IRTS Newsmaker Luncheon
New York City
October 27, 1987
When I think back on it now, it could have been a disaster.
My luncheon address to a gathering of the International Radio and Television Society a year after I became president of NBC was particularly well-timed. Since practically my first day on the job, I had been determined to transform NBC into a cable player. It was an unpopular position, to say the least, and this speech was my first opportunity to publicly explain my thinking.
I was absolutely convinced we needed to be doing something different. We could not ignore the facts: viewership was slipping and so were ad revenues. Dramatic changes in competition and technology, especially cable, demanded new business models. My top priority was engaging NBC in a multiscreen, multidistributor future—a future that was rapidly becoming the present. But to the people in the room that day, cable was a dirty word. For me to push us in that direction seemed like heresy to them. They could have erupted at any moment, but they didn’t.
The idea of igniting a revolution should have been better received at the time. New owners from outside the media world were taking control of the traditional broadcast networks, and they each brought a strict bottom line mentality. It was a perfect time to pursue new initiatives. Even if I had to drag them along, kicking and screaming.
My plan, I explained, was to leverage NBC’s news, sports, and entertainment resources in a way that cable operators and subscribers would pay to support a second revenue stream. I told the restless crowd that our focus would be to expand our audience—not necessarily cut our own costs, as so many automatically assumed. “If our primary concern was immediate return on investment, engaging entertainment simply would never happen, and we would be overlooking the most important factor in the equation—the viewer.”
And then I appealed to television’s universal link. “All of us here today, representing many different kinds of players in the electronic marketplace, are in this together… we share a need to focus on and promote the positives of our business.” Then I hit them with a full dose of my reality. “I’ve been involved in television as a cable television operator, group broadcaster, and network executive, so the old barriers and taboos don’t seem quite so important to me. I see nothing wrong with broadcast television selling programs to cable television. Yes, cable is the competition, but it is also a market for programming and a source of income. The goal we could work toward is putting more quality, substance, and diversity into our end product.” The time was ripe for change: alliances, partnerships, and restructuring our own businesses. “With a little enterprise and cooperation, we can save this marriage!” You could hear the gasps across the room.
These were radical notions for 1987. But we were on the cusp of a digital information and entertainment explosion. Even though it would be 12 years before Apple introduced the iPod and more than 2 decades before it launched the iPad, it was clear that speedy, ubiquitous connections and limitless storage capacity would reshape our lives. So, I kept hammering away at one simple truth: the better the programs, the more they would be viewed in many new places. The biggest risk was not doing what we did best: producing outstanding content for every type of screen. Viewers’ love affair with television was expanding, not shrinking, if we were willing to look at ourselves differently.
◆ Tom Wheeler, president National Cable Television Assn. and Cellular Telecommunications & Internet Assn. Bob was a heretic among broadcasters in that he believed in the future of cable. In the mid to late 70s and early 80s, most broadcasters were determined to strangle cable in the crib. They were exerting all kinds of political influence and being quite effective in exercising their political power. And it resulted in a situation where there were federal rules that limited what cable could offer. So the cable salesman ends up saying, “Hello, I’d like to charge you a certain number of dollars a month, and drill a hole in your wall, so that occasionally you can get some different programming.”
This was a holy war waged in many directions—not only against broadcasters, but also against telephone companies. Telephone companies didn’t want another wire into the home, and so they also tried to deny the right to put cables on the poles. There was an ebb and flow of victories and losses on all sides that shaped the laws governing cable.
