3
Cable TV, over the years that we were in it directly, was a growth machine. The internal organic growth rate of the business exceeded the cost of money. And if you do any kind of present-value-of-cash calculation, that means that the equity values are nominally infinite. Which means it has high returns to equity, because you can borrow money against a growing cash-flow stream, and as long as your growth rate's faster than your cost of money it's a wonderful business.
—John Malone, interview with Ken Auletta, October 16, 2002
CABLE HAS WON THE RACE to sell services to Americans seeking high-speed Internet access. People are dropping DSL service delivered over metal phone lines in droves, as those services prove increasingly unable to compete with cable for the kind of speeds that households and businesses demand. And wireless Internet access does not and cannot keep up. Wireless is great for mobility—Americans love their smartphones—but no one starting a business would depend on the wireless data speeds provided by Verizon and AT&T. Wireless is a complementary service, and only people who have no other option (usually rural, minority, or poor Americans who have no wired access where they live or work) are likely to rely on it as their sole route online. Verizon's FiOS fiber-optic Internet access service is as good as cable (better, in fact, because it allows for uploads that are as speedy as downloads), but it is available to only 14 percent of U.S. residences; from Verizon's shareholders’ perspective, it is too expensive to dig up traditional phone lines and replace them with fiber.1
Cable, on the other hand, has exploded into an enormous market: 80 percent of Americans buying a wired high-speed connection these days sign up with their local cable incumbent.2 The FCC has said that for 75 percent of Americans the only choice for globally standard high-speed Internet access will soon be the local cable guy.3 Comcast is adding subscribers at an accelerating pace at the same time that its revenue per user is increasing. At this rate, Bernstein Research predicts that about 70 percent of all wired Internet access subscribers in America will be cable customers by the end of 2015.4 And as of 2012, Comcast was getting the lion's share of these new accounts: more than four hundred thousand new subscribers for wired high-speed Internet access per quarter, amounting to a total of almost 19 million subscribers overall.5 Time Warner Cable was a distant second, with about a hundred thousand new customers each quarter and a total of 11 million subscribers. True, Comcast lost thousands of its more than 22 million pay-TV subscribers in the first quarter of 2012 as families gave up on the crushing monthly expense of video, but the rate of loss was slow: hard-core sports fans had nowhere else to go, for Comcast owns eleven immensely powerful regional sports networks across the country.6
Comcast was the best at controlling city markets in America; the media-information company SNL Kagan noted in July 2011 that Comcast had won its designation for “most consolidated” markets, with 94 percent of the cable subscribers in San Francisco and 88 percent of the cable subscribers in Chicago. Comcast has done very well at home as well, with 86 percent of the cable subscribers in Philadelphia. It also has over 85 percent of cable subscribers in Houston.7 The company had 2010 revenues of $36 billion for video and Internet access combined (94 percent of its total revenues), and most of that revenue came from expensive bundled video packages—yet the prices for all of these services continued to climb.8 (Between 1995 and 2008, the price of “expanded basic” video packages sold by cable companies went up 122 percent, three times the rate of inflation; between 2002 and 2012, Comcast's average revenue per user per month for its video services—including high-speed Internet access—climbed 133 percent.)9 Those pay-TV subscribers were a captive audience for bundles of services that included high-speed Internet access, and Comcast was successfully shifting its business model: the company's high-speed Internet access subscribers were signing up far faster than the video subscribers were dropping off. Comcast faced some competition from satellite for video subscriptions, but virtually none for high-speed Internet access subscriptions.
