Edward Horowitz

Interview Date: November 19, 1986
Interviewer: Robert Dudley
Audio Only

Abstract

Edward Horowitz, Senior Vice President of Technology and Operations at HBO, describes his start in the cable industry with a summer internship working for TelePrompTer, doing sales and learning about the business. He explains that upon graduation, TelePrompTer hired him in their engineering section, stating that.one of the first specialties he developed was in microwave technology, specifically on the Thetacom AML microwave system. (Thetacom was a joint venture between TelePrompTer and Hughes Aircraft.) He mentions the leadership of Hub Schlafly and Irving Kahn at the company, as well as in the cable business generally. He comments on his move to combining business with technology, building out the franchise in Lower Manhattan, and offering sports services and eventually other services in order to improve revenue without trying to find additional capital.

Horowitz explains that HBO’s original concept was to be a regional service that would be delivered to systems in the Northeast Corridor. Horowitz clarifies that “bicycling” tapes was very expensive, leading to the necessity of establishing a regional origination center, and how the Eastern Microwave System interconnected cable systems. He clarifies the difference between pay cable, a monthly subscription, and pay for view cable, which is determined on a program to program basis. As well, he defines tiering as the division of multiple channel offerings into various levels of packaging. He describes in technical detail how the transmission of signals and the cable distribution work with the various satellites HBO uses. In answer to a question about scrambling, he notes that the original concept of scrambling was to protect the rights of program suppliers, as well as providing control of delivery of services to the operators, allowing the system to shut off delinquent subscribers. He notes that the rollout of scrambling services occurred during a time that the backyard dish market was growing very rapidly and at the time of this interview, comprised about 1.5 million dishes installed.

Horowitz comments on the cost of dishes, about $3,000-5,000, and compares that to installation fees for traditional cable. He discusses HBO’s close relationship to its customers, and researching what else they want, or how service could be improved, noting that customers often prefer movies. He mentions product testing in partnership with cable operators, how tiers are standardized, clustering programs, and raising rates in anticipation, and as a result of, deregulation. He defines clustering. In addition, he describes how “windows” work, using as an example a movie such as “Star Wars” that would start by playing in theaters, then be offered on VHS tape, followed by pay programming and finally on traditional broadcasting service. He notes, however, the complex negotiation process that has to go on between the various entities. This is followed by a discussion about the impact of VCR technology on cable, and its popularity amongst consumers.

Horowitz notes problems with operators not being able to broadcast stereo down their systems. He comments further on other issues with consumers owning different devices such as VCRs, and the advantages of moving decoders and scrambling off premises. He then addresses the challenges that installers face. He recalls that until 1975, hooking up television sets to receive cable was simple and relatively quick, but in an age of pay TV, some type of security had to be installed inside the system, either physical traps or scrambled signals, creating a more sophisticated delivery system into a house. He asserts that installers have to become essentially customer service representatives, citing as an example the challenges of consumers using different devices such as multiple remote controls.

Horowitz talks about the need for cable operators and equipment manufacturers to develop cooperative relationships. He advises young people who would like to enter the telecommunications industry to become familiar with how the basic concept of the technology of a particular distribution system works. In addition, he says there should be an understanding of the regulatory environment as well as marketing principles. Lastly, how to deal with customers on several levels, as cable and telecommunications are service businesses, not manufacturing businesses. He states his thoughts about unionization, and the industry’s dismal record on affirmative action, although he observes that the programmers have done a better job. He answers a question about professional development and focuses again on marketing, offering a great product, as well as excellent customer service. He praises HBO’s internship program and explains how it works.

Next, he discusses issues around high definition TV, including his thoughts about backward compatibility. Horowitz concludes with his thoughts about telephone companies and competition with cable.

Interview Transcript

ROBERT DUDLEY: This is an interview with Edward D. Horowitz, Senior Vice President, Technology and Operations, Home Box Office, Inc. The oral history interview is conducted for the National Cable Television Center and Museum located on the Penn State campus at University Park. The recording date is November 19, 1986.

Mr. Horowitz, would you give us a bit about your background, your parents, your peers, your schooling, your degrees.

EDWARD HOROWITZ: Sure. My parents are both immigrants to the United States; my mother came from Austria and my father from Poland in 1943. I was, therefore, a first generation American, with an older sister as well as a younger one. I went through the New York City public school system from kindergarten on up through high school where I attended Brooklyn Technical High School, graduated there in 1965 and went to C.C.N.Y., City College, School of Engineering from 1965 and graduated in 1970 after taking about six months off to join the National Guard and do my basic training. From 1977 to 1979 I was asked by Time, Inc., to attend a master’s degree program for executives at Columbia University Business School, and I was in the graduating class of 1979. Married June 6, 1970; still married, same family. Have two boys, David, 7, and Michael, 3. Wife’s name is Susan.

DUDLEY: Could you give us a bit more information about what you did before you got into Time, Inc., what other kinds of cable or electronic type positions you were involved with.

HOROWITZ: When I graduated from City College in 1970 as an electrical engineer, that was a time when the aerospace industry had gone from boom to bust. The jobs that I had hoped to apply for, once I graduated in aerospace, no longer existed. However, I had the opportunity in the summer of 1969 to work for TelePrompTer as part of their summer intern program, doing sales work, direct to the consumer sales activities, in addition to learning a little bit about the business. Once I graduated, I was really intrigued by the opportunity that seemed to lie in this new field called cable television, and was intrigued to find that people were willing to pay for television to begin with because my internship was with TelePrompTer in Manhattan, which is, obviously, an urban area, and there’s lots of good quality off‑air reception. I couldn’t understand why people were willing to pay for television. Here was a company that was trying to change peoples’ television habits. I was really intrigued by the business, and they offered me a position in the engineering area upon graduation.