Bob and I were both young men at the time, and the cable business was a young business being created by relatively young go-getters who had a blank slate and could define the future any way they wanted. It was a little like the Internet. That’s what made it so exciting! Bob knew the systems that would cost so much to build would need programming, and that the tie-up with broadcasters would be a natural, since they were the largest source of television content at that time. But this was everyone’s first trip to the rodeo, so there were some rough rides for a lot of years. ◆
◆ David Zaslav, president NBC Cable Distribution, executive VP NBC Cable. Bob was the first broadcaster who saw that the future meant diversifying content for all platforms, and that was really his theme for more than 20 years. It sure wasn’t easy. Everyone at NBC was against him. Cable was viewed like the kids’ table for a long time. Broadcast was riding very high and everyone was asking, “What the hell are we doing in the cable business?!” It took years to change NBC’s broadcast culture. Then he had to convince GE that they should be investing in cable—not a simple matter, either. He really pushed GE to get into the business, and he had to hire an entirely different team to pursue it. Tom Rogers, me, and a whole team. ◆
◆ Tom Rogers, first president NBC Cable and Business Development, executive VP NBC and chief strategist. Bob asked me to see if I could get him through those early initiatives and end up with something meaningful. We went out negotiating with the whole cable industry with the threat that we would pull the plug on our network signal if we did not have a deal. And with the new retransmission consent rules at the time, we could do it. We were in a formidable position to get this thing done, and we went through the whole industry in a relatively short period of time. ◆
Those original cable operators were all high flyers coming into their own. Many of them were becoming wealthy because of what they owned. They were different businesspeople with a different style that came into the cable business from many places. Some sold equipment and some were just entrepreneurs. But all of them were eccentric pioneers, so the press label “cable cowboys” fit. A lot of them tended to be from the west and mountain areas, where cable developed out of necessity. And they spent many years laboring hard to get the industry growing. It was a damn hard business, and they were fighting the broadcasters every step of the way. It was a silly war. Decades later, the Internet circumvented everyone in the flash of an eye. Broadcasters and cable were humbled by new, over-the-top technology that overrode them both.
Cable operators needed the financial ability to build their systems, which meant both a lending and an operating environment. They also needed programming in order to attract customers and increase revenues. The cable operators knew that relying on the three main broadcast networks would only go so far, and that new and better programming would require partnerships.
The difference between having programming and not having programming in the early days turned out to be the satellite. In 1976, HBO went up on satellite along with TBS and shortly after, Tribune superstation WGN. And that’s when USA and many cable networks came along. That’s when some broadcasters like NBC and ABC stepped forward, wondering if this wasn’t an opportunity to make money reusing their program libraries. That began a phase of experimentation that carried over onto the Internet and continues today.
◆ Herbert Granath, VP early cable program development ABC and ESPN. When ABC ended up with 80 percent of ESPN, Leonard Goldenson, the chairman of ABC, said to me, “You know the affiliates are going to have a fit about this!” And he was right. So we thought we could soften the blow by starting out with something that presented absolutely no threat to them, and that was performing arts like full-length ballets and opera and musical performance. That programming was really cheap because nobody else in the States was doing it except for something occasional on PBS and BBC. It was really painful when Leonard told me that I was the one who was going to have to go up in front of the affiliate annual meeting and tell them we were getting into the cable programming business. Of course I got boos and hisses. Seeing the arts channel calmed everybody down. And we were the darlings of the critics. They said, “Well, this is what television was meant to be,” except that nobody was watching, and therefore we had no revenues and had no income.
We struggled. We got through Arts and Entertainment, and then we started Lifetime, which was in those days called Daytime. It was an attempt to offer programming to women, other than the soaps and the game shows. When that didn’t do well, we partnered again with Viacom to create Lifetime.
So now we’ve got two losing propositions. And it was just wonderful. I didn’t have to be a genius to figure that out. So a few of us talked with John Malone, who at the time was head of TCI, about reverse cable fees in 1981. That was probably the most important decision in the history of television. John bought into that. And once he did, then the rest became easy, because all of the other cable operators fell into line. They all needed programming.
There were two problems with that. Number one, I would get hissed and booed when I got into an elevator with some of my former network friends. And number two, every time I’d walk into a cable system to try to get carriage, it was like raining rocks. I didn’t know where to duck.
A couple of guys in the cable business, Ralph Roberts of Comcast and Chuck Dolan of Cablevision Systems, said to their friends in cable, “Why don’t you give these guys a chance? They’re willing to come in and spend some money and maybe give us some decent programming.” ABC Sports was known then as the home of the Olympics, and we had Monday Night Football, and NCAA football. We would invite the sponsors and distributors to the games and tournaments. Announcers like Howard Cosell, Frank Gifford, or Don Meredith would drop by. And that really worked. Once the distributors were on your side, the parent company would embrace it.
Once I got into it, I really became convinced that this thing was going to work one day. All I wanted was to make that one day come. We were losing money on A&E, losing money on Lifetime, and we were losing big-time money on ESPN, because we had to buy sports rights in order to make ourselves relevant to the cable business. And we just didn’t have much income. But by 1983, ESPN broke even with $42 million in revenues on virtually all advertising sales.
