a greater level with the big guys and it didn’t correlate to living up to their performance level. In fact, we had the reputation of living up to our franchise agreements and doing the development things in the system within the timeframe whereas some of the bigger conglomerates would slide that and that’s very known in the industry today. That’s that purely a negotiation thing but I think that that was just one of the conditions that you had to work against as a smaller operator.
KELLER: In the franchising process did any of your communities use a quote consultant unquote.
HEWSON: Oh yeah. (Laughter)
KELLER: Tell me about it.
HILLIARD: We were negotiating in Missoula, Montana and they brought in this quote consultant out of Portland and come to find out his education was in aeronautical engineering.
HIRSHFIELD: Les Page?
HILLIARD: Yeah, that’s guy, Les Page.
KELLER: You knew him too, huh?
HILLIARD: Oh, what a winner that guy was. Man, he was just a real pain in the old wazoo. He knew nothing about our industry or anything else. He was just out to raise money for the city.
HEWSON: Well, saying the city brought in the consultant is sort of backwards. The consultants brought themselves into the city. They would…
HILLIARD: That’s true.
HEWSON: Anyplace where they had success or whatever, they would broadcast that to all of the cities and ask when is the franchise up for renewal and we can do a good job for you.
HIRSHFIELD: And I think their message was to give the elected officials deniability. If you vote on this and make an error, that may be your political career. If you have us recommend, even if we’re wrong, your political career is…
JAMES: And that’s right and what a strong selling point for this cottage industry of consultants to develop was just to that very point. It took the pressure off the city. At the same time the consultant has very little incentive to get this process done efficiently and quickly. Their incentive was to drag it out and that is going on in a bigger and bigger way all over the country now.
KELLER: Still today?
JAMES: Oh yeah, it’s been a growing industry.
KELLER: Did any of you ever deal with the Cable Television Information Center in Washington?
JAMES: Oh yeah.
KELLER: Well, you remember that because there was a point when everyone else…
HIRSHFIELD: Well, not directly. I think they provided some information on some of our things but no. But what’s his name? Harold Horn?
KELLER: Harold Horn. Excuse me.
JAMES: And nowadays Harold is considered among the more reasonable of the consultants. That’s to give you an idea of the degree that this has just progressed to the point where many cities are of course short of money and they are made to see this as a possible way to, revenue source…
HIRSHFIELD: Tax source, revenue source.
JAMES: Not call it a tax of course but get fees for transferring a franchise. Get fees for franchise renewals. Have all these costs paid by the cable operator and of course, it’s just a hidden cost in the end for the consumer but politically it’s very, very nice for the city government to really take this and get a revenue source and take all the responsibly off their shoulders.
HEWSON: Yeah but, come along satellites now. They don’t, they’re competing with us fiercely, in fact they are becoming the largest – I don’t know why Congress hasn’t recognized it yet. The largest bull in the pasture right now, the satellite companies they don’t pay any franchise fees.
JAMES: Well they are protected from paying them.
HEWSON: They are protected from paying them whereas you take a city and the city may put in laws like you pay them a franchise fee supposedly for the use of their rights of way plus they have permits, any time you go underground a road, they want a building permit fee of some kind, so they may order you to go underground to get those fees. You know it’s, doesn’t seem equitable.
HILLIARD: Then you’ve got various contractors insurance for these things. Oh yeah.
HEWSON: Right.
HILLIARD: And you have carrying an ongoing contractor’s insurance if you are going to cut the city streets or anything and then the city gets in there on backfill. You trench all along the street and then they want you go in and put concrete in there and then we say “Well, how are we going to get back in there if we have to dig this up?” “Well, you’ve got to put in this grade of concrete. It will bust up real easily.” But you’ve got to build a basin. They come up with 10,000 different reasons and 10,000 different fees for doing it.
KELLER: Let’s get into the onerous provisions of franchises. Any of you ever accept any onerous provisions and what were they?
HEWSON: We bought systems from Gus Hauser, some of which had really onerous provisions in them.
KELLER: Like what?
HEWSON: Well, for example, a city would have the right to—they were trying to have the right to reopen a franchise at any time.
KELLER: To buy it at depreciated value?
HEWSON: I think we had that in there somewhere but they could reopen a franchise…
KELLER: Which makes it a non-franchise…
HEWSON: A non-franchise. But financially the most difficult part of one of the many franchises we had in the Minnesota area was they wanted a lot of really nice studio gear. They wanted beautiful stuff and then they would complain when we would say, why, because nobody’s watching it. And we’d say, nobody watching it. Well, we need a bigger budget to hire more people to run a better TV station, local TV station, so people would watch it. And then when that would happen, they’d turn around and say, hey, we need more capital dollars to have a big—you know, it was sort of an endless thing and we came and put a stop to that pretty shortly.
