In Memoriam
September 3, 1929 – February 14, 2021
Gustave “Gus” Hauser was a recognized leader and innovator in the cable industry, developing many programming innovations such as The Movie Channel and Nickelodeon. From 1973 to 1983, he was Chairman and CEO of Warner Cable Communications, then the largest company in the cable television industry. Gus was a staunch supporter of The Cable Center and the Hauser Oral History Program.
Mr. Hauser was inducted into the Cable Hall of Fame in 2003.
Obituary: New York Times, Feb. 16, 2021
Interview Date: August 3, 1999
Interviewer: Tom Southwick
Abstract
Gustave “Gus” Hauser, a recognized leader and innovator in the cable industry, developed many programming innovations such as The Movie Channel and Nickelodeon. From 1973 to 1983, he was Chairman and CEO of Warner Cable Communications, then the largest company in the cable television industry. Gus was a staunch supporter of the Cable Center, and the benefactor of the Hauser Oral History Program at the Barco Library.
In this interview, Hauser describes his early life, education and career as an attorney. He notes his heavy involvement in the early cable industry efforts to utilize satellite communications. One example was obtaining satellite distribution capability for the 1979 nationwide launch of Nickelodeon, a children’s channel, at a time when demand for satellite capacity exceeded supply.
His company established the construction of GTE International’s first satellite earth station in Latin America, as well as the placement of an earth station at the Beijing Airport in 1972. The intent was to transmit to the United States footage of President Nixon and Secretary of State Henry Kissinger during their trip to China, and their effort to build up Chinese and American postwar relations.
Hauser describes how he started his career at GTE as a legal adviser to their international business, but moved over to the finance side involving major infrastructure projects such as local or long distance telephone systems in various countries. The company ended up doing projects in over 100 countries in 1971. From 1970-77, he also served as Director-at-Large of the Overseas Private Investment Corporation (OPIC), an organization he defines as insuring American foreign investments against the risks of war, expropriation, and incontrovertibility of currency.
After GTE International, there was a stint at Western Union International, a company that provided telegram and telex services for overseas businesses. He recalls that his relationship with this company led him into the cable television business. Western Union International was interested in possibly acquiring cable systems, and was looking at the acquisition of TCI, which didn’t work out. He chronicles how he met Steve Ross, and was introduced to his company, Warner Communications. Ross and advisors were very interested in gaining a foothold in the cable industry. For one thing, they were enthusiastic about the possibility of cable to deliver Warner Brothers movies to people’s homes.
Hauser then summarizes his thoughts at the time about cable’s potential to deliver new services beyond retransmission of off-air broadcast signals in rural areas, including more video channels, subscription packages of movies, pay-per-view and telephony. He affirms that cable was not attractive to the populace who could receive clear television reception over the air. In order to grow, the cable industry would have to expand its services. The main question was whether pay television could ever become a business. Interested in the challenge of building a cable company and industry, Hauser joined Warner Cable Communications and became CEO in 1973. He asserts, however, that he did not want Warner to expand a traditional cable business by acquisition of other systems. He reiterates his interest in developing cable to build a modern communications business.
He remembers the situation of the industry regarding lack of marketing expertise, non-existent business training or analysis as well as no organized training of personnel. Hauser’s response was to bring in many people from outside the industry who brought the necessary skills and discipline. He mentions Nick Davatzes, one of the professional managers he hired. The company initially focused on the small rural systems that were ripe for improvement, including rate increases to keep up with inflation. As a director at NCTA, he emphasized the importance of raising rates to have a successful business, believing these increases could be justified.
Hauser goes on to comment that numerous industries, including newspaper owners, appeared to have a stake in restraining the growth of cable, even if cable had not yet done anything to affect any of those businesses. A result of that was that preemptive restrictions were placed on the industry by the government. As well, telephone company charges and limitations on usage made leasing unattractive and drove cable companies to build their own, separate infrastructure. And at each stage of its development, until rate deregulation in 1984, cable’s ability to offer new services was delayed or restricted. He discusses the carriage of distant signals.
Hauser addresses the issue of lobbying, stating that Warner Cable did not rely on lobbyists, and he relates an anecdote about observing the unique lobbying efforts of Ted Turner. He defines “churn,” and identifies why it was such a problem for the industry. But he also saw another immediate issue: in his words, whether cable could develop or obtain a package of additional television programming for which consumers would be willing to subscribe and pay – on the basis of a package of additional channels, a single channel or a single program. And whether cable could, on a cost effective basis, obtain the technology necessary to deliver this new product. He affirms his belief at the time that success would mean new television channels or programs could attract advertising and be sold to other cable operators. Warner could expand its video business. Additionally, Warner Cable could successfully build and operate new cable systems in major new markets. Of course, the consequences of “success” would require considerable capital investment.
Hauser created “QUBE,” which he defines as a series of new cable services initiatives to attract new subscribers, making the business viable in all the metropolitan and suburban areas of America. QUBE was meant to be sold to existing and new cable systems. Warner Cable’s QUBE innovation spurred the development of other channels, like Nickelodeon, and MTV. He mentions Spencer Harrison, who helped him conceive, evaluate and implement the various business concepts which were involved in QUBE. He explains that they could not reasonably expect to create television programming which had never been previously seen. Basically, they would have to repackage existing television and present more of it. There would be sports, culture, and children’s programming, niche channels that would be of interest to consumers and different from network programming. But filling numerous channels with unique programming proved to be a challenge. He describes the auspicious beginnings of Nickelodeon. Hauser moves on to explain the first QUBE “box,” which allowed subscribers to press buttons and tune directly into any of thirty channels. He believes this was the first cable “box” and addressable converter. Pioneer, a business based in Japan, agreed to make the terminals. QUBE launched on December 1, 1977.
Hauser details how the company had to re-engineer the cable system to activate a reverse path from the home to the headend where it would be received and processed by a massive Data General mainframe, listing the multiple elements and essentially unlimited features that subscribers could enjoy. Between the advent of QUBE, HBO getting satellite distribution and Ted Turner’s activities, the demand for cable systems in large metropolitan areas grew. Programming channels began to charge cable operators.
Next, he chronicles how MTV came about, and how that network’s video clips affected record sales.
Hauser also recalls talking to Steve Ross and explaining that there was a possibility that information could be circulated on the cable as a “byte stream.” Using a special device, called a “frame grabber,” a consumer could extract a frame and fix it on the screen. As well, he was interested in starting, among others, an all-day news channel. (This was before Ted Turner’s debut of CNN.)
He states that the pay-per-view concept was developed as well as interactive features permitting viewers to select programs, vote, and purchase merchandise. The word “infomercial” was born to describe entire shows created by advertisers to feature their product. But advertising revenue would also become a challenge.
Hauser discusses Warner Communications bringing on American Express (AMEX) as a partner. He remembers that by 1980, Warner Amex wound up being the biggest winner of franchises, winning the big metropolitan and suburban areas, despite fierce competition. The company was accused, however, of gaining an unfair advantage in fundraising because of the QUBE system. At the time, cities were asking for many requirements when considering the awarding of franchises. Ha affirms that franchising was a process in which every company had to “play the same game.” Local people had to be hired to report on tactics, newspapers and magazines, the operation of the city councils as well as the evaluation process for bidders. However, a division grew between AMEX and Warner Communications, in part over the awarding of the New York franchise. The partnership between Warner and American Express fell apart in 1986. He explains why, including the collapse of the Atari video game business. Warner AMEX sold its programming business, including MTV, Nickelodeon and the Movie Channel to Viacom, three networks Hauser describes as some of their “crown jewels.”
In 1983, he left and formed Hauser Communications. As a pioneer of the new “cluster” concept, he assembled two of the first large “clusters” in Minnesota and around Washington, DC, becoming the largest cable system operator in those places. He recalls his strategy as not buying existing subscribers, but acquiring new opportunities to build and develop his own subscribers in choice locations, at a lower cost. He sold his systems in 1993.
In a monumental change for cable, Bell Telephone Companies entered the business. He discusses the effect of the 1992 re-regulation legislation, and its effect on the industry. He then lists the phone companies that acquired various systems, including TCI, Media One, Jones Cable and Prime Cable. He comments that the reason was to gain access to local subscribers through the video cable platform, and to bundle video with data and telephony.
Hauser briefly served as a founding investor and board member of a satellite communications business named Orion Network Systems until 1998. Subsequently, he moved into philanthropy.
He concludes the interview with long descriptions of many of the people he knew in the cable industry.
Interview Transcript
TOM SOUTHWICK: This is an oral history for The Cable Television Center and Museum. We are at The Museum of Television and Radio in New York City. This oral and video history is made possible by The Hauser Foundation Oral and Video History Project of The Cable Center Oral and Video History Program. It’s August 3, 1999 and our subject is Gustave M. Hauser, Gus Hauser.
Mr. Hauser, I wonder if you could start by telling us a little bit about your family history, your parents, where they came from and where you grew up.
GUSTAVE HAUSER: Let’s repeat for the record that this is August 3, 1999 and it is perhaps of interest, that on September 3, 1999 I will have reached my seventieth birthday.
SOUTHWICK: Congratulations.
HAUSER: I was born in Cleveland, Ohio in 1929. My parents lived in Cleveland at that time, having moved from New York. My father was a businessman. I grew up in Cleveland where I went through the public school system, and was fortunate to be invited to go to a high school which had a special program for gifted students, and which for decades had been the leading high school in Ohio. After graduating in 1947, I attended Western Reserve University in Cleveland and received my BA in 1950.
SOUTHWICK: What did your father do? What kind of business was he in?
HAUSER: He was a manufacturer of hats and caps. During my time in Cleveland, it was a place where many young people who had great expectations or ambitions found ways to leave. So I completed my undergraduate degree in just three years and found my way out by going off to Harvard Law School in 1950.
SOUTHWICK: What did you study at Case Western?
HAUSER: Liberal arts, with an English major. I then graduated from Harvard Law School in 1953, became a member of the bar in Ohio and New York, and was immediately drafted into the Army.
SOUTHWICK: Before you graduated from Harvard Law School, you met somebody fairly important, did you?
HAUSER: Actually, I met my wife, who also attended Harvard Law School, when I later returned to the Law School as an instructor, following the completion of my military service.
SOUTHWICK: I see.
HAUSER: I was drafted at the time of the Korean War and served twenty months, during which time I was on the faculty of the Army Military Police School. My assignment was to teach military police officers and other personnel the legal aspects of their job. Sometimes, when I’d finish a class, students would come up to me and say, “Well, that was very interesting b.s., but let me tell you what we really do.”
SOUTHWICK: Where were you based?
HAUSER: The Military Police School was, at that time, at Camp Gordon near Augusta, Georgia. I was bored, so I taught law at night at the local University of Georgia College extension. All this teaching lead to an interesting and unanticipated next step because, having become an instructor in law, I was asked by Harvard Law School, among others, to come back to Harvard as an instructor. I had never planned on an academic career, but the opportunity intrigued me.
Soon after I returned to Cambridge, Massachusetts in the fall of 1955, I met an entering student who was to become by wife, Rita. We have now been married for over 43 years. Women had first been admitted to Harvard Law School when I entered in 1950, and there were exactly a dozen out of approximately 1200 students. Rita was one of the earliest female law students at the School. I suppose that if you apply today’s perspective to an instructor befriending a female student you would immediately say it sounds like harassment. But you have to put yourself in the perspective of those days. It was all very legitimate, and I would only plead guilty to distraction. It was certainly not harassment and no one thought it was. We liked to think it was clandestine, but everyone knew about our romance. We got married at the end of the school year and were the first faculty-student marriage in the history of the Harvard Law School. We celebrated this event by contributing, in 1995, the Law School’s new office and classroom building. And we both serve on the Law School’s Board. The building received a major architectural award as the most beautiful new building in the Northeast.
Then another unexpected thing occurred. I was offered an opportunity by the Ford Foundation and New York University Law School to become proficient in European law. It was a time when most American lawyers who understood foreign law were beginning to retire or had passed on. They were largely people who had come to America as refugees. Most of them were by birth and training Europeans. I was the first to benefit from an effort to educate some Americans in foreign law. An opportunity was presented to me to go to Europe and learn the French legal system, as a model for European law.
SOUTHWICK: Did you speak any foreign languages?
HAUSER: I knew French and received tutoring. And this opportunity coincided very nicely with an aspect of my wife’s life. She was bilingual in French and had already received a French doctorate in political science.
SOUTHWICK: Her maiden name, just for the record?
HAUSER: Abrams.
SOUTHWICK: Rita Abrams?
HAUSER: Yes. Rita, who is American, entered Harvard Law School after studying political science at the University of Strasbourg in France. We discussed whether we would like to start our married life studying law in France. She said, “Why not?” Many in her position would have said, “that’s a deviation from the usual Harvard Law School path and I’m not going to do it”, but that wasn’t her style. So, supported by many grants and scholarships we both obtained, we went first to New York and NYU. I received an LLM, Master’s degree in foreign law from NYU and Rita continued law school. Then we went to France. I received a French diplome en droit, equivalent to a Master’s degree in French law. Rita earned a full license en droit, which is the equivalent of the basic American LLB or JD law degree. We were each first in our class. So Rita actually became a fully credentialed French lawyer before she became an American lawyer. Very unusual. We don’t know of any other American who has actually earned a French LLB. You’re wondering how all this connects to the cable television industry? I obviously wasn’t heading in that direction.
When we returned to the United States, I joined, in Washington, DC, the Office of the General Counsel to the Secretary of Defense, and my assignment was Counsel to the International Security Agency. ISA is something like the Pentagon’s State Department, and is responsible for military relationships, other than war, with foreign countries. No shooting, but lots of treaties and agreements concerning such matters as base rights, procurement, mutual weapons development programs, and international legal issues affecting our military forces. Rita completed her American law degree and joined the U.S. Department of Justice under a special honors program. She worked in the Appellate Division, which argues the Government’s cases in the Federal Appellate Courts around the country. We spent about two years in Washington, DC.
SOUTHWICK: Sputnik went up about that time, didn’t it?
HAUSER: Yes, that’s an interesting coincidence in terms of my own career. Sputnik was a grapefruit-sized communications satellite launched by the Russians. It was a first. Americans looked to the heavens and said, “What does all this mean? How far are we technologically behind? What threats? What are our reciprocal rights to orbit an object over another country’s territory?” In the Pentagon we thought a lot about this and nobody had any answers because there was no directly applicable law. I was assigned to write what I believe was the first paper that the Defense Department originated assessing international legal rights and obligations concerning objects orbiting in space. Since there was no relevant law, we looked to the law of the sea as an analogy. Today, the laws governing outer space are well established. Oddly enough, communications satellites were to be repeatedly relevant to my career.