I stayed at TelePrompTer, Manhattan, for about three years, where I worked on some of the, at that time, state of the art microwave equipment. Really, one of the first specialties I developed was in microwave technology, specifically on the Thetacom AML microwave system. Thetacom was a joint venture between TelePrompTer and Hughes Aircraft. Hughes still has that today in its product line. In fact, I just saw an ad; they have 100 thousand channels of AM microwave around the country. But the first system, the prototype, was really designed and placed into operation in Manhattan. It was my job to see that the product, the pre‑production model was tested and installed properly.

DUDLEY: At that time TelePrompTer was sort of on the leading edge of technology, were they not?

HOROWITZ: Exactly. Between Hub Schlafly in the engineering area and Irving Kahn in pure business, TelePrompTer was clearly the lead company not only in cable in general, but specifically in technology. In fact, Hub was one of the first visionaries, if you will, to see the promise of satellite television. He commissioned Scientific Atlanta and one or two other companies whose names escape me, to develop a 10‑meter dish that could be demonstrated around the country in the early ’70s.

DUDLEY: I’m sure you’ve heard the story about Irving Kahn, too, that he always stood with his feet planted firmly 100 feet above the ground.

Were your avocational or your vocational interests toward electronics as you were growing up?

HOROWITZ: Yes. I’d always had an interest in electronics or electrical engineering. Really, it’s from building a Heath Kit radio. I never was much of a ham operator. I’d just go out and build this Heath Kit; that’s how I used to build transistor radios and things like that. Built a television set once.

DUDLEY: The challenge to move from an engineering background into the business end of it was instigated by your employer. Was that rather unusual at that time?

HOROWITZ: As I said, I worked for TelePrompTer for about three years, three and a half years. Then I went for a short period of time to a start‑up cable company in New Jersey, which I was involved not only in the design of the cable system in a suburban environment, but also in the franchising process as well.

I really had a good basis of knowledge of how to go out and get a franchise, which is how to deal with the politics, how to design a system that works. Once it’s installed how do you properly market and sell that system to the consumer? I’ve kind of done it all. I’ve climbed poles; I’ve gone down sewers; I’ve knocked on doors; I’ve run service calls; and I’ve managed a cable plant. And that kind of broad base of knowledge of the very specific cable industry, to me, indicated that I was lacking something.

HBO in 1974 was a very, very new company. I’d been there for two to three years when they invited me to go to this Columbia program. It was not usual for them to take a technically‑based person and put them into this business environment. In fact, Time, Inc., is not a very technology‑oriented company. In fact, they don’t really recognize just how much their livelihood depends on the innovative uses of technology. Historically, they haven’t depended on it.

DUDLEY: Why, then, did Time, Inc., conceive of the idea of HBO?

HOROWITZ: HBO was a means…try to think of a good answer to that. Time, Inc., owned cable properties, owned broadcast stations as well, and sold off the broadcast interests and most of its cable properties, but couldn’t sell one cable system in Manhattan. They had a franchise for lower Manhattan. It was viewed to be an albatross because no cable had successfully penetrated urban areas; it was losing a lot of money.

The genius of Chuck Dolan and the president of Time, Inc., a guy named Jim Shepley at the time, basically said, in order to make this cable system work, we have to get more revenue per household than we are getting now and we don’t want to invest a lot more capital in it. How can we do that? What kind of service can we offer? One of the first offerings was the Nick and Ranger home games, direct from Madison Square Gardens. They were offered exclusively to cable subscribers in the Manhattan area to begin with and later on in the greater New York metropolitan area. The concept of delivering some proprietary programming into the house was really the driving force behind the sports services and then, ultimately, the pay services.

DUDLEY: It was a programming thrust to increase revenue from an existing system?

HOROWITZ: Without additional capital. That’s correct.

DUDLEY: I’m curious about why you started in with Service Electric in Wilkes‑Barre, Pennsylvania?

HOROWITZ: John Walson is the pioneer‑‑now, there’s some controversy whether John Walson or Bob Tarlton, but we think that John Walson is number one, and we wanted to demonstrate as we took this product outside the captive environment in Manhattan to the cable industry that we could get a pioneer, one of the stalwarts, the pillars of the industry, to accept this concept. The pioneer that John is really shone through at the time.

DUDLEY: So it had a lot to do with connecting up with somebody who had already made a name for himself in the cable industry?

HOROWITZ: Yes, and to whom people looked at and said, “There’s a man who is not easily convinced of new things. If he can make it work, then there’s good reason to believe that others can make it work as well.”

DUDLEY: So you tested on the cable system in Wilkes‑Barre, Pennsylvania?

HOROWITZ: Yeah.

DUDLEY: How did you distribute, then? How did you build system connections and subscribers?

HOROWITZ: The original concept of HBO was really that HBO was going to be a regional service that would be delivered to cable systems in kind of the northeast corridor. We were using terrestrial microwave links to get from our origination center in Manhattan through New York State, down going west from Albany through New York State and down into Pennsylvania, ultimately somehow it was routed through Philadelphia. I don’t remember the exact routing. But we may have an old Eastern Microwave map that we can send out here.

The concept of bicycling tapes was very expensive, A, for the tape; B, for the origination in cable systems. And most cable systems weren’t large enough to support an origination center with manpower that goes along with that. So someone said, “Since bicycling tapes was so expensive, then we needed to rely on a central origination center. And we need to have the efficiencies and economics that come along with regionalization.” The interconnect between one cable system and the other was this Eastern Microwave system. That’s how we started HBO.

DUDLEY: Pay cable. Pay‑per‑view cable. Basic cable. Would you give us your definitions of those because I’m sure we’re going to touch on them as we go through the rest of the conversation?

HOROWITZ: All right. Pay cable is a monthly subscription service in which the consumer is paying a monthly subscription fee for a channel of programming that has been pre‑packaged for him. There’s one fee to watch one month of that channel.

Pay‑per‑view is when the consumer is given the choice on a program‑by‑program basis as to whether he wants to watch that program or not. If he chooses to watch, he pays for that program on an individual basis.