HILLIARD: I just went in and talked to the city attorney in Missoula. We were up for renewal on ours and he said, well, our public access channel is looking for new space and more room and we’re going to need a lot more equipment and everything else. So maybe you can give some thought to that before we start meeting. So they have not gone away. The onerous threats or everything are still there and I’ll be looking at that this next year. Our negotiations in Missoula, to take care of it. Of course, they give the entire 5% franchise fee to the city and the city turns around and gives it to the access channel and one-half of all that money goes to the manager for salary. The manager takes a bigger salary home than I take out of my own company.
HILLIARD: That’s the American way…[crosstalk]
KELLER: Jim, you said you wouldn’t accept any onerous provisions?
HIRSHFIELD: We worked really hard just not to do that. And on renewals, you can do that. I was talking to Bob. I think we were 7 or 8 years operating on a franchise that had expired by date, but the county—King County, Washington, in this case—was still allowing us to operate and therefore we had a franchise by federal law. Because they wanted us to do a lot of things that were silly. Essentially they wanted to browbeat us, the small operator, into agreeing with terms that they could then take to AT&T, the large operator, and make AT&T go along with it. But we did agree on a couple. I was thinking of in Port Townsend. In Port Townsend, we renewed our franchise. Port Townsend, Washington. About four years ago, and the city in addition to all the franchise taxes, had a 45 cent customer. I think it started at a dollar and we got them down to 45 cents a customer local origination fee.
KELLER: Could you pass that on?
HIRSHFIELD: We added that on and we added it on as a line item. We also got in the franchise that they were required to spend it on the studio operation, that they couldn’t just amass it. But of course what happened two to three years into this, they hadn’t spent any of it. And so we were then faced with somehow trying to go and make the city that regulated our every move comply with their own document or simply ignoring it. That’s difficult to do. The other wrinkle there was more of our customers were in the county than in the city so the county came and said, well, we want you to redo our franchise to be the same as the city’s. And we said, well, this franchise has twelve years to go; why would we want to do that? And I think that discussion went on for two years. Usually “why would we want to do that?” is an invitation to tell us something. There were a lot of things they could have done that probably would have helped us. But we almost had these people in another world of non-belief, if you will.
KELLER: Bob, can you get into the rationale for franchising, for franchises?
JAMES: I think the rationale was and is that the cable companies using the public rights of way and the city has to regulate those rights of way. And the city extends that to say that they should be paid for the rights of way. So with cable and with telephone and with the new competitive telecommunications carriers, the cities are looking very much at this as a revenue source. But the early cable franchising and some of the provisions that the cities were requiring and getting led to the federal law that imposed a 5% franchise fee limitation. And that’s 5% on gross which of course, as you all know, is a pretty hefty number. But because the cities are strapped for cash, there is an effort more so now than ever to share in the business.
BLISS: They don’t want to raise taxes so they go around it and raise taxes on it.
JAMES: And cable is one of the many industries where the cities are looking for revenue; it’s not a direct tax, it’s an indirect tax, but it leads to things like provisions in franchises that say, if you transfer this franchise, you will pay the city $250,000 as a fee, which we may argue is illegal, but when that’s part of a transaction, companies end up agreeing to those kinds of things. So the city ends up with some money but the attitude for many of the consultants is “we want to be in your business. And share in your business.” Not in terms of regulating it or taking care of the rights of way, but as a revenue source for the city.
HILLIARD: Share the wealth.
MHIRSHFIELD: What kind of percentage on a monthly bill do you think are these fees?
HIRSHFIELD: In Seattle, the 5% cap notwithstanding, we paid 13% of our gross to the city because they had constructed various arguments and if we didn’t buy the arguments, we wouldn’t have a franchise. They have a lot of power. So on a $30 cable bill right there, that’s $4.00 a month that’s just taxes.
HEWSON: You had a franchise tax plus a utility tax?
HIRSHFIELD: I can’t even remember all the pieces. Lots of different things
JAMES: Origination fees and things like that that were not classified as franchise fees but fees to support the access studios like you were talking about. In my cable bill at home I think I’m paying I think it’s something like $9.00 in fees on about a $60.00 bill and this is going to the city.
HEWSON: As I recall, one small franchise, one of the requirements for the franchise was that we not itemize.