Cable television programming networks were eventually distributed by satellite. New cable programming networks leased commercial satellite transmission facilities to transmit their programming to cable system headends. As Chairman of Warner Cable Communications and the originator of many new cable programming networks, I was heavily involved in the early cable television industry efforts to utilize satellite communications.
One example was obtaining satellite distribution capability for the 1979 nationwide launch of Nickelodeon, the children’s channel which, according to its famous chief executive officer Geraldine Laybourne, I had “fathered”. Demand for satellite capacity exceeded supply and capacity leases were traded like commodities. I learned that the then famous televangelists Jim and Tammy Faye Baker owned appropriate rights on an existing satellite, and I went to meet them at their huge television studio/church in North Carolina to negotiate a purchase. It was surrounded by acres of parking lots where the faithful parked recreational vehicles for extended periods while they attended charismatic religious television shows in the studio. Inside the studio building, everyone without exception said, “God love you brother” as I walked past or met them. But it was cash, not love, that persuaded the televangelists to part with their heavenly satellite rights and to help me launch Nickelodeon for the world’s children.
I have a published photo showing me, in jacket and tie, ceremonially digging the first shovelful of earth for the construction, by GTE International; of the first international satellite earth station in Latin America, on a sheep meadow 120 kilometers outside of Santiago, Chile.
In 1972, my company placed a satellite earth station at the Beijing, China Airport to transmit to the US pictures of President Nixon and Secretary of State Henry Kissinger on their famous trip to China to establish Sino-American post-war relations.
In the 1990’s, I was Chairman of a public company, of which I was a founding investor, which owned and operated international communications satellites.
Thus, my chance Pentagon involvement with the earliest orbiting satellite somehow became a considerable lifetime involvement in what was to become a world-wide satellite communications industry.
While I was at the Pentagon, we began the process of inserting American unarmed, un-uniformed military advisors into Vietnam. I sat, on occasion, in meetings with the Joint Chiefs to discuss legal issues such as the status of these military personnel if they were captured. This was before John F. Kennedy was elected. I can say quite reliably that by the time I left the Pentagon the US had approximately three thousand un-uniformed, un-armed American military personnel assisting the South Vietnamese. From that base grew the Vietnam War.
SOUTHWICK: When did you leave the Pentagon?
HAUSER: I left the Pentagon several months before the 1960 election, when Kennedy beat Nixon. We decided to leave Washington, DC, and I had already moved, prior to the election. We did not leave because of the outcome of the election.
SOUTHWICK: Where did you go?
HAUSER: I moved to New York, and after the November 1960 election, Rita joined me there to practice law. Rita was a life-long New York Republican and when Nixon became the Republican presidential candidate in 1960, President Dwight Eisenhower’s Attorney General invited Rita to leave the Justice Department and join the Nixon campaign brain trust, where she became a strategist, speech writer and speaker. When Nixon was ultimately elected President in 1968, Rita was again involved in the campaign and he appointed her Ambassador to the United Nations Human Rights Commission where she worked with former President George Bush, Sr. – then the Ambassador to the United Nations. She went on to an illustrious career as an international lawyer and one of the first women to become a managing partner of a major New York law firm. She chairs the International Peace Academy and is a board member of many major philanthropic arts and education institutions and “think tanks”. Upon the election of George W. Bush as President, she accepted appointment as a member of the President’s Foreign Intelligence Advisory Board.
I left the Pentagon at age 30, to become Legal Adviser to the international business of General Telephone & Electronics, the largest independent (non AT&T) telephone operating company and manufacturer of telecommunications and electronic equipment. The international business involved manufacturing and selling equipment and services overseas and the ownership and operation of overseas telephone companies. At that time, throughout the world, the only private telephone utilities were owned and operated by American companies. The rest of the world-wide telephone industry was owned and operated by governments. This was also true of television broadcasting.
GTE International was a world-wide operation which fit my international background. The move to GTE International led me into the communications business.
SOUTHWICK: You became CEO of that division of GTE as well, right?
HAUSER: After a couple of years I moved over to the business side. First, I became involved in finance, including the financing of major international infrastructure projects, such as the local or long distance telephone system of a country. I then progressively moved into the management of this international communications business. A very challenging, innovative business. We were always fighting head to head with the giants in international telephony – the Germans, the Swedes, the French, the British, the Japanese, etc. It was constant commercial warfare. So, early in my career it became logical to leave the legal profession. That’s the fate of many lawyers who go into business enterprises. They tend to be a very capable and versatile lot. The companies they are involved with discover that very quickly and lure them into management of the business they were advising.
SOUTHWICK: Where the decisions are really made.
HAUSER: My work was very exciting, dealing with many foreign cultures and meeting frequently with heads of governments.
You can ask how I came to know anything about telephony. I learned it. I’ve always been, I guess the technical word is, an autodidact; a self-taught person who can absorb, by reading and experience and observation, a great deal of the knowledge base required for a particular activity. And so I learned the telephony business and the manufacture and use of communications equipment.
My decade with GTE International involved very heavy world-wide travel during a period of tremendous expansion of American business overseas. This was a time when America had a very strong dollar. It was thought there would never be enough dollars. That turned out to be wrong, but in the decade of the ’60’s, America was buying up businesses all over the world, and that’s what we did. When I left GTE International in 1971, it was operating in over 100 countries.
I recall a specific moment when I decided that my exciting international lifestyle was exhausting even for a young man, and incompatible with a normal family life. Rita and I had discussed this growing problem. We had two young children and a housekeeper and I was far away for weeks at a time. One night I found myself in the Karachi, Pakistan airport on a stopover during a flight from the Philippines to Switzerland. It was dismal. People wrapped up in robes that looked like white sheets were lying everywhere on the floors, and the smells were not pleasant. It was 2AM. I was jet lagged and tired from long meetings and negotiations. Why, I asked myself, would I want to continue doing this? Even though my work involved meetings with heads of state and usually had major social impact, I knew I would reorganize my career to accommodate a more stable environment. And the opportunity unexpectedly materialized.
During my time at GTE International, I collaborated with a small group of leading American businessmen to conceive a US Government program of insurance to stimulate international private business investment. We authored legislation which was passed by The Congress, and I was appointed twice by President Nixon and confirmed by the Senate to serve from 1970-77 as Director-at-Large of the Overseas Private Investment Corporation (OPIC). OPIC to this day profitably insures American foreign investments against the risks of war, expropriation and inconvertibility of currency. Other Directors are, ex-officio, the Undersecretaries of the Treasury, Department of Commerce, etc. Paul Volcker, later head of the Federal Reserve Board, was one of the initial directors.
SOUTHWICK: Was there somebody at GTE who was your mentor, or to whom you reported that kind of brought you up from the legal counsel position up into the business?
HAUSER: No, I wouldn’t say there was any particular mentor. GTE was built as a company by a man named Don Powers who actually was a regulatory lawyer from Ohio, but he wasn’t a mentor. He was, however, an example of a lawyer who built a major telecommunications company and, perhaps, a role model.
I moved from GTE International, in 1971, to become executive vice-president of a public company, Western Union International. Western Union International had been spun-off from Western Union pursuant to an anti-trust decree. It provided international telegram and telex services and private international leased lines for businesses. Telex was the hot button in those days. It was growing at about 25% a year. You can now look back and see that it was wiped out by the fax machine, which is today being wiped out by e-mail. But in those days, telex was a very attractive business, growing exponentially, and it involved a lot of relationships with foreign carriers, which were government monopolies. You couldn’t route traffic into a foreign country or take traffic out and bring it to the United States without Government permission. This made the business very political.
My move from GTE International to Western Union International was made in the context of working directly with the controlling equity ownership of the public company, with the intent of making it much larger and maximizing its opportunities. Ultimately the company was sold to Xerox and later it was bought from Xerox by MCI. Oddly enough, my relationship with the company led me into the cable television business.
SOUTHWICK: How did that happen?
HAUSER: My first contact with cable came when I began looking at the cable business as a possible diversification opportunity which Western Union International could enter by acquisition. In those days, the early 1970’s, cable was not a significant industry, as you have adequately demonstrated in your book. At one point, I believe it would have been about 1972, we were offered TCI an opportunity to acquire a company called TCI. As you have chronicled in your book, TCI was in very deep trouble. Creditors were nipping at its heels, and that’s not to say anything was wrong. It was a normal condition of the early development of cable as we now remember it, and it’s fun to think back to those days. I don’t know what might have happened to TCI if I had bought it. That was my introduction to cable: a) looking at the cable industry for acquisition possibilities and b) looking at TCI as a specific acquisition.
SOUTHWICK: Did you get as far as meeting with Bob Magness?
HAUSER: No, I did not. We never negotiated to buy TCI. History shows that no one bought it, so we hadn’t passed over a jewel. At that time, it was too troubled a situation and we were not interested in getting into it; perhaps a mistake, but nevertheless, I learned a good deal about cable. This information was helpful, in a strange way, to my next step.
I had initiated a process to acquire the controlling equity interest in Western Union International, which I saw as a platform on which I could build a telecommunications empire. In that process, I became involved with a number of investment banking houses, particularly Lazard Freres and Felix Rohatyn. At that time, Lazard, and Felix personally, were very close to Warner Communications. But, at first, our discussions did not involve Warner. We discussed, in general, the possibilities of structuring a Western Union International deal. It was not simple. The financial environment in the early 1970’s was much more cautious than the go-go 1990’s. After I introduced Lazard to a major investment banking opportunity, these discussions unexpectedly turned to the possibility of my joining Lazard Freres and to meetings with Andre Mayer, the legendary head of Lazard. One can only imagine what my life would have been like had I gone down that path. But at the same time, efforts continued to put together a plan for acquiring control of Western Union International. One of the companies that emerged as a possible participant in such a plan was Warner Communications, and Felix introduced me to its Chairman, Steve Ross.
Steve Ross died of prostrate cancer in, I believe, 1992. A terrible tragedy. But in 1973 he was at the height of his powers, and a very interesting personality. Warner Communications had just purchased two small cable television companies and had about 200,000 subscribers. I’m doing this from memory. I don’t recall exactly how many there were. That was a lot of subscribers in those days. The owner of a 200,000 subscriber business was a big player in the cable industry. Steve Ross, and Warner Communications, came from a very different background.
SOUTHWICK: Different from the other cable companies, or different from you?
HAUSER: A different background from cable television operators. They knew very little about that business. The acquisitions were based more on enthusiasm and curiosity than on knowledge. Remember, in those days, few people outside the industry knew or cared much about cable. Even I, who had learned something about it, had come to that experience by accident rather than by design.
Although I had not come to discuss cable television, and had not actually been aware of Warner’s involvement in that industry, I was a very experienced communications executive, and Ross and his closest advisors immediately wanted to discuss and test their instinctive interest in cable and their reasons for acquiring a foothold in the cable industry. They expressed great enthusiasm for the potential capability of cable to deliver Warner Brothers motion pictures to individual homes.
Warner as a company had been started by Ross, who had acquired a parking lot business, and then a small private talent agency called Ashley Famous, which was owned by a talent agent named Ted Ashley. Ted Ashley then suggested to Ross that he look into acquiring what was then a very troubled Warner Bros. Studio. Ross may never have intended to focus on the film industry, but Ashley explained it, and Warner Bros. was available and he managed to acquire it. With the Warner Bros. studio came something that no one had paid much attention to: a small recorded music business, later to become the leader of a giant recorded music industry. Having become involved in video content and recognizing that cable was carrying television into homes, Ross intuitively had the sense that cable was a way to distribute the video content Warner had just acquired.
What followed was a series of discussions – a tutorial – in which I discussed with Ross and his advisors my sense of the place of cable among all communications industries and its potential to deliver new services beyond the retransmission of off-air broadcast signals in rural areas for $5.00 a month – more video channels, a subscription package of movies, pay-per-view and telephony.
As we talked, it became clear that Warner’s interest was in cable and in me, personally, and not in becoming a participant in the buy-out project I had come to discuss. At the same time, it also was becoming progressively clear that in the operative investment climate, the achievement of my plan to acquire a controlling equity interest in Western Union International would be a difficult and lengthy process with many unknowns. The conversations with Warner were interesting because they were about joining Warner to build a new and much more significant cable industry. To do this, I would have to put aside my aspiration to head my own public telecommunications company, which would have been a platform for entering many telecommunications businesses.
Now, at that time, Warner Communications was by today’s measurements a small company. But it, nevertheless, had muscle and the financial ability to pursue a reasonable business goal. Warner agreed with me from the earliest moment, that cable, at that time a limited antenna service retransmitting off-air signals into homes that couldn’t receive them, had already matured. Customers were paying about $5.00 a month (I found ultimately that many of them had been paying $5.00 a month for twenty years) for an antenna service. Its basic growth problem was that it had no attraction to people who could get clear television reception over the air. Why would they pay for something already freely available? The question was: what else could be done with this cable wire? Its technical capacity was very limited. Most systems had five channels; just enough to carry the available over-air-signals. Some systems had twelve channels, and there was even some incredible imagination and investment foolishness: a few systems had been built to the then state-of-the-art thirty-six channels. All those extra channels were empty. So from our earliest meetings I began exploring with Warner what else we could do with a high capacity cable wire, and whether customers would pay for television beyond better reception. Television was perceived as free. Customers were accustomed to paying for antennas and cable was an antenna service. Paying for more television was an idea that had not yet arrived. The question was whether pay television could ever become a business.
SOUTHWICK: I want you to tell me a little bit, if you can, about your early meetings with Ross and how he impressed you as a person. Here you had an offer from Lazard Freres, you were at the height of your career, or approaching it. What impressed you about Ross?
HAUSER: Well, as people remember him, Ross was a very dynamic person and also a very warm, engaging person. That was his hallmark. Some people felt that he was buying love, that he treated people well so they would like him. There’s something to that. He came from a very humble background. I don’t think he ever imagined being in this circumstance. He controlled a public company ultimately oriented to entertainment. It involved a lot of movie stars and music talent; they required a kind of personal attention to which he responded. He always used the company’s resources. He certainly did not use his own. It was as if he were a king of Saudi Arabia and the national treasury was his personal treasury. There were many, many stories about his extravagant lifestyle and generosity. He specialized in endearing himself to people by giving them the use of the company airplane or the company house in Acapulco or huge parties and other attractive perks and benefits. Actually that worked very well, and still does, with the movie and the rock music stars. It perhaps wasn’t as attractive for other people who were just engaged in normal business. Style aside, Steve Ross was a brilliant business tactician; very strong in math even though he had not gone to any good schools or had a particularly good education or done well as a student. He was intuitive, but he clearly was a very brilliant, detailed deal maker. Working with him was interesting, as it turned out, because he had great skills in a number of directions. He was someone whose imagination could be ignited. He was someone who wanted to take action rather than to say let’s think about it, or let’s not do it. If you convinced him of the right path, he was behind it and willing to be associated with any related risks. And he could suggest many helpful ways to accomplish the goal; he challenged the people with whom he worked, their logic, their assumptions, their methods. But he was basically supportive and encouraging.