So as of late 2011, after approval of the merger, Comcast's infrastructure and distribution business was accelerating quickly and the numbers were extraordinary. Revenues for high-speed Internet access were growing by 10 percent each quarter. Comcast's investors were happy because Comcast had finished building its network and was plowing more than 30 percent of its free cash flow (operating cash flow less capital expenditures) into dividends and share buybacks—keeping the price of its shares high. Comcast's costs for high-speed Internet access continued to fall while its margins became very high—40 percent or more—as the company charged high prices for the higher-speed access that more and more of its customers wanted.10
Comcast's high-speed Internet access subscriptions were nearly twice as profitable as its video subscriptions because programming was expensive and cut into the profit margin. These high-speed Internet access subs-criptions were growing swiftly in number at the same time that support-services costs were declining proportionally due to the greater scale at which Comcast operated—yet Comcast was still charging more per subscription.11 High-speed Internet access, indeed, was becoming Comcast's core business, contributing most of Comcast's growth. The product is enormously profitable; when the company adds more bandwidth for consumer use this does not mean it is facing commensurate costs: the pipe is already in place. Revenue and prices continued to climb, capital spending was down, and dividends were up: all the arrows were going Comcast's way when it came to control over high-speed Internet access in the markets it dominated.
At the top of the Comcast empire stands Brian Roberts. The Roberts family, like the Gilded Age families of the late nineteenth century, possesses enormous wealth and power; Brian Roberts was one of the highest-paid executives in the country in 2010, with total compensation of about $31 million (including a cash bonus of nearly $11 million).12 Brian Roberts owns or controls all the Class B supervoting shares of Comcast stock—an undilutable 33 percent voting power over the company, and thus effective control over its every step (though Brian controls just over 1 percent of Comcast's shares).13
When Comcast purchased a $40 million corporate jet for business travel related to the NBCU merger, the jet's most frequent destination (after its home airport in Philadelphia) was Martha's Vineyard, where Brian Roberts, an avid sailor, has a home. According to the Wall Street Journal, FAA records also showed that Comcast's new jet made a large number of winter trips to Palm Beach, Florida, where Roberts has another home. In all, nearly two-thirds of this plane's trips were to Roberts's private homes or to resorts.14 The travel of this one corporate jet is just a proxy for deeper issues: in 2010, the Corporate Library, an independent shareholder-research organization, gave Comcast an “F” for its corporate governance practices.15 At the time, several of Comcast's directors either worked for the company or had business ties to it, and a third of the directors were over seventy—signaling that Brian Roberts's power over Comcast's operations was effectively unconstrained.
At the Antitrust Subcommittee hearing, Brian Roberts earnestly focused on the “American icon” NBC network and its “storied past and … promising future.”16 But when speaking to analysts at the time the deal was announced in December 2009, Roberts struck a different and more confident tone: the NBCU transaction was about making Comcast “strategically complete.”17 That same confidence came through in March 2011, after the transaction was cleared, when Roberts told analysts that despite steady price increases in its high-speed Internet access service, to which more Americans subscribed than any other, Comcast's sales were “tremendous.”18 In each market where Comcast operated, it already controlled a third of the high-speed Internet access subscriptions. But Roberts knew that Comcast could handle more: “So,” he told analysts, “the goal would be 100 or 90 [percent of high-speed Internet access subscriptions in each market]. We have one competitor.”19
How did America get to the point where one man was within striking distance of controlling most of the major metropolitan markets for high-speed Internet access?
The family story of Ralph and Brian Roberts is often told by Comcast. The company has its epic narratives, all of which are useful on Capitol Hill, whose members love a homespun American success tale. The story has the advantage of being true, and Brian Roberts genuinely considers Comcast a family company. That said, there is a jarring contrast between this family storytelling, with its connotations of intimacy and support, and the brute strength with which the giant company wields its economic advantage. Through canny skill, dogged persistence, and political heft, Comcast has put itself in a position to squeeze all the other players. Everyone, media conglomerates and small cable companies alike, has to work with Comcast on its terms. This allows Comcast to reap the rewards of dominance in the form of ever-increasing prices for data access and content in the twenty-first century. Comcast got where it is today through clever financing strategies, clustering of its operations to take advantage of scale economies, careful and constant cost cutting, the quick embrace of new technology, and shrewd investments in content, all within an environment of regulatory passivity. The idea of “common carriage,” the centerpiece of public-communications policy for most of the twentieth century, has ceased to be a credible threat to Comcast's domination. The result: wide moats around an infrastructure business that cannot be crossed by competitors, and ever-increasing power and profits. In a very real sense, Comcast now owns the Internet in America.