Basic cable is essentially an antenna service that cable came into existence for. That is, to receive the local off‑air signals, to some extent some distance signals, package them as a multiple channel offering, transmit that down the cable, and offer that multiple channel offering to the consumer for a fee.

Tiering is the division of these multiple channel offerings into various levels of packaging. For example, one may have a local off‑the‑air tier, which is composed of all the stations that are located in a general vicinity of the cable system that are picked up off the air and sold for $6 a month. There may be a tier on top of that composed of advertiser supported, satellite‑delivered services, such as ESPN, MTV, TBS, USA Network. They’d be sold for an additional fee.

Subscription television, or pay TV, is one channel, a la HBO, Showtime, Movie Channel, Playboy, or Disney, that’s sold on a monthly subscription basis. And then pay‑per‑view is, obviously, a single event per fee.

DUDLEY: I’m going to say at this point that we would reference listeners to the lecture tape because it has a very good description of the technical system used to originate and distribute. But just for this tape, could you walk us through that from your origination point in New York through the reception in the home?

HOROWITZ: We have an origination center where literally all of our movies, sporting events, or pre‑packaged sporting events, and special programs are loaded on to tape machines and played down one right after the other. The feed is constructed in Hauppauge, Long Island, at our broadcast center. At that same facility we have a ground‑to‑space uplink antenna that allows us to communicate directly to the satellite from the origination center. All of our channel feeds, and HBO has got two feeds; it’s got an east coast feed and a west coast feed, time‑zone sensitive, as does Cinemax, as does USA Network. The signals are then beamed up to the satellite, which is essentially an amplifier in the sky. That’s all it is. It’s a tube. Put a signal in from the ground; it amplifies it; turns it back, re‑transmits it back to earth.

The satellites we’re using for our primary cable distribution are RCA, SatCom 3R, Hughes Galaxy 1, and now RCA KU1. HBO is in the process through a joint venture we created with RCA to build a satellite designated RCA K3. The joint venture’s name is Crimson Satellite Associates. That’s the next generation.

The signals, then, are re‑broadcast by satellite to the ground where an earth station is placed that can pick up, that can physically see the line of sight between ground to space. Signals are then picked up, combined in the headend processing room at the cable system with other signals that are received by satellite or off‑the‑air, multiplexed together, and sent down the main cable trunk lines to get to the street closest to the consumer, then down through subsidiary feeder lines directly to the consumer’s home.

DUDLEY: Today you used a graphic that drew a comparison between the hotel, the cable system, and the home as receiving sites. This was related to scrambling. I want to talk a bit about the television‑receive‑only dishes at homes and scrambling.

HOROWITZ: The original concept of scrambling is to protect the rights of our program suppliers, as well as to add a little more control to our own delivery service as related to our own affiliates. Prior to scrambling, we essentially had no control as to whether a person could watch us or not. If he had not been authorized by us to sell our programming, he could still pick it up.

If a person or cable operator didn’t pay his bill, we had no way of shutting him down. We essentially did not have control over our own signal destiny. One reason to scramble was to get that control. The scrambling system is addressable to individual decoder units, so that if a cable operator who has HBO in his service offering to the consumer, does not pay us our bill, we now can shut him down.

Our receivables have gone from 90 days to under 50 as a result of this. We picked up about 250 additional Cinemax affiliates, cable companies that had been testing Cinemax on their own and without letting us know that. And, more significantly, 600,000 hotel rooms.

DUDLEY: Much of the trade and general press seems to have addressed the scrambling issue related to the backyard dish owners, but you are saying that by protecting your product, you are also able to pick up additional revenue from your traditional clients.

HOROWITZ: That’s right. When we first started looking at scrambling it was really in 1981. When I first started the concept was May of 1981, about a year after I got to my present job. At that time there were only about 200 thousand earth stations in consumer backyards. It looked like it was going to grow but it was nothing on the order of the million and a half that are presently installed. I saw that as a potential threat to our business. But the basic premise and the original funding was received by the company for the protection of the program rights of our suppliers and our ability to regain control of our signal destiny. It took three years to develop the system and finally roll it out. During the course of that three years, the backyard dish market was growing very, very rapidly. By the time we actually flipped the switch to turn on the scrambling system, there was about 1.5 million backyard dishes installed. We then said, “All right. Here are people that have had the longest preview in history of HBO. If anyone is going to buy our programming, it’s them. Particularly if they watched often and they like it. Let’s not ignore them. And let’s see if we can harness the technology.” Which is what we are doing.

DUDLEY: Could we talk more about the cost to a backyard‑dish owner, and then I don’t think we need to dwell on this too much longer. The dish owner made his own decision to buy a dish.

HOROWITZ: That’s correct. He tended to make a three to five thousand dollar decision to buy his dish.

DUDLEY: The cable viewer pays an installation fee and then pays a monthly fee. Is it a correct analogy, then, to say that about the only difference between the TVRO owner is that they’ve got to buy the decoder and they’ll pay a monthly fee the same way as a cable viewer would?

HOROWITZ: We’re really in the very early stages of the direct‑to‑the‑consumer‑by‑satellite business, so right now, if you recall, in the very early days of cable, if a consumer wanted cable, he had to pay for running that cable to his house and a very hefty installation fee. So if you want an analogy, in the 1950s if you wanted cable, you paid $115 or $120 or more for the right to pay five dollars a month. Now, you add inflation and all those things on top of the 1950 cost versus 1980, and I suspect you would find the investment is very similar. The backyard dish person has paid three thousand for his dish for the right to pay HBO for its monthly product.

DUDLEY: Again, we’ll reference the lecture tape that has a very good visual presentation about the organization of HBO within Time. Would you take a few minutes to sketch that out for us as far as the program services within HBO and some of the joint ventures that you have?