Steve’s great generosity, as I said, was based more on the company’s capabilities than on his own personal resources. I don’t know what his actual personal charitable giving was. I’m not aware of any nonprofit institutions that exist because of his personal generosity. On the other hand, his generosity with company resources was legendary. Like the time Steve was in a hotel elevator and dropped a quarter on the floor as a bellboy was taking him up to his room. The bellboy picked up the quarter and handed it to him, and Steve gave him a five dollar tip. In fact, somebody told me just the other day that he had met a man who was Ross’s dentist and the dentist remembered him fondly because Ross had given him use of the company plane and sent him to use the company retreat in Acapulco. Who knows how many people benefited who weren’t even involved with him in business.
SOUTHWICK: Now he had a controlling interest in Warner?
HAUSER: Well, he controlled it by whatever amount of stock he owned and otherwise by the fact that he was the creator of the company and the Board members were his choice. So there was never any question.
SOUTHWICK: It was his fiefdom.
HAUSER: It was his fiefdom and what it accomplished, which was a great deal, was in large measure due to him, and he was not challenged. On the other hand, he never had a second in command or a normal hierarchical business management structure. The way he managed, and this was well known and it worked well, was to acquire the best people to run each businesses area, to make them very wealthy through a participation in success, and to leave them alone. He never became involved in any business on a day to day basis. There’d be agreement on a general concept and direction, a discussion of required funding, and for the agreed concept he would make sure the money was available or participate in getting it. After that, he would leave it alone subject only to periodic reviews. So each of the businesses was built and managed by somebody who had very great ability and wound up being a major figure in the particular industry. It was a hallmark management technique of Warner Communications applied to motion pictures or the music labels, book publishing or cable.
SOUTHWICK: And how did you actually make the decision to take this job? Did he woo you or was it just kind of a mutual understanding, or how did it happen?
HAUSER: Well, as they say in the crime world, he made me an offer I couldn’t refuse. He made a very attractive offer, and yes, it was a wooing situation and I became very interested in the challenge of building a cable company and industry, assisted by the capabilities of a substantial company. Specifically, I did not join Warner to grow a traditional cable business by acquiring other traditional cable systems. I joined to exploit the potential of cable and build a modern communications business based on cable. This had the makings of a very interesting new direction for me. It was consistent with what I had been doing and what I knew. And, of course, it was very well rewarded. In 1973, at age 43, I became CEO of Warner Cable Communications. When I left Warner in 1983 to start my own company, I was a very wealthy man.
SOUTHWICK: Warner was based here in New York?
HAUSER: Yes. It had just moved into its Rockefeller Center offices. And so for the next ten years, through much that we will discuss and much that happened in the industry, I occupied a very large office, not far from where we are this morning, at the top of the Warner building at 75 Rockefeller Plaza on 52nd Street near 5th Avenue. It was an office that looked down on the Rockefeller Center Christmas tree, which I remember doing every Christmas.
We started out in the Fall of 1973, when I took over as the Chairman of Warner Cable. We started with a situation, which was typical for cable at that time. Badly built and badly run systems providing an antenna service in rural areas. The industry had not yet entered metropolitan suburban or urban areas. Since we could not yet think of expanding into larger markets, the first thing that had to be done was to deal with what we had. Fix it before we could grow it. I moved very quickly to do some things I believe were not normal in the industry at that time, because I was able to take a professional management look at the situation. At that time, if my memory is correct, the cable industry had very few really professional managers. One of those had just taken over at TCI, John Malone, and I was probably the other one who had actually been involved in running some other business.
HAUSER: Ultimately, professional management became the norm, but in those days we were probably the two first serious professional managers. It didn’t take long to see what was needed. It needed skills that the industry and the Warner systems simply did not have. It was apparent that I had to bring in people from other companies and other disciplines who had the necessary skills. For example, there was no real marketing. Cable was regarded as a utility, and no one did any marketing in the sense that we understand it today. Operations were the result of many years of practice. They responded to no business training or analysis. How many trucks were actually needed? How efficient were they? How good was the service? How do you measure the service? The organization response to such issues was: we do what we always did starting decades back. Nobody knew or asked why. It was just done. There were poor accounting systems. Subscriber information was manually kept in drawers called “tubs”. There was great difficulty in obtaining enough information to determine what was happening. Available information was in a poor form and very, very late. Months after the events being reported. In many cases there were no reports at all, no details. There was no organized training of personnel. Employees learned on the job. People who interfaced with customers had no real training. What they did depended on their personality or the culture of a particular cable system. Nothing was uniform. Purchasing was not coordinated. I could go on and on. In terms of modern management, this was a joke. The existing business clearly had the potential of being far, far more profitable if all this was straightened out.
So the first task was to hire and turn loose people from outside who brought necessary skills and disciplines. I couldn’t afford to put people like that in every system. Remember, cable was a series of very small rural systems; there were hundreds of them. I had to install change from the top, and I created central SWAT teams which brought particular skills and programs to individual operating systems and implanted a new culture. On a typical system visit we would take out all kinds of costs: too many technical operations people, too many trucks. Or we would install functions like marketing and training. In effect, the SWAT teams would address all the things I just mentioned that were capable of improvement.
One of the big issues I focused on was the monthly charge to subscribers. At that time, cable systems were charging about $5.00 a month for service. This included systems that had been operating since the dawn of television in the 1950’s. For example, I remember that in the Palm Springs, California system, which delivered the Los Angeles television signals, the rate had been $5.00 for twenty years. It had never changed. Because of local government rate regulation, the system had to request approval for any rate increase, and, of course, the local authorities could reliably be expected to say “no”. There was no political benefit to saying “yes”. When I first suggested to the system managers that they request a rate increase, they looked at me as if I was insane and just basically said, “We can’t do it. We don’t know how to do it. What do you do? How do you get the City Council to agree?” They’d never done it. A whole new cultural approach to pricing had to be developed within the cable industry; and it later became a primary function of cable management. So I had to create a rate SWAT team which prepared all the financials, all the submissions, all the explanations and justifications and the political strategy for each system. They would go to a system, assess the situation, prepare everything for the manager, hold the manager’s hand through the process and establish the necessary relationship with the local regulators and the community. It was just plodding through the mud.
SOUTHWICK: What were the arguments that were effective with City Councils? Was it the financial argument, or we’re going to improve the system in some way, or…?
HAUSER: Well it depended on the situation and later, as we obtained some new programming, new justifications developed. But in the earliest antenna service days, the most important argument was that we simply hadn’t changed the rate in twenty years. Inflation alone mandated a price increase. In most cases, it wasn’t something that could be seriously resisted. The logic was compelling. But the politics had to be properly addressed. When you were writing your book I mentioned to you a typical incident that I’ve always remembered. I had gone, personally, to Palm Springs, California because I wanted to get a first hand feel of what was going on in the field. I was not a manager who sat in New York and just gave out instructions without understanding what the real problem was. I had to go out and do it myself. I personally obtained a pile of rate increases to show that it could be done, and to understand the problems the systems were up against and to help them devise solutions. In Palm Springs, the City Council held a public hearing in the town hall. Hundreds of people came. They were hanging from the chandeliers; it was a big event. The monthly rate was $5.00 and after 20 years we asked for $1.00 more. It was a circus. I made the presentation and was personally denounced and attacked on a brutally hot evening. You can imagine that I came out of the meeting not expecting anything good. A man who was in the audience came up to me and said, “I sympathize with you.” He explained that he was the head of a citizen’s organization which represented the elderly, and he said, “You have to understand we have many issues and this was just another occasion for us to come out and make a lot of noise and be recognized as a power here. Don’t take it personally.” That night I really understood the real nature of the rate approval process, and that the noise really didn’t matter. And yes, the City Council voted the dollar rate increase and the man that night also said to me, “You deserve it, and nobody here cares that much about the $1.00. It’s really a non-issue.”
SOUTHWICK: Local politics.
HAUSER: Bringing in people with experience outside the industry was something new for the industry, and many who joined me lived to have their own great success. I’ll come to some people later who came through this history and went on to great things. For example, I hired Nick Davatzes from Xerox for his management skills. As you know, Nick Davatzes wound up being the builder and still to this day, President of the highly successful Arts & Entertainment Network.
I hired, from telephone companies, people who were operational supervisors of a fleet of service trucks. I acquired from a variety of major, proven companies, marketing, financial, customer service and many other skills. At one point, I hired the marketing director of Avon. Avon was very angry about the pirating of their people and made a big fuss about this with Steve Ross. By that time we had American Express as a partner, and Avon complained to Jim Robinson who was the head of American Express. The marketing talent was Ed Carter, a charismatic leader who went on to be the marketing director of MCI.
The importation of these skills was like a blood transfusion. It made an immediate and enormous difference. The cash flow grew exponentially as we took out costs and raised the rates. The results were a signal for a lot of operators in the business that it could be done. It was a wake-up call. Let’s get the rates up where they should be. I was a pied piper of that concept. I said, “Here, I’ve got the people who know how to do it. They’re doing it.” And as a director of NCTA, The National Cable Television Association, I preached from the Warner pulpit an industry theme: We must raise rates to have a successful business, and we can justify it. Yes, you can do it and if you do it right, it’s not that big a deal. The industry must improve its operating parameters and to do it, it must hire people who have new backgrounds and skills. It must appropriate the best management techniques from more established industries.
SOUTHWICK: Were there Washington issues that you focused on as well in your early days?
HAUSER: Yes, of course. In those days, cable was facing many types of local and national restrictions and was hobbled from day one by the lobbying efforts of industries which felt threatened by it. The National Association of Theater Owners, the broadcast television industry, telephone companies, newspapers. Even burglar alarm companies. Cable had done nothing yet to affect any of their businesses, but there was a great wellspring of concern, based on literature that had been published, about what cable might become. Many industries seemed to have a stake in restraining the growth of cable. As a result, preemptive restrictions were placed on cable by government, responding to the theoretical concerns of potentially competitive businesses. Newspaper owners, for example, were concerned that cable would one day be able to present classified ads and reduce the revenue of the newspaper industry. Well, the threat wasn’t realistic then and it isn’t today, as you can see, but they did their best to restrict cable’s growth.
Telephone companies instinctively feared the presence of a second communications wire into each home. Since cable businesses were desperate for money, it might have been very attractive for them to lease special facilities from telephone companies who could then retain some control of the second wire. But telephone company charges and limitations on usage made leasing unattractive and drove cable companies to build their own, separate infrastructure.
SOUTHWICK: And you had distant signal limitations on the number of distant signals you could bring into a community, where you could bring them from, and so forth?
HAUSER: Well, we started out with the regulation of rates. The idea that cable, which was only an antenna facility, had to be locally price-controlled created a huge impediment to its growth by severely limiting its financial resources. You may ask why it was thought necessary or logical to regulate the cost of an antenna service. At each stage of its development, until rate deregulation in 1984, cable’s ability to offer new services was delayed or restricted. As cable struggled to provide its customers with something other than better reception, the path was, somehow, always blocked. I recall that when I launched Nickelodeon, the children’s channel, we initially asked cable operators to pay $.05 a month per subscriber for this innovative children’s programming. National distribution was negatively affected for years as cable operators struggled to get a $.05 rate increase approved by local authorities.
Carriage of distant signals was blocked in 1968 and when some distant signals were finally allowed, in 1972, it was under such restrictions and at such great cost that it really had no impact. We haven’t time to get into all the arcane restrictions that were lobbyed through the Federal Communications Commission and The Congress, but the general trend was to prevent cable from getting anything useful to improve the attractiveness of its package of services.
SOUTHWICK: How did you set up your relations with Washington? Was that done through Warner Communications or did you have your own person down there for the cable division or did you do a lot of it yourself?
HAUSER: That’s an interesting question. The cable industry’s own lobbying capability was built up over many years, but at the dawn of the modern cable era, in 1974, cable had a relatively weak National Association. Its lobbying capability was minimal. And the cable companies were essentially too small to afford their own Washington lobbyists. At that time, even Warner Communications didn’t have a Washington lobbyist. It wasn’t a company of the size that it is today with a full panoply of Washington lobbyists. And throughout my Chairmanship of Warner Cable, Warner Communications’ lobbying was never a factor in what happened to cable. Warner Cable itself did not rely on lobbyists. Frequently, I went personally to Washington to lobby Government officials and to testify at many, many, many hearings on behalf of the cable industry.
I recall going lobbying with Ted Turner a number of times, and he had a very dramatic style. He would say to a Congressman or a Senator, “If we don’t get what we are asking for, I’m just going to die.” And then he would lie down on the office floor and demonstrate the idea of dying. Or on the other hand, he would try to scare the opposition. Once, he and I and the President of AT&T spoke, one after another, to the convention of the American Newspaper Association in Chicago. Ted, I remember, told them that in 36 months (I don’t know why 36 months) cable would drive all newspapers out of business. It was so absurd that they loved it. His prediction got a tremendous laugh, but on the other hand, it spooked them a little bit and pushed them to try more aggressively to make sure cable didn’t get anywhere near their business.
But the issues in Washington were far less important than the business issues confronting cable; Washington could not create an industry. Washington could cause a lot of trouble, which it did and continues to this day to do. But, we still needed to rely on ourselves to create a product. We needed something that people would want and pay for, and that would permit cable to enter every house in the United States. This was the next stage of cable’s growth.
SOUTHWICK: I want to get back a little bit to the chronology. As you got the SWAT teams out and you began to fix some of the problems in these systems, is it fair to say that Akron and a couple of the systems which were in more urban areas was the next issue that you began to focus on and how to fix those?
HAUSER: Yes. It was part of this march to the future, but unfortunately the future had arrived too soon in two cities – Columbus and Akron, Ohio.
SOUTHWICK: And you had inherited those? I mean those were part of your properties when you took over at Warner?
HAUSER: Yes.
SOUTHWICK: And those had been part of TV Communications, which was Al Stern’s company?
HAUSER: Yes, and Cyprus Communications which was Burt Harris’ company. Two companies that had been acquired.
Both those systems had been optimistically built with 36 channel plant, which was the state-of-the-art. These were facilities which, I believe, no other cable operator in America had yet built, because they were very expensive and there was no apparent need for 36 channels. In those systems, seven channels were being used and 19 were empty. The business in those systems was consequently unique. Whereas a normal cable system could expect to have a stable, reliable subscribership, these systems were extremely unstable. Residents of Columbus and Akron had no broadcast television reception problems. They could only be induced to sign up and pay for cable service by the prospect of receiving something more to justify the price. When reality failed to meet expectations, they disconnected. This was a costly demonstration of the national problem cable faced in expanding beyond a rural antenna service. Each month the systems connected newly marketed subscribers and disconnected even more disappointed subscribers. We called this phenomenon “churn”, a word eventually added to the industry’s vocabulary. The systems were buckets with holes in the bottom. Subscribers were poured in at the top and they, predictably, leaked out the bottom. And the money spent was a total waste.