Then came must-carry, which was another radical idea at the time. On the cable side the argument was, well, we’re being forced to carry this thing. And not only the major stations, but I believe the deal was that any signal that had any penetration whatsoever in the market was a must-carry, and so it took up a lot of space on the cable band. One of the reasons that ESPN is so profitable today is because they get a very large payment from cable operators for a subscriber base attracted by expensive live programming rights. What we did instead in some cases was rather than charging fees, we got cable operators to agree to carry several new cable networks we launched, like ESPN2 and the History and Biography Channels.
To appease the affiliates, we just told them straight: since we’re making diminishing returns from the broadcasting business, partly because of the inroads cable was making, we needed to generate new revenues from cable. It was the only way to keep the company financially healthy. It was a painful internal battle for a long time that Bob Wright knew only too well. He helped forge the way.
But you know the biggest challenge was getting ABC, a public company, into a business which was pretty much unknown and that would lose us a lot of money for a while. I had a board of directors that I had to convince that it was worth the gamble. There are always yin and yang things going on here, and the trick is to have more yins or more yangs to stay ahead of the game. There are people in the position of making decisions who are really smart and dedicated. There are others who are riding the tide, and it may wash them over the edge. But being able to work with people who are the intelligent risk takers, as opposed to the cowboys, is the key to be able to discern when a new idea is feasible or not. ◆
One big hurdle for NBC, of course, was the financial picture. GE during the Welch period was very focused on earnings per share. EPS means you have to have accounting earnings, which startup businesses won’t have. You have losses so you will have some reduction in EPS. GE didn’t appreciate any business that wasn’t making money. That is a positive thing for shareholders on one level, but on another level it means you are staying in a lot of businesses that are just marginally profitable, have a huge capital base, and may not have much of a future. So the story of cable television in its early days was never about EPS; it would have created tremendous losses. Financing cable was primarily done through limited partnerships where people would invest, and instead of getting cash back, they would get losses back that they could deduct, and then use it against profits from other businesses. That’s what John Malone was all about. Nearly every new cable acquisition or partnership required the blessing and strategic involvement of the Yale-bred engineer-turned-cable czar. Brian Roberts has done a good job over the years of explaining tremendous losses and tremendous profits. But they still have a tendency to be measured by EPS. In cable we used to focus on a 10-year life, and the losses would run right through year 5.
Another never-ending challenge was the constant rollout of new technology. It changed everything about the economics, competitive dynamics, and business relationships, and eventually completely redefined the consumer experience. At first, it was cable; 2 decades later it was the Internet; now it’s the virtual streaming connection of everything about our lives. I knew then and all through NBC’s growth that it was important to track the development of new technology to integrate and seize it before we were seized by it. Even today, you don’t have to jump into everything at every minute, but you have to be well-informed enough so as not to be arguing with yourself about why you are not there. The error should be on being there. Even if your new technology gamble doesn’t pay off, you will benefit from the experience and knowledge gained. If you sit back on the sidelines for too long, your entry will be late and you could miss unique opportunities. You have to try.
◆ John Malone. Equity partnership became a staple of the way we did business. In some cases, we had opportunities to do many deals with people who had financial distress and who didn’t want to sell their companies. A great example of that was Ted Turner, who had gotten himself into financial trouble with his MGM acquisition. Even though he was over leveraged, we were able to put together financing and invest ourselves to help Ted stay independent.
I was the reason NBC never got into that club. I thought that the relationship with Ted was unique. He really had demonstrated a love and relationship with the cable industry, and we trusted him. And if you were to bring in other players who had other motives, you would not be as comfortable. So we made this really a cable club investment in Ted’s bailout and creation of a new board comprised of the biggest cable operators.
To have a successful partnership then or now, you have to understand what the other side’s motives are in order to make those deals work. You have to roll around in your mind what you might do that’s good for yourself and good for them, and fit all the intricate pieces together. The late (Liberty president) Peter Barton used to say that my mind worked like a Rubik’s Cube figuring out the deal details.