HOROWITZ: HBO has three, 100 percent owned services. One is called Home Box Office, that’s HBO Service, Inc. We have Cinemax, which is another pay subscription service. And we are test marketing a third subscription pay service called Festival that is geared toward an older audience and kind of a tryer/rejector of HBO and Cinemax. HBO and Cinemax does have broad appeal programming but it does contain R‑rated product and there’s some objection by a percentage of consumers to the language and the nudity. Festival is designed not so much to be subscribed to by the HBO and Cinemax customer, but, rather, by the customer who does not have any pay services.

We have a one‑third interest in two advertiser supported services. One broad based called USA Network, where our partners are Paramount and Universal Studios, and one‑third interest in Black Entertainment Television, which is a more narrow casting advertiser supported service, where our partners are TeleCommunications, Inc., and Taft Broadcasting.

DUDLEY: Advertiser‑supported services, then, compare to commercial broadcasters because somebody else, the advertiser, is paying the bill. What’s your obligation to the pay viewer? Do you have to pay more attention to the wants of that individual?

HOROWITZ: Yeah. I think one of the beauties about pay television that we enjoy versus the normal commercial broadcaster is that we have a very close relationship with our consumer; he speaks to us month‑by‑month, in that if he doesn’t like what he has seen in the previous month, he does not pay his bill. It’s almost like a perfect survey because we have to survey 100 percent of our customer base every month in order to collect. Unlike the commercial networks, in which they sample 1,700 homes and there are trends to indicate what programs make it or don’t, the basis on which a program is left on a network is as much left up to the advertiser as it is up to the consumer. In our case, it’s the consumer speaking directly to us.

DUDLEY: That’s kind of an on/off situation. If they don’t pay the bill, they get cut off. What other kind of audience research do you do to find out what an unserved audience wants and why that subscriber may have stopped paying for the service?

HOROWITZ: One of the realizations that we came to three years ago is that we really are in the package goods business, in that just like a soap manufacturer, the keys are shelf space and filling the need of what the consumer perceives for a particular product. Sometimes you can fill the need by re‑packaging.

If you look at HBO, Cinemax, and Festival, the baseline product is the same; it’s kind of the edges that are different. HBO has sports; Cinemax has more avant‑garde programming. Max Headroom is trendy; it’s alive; it’s funky; it’s not a broadbased appeal service that may appeal to 19 million Americans. Festival is the same baseline movies, however, there’s no R‑rated product in there. The specials, you won’t find a Robin Williams special or a Redd Foxx special on Festival; you will find Bette Midler, you will find Barbra Streisand. So taking a packaged goods approach, we are going out and saying, “What else, consumer, do you want?”

We’re constantly going out to the consumer base and saying, “What do you want us to do to improve the services we have? Or is there something we are not doing that you would like us to put together?” What the consumer has said quite vocally is, at least a large portion has said, is, “We like the movies. We don’t like the nudity and we don’t like the language. Give us a product without it.” And that’s what we have done.

DUDLEY: Do you do that kind of testing through the cable systems or do you do it by going directly to the consumer market?

HOROWITZ: To ascertain the need for the creation of a product, we do that directly with the consumer. Once we determine that there is a desire that the consumer has, we can construct product that we think will fit the desire of the consumer. And it’s a product that has to last for years, unlike magazines. Some of these topical magazines come out every couple of months; we are on 24 hours a day, seven days a week. It’s one thing to have a concept. It’s another thing to have enough staying power to last for a few years. We do all our testing of the product by the cable system to the consumer, and in partnership with the cable operator.

DUDLEY: Continuing with programming. Could you talk with us now about rearrangement of tiers? Clustering programs? Changing where various services appear on the VHF and the UHF dial?

HOROWITZ: January 1, 1987, is a watershed day for the cable industry. It’s the first day that their rates are totally de‑regulated as the result of the 1984 Cable Act. In anticipation of, I’ll say, raising rates because it’s literally based on raising rates to the consumer, a lot of cable systems have been standardizing their tiers and clustering programs in their general offering to the consumer. If you look at the business and how it has evolved over the last few years under a regulated environment for cable rates, you will note that there are a certain percentage of subscribers who have a basic tier, maybe just off‑air. There’s another percentage who have the basic tier plus the satellite tier. And then there’s a third percentage that may have pay. In order to reduce your overall cost of running the system, what cable operators are going to be doing starting in January is probably cutting back the number of specialized tiers‑‑choices that the consumer has. In essence, develop a more uniform offering. So, the enhanced satellite tier may go away. Everybody’s basic rate will go up. Everybody will get the satellite tier. I don’t think there will be any programming taken away from anyone. But, instead, everybody will almost be forced to take more. I think that’s what’s going to happen.

Now, this other concept of taking channels and moving them around the dial. Taking channel 2, for example, CBS is on channel 2 in New York, and putting it up on channel 13 on the cable plant, I think is a mistake. CBS on channel 2 has spent millions of dollars creating in the consumer mind, that if they tune into channel 2, they can watch CBS. I really can’t figure out the reason why any cable operator would fly in the face of what the broadcaster has attempted to do in creating a franchise between himself and the consumer. And I think it’s a mistake.

DUDLEY: Clustering seems to be an argument made by cable systems for doing this: you try to put your arts and entertainment type programming, your movie type programming, together on adjacent channels. What’s your personal opinion of that?

HOROWITZ: I think they almost want to drop in pay service in between two popular off‑air channels so that when the consumer flips through his dial, at least he’s going to flip through HBO in order to get channel 2 or channel 4. If HBO’s on channel 3, he’ll go from CBS on 2, HBO on 3, to NBC on 4. I think that’s going to cause more confusion to the consumer than a benefit. It’s my belief that if a programmer has programming that is worthy of watching, the consumer will find it. If the cable operator does his job of being a good marketing company to the consumer, then he will create that franchise and make him aware that the product is on the cable system. Forcing the consumer through juggling and technology to watch programs is not going to endear the consumer to the cable operator.