I realized very quickly that we would soon run out of potential customers. There were only so many homes, and once they had all tried the service and disconnected, there was no future. And cable service would obviously have received a very black eye. When a consumer tries a product and says, “I don’t need this.” It is very hard ever to get them back. So we said, let’s not spoil these markets by continuing this hopeless and costly process.
Subscribers in these systems could receive television off-air and without cable: the three networks, an independent and a public broadcasting station. Cable supplied a distant, out of market, signal and a time and weather display. It was clear that only a relatively few customers were willing to pay for this modest enhancement. The experience of the industry at that time was that distant signals were not, alone, a strong enough product to induce many customers to pay for cable service.
Rather than shut down these two technically advanced systems, we decided to minimize the losses and buy some time to fund and develop a product which could attract and retain subscribers in these and similar markets. We simply stopped attempting to get new subscribers and let the subscribership float down to a tiny core group who were, for some reason, permanent.
The urgency of this problem caused me to turn my attention immediately to the challenging task which had attracted me to Warner Cable. This was the origination and development of a television product which consumers would pay for and which would enable cable to enter America’s major markets and become a major industry.
It was clear that cable could not be expected to develop and offer, overnight, all of the services imagined by writers of science fiction, untroubled by cost or risk concepts. Cable was seen by them as a broadband pipeline carrying vast quantities of information in electronic form. Rather, I saw the immediate issue to be whether cable could develop or obtain a package of additional television programming for which consumers would be willing to subscribe and pay – on the basis of a package of additional channels, a single channel or a single program. And whether cable could, on a cost effective basis, obtain the technology necessary to deliver this new product.
At that time, I began putting together the concept of something which became known as “QUBE”. It was just an abstract name for a series of new cable services and initiatives that, hopefully, taken together, and recognizing that not all would be successful, would attract subscribers and make the business viable, not only in Columbus and Akron, but in all of the metropolitan and suburban areas of America.
SOUTHWICK: Now was this prior to the launch of HBO on the satellite or about the same time? What’s the sequence there? Actually, we have to stop for a tape change, so maybe if you want to take a little break this would be a good chance to do so.
SOUTHWICK: We were talking about the development of QUBE and I was curious as to where that came in the sequence of events relating to the launch of HBO on the satellite. Was QUBE conceived prior to that or around that time? How did that develop?
HAUSER: First, I think I should describe the situation at Warner Communications. Virtually no one in Warner Communications was technically trained or had any background in technologically based businesses. It was a company devoted to media as content, but not to technology. Whatever had to be done was something that I had to convince Steve Ross to fund. His vision of what cable might be was a general one, such as had been printed in many publications and books: that cable could carry many types of information, that it might one day be the “information highway” as some now call it. But how to get there or exactly what to put on beyond movies, that was something that wasn’t a formed idea. Really, what I had to do was put together a business plan and explain it and get Steve Ross to buy into it and provide the funding. After all, we were part of Warner and anything that we did in the cable business was reflected on the Warner balance sheet. The concept required his participation and, as I said earlier, once he got into it he was very helpful. I started down this path with a look at what we might possibly do to make cable viable in new markets, using Columbus and Akron as examples. These efforts foresaw virtually all of the product and technological developments that marked the subsequent progress of the cable industry.
The implications of this strategy were not ignored. Success would mean that these new television channels or programs could attract advertising and be sold to other cable operators. Warner could expand its video business. Success would also mean that Warner Cable could, successfully, build and operate new cable systems in major new markets. The consequences of success would require considerable capital investment.
Consideration was given to achieving immediate growth by acquiring existing rural cable systems. But absent a new product, the acquisition of mature, rural cable systems seemed unattractive. If a new product proved successful, it would be far more economically advantageous to exploit it and build cable systems in large, new metropolitan markets than to focus on paying for existing subscribers in rural areas. New subscribers in urban/suburban markets were actually cheaper and had far greater potential. In effect, it would be cheaper to build than to buy and we would capture the future of both cable content and operations. On the other hand, if the new products were not successful in attracting subscribers, cable was a business that neither I nor Warner wanted to be in.
To build new cable systems required the receipt of local franchises. I assumed that in the competition which would surely develop, we would get our share. And in the worst case, we would be the owner of successful new cable programming networks. In effect, the goal was to develop two new businesses: a cable programming business and a major cable system business in metropolitan, suburban and urban markets. If successful, the QUBE package of programming channels and services could be sold to existing and new cable systems throughout America. The assumption was that success could always be funded.
History shows that the new content was, in fact, developed; that cable was able to build out the rest of America; that a massive growth opportunity attracted sufficient financing; and that America’s innovation was copied throughout the world.
One of the earliest products to be developed in Warner Cable was a channel devoted to motion pictures. The development of the HBO channel and Warner Cable’s Star Channel (now The Movie Channel) was more or less simultaneous and preceded the further QUBE development. As early as 1973, because of Warner’s focus on movies, one of the new services which appeared logical was to package an all-day channel devoted to motion pictures to be made available on the basis of a special subscription. Warner Cable started testing this product in its own systems in 1974. Technologically, video tapes were mailed to the test cable systems and played by Sony U-Matic machines (an early, professional VCR) through the system into the homes of paying subscribers. By a mechanical device, called a trap, non-subscribers were blocked from receiving this pay channel.
The concept was by no means an immediate success. The cable systems were located in rural areas where many subscribers, culturally, regarded the available motion pictures as “dirty”. Acceptance by existing subscribers was less than overwhelming. Delivery was horrible; the U-Matic machines frequently broke down in the middle of a showing, and couldn’t be rapidly repaired. Repairs were made slowly by dispatching engineers. The major question was whether consumers who had not otherwise elected to subscribe to cable, would be willing to do so in order to further subscribe to the motion picture channel. Would they pay, say $6.00 for basic cable in order to have the privilege of paying another $8.00 for a package of motion pictures? The results were not encouraging. Star Channel, alone, did not seem to be the magic bullet.
At the same time, HBO was being developed by Time, Inc. and, presumably, encountering the same results for the same reasons. While the Warner Cable experiments were being conducted on its owned and operated systems, Time, Inc. did not, at that time, own cable systems, and so conducted its pay TV experiments on cable systems owned by others. When it became possible to distribute programming by satellite, HBO was the first to try it. Star Channel, renamed The Movie Channel, eventually was also nationally distributed by satellite to all cable systems. In what later became a distribution race between HBO, The Movie Channel and another movie channel called Showtime, HBO leapt ahead of the others because it had established an early lead in distributing its package to cable systems around the country. Satellite distribution was, obviously, a great improvement over tapes and Sony U-Matic machines and solved a major technical problem. But consumer acceptance in the rural markets remained unimpressive. Pay TV, as it was called, became a corner-stone new product when it was joined with other new content, enabling the cable industry to expand into metropolitan markets.
Standing alone, a subscription television movie channel was not, at that time, a sufficient reason for masses of consumers to subscribe to cable and major metropolitan areas to be built. More services were needed, and Warner Cable was at the forefront of the multi-channel cable television revolution which followed. Warner Cable focused its attention on QUBE, which was a general concept anticipating nearly every cable industry innovation. It resulted in the development of such highly successful new channels as Nickelodeon, the children’s channel, and MTV Music Television.
SOUTHWICK: Before we get off of this, where did the name QUBE come from? Who thought that up and why? It doesn’t stand for anything?
HAUSER: No, it didn’t. The development of the QUBE service concept was a process which did not begin with naming. The process began with imagination and business planning. Two different skills were required and neither the cable industry or Warner Cable had either of them. Once again, I assembled a SWAT team recruited from companies outside the existing cable industry. Many well-known alumni of that SWAT team have been and are major figures in the cable industry and in cable programming networks. I needed people to help me imagine and create television products which never previously existed, and at an unimaginable low cost. And I needed people to develop the technology to deliver these products in ways which had never before been attempted, again at a low cost.
Any comprehensive effort of this kind was going to require an investment, and the great advantage of being a part of Warner Communications was that Warner Communications understood the challenge, recognized the potential benefits and advanced the funding for this SWAT team. If you were to ask why all this activity began within Warner Cable and not elsewhere, the answer is that Warner Cable was at that time the only industry’s visionary with the means to implement such ideas.
To obtain cooperation and funding support from Warner Communications, it was essential to educate and fire the imagination of Steve Ross. I remember that I had early on explained to him that there was a possibility that information could be circulated on the cable as a byte stream – this was all before personal computers and the internet – and a consumer could, with a special device, extract a frame and fix it on the screen, permitting it to be read. The device was called a “frame grabber”. It was a word that Steve fixed on and used generally for the rest of his life to refer to many services and devices. He spoke often about “frame grabbers”, and people have asked, “Where did he get that term?” From me, that’s where he got it. It was part of the education process.
Steve liked the QUBE business plan, and we then sought the input of Warner Communication’s managers of the motion picture and recorded music businesses.
SOUTHWICK: In house.
HAUSER: In house, yes. I could always sit with them around a table and we could talk realistically about these new developments. What could we do to start a subscription pay service like Star Channel? When we got to MTV, how could a music channel get video clips made by the recorded music companies? MTV was initially rebuffed by record companies such as CBS, and the support of Warner’s record labels in making video clips was crucial to the early success of that new channel. We had a great in-house consulting group.
By the way, this consulting had pluses and minuses. For example, there was a day when I wanted to start, among others, an all-day news channel. Since we had no in-house source of news content, I had talked about a joint venture with Kay Graham, owner of The Washington Post, which also owned Newsweek magazine. All this preceded Ted Turner’s initiative to launch what became Cable News Network (CNN). We had reached a conceptual deal, with The Washington Post, and one day Mrs. Graham came to join me and Steve Ross for lunch in Warner’s dining room in New York. Surprisingly, she said: “This is too big a project for my little company.” Later, she told me on a number of occasions that this was a mistake she regretted.
At that time, Warner was funding QUBE and its special programming initiatives such as Star Channel, Nickelodeon and MTV. A news channel would have involved additional capital commitments, but Ross was willing to assure such funding. However, The Washington Post withdrawal from the project created an opportunity for some of the in-house consultants to reinforce their doubts. They said no one would watch news on cable because cable would be going up against established broadcasting deities such as Walter Cronkite. The dissenters included people like Ted Ashley. I will not name them all. But faced with my saying “let’s do it” and an in-house chorus of programming experts saying “it won’t work”, Ross punted and said “let’s wait”. It was the only time he avoided a decision, and it was fatal because Ted Turner then created CNN.
SOUTHWICK: Right. Warner wasn’t the only company that reached that conclusion. Can you just talk a little bit about some of the people on the programming SWAT team?
HAUSER: Perhaps it would be helpful if we talk about people in the context of the specific things we were trying to do.
First, a word about the man who worked most closely with me in developing the QUBE programming concepts. Spencer Harrison was a man who came from Warner Bros. and who has died of cancer. In early 1974, he joined me, full time, from Warner Bros. where he had been number two. Spencer had previously been in charge of business affairs at CBS, and was a partner of Ted Ashley in the talent agency business. More than anyone he understood the content side of what we were attempting to do. He knew nothing about technology. Spencer worked closely with me to conceive, evaluate and implement the various business concepts which were involved in QUBE. To all of this he brought great judgment and a deep understanding of the broadcasting, advertising, talent agency, motion picture and recorded music businesses. He became a close personal friend and a mental soul-mate. He actually moved to Columbus, Ohio to assist with the implementation of QUBE service. His premature death was a personal and corporate tragedy.
We looked first at creating new video content to fill up empty channels. To do this, it would not be necessary to reinvent the wheel. We could not reasonably expect to create television programming which had never been previously seen. We would, basically, have to repackage existing television and present more of it. There would be sports, there would be culture, there would be children’s programming. Whatever was on broadcast television we were going to do, but a lot more of it and in a unique fashion. We would organize the programming into niche segments, each designed to fill an available channel and attract a particular interest group.
SOUTHWICK: Excuse me, but I think this is important. The idea was to have each channel devoted to each of these genres, rather than a whole bunch of channels, each with a lot of different things on them. You weren’t going to replicate the broadcast networks?
HAUSER: That’s correct. The only way we could expect to attract subscribers was to offer a video menu they would be willing to pay for – and it couldn’t look the same as broadcast television. There was no point in having nineteen more NBC or CBS channels. Besides, we couldn’t afford it. What was needed was enough programming to fill up many more channels at a very low cost. No one in the world had enough money to fill up – say – nineteen new channels with fresh, new never-before-seen-television programming. It was hard to imagine cable revenue ever being able to meet such a challenge.
But we also realized that, in addition to motion pictures, a great deal of video programming material was available, and that in view of limited distribution outlets it could be obtained at low cost. We would present this programming in thematic or “niche” formats unique to a particular channel and to a particular audience.
As to the SWAT Team: On Spencer Harrison’s suggestion, I brought in Mike Dann, former President of the CBS network, as an overall expert and thinker about new ways to fill up video channels, recognizing that we would not attempt to reproduce CBS. His creative ideas and contacts proved invaluable.
I decided that we should have an all-day children’s channel, and hired Dr. Vivian Horner to execute this concept. She was a professor who had been with the Children’s Television Workshop. We were able to acquire long-term rights to children’s programming at very low cost, both in the US and abroad. It was evergreen; it could be presented over and over to new members of a particular age group. When QUBE service started in Columbus, Ohio, a core original segment called “Pinwheel” was produced in the QUBE studio. I selected the name “Nickelodeon” from a list presented by professionals. Eventually this channel, under the magical leadership of Geraldine Laybourne, was developed and distributed to cable systems nationally by satellite. As originally hoped, it became one of the most valuable cable programming networks. I believe Nickelodeon was the first cable programming network containing material assembled or created specifically for cable television.
SOUTHWICK: John Lack was another one?
HAUSER: Yes, John was not a member of the original team. John was a radio executive and I hired him later when I tilted heavily in the direction of radio as a source of talent because the QUBE concept of a package of niche programming channels was much like radio. Even motion pictures were presented in thematic form. We conceived the concept of drive-in movies, horror movies, romance and adult movies on separate channels. Each channel was devoted to a particular niche audience. So, I brought in people with radio programming experience. John became the manager of the QUBE programming initiatives.