Yet the genial family story continues to be put on display: Ralph Roberts's presence behind his son during the Antitrust Subcommittee hearing may have made some legislators worry that they were wearying him by going on too long. Looks can be deceiving: media mogul Barry Diller, bested by Ralph and Brian Roberts in his effort, as chairman of QVC, to buy CBS in 1994, told the New York Times in 1997 not to be fooled by Ralph's appearance. “Ralph is tough,” he said. “Under that bow tie and courtly manner beats the heart of one tough man. He is steel.”20
If Ralph is steel, Brian is, by all accounts, titanium. “He's a hard guy to work with,” said one former cable mogul to me who did not wish to be named. “When I did deals, we had the idea that both sides needed to succeed in order for the deal to work. For Brian, it's ‘If I haven't left them dead I haven't gotten enough.’” More pithily, as one satellite company executive said to me of Brian Roberts's company, “They'll gouge your eyeballs out.”
Ralph Roberts could not have imagined what was ahead for American Cable Systems, his first cable company, when he opened its doors in early 1963. After selling his men's accessories business in Philadelphia and leaving a job writing advertising copy for Muzak—run by his brother, Joe—Ralph had been looking for a place to put his money. About a year before Ralph took the leap into cable, Joe encouraged him to investigate cable franchise opportunities, which served distant rural markets that were then just taking off. (Joe's Muzak business and Ralph's cable businesses intertwined over the next few decades; having a local exclusive franchise with high initial costs and steady subscription revenue, the case with both these industries at the time, is great for business. In a July 2000 interview, Ralph described both Muzak and cable businesses as a “license to steal as recurring monthly income. … You put in the equipment and every month they send you money.”)21 Ralph decided to buy some cable franchises in Tupelo, and later West Point, and Laurel, Mississippi; cable services could use marketing, he figured, and he was good at that.
Ralph's Tupelo franchise covered just twelve hundred subscribers by grabbing signals from Memphis broadcasters and running them along wires to the subscribers’ homes. It was a risky move: he had to put up 51 percent of the half-million-dollar franchise cost. That was the last personal money that the Roberts family ever invested in their empire.22
Roberts didn't go into the venture alone. Julian Brodsky, an accountant with a deep commanding voice, prominent J. P. Morgan nose, and a frank, street-smart manner, was his financial wizard (and, later, Brian's mentor in deal making). Brodsky had been Ralph's accountant before they went into business together, and he helped Ralph found the company in 1963, including setting up the Class B supervoting shares that the Roberts family still controlled absolutely as of 2011.
Brodsky was the right man to push the tiny new company along. As he describes himself, “There were people whose weapons in business are the stiletto and there are people like me … whose weapons are the sledgehammer. And there's no conniving, no deceit. You just say your position and that's that.”23 Brodsky had the accounting and legal finesse to make Roberts's fledgling company tick.
It was Julian Brodsky whose sledgehammer drove the big deals and who fought the franchising wars that made Comcast grow. According to Dan Aaron, Roberts and Brodsky's third partner, Brodsky was the “maniac,” with his foot on the pedal, “trying to go a million miles an hour,” making deals. His goal was to buy cable franchises without either taking on enormous debt or losing control of the company. “We just knew that if we could continue to make good acquisitions and find opportunities to build cable systems, then things would sort themselves out for the long haul,” Brodsky said in 2009.24
The early escapades of Roberts, Brodsky, and Aaron (a refugee from Nazi Germany who as a young journalist had become fascinated by the cable industry) in Mississippi involved shrewd uses of Roberts's sociability—he met one new franchise holder through a newfound friend at a local craps table—and the skillful avoidance of a requirement to provide everyone with service.