DUDLEY: Again, with programming. Would you talk about the various kinds of windows, shared production costs, and marketing strategies that HBO has followed with developing new products?

HOROWITZ: Windows. Better define window. A window is, very simply, a period of time‑‑and I’ll create the definition by an example. When a movie is created, it goes through a series of release cycles into different market segments, each portion of the cycle into a specific market segment called a window. So, for example, a movie is produced and released to the theater, it plays there exclusively. It’s called a theatrical release; a theatrical period; a theatrical window.

Following the theatrical release, typically, today, is a VCR window wherein that movie, while it may continue to play in the theaters, is also now available to the consumer on video tape so that we can rent it in the video store.

Following the VCR window is the pay window, the subscription window in which, and that typically is 12 months after a picture has arrived in the theater for the first play, it goes to pay. There’s probably a six‑ to 12‑month window when that product is available, sometimes in the theater, generally still in the VCR market, but now as part of a pay service as well. Following pay, the product may also go back into the theater for re‑release or it may go back into the VCR market for VCR release, again re‑release. That is not generally the rule. It’s for blockbuster. “Return of the Jedi” is one example of that. “Star Wars” another. Really A‑rated, heavyweight movies.

Following the pay window, we have the broadcast window where the product is now available for transmission by one of the three major network stations. Following the broadcast release cycle, sometimes it comes back through pay. More typically it goes down into syndication in which it is available, generally, for playing on independent TV stations around the country, market by market as opposed to a network‑wide distribution. That’s windows.

Now, overlaying these windows, it all sounds very nice and cut and dried but, there’s a constant juggling in the negotiating process between the broadcaster, the pay programmers, and VCR distribution entities as to whose window comes first and how long should that window last. Then you add on to that a new technology, and I’ll call pay‑per‑view, for the moment, a new technology‑‑that says when does pay‑per‑view get their window for display? Does it occur day and date with theatrical release? In other words, does it occur the same day, the same date the movie first hits the theater? Or is it day and date with the VCR market? Or is it day and date with pay? In the case of pay‑per‑view, obviously, it being day and date with pay TV doesn’t serve much of a benefit, so pay‑per‑view tends to be available day and date with the VCR market.

DUDLEY: Talk a bit about VCR, which appeared to be the enemy, and now it appears that being cable friendly or VCR friendly is the name of the game.

HOROWITZ: VCR is still the enemy. VCR offers more choice and flexibility to the consumer in the home rather than just flipping through the channels and allowing him to tune in to HBO or other programming of the moment. It’s not quite as big an enemy as we thought it would be though. Probably 60 percent of VCR use is for timeshifting programming. Another 20 percent is for watching movies that he may have produced at home. The last 20 percent is for rentals. And this, obviously, varies from home to home. The rental phenomenon, six months after the consumer gets his VCR, peaks out.

Whereas in the first six months, the consumer might be going out and renting six movies a month, we find out that after the honeymoon period he is sick and tired of going to the VCR store, finding the title not there or forgetting to bring back the tape and having to pay for another day. And he goes back into the more traditional viewing habit. The VCR, then, serves to function really as a timeshifter. VCR penetrations are going up, growing, will continue to grow.

There is, obviously, a percentage of the market that does not feel they need to subscribe to pay TV because they have another place to go to get their movies. They don’t want to watch 80 movies a month. They just want to watch two. And that last segment, which is, obviously, the most profitable segment, the last customer coming on is the most profitable customer, is harder to get.

DUDLEY: Let’s jump on to technology. Where are we going with technology in cable TV or in telecommunications, particularly video?

HOROWITZ: Cable went through a channel‑expansion mode in the 80s, and I think that 55‑channel capability is really state of the art today. I think that’s enough. The challenge that the cable operators face today is the ability to broadcast stereo down his cable system, and he has got to be able to broadcast stereo.

The other phenomenon he has to watch out for is that the consumer devices being placed in the home are not very friendly to the way he, the cable operator, has chosen to secure his programming on the cable band. As a result, if you have a signal that’s scrambled on a cable, and the consumer has a VCR, it’s very hard for the consumer to watch two scrambled pictures simultaneously. In other words, tape one while watching another. In order to do that, he has to have two boxes, doubling the cost to the cable operator of the capital that goes into the house, typically without increasing the consumer’s cost a lot. Maybe it’s another outlet for a buck or two more, but it certainly doesn’t cover the cost of the decoder.

I think one challenge the cable industry has is to become more consumer friendly. The NCTA engineering committee and the EIA have been working for three years to come up with a standard interface plug that would go on the back of new TV sets. I applaud the effort. I think it’s a little bit too late. There are unbelievably installed base TV sets out there today. It takes 30 years to change out an installed base, really. Number two, not every manufacturer has signed up to put that little plug on the back of the set.

So, I think the challenge that the cable operator has, is to see if he can’t come up with an off‑premise security. Off‑premise doesn’t necessarily have to be out of the house, but kind of take the security away from the back of the set. Allow the programs to be fed into the households secured, but once they get in the house, decode it altogether. To some extent, I think if we take a look at what AT&T, The Bell Companies, have done, we can learn a lot. They are responsible for getting the signal inside the house. The consumer is responsible for picking it up on the inside of the house and putting it on wiring in his house and having his own telephone. The cable operator should demand from manufacturers’ security systems, a system that would allow them to decapitalize the investment they have in the house, recognizing that the consumer has so many different devices.

To some extent, and I’m getting back to a question you raised earlier, the standardization of tiering, that is, reducing the number of tiers that are available in a cable system, for instance, raising everybody’s rates, taking one uniform tier across the cable system will provide a good basis by which you can now put this equipment in the house. Decapitalize the sophisticated equipment that was necessary to support those different tiers. You can remove that equipment, and simplify signal delivery.