The development of the QUBE concept began in New York in 1975. In 1977, the entire QUBE team moved to Columbus, Ohio in preparation for the launch of the service in December, 1977. In 1979, the QUBE programming team was split between those who remained in Columbus to implement the service and those who moved to New York to initiate a national cable programming business, including Nickelodeon, MTV and The Movie Channel.
As we shall see, the package of channels and services which eventually became the QUBE service foresaw virtually all the later developments of the cable industry. For example, a culture channel was a precursor of the Arts & Entertainment Channel; a documentary channel was a precursor of The Discovery Channel; a sports channel was a precursor of ESPN; a live, local channel was a precursor of local cable news channels; the QUBE adult channel was a precursor of the Playboy and similar channels; the pay-per-view concept was developed as well as interactive features permitting viewers to select programs, vote, and purchase merchandise. The word “infomercial” was born to describe entire shows created by advertisers to feature their product.
In New York we talked a lot with advertisers about the possibility of obtaining support for the niche programming concept. Would there be advertising revenue for an all day children’s channel? Would there be advertising for movie channels that had different genres – romance, horror, adult, whatever? The initial response of advertisers was very dim. They didn’t seem to understand this at all. It was virtually unthinkable. Their minds had not even begun to evolve to where they are today. They were dominated by parochial concepts of cost per thousand. The idea that they could have a niche audience that had been self-selected – a targeted demographic – penetrated their thinking only very slowly.
We engaged major professional firms that helped us think through the problems of launching these new channels and naming them. For example, you asked me where the name QUBE came from. In this process, a list of potential names was proposed, and finally, after sitting through hours of discussion, a decision was required and I chose “QUBE”. The name didn’t mean anything, but of the choices it appeared to be the best. Same with Nickelodeon. Many names were proposed, and at one point I said, “Okay, I vote for Nickelodeon”, and history was made.
The technology developments which accompanied the QUBE service development were also very impressive. They anticipated, by decades, digitization and other technological advances which are the cutting edge of cable service today. The most basic technical problem of going to “high capacity” cable by presenting 36 channels of programming was how subscribers would access these channels. Normal television sets had tuners capable of selecting 13 VHF channels with a knob. Some had a second knob used to select poorly viewed UHF channels. We would have to supply the QUBE subscriber with a separate tuner capable of selecting up to 36 channels. This fundamental requirement led to the assembly of a technical SWAT team which began to address the frontiers of cable technology. Normally, cable companies relied on suppliers to develop and offer equipment. We set out to develop new equipment which would be required for the new QUBE services. The team developed a QUBE “box” which allowed subscribers to press buttons and tune directly into any of 30 channels. This was the first cable “box” and addressable converter.
I decided the capability of offering subscribers an option to purchase motion pictures or other video events one at a time would be a priority. This coincided with the interests of Warner Bros. and came to be called “pay-per-view” services. We proceeded to invent and develop this concept long before the existence of the VCR and the home video business. At its 1993 Pay Per View Conference, the Cable & Telecommunications Association for Marketing dubbed me the “Father of Pay Per View”.
HBO and The Movie Channel offered subscribers an opportunity to subscribe to a monthly package of motion pictures. Would subscribers be interested in purchasing a single motion picture or event? Could this content be offered “on demand” rather then at pre-scheduled times? What were the economics of this business?
Technically, the pay-per-view concept required that subscribers be able to order a single program and for the cable operator to limit viewership to those electing to pay. At first we sought the participation of telephone companies in a concept that would permit orders to be placed by making a telephone call. But the telephone companies expressed no interest at that time. Eventually, the cable industry was able to offer pay-per-view services with a telephone ordering system. But when we originated the pay-per-view idea, it became immediately clear that the subscriber order would have to travel from the subscriber home to the cable headend over the cable wire! Two-way cable, with communications to and from the home, was the answer. Fantasized in literature, but never before tried or implemented. The subscriber could order a program on “impulse” merely by pressing a button. Surely a superior marketing approach, if it could be technically accomplished.
We had to design a “box”, or home terminal, figure out how to send information upstream from the subscriber’s home to the cable headend, and how to manipulate this information once received. Computers and software were required. The SWAT team was augmented, and we continued to dream.
The home computer industry did not exist; Microsoft did not exist. We had to develop all our own software, and so I had to hire computer-knowledgeable people, in the vanguard of the software development process in this country. We had to re-engineer the cable system to activate a reverse path from the home to the headend where it would be received and processed by a massive Data General mainframe. It was the most elaborate computer ever connected to a cable system. Information was collected from each home, brought back over the cable through a low-band return path, and made accessible to the computer without excessive noise and interference. Cable systems in those days were vulnerable to ingress of all kinds of noise, which distorted the data and made the results problematic. Every six seconds, the computer swept all customer terminals asking each one: Are you functioning properly; what channel are you tuned to; which response button is being pressed.
Once we had the capability to obtain and process this type of information, it was apparent that we could do a lot of other things, and we dreamt on. In addition to channel selection buttons, the QUBE terminal was designed with five special buttons which could be pressed to provide an interactive response. Subscribers could order information and purchase merchandise. In effect, we initiated home shopping long before there was a home shopping channel. It was more like today’s Internet electronic shopping. Subscribers could be polled. They could respond to questions. They could give their opinions. They could vote and participate in programs. They could play video games involving other subscribers. The QUBE technology was the precursor of today’s $20 billion video games industry and the Play Station, Nintendo and X-Box capabilities. The imagination had no limits at that point. Interactive cable was born. Subscribers could participate in programs, determine the outcome, call the next football play. We’d sit around the table and invent all these things that are today either available or about to be available in the cable industry.
We also were able, and this presented some problems, to determine the channel every set was tuned to every second of the day. The computer would print it out before your eyes. It could be done for a particular subscriber or a whole city. And even for the whole country if the equipment were in place. This was an absolutely 100% accurate Neilson rating, and it immediately raised questions of privacy. I ordered our general counsel, Richard Berman, who’s now a Federal judge, to write the industry’s first code of privacy. Once we went into operation, the computer room that received this information was locked and triple locked and only a few authorized people could get into it. No record was ever kept of anybody’s individual viewing pattern, although technically it was possible. Everybody understood that if any subscriber’s personal viewing habit were ever observed or tracked, we and the industry would have a very big problem. I’m happy to say that the security was never breached.
The potential use of these facilities became a nationally discussed issue. Direct voting was a major concern of political scientists. Advertisers drooled over the information which could be available to them. For Warner Cable, an early by-product was the ability to ascertain the exact audience for each channel at every moment in the day. For example, when the earliest video clips that led to the development of the MTV channel were played on the system in a one-hour program called Pop Clips, the computer could report the viewership for this program, minute by minute, for each video clip. The doom of the Nielsen rating method was foreseen.
We talked to many manufacturers to get a box engineered and manufactured. Nobody wanted to touch it. I did much of the talking myself. I talked at length with IBM about the future of all these computer driven developments and the convergence of television and the computer business. But, in those days IBM was asleep. They thought the development might be very important for their business, but they were not going to do anything about it. I finally resorted to Pioneer, in Japan. I picked Pioneer because they had a relationship with Warner in the music business. Pioneer made hi-fi and stereo equipment and partnered with Warner in the distribution of recorded music in Japan. Pioneer had a large hi-fi equipment business in the United States in those days. They were very interested, and as a result of this, I put Pioneer into the business of making terminals for cable television. They are a major player to this day. I and our engineers went to Japan; and with Pioneer we designed and priced and arranged for the manufacture of the box. I actually have one of the last remaining copies of the first home box or console. I am giving it to The Cable Center and Museum’s collection.
SOUTHWICK: When QUBE launched, on December 1, 1977, it generated a huge publicity wave in the U.S. All of the major broadcast networks covered the event.
HAUSER: Yes, it made the nightly news on all the networks. The Cable Center has a copy of a fascinating tape including Walter Cronkite, Jane Pauley, etc. It represented a new departure. It said cable is really about many of the things that had been discussed in books but that the public has never been exposed to. Cable actually could do much more than provide better TV reception or a subscription channel of movies. And we had a local channel which allowed subscribers to interact with their TV sets by pressing buttons on their consoles. I remember discussing this with Ross and speculating that if we did this right we could have a local television station which would reach the entire community and we wouldn’t have to get a license from the FCC.
SOUTHWICK: And people could respond to what the person on camera was saying and vote as to what they thought about an issue?
HAUSER: Yes, we even had the equivalent of a “gong show” in which the audience could continually rate a performer. Viewers would press their buttons “yes” or “no” and the collective results were displayed in real time by a bar on the screen. If the performer failed at any time to get a majority of votes, he would be yanked off. It was like the lion’s den in the Roman Forum.
SOUTHWICK: All of this publicity and excitement about QUBE played into your hands in terms of your efforts to win franchises?
HAUSER: Well, no one was seeking franchises when the QUBE project was begun in 1975 or launched in 1977, and I clearly did not create the QUBE service in order to get franchises. It has to be a proven business concept or no one would seek to invest in new franchises. Certainly QUBE was an asset when franchising activity began about 1979, but it wasn’t designed just for that purpose. Eventually Warner Cable was the most successful competitor in the franchise wars.
SOUTHWICK: What was the reaction in Columbus when it first started? Did it significantly increase the number of subscribers to the cable system?
HAUSER: Oh yes, absolutely. It stabilized the subscriber count at a much higher level and made the system economically viable. Remember, the subscriber count in Columbus was down to an absolute and uneconomical minimum. QUBE attracted real, long term basic cable subscribers who, in addition, bought pay-per-view movies. Many subscribers were spending, in those days, $15 a month on pay-per-view. In fact, QUBE’s success resulted in a credit problem. It became apparent that we were giving open credit to subscribers. They could buy as many movies or events as they wanted. At the end of the month they got a bill, which could just be too big for a particular subscriber. Somebody would just pig out and buy $100 worth of movies. In those days $100 was a lot of money. Credit limits had to be established and enforced.
In view of the remarkable initial enthusiasm for the pay-per-view concept pioneered by Warner Cable, it seems useful to consider its evolution from its initiation as part of QUBE to its current year 2001 status as “video-on-demand”, commonly regarded as the “killer application” of the modern cable industry’s most advanced technological capabilities. Virtually unlimited consumer choice. Pay-per-view on cable has always been more technologically complicated, but far more versatile than the subscription pay packages like HBO or The Movie Channel. And, today, video-on-demand over cable appears capable of making obsolete the VCR-based home video business and turning the TV set into a single channel that delivers any programming a subscriber wishes to see at a particular time.
The policies of the owners of the movies and other programming have, naturally, exerted a major influence. Subscription pay packages and, later, home video, have always received much earlier programming release dates or “windows” than pay-per-view service. This policy, which I have always argued is not in their long term interest, has always hampered the growth of the pay-per-view business and, similarly, threatens the bright future of video-on-demand. Protection of today’s revenue stream has blocked the emergence of even larger revenue and customer service opportunities.
SOUTHWICK: Between the excitement that QUBE created and HBO going on a satellite and Ted Turner and so forth, there began to be pretty soon a demand in the big cities for construction of cable systems, right?
HAUSER: Yes, and cable operators began to feel more confident about investing in metropolitan areas which up to that time had not been seen as cable markets.
SOUTHWICK: How did Warner react to that?
HAUSER: With great satisfaction, of course, because cable now seemed to have a product which was demonstrably able to get subscribers to pay for it. But before I discuss franchising, a few more words about that product. That product and its credibility grew without real industry planning. Warner Cable contributed to this process in the QUBE environment, and really foreshadowed almost every cable programming network that was later and separately established. I’ve always regretted we couldn’t, ourselves, exploit all of these concepts.
All through the industry the idea of new cable niche programming channels blossomed. Each had an unique and well-documented history, but many things in common. They reflected an accepted wisdom that cable operators could successfully package and sell these new networks to attract subscribers in new markets. They could be cost effectively distributed by satellite. And, very importantly, these new program channels could be supported not only by traditional advertising, but also by payments received from the cable operator. Nickelodeon was one of the earliest to charge the cable operator. This fundamental relationship was not a foregone conclusion. There was a theory at the beginning that the programmer should pay the cable operator for providing access to his customers.
SOUTHWICK: That’s the way the broadcasters did it.
HAUSER: Yes, and in fact that’s how it has worked in Germany. The programmer pays the cable operator for access. Most of the industry initiatives to create new programming networks were backed by cable operators. It was not the work of the traditional originators of television programming, whether broadcast networks or motion picture companies.
And most of the new cable programmers obtained their programming in the same way as QUBE. Not being able
to afford original programming, they bought and recycled existing programming. When Nickelodeon started, the people who were involved, first Vivian Horner and later Gerry Laybourne and Ruth Otte (who became the President and COO of the Discovery Channel), and Anne Sweeney (who became President of Disney cable programming), bought children’s programming all over the world, much of it non-verbal. Only when Nickelodeon became successful could it afford the transition to original programming. The Discovery Channel has probably bought the rights to every shark movie ever made, and now makes its own.
SOUTHWICK: If you would, talk a little bit about how MTV started.
HAUSER: MTV, like Nickelodeon, grew out of QUBE. Had there never been the initiative to do QUBE, and the experiment in Columbus, none of the people who were involved would ever have been hired. They were from outside the industry. We can only speculate as to whether or how they might otherwise have found jobs in the industry or ever met each other. So the one thing they all have in common is that there was Warner Communications, Warner Cable, QUBE and Columbus, Ohio, and everything they accomplished grew out of that environment, including and starting with the fact that they were hired by Warner Cable. The QUBE alumni club is very large and very impressive.
Once we had identified the radio business as a source of niche programming talent, Mike Dann and Spencer Harrison brought to my attention John Lack of CBS radio. I hired him in January of 1979 to be responsible for the already existing QUBE programming effort. QUBE had launched in December 1977, and had already developed the Nickelodeon channel and the initial QUBE niche programming concepts. Nickelodeon was being readied for national satellite distribution in 1979.
The idea that video clips could be used to illustrate recorded music and that these clips could initially be shown on QUBE and ultimately bundled into a satellite network was an evolution, rather than any individual’s invention. A creative team at QUBE was in the right place at the right time. The MTV embryo grew in the womb of Nickelodeon.
As I recall, John Lack had seen rudimentary video clips used in England to promote records. Absent English FM radio jockeys, the clips were played in theaters before and after movies as well as on TV. Seeking to broaden the demographic reach of Nickelodeon by introducing music oriented programming, he had some clips made in the Nickelodeon studio in Columbus and contracted outside for the production of others. These were eventually bundled into a one-hour segment on Nickelodeon called “Pop Clips”. The QUBE computer immediately showed a growing and desirable audience for this segment. From this humble beginning in Nickelodeon grew the concept of a separate cable network based on music video clips, which has become the world’s most widely distributed television network.