From the beginning, like other cable operators, they tried to “skim a little bit off the top,” in Brodsky's words, to get “better demographics.”25 Cable was expensive to build. Meridian, Mississippi, required American Cable to put up a $125,000 bond that would not be released unless the company provided service to 90 percent of applicants. This was a problem. If everyone applied, the fledgling company would have no chance of surviving—it did not have the capital to lay enough cable to serve the entire town. So instead of creating a buzz about the new cable franchise, Aaron took space in the sole high-rise in Meridian and proceeded to set up shop extremely quietly. He did no advertising, put up no signs, and used unmarked trucks. The company sent out a direct mailing to one demographically promising block at a time and deployed clean-cut college kids to follow up on the mailings. When they had enough orders, they wired up one block at a time, and thus ended up serving 100 percent of their “applicants”—because, in Brodsky's words, “it was really hard to apply.”26 Brodsky, telling the story, considered it amusing; a company that is hard to find is a company that will be able successfully to serve all its customers; and a company that cherry-picks the best areas will be successful. The bond was released. The money flowed in.
The little cable company replicated this marketing model for years. Brodsky loved the new business because it was so straightforwardly lucrative. Ralph Roberts felt the same way. “I was never, never nervous about buying a cable system,” he told USA Today in 2001. “You have recurring billing, reasonable rate increases, you keep your costs down and it's like chicken in a grocery store. It's very nice.”27 The company rolled on, acquiring exclusive franchises in Mississippi; it charged up-front installation fees to keep cash flowing and achieved adoption numbers and monthly service rates that covered its costs with enough left over to make the business grow. Depreciation rates as short as five years on cable equipment meant that the company could avoid paying much in taxes.
But there was a limit to how far the company could go in its new territory. Cable adoption in Mississippi was a tough business because many people were too poor to commit to making monthly payments for broadcast television that other Americans received for free. So Roberts and Brodsky turned their attention to their home city of Philadelphia and its surrounding towns, acquiring a group of suburban systems. These early acquisitions allowed American Cable, renamed Comcast (from communications and broadcast) by Roberts in 1969, to consolidate its back-office operations with these other franchises, so that they could take advantage of scale economies for their internal operations—accounting expenses, legal fees, overhead—as well as their purchases from vendors.
For many cable guys in the 1960s, building and consolidating systems was exciting. “At the beginning, middle, and end, nothing is more fun than building a cable system in a town that had never had a cable system before. This is a cable company and we are all cable guys,” Brodsky said. They were also talented, disciplined, and highly intelligent. “We were absolute deal junkies, and driven by a need for growth.”28
Reminiscing in 1998 about how things had changed in his industry, Brodsky remembered that back in the 1960s, selling cable was a difficult generational issue. Older people were “not in the mood … to make fixed commitments to spend money.” But his view then, which he conveyed to the bankers backing Comcast in the early days, was that it was “just a matter of time” “all these people go. The young people grow up who grew up with cable, and sooner or later cable will be a way of life.”29 And Comcast would feed the demand. This was only one of many prescient calls made in the company's early years.
At the time no one thought a company like Comcast would one day try to feed all that demand by itself in every large market it entered. Cable was smalltime: despite the franchising energy, in the 1960s few firms had more than a dozen systems each; the four largest combined held just under 20 percent of all subscribers. Even though companies owning multiple systems were growing in the 1960s, there was so much territory to wire that concentration was not an issue. Today, in the areas where Comcast operates (it never tries to compete with its big-cable peers Time Warner and Charter), it routinely controls more than 50 percent of subscribers.