DUDLEY: So, that the different arrangement of tiering as well as the off‑premises decoder and scrambling, might be able to increase the subscription base because the multiple family dwelling, for instance, doesn’t have to have a decoder in every unit. High transient areas, I would say, frequently don’t want to invest in a decoder. The cable operator has an investment to consider also, the tenant changing. Will he get his decoder back?

HOROWITZ: That’s true. I think, in addition, the cable operator has to look at the ways that he wires his plant. Traditionally, obviously, it has been trunk and feeder.

End of Tape 1, Side A

Editors Note: There is a brief gap here because the interview started before the tape leader on Side B had passed the head. Mr. Horowitz has made a statement about the design of a telephone switching system and how that might be related to cable systems.

DUDLEY: Would you explain that?

HOROWITZ: Switched star is where you have, essentially, point to point communication. I call you up. My voice goes through a switching center, goes down a line that is dedicated to you. The cable system utilizes a point to mass distribution architecture, which has a head end. And I’m not suggesting that we need to change the architecture of the basic cable system overnight. I think one place where one can test the concept is in a multiple‑dwelling unit. For example, you are correct in saying that the turnover in apartment houses is significantly higher than in private homes. Quite often the last thing that gets packed in the box when the consumer moves out is the cable converter. Away it goes, and there is, obviously, no forwarding address.

I think that if one would design the in‑house distribution inside an apartment house to be on switched star basis, in other words, each apartment is individually addressed first from a central location and has a dedicated wire going to it, one can accomplish two things. One, is you decapitalize your investment in the apartment. And, two is you can attach to any number of devices that that person has in his apartment. That’s in its most simple form, but there is no reason why you couldn’t add a little bit of intelligence. Have some multiplexing, if you will, of apartments one to another. Have a little bit of intelligence as an A/B switch, if you will, inside the apartment so you don’t have to run one wire to each apartment.

DUDLEY: I’d like to jump ahead and have you follow up on installation, particularly as it relates to the training of people who are involved in system design, and technical installation for the local cable company. It used to be that you’d run the RG 59 into the home, hook it up to a 300 ohm connection, and hook it up on the back of a TV set. Obviously, that’s not the case now and will not be the case in the future.

HOROWITZ: I think it’s going to be the case in the near future. I think systems that have been built in urban areas have to be a lot tighter to the overall maintenance and the manner in which an installation is put in. I may be missing the point of the question a bit here.

DUDLEY: One of the biggest concerns that people who are operating cable systems now are telling us about their technical installers is that they are not up‑to‑date on how you connect the VCR, the video disc, the addressable system; what is stereo doing to the system; what if you have multiple sets?

HOROWITZ: OK. There is a challenge. The cable industry has a challenge. An enormous challenge. And it’s in two areas. One is the technical sophistication of the installer, which I think is the initial question. And the other is the consumer representative, which we can talk about if you like.

The technical installer used to be able to go into the house, cut out the twin lead that was in the house, replace it with a piece of coax, zap on a matching transformer, and leave. The only thing he was attaching was a TV set. That was in the early days. Right up until 1975.

When pay TV came along, there was a need to have some kind of security inside the system, on the system. And that took the form of external traps on the pole, whether it be a positive trap or a negative trap. Or a scrambled signal on the system itself; that meant you needed to have a converter, converter/decoder. Made the installation a little more critical because in addition to having good quality signal coming in to the decoder, you had two more connectors to depend upon. One coming out of the decoder and one coming into the TV set.

Particularly, the early versions of those units were rather sensitive to the incoming signal level, which meant that your plant maintenance had to be improved significantly. So you now have an improvement in plant maintenance that was necessary. You have a more sophisticated delivery system into the house.

Along comes the VCR. And along comes remote control. The consumer goes out to the TV store and buys a $500 TV set where the last $100 was for remote control. He brings the TV set in the house. The first thing the cable operator tells him is he can’t use his $100 remote control he just bought. So he’s pretty ticked off. The cable installer, who is the one who generally delivers the message that he can’t use his remote control, has to be consumer friendly. So, now, he’s not only the installer but he has to be a customer representative. Traditionally he is not. He has to be trained. Couple that with the VCR, and you have now a couple of remote controls plus sometimes the cable converter had a remote control. You’ve got three remote controls in the house. Each device having to be linked one to the other. There’s really no standard way of linking a decoder installation with all kinds of VCR installations, with all kinds of TV sets.

So, I think, if anything has to happen, it has to be a training of the technicians. They have to be almost a designer, a custom designer. Saying, “OK, I recognize there are different devices in the house. Let me design the system so that it will work well.” And it’s an incompatible system to start with.

DUDLEY: Some of the members of our education and training committee of the Museum have indicated that the cable industry has not met what should be its obligation for years: to become very active in the development of new products and in the development of new technology. That it’s been pretty much left up to the equipment manufacturers. Do you have a point of view about that?

HOROWITZ: I blame the equipment manufacturers as much as I blame the cable operators. In fact, I blame the equipment manufacturers more than I blame the cable operators. There’s no one cable operator, even today, and TCI is a major player in this business, that is large enough, that if they bought a single piece of equipment …how many units can it buy? Three million. If they bought a box for every TCI subscriber, that’s 3 million, maybe 4 million units.

That sounds like a lot in our small industry, but when the manufacturer looks at developing a new converter, what is he looking at in terms of his market opportunity? He’s looking at an installed base of 40 million subscribers, and he’s hoping to get 10 or 15 million boxes sold into the universe. Jerrold is number one, I think they have a 50 percent share. And I think Jerrold is saying to itself, “Hey, I have a leverage. I have a power. I can design the box. And I don’t really care what John Malone says or not. There’s no one else in the business who’s developing anything much more sophisticated than I do, and he doesn’t have significant market power. I could not get the John Malone order and still get a very good business.” That’s the attitude I see.