[crosstalk]
HIRSHFIELD: Even though federal law allowed you to do that.
JAMES: That’s still an issue in many cities. We write letters constantly to the cities saying—
BLISS: Can’t do it.
JAMES: The company’s allowed to itemize and show the consumer how they are being taxed.
HIRSHFIELD: We had one city councilman once started calling us and say, I don’t want you to itemize it. And we sent him your letter and he said, I don’t care what the law is. I don’t want you to itemize it. He was head of the cable committee and he felt exposed.
HILLIARD: The thing of it is, none of them want to follow the laws if it’s not to their advantage. But the minute the law is to their advantage, they insist upon it being upheld to the last…
JAMES: Of course, that’s a good approach to business…we like that.
HILLIARD: The whole point is they can twist and ignore the law so much. I’m dealing with a re-franchising of a military base. So I get the military franchise and send it to my lawyer in Washington, D.C., and I end up with the expert there and the young lady goes through there and says, you know, this is illegal, this is illegal, this is illegal. You’ve got to do this for the FCC and everything else. And all of a sudden, this thing has come to a screeching halt because they don’t want to comply with the FCC rules. They want to do it their way with the Air Force. So I can’t get them to even communicate with the Pentagon to find out if our request to meet the FCC rules are acceptable by the Air Force.
HIRSHFIELD: Are they exempt, being a federal body?
HILLIARD: They’re not exempt but…
HIRSHFIELD: They just think they are.
HILLIARD: They just think they are and they’re going to sit on this thing until they get their way. And how do you get them to move beyond that point? That’s my question to you, my current problem, Bob. We’ll talk about that tonight.
HEWSON: The point of all this, I think, Jim, is that over the last 20 or 30 years, there has been an awful lot of brainpower wasted dealing with interventionist local and state and federal government applying rules where they have no knowledge or very little knowledge or occasionally, I suppose, too much knowledge. And think of where the industry would be without having to take the top people within various companies to contend with these things, endlessly.
HILLIARD: This is one of the reasons that it’s like having anemia or worse, leukemia. This is one of the reasons that you really would like to have all under one federal rule so it applies to everybody and just tell the cities you cannot do this period. At this stage, you cannot do this. Period.
HIRSHFIELD: I have a big problem with that when we get to political philosophy because everybody that wants it under one rule thinks that that rule will be equitable and appropriate.
HILLIARD: That’s true, that’s true.
HIRSHFIELD: But there’s no guarantee of that.
HILLIARD: I’m probably mistaken there, too.
JAMES: But in the end you wonder, and I think the point you made is a good one, that in the end, all these rules are supposed to benefit the consumer, the public. And they really don’t. They’ve retarded the development of the industry, they’ve cost the consumer and the cable industry has been singled out for financial support for different causes within the city governments or whatever it is, that these other competing industries don’t have and are able to avoid, like the direct satellite people, like other kinds of communications companies…
?: MMDS.
JAMES: That’s really the part that is so frustrating is that the industry has really been looked at as a source of revenue and other things for the cities as opposed to a business that’s out there competing.
KELLER: I want to end this thing on competition. The general category of competition. Starting with number one: have any of you faced competition from telephone companies in your systems? So there’s no sense getting into that if you haven’t.
Would you please give us, Roy, a background of the development of satellites in delivering television signals?
BLISS: Certainly. The early satellite dishes, as we talked about earlier, the big ten-meter jobs, the first ones cost over $100,000, $125,000. That was in the late 70s when satellite first started. I did a whole bunch of calculations trying to figure out how many cable systems could afford a $100,000 satellite dish and came to the conclusion that there weren’t enough cable systems that could afford $100,000 satellite dish to get into the satellite business. But the price of that dish rapidly started coming down and the size of the dish started coming down. Satellites got more powerful, satellites in the sky were more powerful and there was a lot of work done by backyard electricians and technicians really worked hard at reducing the cost of that. I forgot we came down to about a 15-foot dish within two years maybe, like by 1979, we were down to a 15-foot dish and $15,000. And now we know from DirectTV or Echostar you can get a $300 dish and receiver, which will pick up 300 channels. I mean that just dramatically changed the distribution of product, entertainment and data, all kinds of data.