Obviously, since MTV is such a success, as is Nickelodeon, many people would like to be credited with having invented it, but I think it’s well understood in the whole industry and certainly by everyone in the QUBE alumni club that the development of MTV was a process in which a number of very talented people, working together in the QUBE environment, participated and contributed, and there is no one inventor, founder, or creator.
SOUTHWICK: The QUBE computer could tell the number of viewers watching the video clips.
HAUSER: Exactly. But equally important was the impact in retail stores where the records were being sold. Playing a video clip resulted directly in higher sales. The business concept was that the record companies would promote their own records by making clips for exhibition on cable. Warner Records was an early participant. Others like CBS Records were slow to react. Eventually, “cutting a video” became a matter of prestige for recording stars. Ultimately, video clips became probably the most expensive video programming per minute – more than any motion picture or TV show. The creative production of video clips is contracted out by the record companies. I’ve often joked that MTV has created more jobs for dancers than ever existed in the history of the world.
About the time I hired John Lack, we realized that an important goal of the QUBE initiative was being realized. We were in the cable programming business with The Movie Channel, the Nickelodeon channel, a possible music channel and many more programming ideas. This business had outgrown its experimental roots in Columbus and should be located and managed in New York. This was done.
In April of 1979, John brought to me the impressive resume of a young Robert Pittman, who was Program Director of WNBC Radio in New York. He was hired, initially, to work in New York on The Movie Channel. Early on, he became involved in the ongoing development of the QUBE video clips into a national music channel, later called MTV, and became its legendary CEO.
As you can see, the basic QUBE concept was vindicated. Filling cable channels with niche programming proved successful in Columbus, Ohio. Niche programming channels were started by others, and cable operators decided that it was worth paying for this programming. The sheer volume of this product, the filling up of channels, the multiplicity of special interest groups being satisfied, the loyalties that were built up among fans of particular channels proved to be the recipe that enabled cable to expand at last into the metropolitan markets, and to seek new franchises. For existing cable systems the business concept was simple – buy three new channels for thirty cents a month and sell them as an additional programming package for a dollar a month.
SOUTHWICK: And that’s what made it viable in the big cities.
HAUSER: Yes, absolutely. So, as they say, the gold rush was on.
Before we talk about franchising or the partnership with American Express, I believe it would be useful for me to provide some overall perspective about the QUBE experiment and what became of it.
The QUBE experiment was certainly a success for Warner. It’s development cost, much of it in home terminals which were used for many years, was about $20 million, an investment recovered many times over by the programming and cable operating assets which it achieved for Warner.
Naturally, the costs of mounting the QUBE experiment were never expected to be supported on an ongoing basis by a single cable system. The business concept was to syndicate or roll out this content and technical package to existing and new Warner Amex cable systems and to the systems of other cable operators. In the early 1980’s, this was actually done within Warner Amex’s new metropolitan systems. The QUBE programming initiative jump-started the franchising and construction of new cable systems and put Warner Amex at the forefront of a new cable programming industry. Ultimately, as many niche cable programming channels were developed and made available by others, it wasn’t possible or useful for a Warner Amex QUBE programming package to be syndicated throughout the growing industry. The niche cable programming which QUBE demonstrated as required to attract new subscribers was finally growing by spontaneous combustion.
Consumer demand for constantly changing interactive programming formats seemed to make this earliest interactive television initiative too costly on an ongoing basis. And, because the QUBE technology was not widely available, there was no real opportunity, on a sustained and comprehensive basis, to test the willingness of subscribers to make purchases by pressing a button on their consoles. The industry is, today, still struggling to develop the full potential of such “killer applications” which represent the most attractive elements of cable’s future. Interactivity and e-commerce.
Although QUBE as a defined service package was abandoned after 1984, virtually every unique element of the QUBE experiment is represented today in what cable television offers its subscribers and what it depends on for its future.
QUBE served the industry well. To legislators and government officials it demonstrated early on that cable was a business worthy of respect and encouragement. And to its own industry it demonstrated that a package of new products, not all of which would individually succeed, could attract new subscribers.
SOUTHWICK: Do we want to talk about franchising first or American Express or do we want to talk about them together?
HAUSER: It’s all simultaneous. They don’t come one before the other but I think we should take a minute to talk first about American Express. Amex became a partner by buying a half interest in Warner Cable in 1979, just as the big franchising effort took off. American Express was, as it turns out, one of a number of major companies that bought into cable and ultimately found it wasn’t their cup of tea and then bailed out to their everlasting sorrow. Following its original business plan, Warner Cable had commenced seeking franchises, won a few, and was seeking more. As anticipated, building them would require considerable capital investment. It was a nice problem to have. Warner Communications was still a fairly small company by today’s standards. Warner Communications total market capitalization was about $850 million dollars. Small in today’s terms. I realized with Steve Ross, who was certainly financially very, very shrewd, that if Warner Cable were going to grow, a lot of capital would be required and the debt would all be on the Warner Communications balance sheet. This was going to be bigger than Warner Communications could handle. As it later turned out, Warner Cable proved to be capable of incurring substantial debt on its own balance sheet, secured only by the cable business. The banks were very impressed by Warner’s cable business. But in 1979, Warner Communications expected that it would have to support this debt, and that it would be a very, very big threat to its balance sheet. We were not facing anything that hadn’t been anticipated, but Ross decided to keep the debt off the Warner Communications balance sheet by bringing in a partner. This had other advantages to Warner Communications, which I will describe.
The search for the right partner was undertaken by Lazard Freres and Felix Rohatyn. Among others, he came up with American Express. They were particularly interested because of Warner Cable’s QUBE interactive service capabilities. Amex saw a lot of synergies with its merchandising and credit card operations and they wanted to diversify. Why was American Express chosen? I think, looking back, they represented to Warner Communications an image that Warner Communications wanted to cultivate which would be helpful, not only financially, but in terms of being very, very white-shoe and clean. American Express was an icon. To have them join Warner Communications, which was a struggling kind of company that had been brought out of nowhere by Steve Ross who was facing charges which had never been resolved, would have obvious benefits. The U.S. Government finally dropped all charges, but no one seems to know what they were about or whether they had any merit.
SOUTHWICK: But it was a blotch.
HAUSER: It was a blotch at that moment in time, and being a partner of American Express would make things look a lot better.
SOUTHWICK: So you ended up with two chiefs to report to.
HAUSER: Yes. The company was renamed Warner Amex Cable Communications. Warner Amex had a board of directors, which included Steve Ross and Jim Robinson, who was the Chairman of American Express, and Lou Gerstner, now the head of IBM, who was then President of American Express. Later, they were joined by Sandy Weill, now the head of Citicorp. Weill’s brokerage business, Shearson, had been acquired by American Express. It was quite a stellar Board and, of course, it had its problems. All partnerships do. I’ve always found that partnerships are very difficult in business and usually don’t last for very long.
SOUTHWICK: Particularly equal partnerships where it’s fifty-fifty, which it was in this case?
HAUSER: Yes, it was fifty-fifty. But regardless of the legal relationships, over time the persons involved in a partnership can change, businesses look different and it’s a family that usually starts fighting.
SOUTHWICK: But initially, getting back to the franchising effort, I assume that this partnership was a big help.
HAUSER: Well, certainly financially. We were able to raise the necessary funds with no difficulty. Everybody understood, and this was the main reason Amex had joined: that Warner Amex was going to grow explosively by building a lot of new franchises. You may recall that some people in the industry preferred to grow by buying up existing traditional systems instead of seeking franchises and building new systems. But clearly the economics of building a new system were far better than paying someone for an old system which then had to be rebuilt. And somebody had to build new systems or there wouldn’t be any to buy. When the franchising process began, the only systems available for purchase were the traditional mature rural systems. In order to seriously grow the business somebody had to go out and build cable systems in the rest of America. The industry had its ups and downs borrowing the money and attracting the stock market support that was required. Warner Amex initially established a $250 million dollar line of credit which was ultimately expanded to about $800 million dollars. At that time, this was the largest credit line ever granted in the industry. Most importantly, it was not guaranteed by the parents. The lenders were, obviously, very impressed by Warner Amex and its business prospects.
SOUTHWICK: And how did you structure, in terms of looking at where you would franchise and how did you structure the team that handled that and those kinds of issues?
HAUSER: Well, franchising was something that we had some familiarity with because of the prior history that I mentioned with respect to getting rate increases.
SOUTHWICK: You knew how to deal with city councils.
HAUSER: Learning how to deal with the political environment – local city and county governments. Again, I did what I always did, which was to bring expertise to the problem. There were so many franchises and so many stories and situations relating to each of them, that nobody could keep track of franchising while running another part of the business. So I developed another big SWAT team and I hired Dick Aurelio to run it. I knew Dick through my wife, who was involved in politics. He had been a Deputy Mayor under John E. Lindsay in New York. I thought he was the perfect person for this job. He understood politics, he understood local government, and he had a lot of direct experience. Dick turned out to be a jewel. We created a famous and highly successful team which included a young Ken Lehrer, now Executive Vice President of AOL Time Warner.
The SWAT team would prepare all proposals, follow up and deal with the cities. Because the franchise process was a one-time unprecedented activity in most cities, it created a very strange environment. Warner Amex wound up being the biggest winner of franchises. In one year, 1980, we won about a 1.1 million out of 1.6 million households that were awarded nationwide that year. More importantly, we won the big metropolitan and suburban areas. The competition was fierce, and personal.
It was the only time that the otherwise brothers of the cable industry, who knew each other and were actually very fond of each other and today are still personal friends, went out and fought each other head to head. As a result, there was a lot of acrimony and a lot of back biting and accusations. It was a bitter period. Once the franchising wars ended, everything went back to normal.
Competitors suggested that QUBE was invented essentially for the purpose of getting an unfair advantage in franchising. It was usually said that the winner of a franchise offered too much, and that the resulting franchise was uneconomical. The winner always disagreed. In the real world, if you think back to those times, the local authorities honestly believed that cable could and should do certain things. They were vastly misled by advisors and consultants who suggested all sorts of things to ask for. They were following the thesis of books that had been written about what cable might theoretically do. The cities wanted it all, now. For example, they wanted a lot of public access channels that the government would be free to use. Most of those channels have never to this day been used for the hypothetical purposes for which they were intended. The idea was that the public could now have access to television. At that time, unless you got on CBS or NBC, you couldn’t get onto television. Public access offered a television channel accessible by any citizen. It turned out that most people do not, in fact, want to be on television. Many of these channels go unused or are used for purposes never intended. Everything from trivia to pornography or self-amusement for a few people who are exhibitionists – not harmful, but still, not worth the money. I recall a requirement that the winner plant 20,000 trees.
SOUTHWICK: Sacramento, California
HAUSER: Yes. It was an example of many legendary demands. Such demands were usually put into the requests for proposals, and there was a first round in which bidders either said yes to all of them, or they would be eliminated. History shows that most bidders said yes because they didn’t want to be eliminated, on the hope that reason and judgement would one day prevail. So over-promising was always what the winner was accused of doing, although everyone had probably offered the same thing. Did all bidders agree to plant the 20,000 trees? Of course.
SOUTHWICK: It was also a two step process. You would win the franchise and then you would actually negotiate a contract and sometimes you could modify a little bit.
HAUSER: Yes, but bidders didn’t go into the process on an insincere basis. Of course, some of the things that were patently not doable had to be discussed later. You had to get to the table and then discuss what was clearly impracticable or impossible. But as we look back historically, for those who won, nothing that was ultimately required was a reason to regret having accepted the franchise. Planting 20,000 trees or building a library added to the capital cost, but given the values that have been created, would we today happily plant 20,000 trees to get the Sacramento franchise? Of course. It’s not even discussible. Would we build a library? Sure. So, in retrospect, I don’t believe anyone promised anything that so seriously debilitated the business that it was rendered uneconomic or prevented them from making a fortune. Candidly, we all did extremely well and if we gave away something, so what?
SOUTHWICK: Was the process, from the political point of view, largely clean or were people trying to hold you up? Were there local pols who said if you line my pocket I’ll give you my vote? I would think the temptation would be enormous.
HAUSER: I’m glad you’ve asked that Tom, because it has always been an issue. I think history now shows that the process was clean. It’s not just my personal opinion. Other than the one situation, which really wasn’t a franchising issue, but it was with a franchising authority, where Irving Kahn…
SOUTHWICK: Johnstown.
HAUSER: …was convicted of responding to an extortion request and that made it bribery. Other than that, I’m not aware of a single instance in which anyone was ever even prosecuted for any such act. So it was a singularly clean activity. Franchising was a process in which everybody was forced to play the same game. Local people had to be co-opted to support each franchise application. Imagine you’re a cowboy and you ride into town, you don’t know anybody and you’ve got to get this here franchise. What do you do next? You hire a local lawyer or somebody knowledgeable about community affairs. Common sense.
SOUTHWICK: A local person.
HAUSER: Yes. You don’t hire a councilman; he’s got to vote. But you hire somebody to tell you what’s what. Who are you supposed to talk to? What tactics should you use to educate the public? What’s the newspaper situation? What’s the magazine situation? How does the Council operate? What is their thinking? How will they evaluate the bidders? Everybody developed local help and paid for it. They paid for it pretty much in cash. It was aboveboard. They were consultants.
SOUTHWICK: You were particularly effective, as I recall, at least in Pittsburgh, in involving minority groups in developing your franchise proposal and being involved in the whole process, which helped as well.
HAUSER: Such minority involvements were standard in major cities. There was an effort to reach out and work with local groups, to get their support. All bidders, logically, had to do the same thing. Many found themselves in a situation where, to be competitive, they had to recruit local “partners” and give them an equity interest. But it was always disclosed.
All of this was imposed on the industry by the process of local franchising. Bidders were required to mount efforts in literally hundreds of places, and it was like placing a bet that you’d win. You could lose for any reason, and never know why. I remember in one city, I believe it was Tucson, Arizona, the Council had eliminated all but two bidders, Warner Amex and one other. They were deadlocked. They went into a back room and came out saying that they couldn’t resolve the deadlock, so they chose a bidder they had already eliminated. It was Cox from Atlanta. Cox wasn’t even present at the meeting because they thought they had no chance. The Council declared Cox the winner, and since no one from Cox was even at the meeting, the Council instructed its staff to call Cox in Atlanta and tell them they had won. So there could be major disappointments for no reason. I pity these poor officials who were asked to make a decision when they didn’t understand the business or the technology and were inundated with advice from their own and other experts and consultants. Ultimately, their decision had to be based on enthusiasm for a bidder, but there was no bribery. I’m not aware of any bribery or any situation where an illegal contribution of money was made, and the history is clear on this.
SOUTHWICK: How much of a role do you think it played in your victories that you had the QUBE system up and running and were able to demonstrate and show people that what you were talking about was real and could work as opposed to talking about something that was a pipe dream?