I believe there has to be a marriage between ‑‑ again, I’m going back to the AT&T scenario, Bell operating companies scenario; I think there has to be a device developed that is very high security, that can be sold to the consumer just like a TV set is sold, and that the level of sophistication necessary to basically develop a box that doesn’t work unless it is authorized, requires cooperation to the extent that the industry has never done before. That cooperation is, for example, the industry, to accept a universal addressing scheme, the universal data access scheme, so that when a consumer goes out and he buys this piece of equipment and brings it into the home in city A and then moves to city B, the piece of equipment will still work. Just like his TV set will.

I see no movement by either the cable operators or the manufacturers to do this. As a result, you’ve got cable unfriendly installations.

DUDLEY: If you were addressing a group of young people about what they should do as part of their educational process to function well in the telecommunications industries, what kinds of things would you tell them about? Type of education to take, the mix of courses, social conscience, ethics? What would you tell them about internships?

HOROWITZ: To survive in the telecommunications field, one needs to have a technical baseline of information. So you have to at least take some courses that familiarize you with the jargon and how a particular box works. You don’t have to know what goes on inside the black box. You don’t have to know that an amplifier has 18 transistors and three power amplifiers. All you need to know is that you put a signal in here, and something happens on the outside. I think there is a level of technical understanding that is fundamental for the student to have in order to understand the basic concept of how the technology of a particular distribution system works. That’s one piece.

Second is, particularly in telecommunications, there should be an understanding of the regulatory environment. Who regulates your business? What happened in their decisions of late. For example, the HBO decision in 1977 or ’76, landmark decision by the Supreme Court that said movies of more than three years or less than ten years are now available for sale on tape. Understanding that there were restrictions on the product in the past. Understanding the first sale doctrine, the first amendment implications on cross ownership on distance signal carriage and copyright. All those dynamics come into play when you try to understand how this business works and who regulates what. So I think the second area is regulation.

Third is dealing with the customer, on various levels. Cable or telecommunications is a service business. Not a manufacturing business. As such, marketing is extremely important. The cable industry needs to escalate its sophistication in marketing almost to infinity. It really is so fundamentally lacking in its sophistication of marketing. A person who comes to the industry with an understanding of the concepts of technology and the concepts of the regulatory environment and a super education in marketing is going to have it made, in my opinion.

Followed by just a basic business understanding. How do you run an efficient shop? How do you create an organization that provides good responsive service to the consumer that’s being done efficiently? So there’s office administration and good economics and controls applied. Within that office administration, there’s organizational skills, there are financial skills required in running a day‑to‑day operation. How do you keep cost control, basically?

DUDLEY: What about labor negotiations and affirmative action?

HOROWITZ: I don’t think our industry is unique in the need to pay attention to those two areas. Typically, we are a non‑unionized industry. I know there are some organizations that are unionized. I think that if you pay attention to administration and to managerial philosophy, you treat people fairly, you’ll be treated fairly. If you have that basic philosophy of life, then I don’t think you will be dealing with an organized situation. And I don’t see there being much of a movement, particularly now with the kind of swing of the pendulum away from organized labor forces. I don’t see that as being an issue in the near future.

Affirmative action. There’s no question that this is an industry where affirmative action is one of the lowest priorities that the industry has paid attention to. Interestingly enough, the cable industry does not have many women or minorities, in the cable operator industry. Programmers, on the other hand, have done a lot better job. HBO is 53 percent women, and in minorities, I think we are 26‑27 percent women. We represented a newer field. I think the cable operator has to pay attention to this issue. He has not done a very good job to date. I don’t think you can manage a better cable system by paying attention to minorities. There’s been no one putting a premium on it. I think that they will do just enough to stay out of being regulated, quite frankly.

DUDLEY: What’s needed for continuing professional education? For those people already out there, either having been there for years or having newly arrived in the industry who maybe don’t have all the kinds of skills that are needed. Do you have any preferences, any advice for them?

HOROWITZ: For those that have been there a while, I think that they need to go to school on how other communications systems work. I think that no one has a really good understanding of the power of computers. Look to computerization, not just to the administration of the systems, but the architecture of the systems, signal processing. I also think that we should look at the other fields of telecommunications and at their architecture. We’ve talked already about switched star versus trunk.

An area I’ve mentioned a few times this afternoon is marketing. If there is anyone who has got to go back to school, it’s the cable operator as to how to market. Package‑good marketing. Now, for a person who is thinking of switching fields from another service industry, essentially if he takes a few courses that are geared toward understanding the concept of how the system works from point A to point B, couple that with the marketing aspect of it. Probably that’s all it will take. Not a lot. Cable is not a very complicated business. It is not as unique as we might like to believe it is. It’s basically very simple. Provide good quality product at a reasonable price, answer the phone when it rings, and be polite to the customer. And you’ll be the most successful cable operator in the country.

DUDLEY: Tell me about internships. Are they important to HBO? Is it something that every student who plans to work in the industry should have before they leave college?

HOROWITZ: I think that having an opportunity to dabble in an industry without having any accountability or responsibility is a wonderful concept. HBO has, typically, a summer intern program for graduate students. We don’t typically just have undergraduate students in the intern program. We’ve got somewhere between 15 and 20 students each summer who come in on an internship basis. About half of those students are invited to stay once they graduate from graduate school. And about half of them do stay. We find that they stay for two to three years. It’s a good first job. And then they leave and go and pursue another career.

So I think that’s kind of a downside of giving a person his first job. The upside of giving a person his first job is that you know they’ve had an opportunity to look at you, and you have looked at them. And there’s a decent marriage to be made. The downside is they, typically, go off and look to a two‑year job or for something else to do.

I think the number of internships available relative to the number of students seeking them is very small. They are very, very hard to get. It would be great if you can get it. But if you don’t get it, don’t ignore the field.

DUDLEY: What are your comments about must‑carry? The FCC someday is going to put something in print.