One of Comcast's biggest advantages in its early days was Julian Brodsky's financial and technological acumen. In a 1998 oral history, Brodsky recalled in detail the company's strategies in the 1960s and 1970s. He would fight to get long-term fixed-rate reasonably priced loans for each new system—financing the cable industry had been unable to get before—and he required each project to be self-sufficient, so that the whole operation would not be threatened if one system faltered. It was a good plan, but Comcast still nearly folded in 1969–70 when its partner at the time, McClean Publishing, pulled out. Comcast found a way to survive by stepping up its acquisitions. (Comcast learned its lesson; as Executive Vice President David Cohen said in 2011, “We're not very good partners. We like to run things.”)30
In an early, adventurous use of technology, Comcast employed computerized cost projections to obtain the longer-term loans Brodsky wanted. “[What] gave Comcast firepower in excess to any other cable operator,” Brodsky explained, “was that we got access to computers [in 1965–66]. I leased a TTY 33 teletype that was used in Western Union offices. And I subscribed to GE's time-sharing services. … I devised models for cable projections [that were] all externally driven. … I was the only person in the cable business getting computer cash flow projections in the early and mid-60s.”31 Other cable companies consistently underestimated the costs of maintaining and expanding their installations, but Brodsky could make accurate projections. Technological agility became a company hallmark.
Innovative financial structures were another strength. In addition to getting good deals on new debt, Brodsky figured out how to use the same kinds of limited partnerships that had been popular in the real estate, oil and gas, and trucking businesses to raise money. The equity investors in the limited partnerships—doctors, dentists, lawyers—would get back more than they invested and be able to take advantage of the enormous deductions Comcast would generate based on the initial losses associated with construction of new cable systems, while they supplied the money to pay for the building of new systems. Meanwhile, because the limited partnerships did not show up on the balance sheet, Brodsky could keep Comcast's more traditional investors happy as well.
At the same time, Brodsky took an extremely conservative approach to deals. Comcast was not interested in loading up its balance sheet with debt. Each deal had to pay for itself, and those loans had to be paid off. Comcast went public in 1972 to get access to funds that would finance its expansion, and marched ahead to acquire franchises in Kentucky and Michigan.32
The 1980s saw the company accomplish a number of big deals. The key was to get the right to operate new monopoly franchises; battles over these rights were fierce and expensive, and involved promises of lucrative payouts for cities, advanced and interactive services, and payments to favored charities. Bidders made sure that minority groups got a stake in the resulting system. Because of the up-front costs of building the system and the need to (legally) buy off local power brokers, these franchises were natural monopolies, and have remained so, even though federal law since 1992 has made exclusive franchises illegal.33
Brian Roberts stepped into a leadership role in the company by demonstrating his skill at cutting costs and trimming workforces in connection with a major acquisition of rival cable systems in 1986. The target at the time was Group W, then the nation's third-largest cable-systems operator. Comcast, TCI, and Time Inc. formed a consortium to acquire Group W's systems for $1.6 billion, a huge step for Comcast, which doubled in size with the addition of 520,000 new subscribers. Comcast moved overnight from being the sixteenth largest cable system to the eighth. But Group W also had 1,500 employees. Comcast thought that was too many paychecks, and the young Brian Roberts, who had been working in Flint, Michigan, and elsewhere around the country learning the trade and installing cable lines, reduced the Group W workforce from 1,500 to 1,200 before the companies were integrated. Brodsky said years later that in the Group W transition Brian “gained a fair amount of attention within the company” and “showed that he had potential.”34
The company kept growing. In 1988, Brodsky was able to buy half of Storer Communications’ cable systems—Comcast got eight hundred thousand subscribers and nearly doubled in size again, becoming the nation's fifth-largest cable company with two million subscribers. John Malone's TCI got the other half.35 Other large acquisitions tumbled in. Comcast snapped up franchises in New Jersey, Maryland, and Michigan, and continued its growth in Mississippi. After a long tussle, Northeast Philadelphia became Comcast territory in the mid-1980s, cementing Philadelphia's role as Comcast's home territory (and loyal partner in resisting competitors). More important, from the family perspective, in 1990 Brian Roberts was named president and Ralph's successor. He was just thirty years old.36
Brian Leon Roberts's path to mogul status started early. Alone among Ralph's children, Brian, born in 1959, the fourth of five siblings and the second-oldest son, took a strong interest in the cable business. While still in grade school he spent his Saturdays putting bills together in the Comcast office. “Brian is very unique in that he made up his mind what he wanted to be when he was almost in junior high school to senior high school,” said his father. “He wanted to be in the same business I was in. And he would come out to the office and sit around; he couldn't get enough of it.” Brian wasn't interested in reading books or listening to music (though he excelled at squash), and his father has described him as “a one track mind … on how to make the business better.”37 Brian was always ready to work, and was already sitting in on deal negotiations and meetings with banks in his teens; by 1975, the summer before his senior year in high school, he was out in the field with a Comcast installation crew, and before he went off to college he managed to get Comcast listed in Standard & Poor's stock guide.