It’s financial or structural problem solving or an engineering problem, and it’s what I do. The goal has always been to build good, scale, efficient, sustainable businesses and give them to your shareholders tax efficiently. If I had kept intact all the stakes and assets that TCI and, eventually, Liberty came to control through partnerships, it would have become a very large and a very unmanageable collection. So, we carefully used the pieces to build more value for everyone concerned. That takes time and know-how and being able to respond to the right opportunity when it is presented. That’s exactly what Bob Wright did at NBC inside of GE. ◆
◆ Herbert Schlosser. Bob came to NBC not really knowing the company well, but he fully understood the need to take it to the next level. The business acumen he brought to the network from GE and his training as a lawyer proved invaluable as NBC and the entire media industry went through tremendous churn over more than 20 years. In 1986, cable program services were not yet fully developed, so it was all about developing guidelines and regulations that would stand the test of time involving new technology no one knew enough about. The only cable property he inherited at NBC was something I put in place. Herb Granath at ABC and Gannett were my partners in a service called The Arts. NBC and the Rockefeller Group invested in something called The Entertainment Channel. Neither of these services was really working. So after about 6 months of negotiations, we put the two together, and that became Arts & Entertainment, owned by three partners: NBC, ABC, and Hearst.
And Bob went on to create so much more, most importantly the deal with Microsoft, which gave NBC the MSNBC channel—an entity that could bridge broadcasting and the Internet through cable.
When you merge with another company, it’s never a slam dunk. Opportunities get lost in the shuffle, and that was more often true than not of media mergers. When NBC merged with Universal, there were no guarantees. At the time, cable was largely a distribution system for rerunning content from elsewhere. NBC seized on the opportunity to play a role in providing new content. Broadcasting was working at the time. The numbers were good. When Cap Cities bought ABC, they didn’t know then that ESPN would turn out to be their most valuable asset. ESPN today is worth more than the ABC Television network, all their stations, and their studios. The same is true for NBCU; the cable networks represent the most value. So it wasn’t just GE getting used to the idea, although it could see cable growing in importance and starting to chip away at the broadcast audience share. It was about people like Bob pulling the right business and legal and strategic levers, and lining up the partnerships and acquisitions to better position NBC. Having an effective game plan is one thing; having just the right mix of skills to execute it is quite another. ◆
So in spite of the misgivings of just about everyone involved, we went into cable and made a success of it. It’s one chapter—a big chapter—in the unique 30-year story of GE’s relationship with NBC. ABC was sold to Disney in 1994, CBS was chopped up and it is a different animal. NBC is the only one that still kept everything together—news, sports, cable, all that stuff, for that whole period of time.
Almost 2 decades later, I did it all over again—moved NBC into more cable, movies, theme parks, and the Internet. More on that later. For now, the point I want to make is that the strategies in both cases were much the same.
You start with having clarity about your business priorities: what you want or need to accomplish and why. At GE, we established our strategic objectives every year in a rigorous process we called the S-1. We would have an honest dialogue with GE’s senior management about where we saw ourselves going and how we expected to get there. Imagine GE’s surprise when we told them we planned on taking the major broadcaster they just bought into cable! And it wasn’t that simple or that quick. But going through this process is your main defense against the danger of all successful businesses: being right for so long that you end up being wrong.
As the media landscape evolved from broadcast to cable to the Internet, we went through the same process of assessing, setting goals, and planning ways to achieve them. We developed a business model that enabled us to better compete in a changing media world. We developed strategies that reduced our exposure to volatility. Then we developed services by adding new assets and platforms to replicate what had proved successful for us before. The process was the same whether it was cable or the Internet. It was that simple and that complex.
Behind it all is a willingness to be honest with yourself, your employees, and your shareholders about the future prospects for your businesses and the marketplace in general against the backdrop of changing technology and economics. Such honesty is not easy, but it is accurate. You can’t argue with it and you can’t deny it. It’s what took NBC from a broadcast network to a diversified media company. It takes you from where you are to where you need to be, regardless of the obstacles or characters or issues you encounter along the way.
Our ultimate success in cable and everything else we did well depended on three things: knowing our brands and who we were; encouraging risk taking and thinking outside the box without boundaries; and valuing creativity.
The mid-1980s was a frothy period during which GE and NBC became concerned that NBC was getting too much exposure to cable. Well, we were—because I wanted it that way! They were always concerned about the telephone companies becoming a big competitor and worried about satellite. It was a lesson in how you should be more fixed on where you know you need to go than getting wrapped up in all the things you think may be a problem. Risk is not always where and what you think it is.
The story of NBC is the story of anticipating change and being prepared for it. Alongside our business development strategy, something else was consistently at work: a commitment to innovation—because it is the only effective response to inevitable change.