HOROWITZ: This is not one of my strengths, to tell you the truth. I have an opinion on must‑carry. I think the consumer, if there is an economic reason to have a program on there, it’s because the consumer wants to see it, it should be on the system.

An issue I see coming up is a home shopping service, we’ll use HSN as an example. Home Shopping Network has bought UHF stations around the country. Should they be carried on the cable system that doesn’t want to carry HSN; they want to carry COMB as their shopping service category. I don’t know.

DUDLEY: Are there any other areas that we’ve not touched on that you’re particularly interested in talking about?

HOROWITZ: We haven’t talked about High Definition. And we haven’t talked about the fact that there is an opportunity for total system bypass by off‑shore companies. Japan, Inc., France, Inc., if you will. I just think the cable industry should take a look at its architecture, recognize that with the introduction of origination device in the house called the VCR and a continuing move to get more and more of these out there with greater and greater sophistication, that he is going to have to grow in quality and sophistication to compete with that new origination device in the house.

Whether that is a hi‑fi VCR that’s competing with his monaural delivered audio coming in his cable system and which should be stereo. That’s today’s challenge. Tomorrow’s challenge might be that the origination device in the house might be high definition quality capable, and the cable system might not be capable of passing high definition delivered signal. I think that’s a challenge.

DUDLEY: We’re talking about a technology that is not compatible in most ways with the current system configurations?

HOROWITZ: That’s right. The technology would not be compatible with over‑the‑air transmission because its scan is limited. It’s not compatible with most cable systems because it tends to be greater than 6 megahertz, in terms of its band width requirement. But one thing that I think people are misjudging is people saying no one will buy a high definition TV set to watch just high definition movies. High definition TV set has to be backward compatible. To date, no one has thought about this backward compatible issue. If you take a look at the design of a TV set today, the new generation of TV sets have a digital processing video front end that is capable of being software controlled.

Japan, Inc., has taken a global view of how a TV set should look. It says, “We want to make one TV set which has a programmable front end so it can play a SECAM, and NTSC, and PAL, or whatever the Russian standard is, without any modification other than you’ve got to make sure you put the plug in the right voltage.” You can take that same digital processing technology that can work on the 11 standards around the world on TV and say, OK, if you see an incoming high definition TV picture from the source, any source, I submit that source will be a VCR in the house, you switch into a different aspect ratio mode. So you’ll have a set in the house and then you’ll have a different aspect ratio that may have a black bar in the left and the right when it gets the picture off the air. But when it gets the picture off the VCR that’s high definition, it’ll switch into the broad three by five aspect ratio. Cable operators have got to be able to compete with that. Not tomorrow. Not the day after tomorrow. But I’d say by the mid‑90s.

Also we haven’t talked about the Telephone Company. Or fiber optics.

DUDLEY: There’s an interesting thing. It’s interesting to me that a system like State College, for instance, would go through a complete system re‑build, up to 36 channels, and I don’t think there’s one foot of fiber optics in that system.

HOROWITZ: Well, if you go to a switched star system configuration, the perfect vehicle and this is, actually, perfect for cable too; is a fiber because what today’s fibers are capable of doing is running 15 miles sometimes, good quality fiber, without any amplification. If you look at an average cable system, I think that the typical modern systems don’t go more than 15‑17 amps deep.

DUDLEY: That’s not that far.

HOROWITZ: What’s that? Eight, nine miles? So you say, “Well, if maybe instead of putting out a new coaxial cable, we just run a bundle of fibers to the house, one fiber there we have several hundred multiplexing signals; just run one fiber to each house, we could get rid of all amplification in the street and just have one major amplifier at the head end.” You don’t have any cross‑talk problems. Eliminate all your intermark problems. Don’t have any radiation problems. Get it to the house, you need a terminal in the house. Got to be low cost, secure. The security is capable with fiber.

Who’s going to develop that? Well, the traditional suppliers that we talked about before don’t have an interest in developing it. Someone who’s not in the business today will develop that. The fiber industry is going through an enormous wrenching right now. The growth curve they’ve experienced in the last five years, of 30 percent a year, is over. They are going to be looking at new places to grow. New places to grow could be cable, as easily as it could be Telco running fiber to the home. So I think if cable operators would just test somewhere how fiber could be used compatibly with this new cable system or with re‑building a cable system, I think he might be surprised at how good the quality result is. We know where the competition is. You have Southern Bell. It’s building a 1,300‑home test fiber project in the Orlando, Florida area. Cable is trying to get into that same project. What is Telco delivering? Voice, data, video over one fiber to that house. I think that could be a threat.

DUDLEY: Do you want to talk more about the telephone companies?

HOROWITZ: I think the phone companies will be in our business before we know it. The only thing that stands in the way of the phone companies being in our business, or not being in our business is regulation. The phone companies have been lobbying since the day after they were broken up to get out from under all the rules that they agreed to at the point of breakup. First step will be moving jurisdiction away from Judge Green and putting it into a regulatory agency where they have had years of time to lobby. Namely the FCC. Telco and broadcasting communities are very, very powerful within the FCC and can influence what happens there. Ten years to them is one day. In the history of cable, it’s like forever. With a phone company if it takes one year, two years, five years, ten years, it doesn’t matter. They’ll nibble away at the regulation.

DUDLEY: When you were talking about cable not having friends in Washington, I guess you’re also saying that telephone companies do.

HOROWITZ: Yes, I think phone companies do.

DUDLEY: For the coming few years, when they start on that ten‑year project, they have the friendship. They’ve got the contacts. And the capitalization.

HOROWITZ: They certainly have the capitalization. The telephone companies can always say to the regulatory constituencies, “If you let us go into this new business, we will lower rates.” When was the last time a cable operator went into a new business and lowered his rates?

DUDLEY: Good point to stop. Thank you very much Mr. Horowitz.

HOROWITZ: My pleasure.

End of Tape 1, Side B