HAUSER: I think QUBE service was, undoubtedly, a positive in most franchising situations. That didn’t mean we automatically won, but it helped that Warner had an image of being very progressive.
QUBE helped the industry in a lot of strange ways that were never anticipated. I’ll go back a little way to the legislative situation. We faced a moment in the cable industry when, the Nixon administration was threatening to promote legislation that’s always a mistake in technologically oriented businesses: regulate business conduct in advance to deal with a problem that doesn’t yet and may never exist. Deal with perceived perils.
The White House Office of Telecommunications Policy, and then certain Congressman and Senators, sought to separate a virtually non-existent cable programming business from cable system operations. The reason was a fear that if cable operators ever built all the newly franchised cable systems, they would favor carriage of their own programming on the cable systems they owned. The way to prevent such a possible conflict was to prevent cable operators from developing and owning cable programming. This proposed legislation was a dagger in the heart of the industry. Government is capable of making terrible mistakes, and they were about to make a big one. The cable industry had virtually no programming, and no one else would make any programming for cable. Where were NBC, CBS, ABC? They were the greatest programmers in the world and they did not take this opportunity to create programming for this new distribution platform, because it was a potential competitor.
Were cable operators to be separated from the creation of programming, the dream of filling up the channels would never be realized, because we could not rely on others to develop a product. With NCTA, I went to Washington and met with Lionel Van Deerlin, at that time a congressman from San Diego who was the head of the House Telecommunications Committee, and with other legislators and White House officials. We showed them QUBE and we took them to Columbus and said, “Do you want all this to happen?” “Oh yes!” “Well, if we stop doing it, who is going to do this for cable? Name one organization, company, person who will create any of this programming and offer it to cable operators. Who are we relying on?” Congressman Van Deerlin freely admits that those meetings killed the legislation and prevented a disaster from happening. Tom Wheeler, then President of The National Cable Television Association, always credited QUBE with this legislative success.
So, QUBE was effective in ways we never imagined or planned, and one of them was in franchising. But franchising was not really on the agenda when we started. And while a goal of QUBE was to create a cable programming business for Warner, I could not have planned that QUBE would produce the MTV and Nickelodeon networks, and that they would go on to be among the most widely distributed and valuable cable programming networks – worth $30 billion dollars or more, today, and constantly spinning off additional niche networks.
SOUTHWICK: As the franchising process proceeded, though, the systems that were contemplated became much more elaborate. I think you started out in Pittsburgh with a fifty-four channel proposal and by the time you got to Dallas, it was a hundred and some channels.
HAUSER: Well, the cities kept escalating their demands, and an ever-increasing entry level seemed to develop. As I have previously said, anyone who didn’t agree to the city’s set of basic requirements was eliminated as a bidder. Each bidder had to decide whether to accept these requirements in order to stay in the process. As it turned out, cable systems constantly needed more channels than originally installed and capacity upgrades became normal. The one hundred channel system was obsolete when it was built.
SOUTHWICK: But it made your partner nervous, or it started to, at American Express?
HAUSER: The attitude of American Express toward the cable business was affected most by considerations other than franchise negotiations and construction investments. When Warner Cable entered into the partnership, American Express was very aggressive and wanted to pursue all growth opportunities in cable operations and new programming networks.
And Steve Ross always wanted to pursue the original business plan aggressively. Warner Communications was never a problem. So, at the outset of the partnership, Warner Amex couldn’t pursue and build enough new franchises, and when Warner Amex became the industry’s biggest winner, American Express and Warner Communications were both ecstatic. The files are full of individual letters expressing their happiness. But American Express acquired the Shearson brokerage business a year or so after investing in Warner Amex, and conflict soon developed within American Express between the two cultures and between Jim Robinson and Shearson’s Chairman Sandy Weill, personally. Both of them are my friends, and I see them to this day. But at that time, due to well-publicized personal rivalry having nothing to do with Warner Amex, they became antagonists.
SOUTHWICK: We were talking about American Express as your partner and you indicated that initially they were gung ho and wanting to bid everywhere and win all the franchises they could. How did that begin to change?
HAUSER: It was a fight which Sandy Weill ultimately lost, and the Shearson business was ultimately divested. But as it unfolded, the Shearson organization was publicly critical of Robinson and his business judgments. One of the Robinson business judgments which came under attack was the comparatively miniscule investment in Warner Amex. The Shearson management knew virtually nothing and cared very little about the cable television business. But it was tempting to accuse Robinson of entering a business which was not making any money, in the sense of showing a net profit. The commonly accepted nature of the capital intensive cable television business was, and to this day remains, one in which interest and depreciation charges associated with growth and investment, delay net income. The business is judged on the basis of earnings before interest and depreciation. But the Shearson management elected to leak stories questioning Robinson’s judgment in getting into an unprofitable business. In effect, they were bad-mouthing a perfectly normal cable business for purposes of their own internal struggle. Warner Amex became a pawn in this struggle within American Express.
On a number of occasions I said to the Shearson contingent, “If you don’t like the Warner Amex cable business you should get out of it, but, on the other hand, there’s no benefit to publicly bad-mouthing and harming your own property. Why don’t you stop this campaign?” But it didn’t stop. Warner Amex, often recognized as the most professional company in the business, was by executives of one of its own parents, being critiqued in ways it certainly didn’t deserve. The value of all the Warner Amex new system builds and of the new programming business was discounted and said to be a costly liability. Warner Amex’s growth threatened to come to a complete stop at this point because Warner Communications advocated the aggressive pursuit of the business and American Express, as a result of its internal conflict, became very bearish. They locked horns one day on the New York City franchise. I was about to win the New York City franchise…….
SOUTHWICK: For the outer boroughs.
HAUSER: Yes, and Ross wanted it badly, and American Express said, “Let’s not take it.” I certainly wanted to take it. The partnership was clearly headed in the direction of a break up at some point.
SOUTHWICK: Did that come in a Board meeting, the issue of what to do about the New York franchise, or was it memos or how did this work?
HAUSER: Board meetings and private conversations. I had one part of my Board saying, “How soon can we get this franchise?” And the American Express representatives were privately saying to me, “Let’s not do it, and if Ross wants it why don’t you convince him not to.” Ultimately, I did accept the New York City franchise. New York is, today, the world’s largest cable system.
SOUTHWICK: I don’t want to interrupt you here, but by this time had the partnership split up into two – one for the cable operation side and another for programming?
HAUSER: Warner Amex never split into two separate partnerships or businesses. However in 1980, for tax reasons I can’t recall, the programming assets were moved, technically, into a subsidiary company we called Warner Amex Satellite Entertainment Company (WASEC). By that time, the growing Warner Amex cable programming business and personnel, Nickelodeon, MTV, The Movie Channel etc., had relocated from Columbus, Ohio to New York City, and I gathered them in WASEC as the programming part of Warner Amex. The Warner/American Express partnership continued to be conducted under the Warner Amex umbrella, and all financial results and debt were consolidated.
SOUTHWICK: And did all that come under your jurisdiction or did you specialize in the operations side?
HAUSER: I was Chairman of Warner Amex.
SOUTHWICK: Of the whole thing, okay.
HAUSER: Yes, that is what my contract said. But before the Warner Communications-American Express partnership fell apart in 1986, I left to form my own company, in March 1983.
SOUTHWICK: Was it the New York franchise situation that really caused you to leave or just the whole…?
HAUSER: No, I was just describing the New York franchise situation as an example of what was going on. The unnatural situation became progressively difficult and was clearly unworkable. In March, 1983 I left to launch my own cable television business, HAUSER: Communications, Inc.
The Warner Cable properties had grown from less than 200,000 subscribers to approximately 2 million subscribers, without any acquisitions. New systems were under construction, and a major cable programming network business had been established.
Just to summarize the Warner Amex situation: In 1986, American Express finally brought about a divorce from Warner Communications. American Express bought one-half of the Warner cable business for $175 million dollars plus the assumption of about $25 million of debt. The deal was good for Warner Communications. It got back all of the money it had invested in the business, plus a profit and still owned half of it. And having a partner was expected to be helpful in financing the expected explosive growth of the business. When American Express decided to withdraw, they pulled the trigger on a buy/sell clause, which permitted one party to make an offer to buy out the other party. The offeree was then required to sell or to buy at the offered price.
American Express was in a hurry to exit, and recognized that Warner Communications was at the time financially troubled due to the collapse of its Atari video games business. American Express made a low-ball offer to Warner to purchase Warner’s one-half interest in Warner Amex for $450 million, expecting that Warner was not in a financial position to make a purchase even at this low price and would be forced to sell to American Express. So, at the same time, American Express made a back-to-back deal with large cable operators TCI and ATC to take Warner Amex off their hands, at the same low price. TCI and ATC must have been salivating. The market value of all the cable subscribers, all the unbuilt or partially built cable systems and the programming business was valued by analysts as considerably higher than the American Express offer implied.
Although Warner was experiencing serious financial troubles resulting from the Atari video game debacle, it was able to arrange for the sale of enough Warner Amex assets to buy out American Express, to show a profit on the deal and to increase its participation in the cable operating business by owning 100% of Warner Amex. Warner sold the Warner Amex cable programming business, including MTV, Nickelodeon and The Movie Channel to Viacom. In effect, it had been forced to sell some of its crown jewels. Today, the value of MTV and Nickelodeon networks probably exceeds $30 billion. It is interesting to recall that when I launched Nickelodeon as a national, satellite delivered cable network, my first annual budget for it was about $1 million.
The unwinding of Warner Amex was obviously and by any analysis a terrible deal for American Express. They probably left over a billion dollars on the table. Even if they were in a hurry to get out, there were better, quicker, easier and more lucrative ways to do it. In the end, the cable television venture was a profitable investment for American Express, but they failed to participate in the real value of the property at the time of their exit, and certainly failed to participate in the subsequent explosive growth.
SOUTHWICK: Tell me about HAUSER: Communications. How did that start?
HAUSER: Well, when I left Warner, in early 1983, after ten years, I was a kind of icon in the business, which meant that I could name my deal. Major investors, such as the partners of the investment bank Salomon Brothers, flocked to the opportunity to participate with me on my terms. Commercial banks lined up to lend me money. So, coupled with my own resources, I was in a position to raise whatever financing I needed to buy anything I wanted. I could have retired at 53, but the opportunities were great, and I was ready for one more round. Rita assured me that the best was yet to come. She was right.
The wiring of America was underway. Many new players, particularly large companies, had entered the cable business and stumbled or otherwise could not accept the normal absence of net earnings from their cable operations. Newly granted franchises were waiting to be built, or were only partially built, by major companies which had, wrongly, become disillusioned. Even Warner Communications was induced by its financial difficulties and American Express to sell off major new cable systems, like Dallas, Pittsburgh or the St. Louis suburbs, at distress prices. For someone like me, this was a feast of opportunities.
I saw the prospects for new systems and understood what their value would be. They had to be in major metropolitan areas, with attractive demographics, and in “clusters” permitting economies of scale. They had to be new, only partially marketed, or even unbuilt. I was a pioneer of the “cluster” concept, now accepted wisdom in the industry.
SOUTHWICK: And where were these?
HAUSER: I targeted and assembled two of the first large “clusters” in Minnesota and around Washington, DC, becoming the largest cable system operator around Washington, DC and Minneapolis/St. Paul. For example, I bought the very large Montgomery County, Maryland system from the Tribune Company, which had obtained the franchise, built a small part of it, picked the wrong high-tech equipment and faced huge problems with its subscribers and with the County. Tribune was desperate to leave. I tore out all their equipment and just threw it away.
SOUTHWICK: It’s probably at The Cable Museum now.
HAUSER: No, it was trashed. It wasn’t worth exhibition at The Cable Center and Museum. Building such a large, sophisticated system was a special problem because there were already subscribers being served, and their service had to be protected. It was like operating on a patient without anesthesia. Montgomery County is a large and affluent suburb of Washington, DC with great public visibility. Among the subscribers were high U.S. Government officials, diplomats, high level business executives, Senators and Congressmen. For the sake of the cable industry, the service had to be impeccable.
Another example: From Westinghouse I bought, at distress prices, systems serving over 40 contiguous franchises in the affluent Minneapolis, Minnesota suburbs. They were completely constructed but, as yet, only minimally marketed. Westinghouse had simply decided to exit the cable television business.
In effect, rather than buying existing subscribers, I acquired new-build opportunities and developed my own subscribers in choice locations at a much lower cost.
When I had assembled about 500,000 subscribers, Rita convinced me that I had done enough, and that it was time to sell. By that time I had already bought out most of the initial investors in these systems, and proceeded to sell the systems sequentially at, then, record retail prices. In March of 1993, FORBES magazine said that “the cable television industry is losing an owner, but the FORBES 400 is gaining a new member”.
A transaction that received major news coverage was the $700 million sale of the Washington, DC area cluster to SBC Communications (formerly Southwestern Bell Telephone). It marked the entry of Bell Telephone Companies into the cable industry, and upon the announcement, cable stocks jumped to a 52 week high.
Paul Kagan’s industry newsletter said the deal “shook both the cable and telephone industries to their core”. In his book “Megamedia Shakeout” released at that time, Kevin Maney of USA Today described it as “the deal that shook the telecommunications world”.
SOUTHWICK: You got in just before the passage of the ’84 Act, which de-regulated rates, and then you got out just before the passage of the ’92 Act, which re-regulated rates. Your timing was perfect!
HAUSER: I’m happy to say that as Vice Chairman of the National Cable Television Association I had a lot more to do with the de-regulatory 1984 legislation. I was very involved in that legislation, working particularly with then Congressman Tim Wirth, who was at that time head of The House Telecommunications Sub-Committee. It was a great victory and set cable free to innovate. Once cable operators were able to pay for it, the number and quality of cable programming channels increased markedly.
But getting back to the transaction with SBC Communications: It set a new landmark for the value of cable subscribers. And it marked the entry of telephone companies into the cable business after a long history of mistakes. SBC went on to do a deal for the acquisition of Cox Cable, which failed because of the re-regulation legislation in 1992. Bell Atlantic bought TCI, a deal which also failed because of the legislation. Bell Canada bought into Jones Cable and Bell South bought into Prime Cable. U.S. West bought a 25% interest in Time Warner’s cable and certain other businesses, and Nynex (now Verizon) invested $1.2 billion in Viacom. These telephone companies jumped in for the same reason that AT&T later acquired TCI and Media One (formerly Continental Cable): to gain access to local subscribers through the video cable platform, and to bundle video with data and telephony. In those days, the Internet phenomenon wasn’t yet on the near-term horizon. My SBC deal had set off a major development in the industry and in American telecommunications, adding to the industry’s credibility and raising all values.