JAMES: And particularly to the consumers which—you serve consumers directly with your…
BLISS: We started with the big dishes and when we started WGN, it was just when the 15-foot size dishes were starting to be built. Obviously almost any cable system can afford a $15,000 dish. That just made the satellite business go like this. And helped all of cable. It’s a self-perpetuating wheel. The more customers, the more services you can put on. The more services, the more customers and it just gets like a flywheel. Our backyard dish business: we were maybe the first company that kind of bit the bullet and said, we don’t know who has to pay copyright fees, but we’re going to serve these backyard dish guys with descramblers. And we charged people with their own dish—individuals, what DirectTV is now doing. But they were 10-foot dishes at the time. I was surprised to learn that even in the mid-80s, thousands and thousands of people who had their own dish and were willing to pay what cable subscribers were paying—actually there were a lot of them who didn’t want to pay…who wanted it free. And when we scrambled our signal and started charging for it, they would send us packages full of coins, $15.00 worth of pennies and stuff like that. And we got a few bomb threats. I mean, that really changed the business dramatically.
KELLER: How do you think DirectTV is going to affect your business in the smaller systems within the next ten years? Jim, can you start that one?
HIRSHFIELD: That probably was one of the major reasons I thought it was time to retire. The economics are for each channel you add to a small cable system, you have to put a certain amount of money—probably $3,000 per channel per cable system in your headend. If you only have 100 or 200 customers on that cable system, can you put another 10 or 20 channels on that cable system; at some point when you do that math, you just come to the point where you simply can’t do it. Those people are going to get their product by satellite. So as the math changes, as the satellite gets cheaper, the size of the system that can’t compete gets larger. I think that’s a big issue. I think we’re seeing that all around the country, but one of the caveats is that right now, the satellite is pretty heavily subsidized. If you look at the two major satellite vendors, they’re losing a significant amount of money. If they sell to somebody else—and there’s been a bit of that in the news—then a new buyer will often spend another two or three years worth of losing money because they pay so much for something that they’ll keep building it. So at what point will the subsidization of a satellite receiver customer stop so that we’re actually competing head to head. There’s no subsidization of cable. In fact, we’ve been talking about how it goes the other way. We’re paying lots of taxes and fees.
BLISS: The subsidization you’re talking about is that they’re selling you $200 worth of stuff that costs them $500.
HIRSHFIELD: Thank you, exactly.
?: Loss leader.
KELLER: Then you don’t think there’s any future in a small cable system?
HIRSHFIELD: Well, I think it depends on a lot of things. We’ve talked about a lot of things today. Where regulation goes. Where the economics of satellite dish goes. Where their programming costs go. I think they’ve had some favorable deals on programming costs. You know more about this than me, but I think we’re in the period where those are ending. So the economics I was just playing with can change. But right now they’re pretty unfavorable.
KELLER: Ed, how about you? You had the small system out on the coast.
HEWSON: I still have a small system with about 3,300 customers. And yes, I don’t think the DBS guys are fair. What is it, DSS? I don’t really think they should be able to merge and become bigger and bigger. I know that Rupert Murdoch’s Newscorp gets to buy General Motors, the Hughes bit, puts that together, he has, I believe, the April “Economist” of 1999 shows that almost every corporation he owns runs through 65 different offshore tax-exempt…why should we, the United States, where’s our benefit to let somebody like that control something where they’re not paying taxes? I think, on the other hand, that if you keep giving more and more—sometimes it’s rendering because some of the programming’s terrible—programming to your customers, you’re going to end up paying an awful lot in programming fees. When you look at market share, rating points of the different things that are on the satellite versus what we have on our cable system with maybe 60 channels on ours, I think you get up to about 97, 98% of all the viewing is already on our cable system. If you’re on DSS, to have anything comparable to ours. In Ocean Shores, for example, it’s $31.95 plus $5.95 for five local channels. So the people are at $36-37 bucks a month. The problem is once they sign an agreement that they will stay on service for a year, they give a card to somebody and they will charge you back, the satellite customer back if they don’t stay on for a year. So you have to try and capture them back from the freebie, they all think they have a freebie. But nobody really wants to watch—I don’t know if it’s on the satellite—the Appalachian Educational Network, you know. Or an awful lot of things that nobody here’s heard about but they count as part of that. Right now we’re hanging in there. We think that the high-speed access, what we provide to our customers at every home in America someday, will be on the Internet. They will have to be on the Internet and we’re going to provide a much better service than the satellite guys can.
KELLER: Do you think that’s the future savior of the cable system?
HEWSON: Who knows if it’s the savior, but to me it’s almost more positive having somebody who is a high-speed access customer or maybe i-net, $20 bucks a month or cash flow, $20 bucks a month versus having that as a cable customer. If I can have both, fine. I can make a darn good living just having them as an Internet customer.