SOUTHWICK: How did the deal with Southwestern Bell come about? Did you put your company up for sale, or did they come to you or how did that happen?
HAUSER: I didn’t put the company up for sale. Only cable systems around Washington, DC were involved. My other cable systems were sold separately to other buyers. The SBC deal came about as a result of my relations with the investment bankers at Salomon Brothers. One of Salomon’s major clients was SBC, and I was personally acquainted and had worked with the Salomon investment bankers. The Salomon Brothers partners had actually invested in one of my early deals, and their spectacular returns were a legend at the firm. Salomon believed, early on, that telephone companies should be very interested in acquiring cable television properties. As a result, Salomon invited me to talk with SBC about this concept. One day SBC said, “Why don’t we buy your Washington, DC cluster.”
SOUTHWICK: And they had been involved in cable in the UK, so they knew something about how the industry worked, I think.
HAUSER: Yes. SBC started out as the smallest of the so-called Baby Bells, but it was the first to expand internationally. After acquiring Pacific Bell and Ameritech, it has become one of the two largest telephone companies in America. It is regarded as the most progressive. So it was no surprise that SBC was the first Bell to enter the cable business. After my sale to SBC, it contracted to purchase Cox Cable. But the cable rates were just at that time re-regulated. Ed Whittaker, the Chairman of Southwestern Bell, a very able and extremely decent man, got spooked. He said one day, “I’m already in a regulated business. I don’t want to be in another.” He may have made a mistake because, as it turns out, Cox became enormously more valuable then the price that was being discussed, and the regulatory restrictions affecting rates were terminated in 1996.
Having sold all of my cable properties, I wound up focusing briefly on one other business of which I was a founding investor. It was a satellite communications business called Orion Network Systems. I now had the time to serve as Chairman of the Board of Orion until it was sold to Loral Space & Communications in April of ’98.
SOUTHWICK: And Orion actually launched and operated satellites? Communication satellites?
HAUSER: Yes, the real thing, in geo-stationary orbit. They cost nearly $300 million each.
SOUTHWICK: Going back to 1957.
HAUSER: Somehow my career started and wound up with some relationship to the satellite communications business.
SOUTHWICK: I want to get a couple of things on the record here. Do you have children?
HAUSER: Yes, I have a daughter and a son. They live in New Hampshire and California.
SOUTHWICK: Are they involved in the business in any way, or are they off on their own careers?
HAUSER: No, they’re in their own careers.
SOUTHWICK: Very good. You’ve also been very active in a number of charitable organizations. I know you’re the largest, or one of the largest donors, ever to Harvard Law School and maybe if you could just mention a couple of those.
HAUSER: I have gradually withdrawn from the active ownership and management of commercial businesses. And, with Rita, I have turned much of my attention to philanthropy in the United States and around the world. Rather than managing our wealth to maximize it for future generations, our focus is on the development of creative ways to make it available to philanthropy during our lifetimes or soon thereafter. We believe that one’s philanthropic efforts should “sunset” after a reasonable time, rather than seek to preserve capital for philanthropic project that continue in perpetuity. We would rather apply all our means to solving current problems rather than tie them up in trusts intended to be funding some projects hundreds of years in the future.
One vehicle to achieve our goal is The HAUSER: Foundation which has been functioning for about 15 years. Rather than support a bureaucracy to respond to requests for grants, The Foundation normally joins with us to fund the many philanthropic activities in which we are involved or significant projects which we originate and implement through working with existing institutions.
Some examples of our philanthropy: A very successful project has been The HAUSER: Center for Nonprofit Organizations at Harvard University, established in 1997. The Center brings together all the impressive resources of the University – economics, law, business, medicine, etc. – to provide scholarly analysis of the phenomenon of philanthropy around the world, to encourage this phenomenon, to assist leaders or practitioners, to improve the management of nonprofit organization, to inform public policy and assist donors to evaluate and understand their opportunities. The HAUSER: Center has become perhaps the most highly respected center of thinking about what may be the fastest growing sector of the American economy. We are pleased to have conceived and funded it and to serve on its Board of Directors. Our $13 million gift to Harvard Law School, where my wife and I met some 45 years ago, was at the time, the largest gift ever made to any law school in the world. It substantially raised the standard of what is a major law school gift. Several even larger gifts to law schools have since been attracted. And our continuing support for Harvard Law School will at least double our initial gift.
Another project: With New York University Law School we conceived and funded The HAUSER: Global Law School. Internationalization is widely recognized as the next major development in American legal education. It has moved from a local focus to a national focus and must now move to an international focus. The HAUSER: Scholars program brings top foreign lawyers to study law in the United States. The terms are so attractive that it is regarded as a reverse Rhodes Scholarship. The Global Law School program brings foreign law professors to teach alongside their U.S. counterparts and explain their legal systems. The basic law school curriculum is revised to assure that every student understands how the same problem is handled in the U.S. and by foreign legal systems in places such as Europe, Islamic nations, China and others. This program is being copied by law schools throughout the country.
For over a decade we have funded the recordings of the New York Philharmonic Orchestra, because recorded classical music has not been commercially viable. Rita chairs and we fund the International Peace Academy which, working with the United Nations, provides research and policy guidance for the leadership of peacekeeping forces from around the world.
Working with The Museum of Television & Radio, I have developed and helped to fund an International Council which, annually, brings together the heads of media companies from around the world at a meeting outside the U.S. The next meeting will be held in Beijing, China. I have also developed and funded a New Media Center which organizes programs for the intellectual discussion of issues involved in the convergence of traditional television with the Internet and telecommunications. The international outreach of The Museum of Television & Radio has also lead to the globalization of The Museum’s video and audio archives by the addition of foreign programming. The archives of China dating back to 1949, are already available to be followed by Hispanic, European, Indian and Japanese collections.
SOUTHWICK: I wanted also to just sort of fire a bunch of names at you. I think, there’s an extraordinary number of people who have worked for you and gone onto careers in the media industry, some of them quite spectacular, and I’d just like to fire a few names at you and just have you give me a quick synopsis of how this person came to work for you and what they did. Nick Davatzes?
HAUSER: That would be my pleasure.
SOUTHWICK: And you can add to this later, after you get the transcript. I don’t want to make this an exclusive list because we’re bound to leave somebody out.
HAUSER: No, it’s too long for this interview. There are probably forty-plus people, all of whom are heads of major organizations.
SOUTHWICK: That’s amazing.
HAUSER: I believe it’s the largest alumni club in the industry.
SOUTHWICK: I think that’s true.
HAUSER: They’ve done spectacularly. But let’s try a few names you’ve got on your list.
SOUTHWICK: Okay, Nick Davatzes.
HAUSER: Nick, a wonderful human being, I hired him away from Xerox. He had never thought of being involved with cable television. I hired him into what was then Warner Amex. He was initially in charge of human resources and later of large, new metropolitan area system start-ups. After I left Warner Amex, Nick became President of the Arts & Entertainment network and built it into one of the most successful of all the cable networks.
SOUTHWICK: Scott Kurnit.
HAUSER: Scott was a member of the early QUBE team, responsible for various programming functions, particularly interactive programming. He was one of the pioneering QUBE thinkers. His experience led him to become executive vice-president of Prodigy and, later, President of Viewer’s Choice pay-per-view. How did Scott know about pay-per-view? Columbus, Ohio. He started his own internet company, About.com, took it public, and eventually sold it to Tom Rogers’ Primedia.
SOUTHWICK: Gerry Laybourne.
HAUSER: Gerry was brought into the Nickelodeon fold by my initial head of the Nickelodeon development, Dr. Vivian Horner.
SOUTHWICK: Gerry was a schoolteacher, wasn’t she, at one time?
HAUSER: She was a schoolteacher who became a producer of children’s video programming and an outside contractor for Nickelodeon. She joined Nickelodeon and became its legendary CEO and a national asset. She was responsible for the great success of Nickelodeon, and is a truly wonderful human being. Now CEO of Oxygen Media – women’s network with Oprah Winfrey – her career is very well known. Among the people she developed at Nickelodeon were Ruth Otte who became COO of The Discovery Channel and Anne Sweeney who eventually succeeded Gerry as head of The Disney cable programming networks. Before her momentous leap from Nickelodeon to Disney, Gerry came to me one day and said, “You are the father of Nickelodeon. We want to do a segment on how Nickelodeon started. The kids want to know.” But we never had time to do it.
SOUTHWICK: Ron Castell.
HAUSER: Ron was the head of marketing for Bank One in Columbus, Ohio and was active in local Ohio politics. He knew everybody in Columbus who mattered. I hired him to head QUBE marketing and to deal with local government matters. It was taking a duck to water. He was an outstanding marketing executive and an engine of ideas. After Warner Amex, Ron wound up building the Blockbuster video rental business with Wayne Huizenga. Ron was the marketing genius of the home video business and also made Blockbuster’s arrangements with the movie companies. The home video rental business was the successor to the QUBE pay-per-view concept, and Ron’s transition was easy to understand.
SOUTHWICK: Isn’t that amazing! John Evans.
HAUSER: I originally came to know John Evans in 1974 as a fellow Director of The National Cable Television Association. John represented the Southeast region, and continues as an NCTA Director to this day. In 1983, when I left Warner Amex, John had started an early metropolitan cable system in Arlington County, Virginia (next to Washington, DC) and was its CEO. Arlington Cable was the first acquisition of HAUSER: Communications, Inc. I was so impressed with this young and brilliant cable executive that I sat down with him one day at an NCTA meeting in Palm Springs, California and said, “How would you like to join me?” John became President of HAUSER: Communications and, by 1993, very wealthy. John has been instrumental in building a highly successful cable business and we maintain a family relationship. He is a person of enormous ability, total integrity and decency, with a broad command of the issues and technology involved in the digital revolution. He is working on the frontier of scientific efforts to discover a vaccine or cure for AIDS. A September 2001 FORBES magazine article describes his Waterford Project (named after his Virginia farm) which is involved with leading scientists in some very encouraging developments. He is very happy that he joined up with me in 1983.
SOUTHWICK: I’ll bet. I know that for a fact. I’ll let you add to this list when you get the transcript back.
HAUSER: Well, we’ve also mentioned some other people earlier.
SOUTHWICK: Right, earlier, Vivian Horner and John Lack, and Bob Pittman and many others.
HAUSER: Some additional Warner Amex alumni:
- Tom Baxter – became President of Comcast Cable and then President and Chief Operating Officer of AOL Time Warner Cable.
- Richard Berman – became a Federal Judge.
- Aaron Fleischman – became Founder of Fleischman & Walsh, a major Washington, DC law firm.
- Jim Gray – became President, Warner Cable and Vice Chairman Time Warner Cable.
- Ken Lehrer – became a partner in Robinson Lehrer Financial Public Relations and then Executive Vice President of AOL Time Warner.
- John Lockton – became Executive Vice President of Pacific Bell.
- Michael Marcovsky – became Founder of Nostalgia Television.
- Lee Masters – became President of E! Entertainment Television and then President and Chief Executive Officer of Liberty Digital LLC (Liberty Media).
- Terry McGarty – became President of NYNEX (now Verizon) Mobile and then Chairman and Chief Executive Officer of Zephyr Communications, a private company.
- Robert Morgado – became head of Time Warner’s music business.
- Robert Morton – became Producer of the David Letterman Show.
- Andy Orgel – became President of Video Jukebox.
- Hugh Panero – became President of Request Television (pay-per-view) and then President of XM Satellite Radio.
- Joshua Sapan – became President and Chief Executive Officer of Rainbow Media Holdings, Inc.
- John Scarpa – became President of Alltel Cellular.
- Rupert Walters – became Executive Vice President of Chemical Bank.
- Larry Wangberg – became Group Vice President Times Mirror and President Times Mirror Cable and then President ZDTV: Your Computer Channel.
SOUTHWICK: As a final question, what is it that made these people and so many others attractive to you? How do you identify somebody who is going to become a Scott Kurnit or a Nick Davatzes? Why were you able to do this? Is there a trick to it?
HAUSER: You know, I can’t truly answer that because it’s not a scientific process. Hundreds of senior executives and thousands of others had to be hired. I suppose that over the years I developed an instinct for recognizing capability and potential. It was particularly important in a developmental situation because we weren’t hiring people who had previously done the job before. In all cases, we were dealing with people who had previously done something else and, except for a few cases, I wasn’t luring away the head of a company, I was luring away somebody at a lower level. So you had to have a lot of faith and a lot of belief in their personality, capabilities and decency. I always liked to hire what I’ll call “nice” people.
Even though I was trained as a lawyer, I’ve never sued anybody and I never was sued by anybody in business, except for one interesting event which I’ll mention. Years ago, when we were developing QUBE, we wanted to put the Ohio State University football games on pay-per-view. It was virtually impossible to get a ticket to an Ohio State game unless the ticket was inherited from an ancestor. Pay-per-view was a solution, but it was blocked by a long-standing college football television arrangement. On behalf of all its members, the National Collegiate Athletic Association packaged virtually all college games on Saturday and delivered them to the ABC network which selected the games that they would televise. All other games were blacked out. The price paid by ABC was distributed by NCAA among its college members. Like Robin Hood, it took from the rich and gave to the poor. The powerful teams were not happy. I met with NCAA in Omaha and talked with the czar of college football. His name was Byers, I believe. He wouldn’t allow QUBE to show Ohio State games. I went to ABC and, naturally, they refused to cooperate. So I sued both of them on anti-trust grounds. Just the other day, I ran into the retired ABC general counsel and he said, “That was an absolutely atrocious anti-trust violation that they were involved in.” After costly litigation, ABC chose to settle by making available the rights to the Ohio State games “experimentally”. They avoided the issue. Under the circumstances, I wanted the games more than I wanted to win the lawsuit, so I took the games, which were a big pay-per-view success. In fact, many subscribers turned their homes into theatres where they and their friends could watch the Ohio State games and then finish the day by purchasing adult movies. A big day for pay-per-view and QUBE.
SOUTHWICK: Also, Tom Wheeler told me that he used to get those tapes from you and take them down to Washington and show them to the Ohio Congressional delegation in Washington and it was a terrific lobbying plus.
HAUSER: Oklahoma University ultimately pursued the anti-trust lawsuit all the way to the Supreme Court and, believe it or not, prevailed. This made many more college football games available on television and changed college football for all time.
SOUTHWICK: Well, thank you. You mentioned that you hired nice people. I just thought as a closer I would note that universally, within the cable industry, you are known as one of the nicest and most decent people to work with. So I appreciate your time today.
HAUSER: Well, thank you Tom.
SOUTHWICK: Thank you. This has been an oral history of Gustave M. Hauser, conducted for The Cable Television Center and Museum. This oral and video history is made possible by The Hauser Foundation Oral and Video History Project of The Cable Center Oral and Video History Program.