BLISS: I think broadband is the answer.
HEWSON: We even have the city of Ocean Shores, for example, is our customer. All of Ocean Shores is on our Internet.
KELLER: Les, what’s your reaction?
HILLIARD: I have to agree with Hack here on this that cable and the video presentation that we do today with our analog and then in the future with digital through hits is fine. It gives you your base. But I see the Internet as being the future of where the cable industry will go. It sounds crazy but we have a cable modem in our home and my son has a cable modem in his home in Topeka, Kansas, and we have cameras on top of the computer there. And we sit and look at each other and talk to each other for a base fee of $39.95. We can talk, have videophones, for an hour, two hours at a night. Every night of the week.
KELLER: Are you both on a cable system?
HILLAIRD: Both on cable modems. And it works out just beautifully. I think this is what’s going to be coming in cable. This is why your upstream capacity has to be as big as your downstream capacity—
BLISS: And that’s what satellite can’t do that? Never, ever.
HILLIARD: So this is the future. Then I believe—this is just a theory of mine—that video streaming is going to start and you see them talking about someone experimenting with it. And I think we’re going to reach the point where if you want to watch the Super Bowl, you’ll have to pay “X” amount of money and they’ll sell advertising on that thing but you’ll have to buy the Super Bowl and you’ll get it through video streaming through the Internet into your home. Then all of a sudden, more and more of the sports programming will be this way. If my brother wants to watch the University of Nebraska get beat by Oklahoma, he’s going to have to pay for it. [Laughter]
Anyway, the whole future, I believe, is going to go into digital video streaming and two-way video phones and basically the telephone of the future is right here.
HIRSHFIELD: A bit smaller than that…
HILLIARD: I’ve got an old big one. But the point I’m getting at is this is telephone. Cable will be video phones over the Internet.
HIRSHFIELD: I think the question for the millennium is will the government regulator, those people, kill this new goose that might lay a golden egg or impair it to the degree they impaired the cable TV industry in the last 25 years? That’s the big unknown going forward.
HILLIARD: I don’t think we’ve got the one competitor out there. We don’t have the broadcast industry trying to kill us all along the way, and the movie industry, they want to go to where they distribute their own product directly to the consumer. The fastest way they can do that is through the Internet. And they can eliminate all the different networks, eliminate the middleman.
HIRSHFIELD: Well, those are all true, but when Ed renews his franchise in Ocean Shores, is the city going to say, we’re not going to pay anymore for this service because that’s part of the franchise? Those are the kinds of things that could hurt him.
HEWSON: Fortunately we have a perpetual franchise.
HIRSHFIELD: How did you get that?
HEWSON: A letter, one-page letter of agreement.
KELLER: He has a smart city.
Mary, do you have a feeling on that, about the future?
HIRSHFIELD: I think it looks good for high-speed connectivity. I agree; I think that is the one possibility for cable going forward. As Les said, I think the difference is that radio and TV communications seem to be viewed in our society as a right. Whereas phone has not been. Phone has always been something that you’ve paid for. So I think in terms of the regulatory aspect, it’s not to say it won’t raise its ugly head in one way or another. But the high-speed connectivity is not viewed as a right so I see less of an onus for the degree of regulation that way.
KELLER: Your feelings, Roy?
BLISS: I agree with everybody here. I think the technology of satellite works really, really well for point to multi-point distribution. One up covers the whole United States. Cable television and telephone on the ground is point to multi-point so you could go back and forth in two way. It is possible that we’ll get all of our entertainment off the satellite. Or the mass entertainment at least off the satellite because it works so well that way and do all of our Internet exchange by high-speed cable lines.
KELLER: You have a feel for that, Bob?
JAMES: I’m much more of an observer of all this but I agree with what’s been said here. I think that the idea of the cable modem which I’ve seen—if nothing else comes along that’s better, it’s just incredible. I think you’re right. What Mary said was that it is something that people expect to pay for whereas television was something that was coming in free. And people still don’t want to be paying even when these are networks are selling programming to the cable operators. So I think it is really a very promising future.
KELLER: I want to wrap this up right now and I want to thank you, Ed Hewson, appreciate it very much. Les Hilliard, Jim Hirshfield, Roy. Thank you very much, Bob James and the master Hirshfield. Thank you very much. I appreciate it very much. I think it’s been informative, it will go down in the archives as something that really will be appreciated for people in the future to see and hear some of the people that made this industry work. Appreciate it very much.
ALL: Thank you.
END OF PANEL DISCUSSION