Brian graduated from the Wharton School of Business in 1981 with a B.S., played a lot of high-quality squash, and became a low-handicap golfer.38 He could have had a comfortable life sitting on boards, dabbling in business, and playing even more squash and golf. But he had other aspirations. Things moved quickly for him; he joined the Comcast board in 1987 in the wake of the Group W acquisition, and he took part in the Storer Communications negotiations. Meanwhile, the cable industry continued to grow; cable in 1986 was in about 37 million U.S. homes, or 43 percent of all households with a television.39
Brian, like Ralph, had no interest in giving up control of Comcast, even for an enormous amount of money. He could see far greater profits ahead in the digital world. Given some well-timed deal making, a favorable regulatory context, and good financing, more riches were bound to come Comcast's way.
The only other cable guy whose ambition has compared with that of Brian Roberts was John Malone, former CEO of TCI, who brought down Al Gore's ire on the cable industry by his arrogance in the early 1990s. But where Malone was rough, curt, and dismissive, Brian Roberts was smooth and polite. Roberts now owns Malone's cable systems; Comcast bought them from AT&T in 2001. Malone, for his part, is proud of what Roberts has done: “Brian has really matured as a business man, as a financial expert,” he told Bloomberg News in 2010. “I take enormous pride that he's come out of our industry.”40
The company grew even faster after Brian's ascendance in 1990. So had the cable industry generally, following CNN's dramatic coverage of Tiananmen Square and the fall of the Berlin Wall; by 1991, cable was in 60 percent of U.S. homes with televisions.41 Comcast aggregated its Philadelphia cluster of systems through nine separate transactions that pulled together more than 1.4 million additional subscribers;42 it bought MacLean Hunter's systems and the Scripps systems, becoming the third-largest multiple-systems operator by 1995.43
Television viewers weren't the only ones taking notice. Julian Brodsky was proud of Brian Roberts for convincing Bill Gates at a dinner in 1997 that “cable is clearly going to be the way to go,” the best high-speed data route into Americans’ homes, far more promising than the phone companies’ copper lines. Following Brian's direct pitch, Microsoft gave Comcast a major shot in the arm by buying 11 percent of the company for one billion dollars.44 The deal was a typical sledgehammer Brodsky arrangement: “They asked about the Microsoft discount. We explained to them the Comcast premium.” The Microsoft billion went right in the bank as general funds supporting Comcast, and Microsoft received no power in return.45
This was a turning point for Brian Roberts and for the cable industry. Gates saw that with television and the Internet becoming one thing, conduits capable of shipping massive amounts of information were going to be dominant. The cable companies could do this more cheaply than the phone companies because they did not have to dig up the streets and install a second network.
At about this time, “clustering” (“You take Philadelphia, I'll take San Antonio”) became the rage for cable-systems operators. The country had been wired; there was no more room for new cabling in metropolitan areas. As a former cable mogul told me in 2010, “I thought that if cable was going to be on the technology cutting edge; if we were going to compete with the likes of an RBOC [local phone company] or a public utility, we had to own whole markets, not parts of markets.” So the operators, primarily TCI, Time Warner, Comcast, and Cablevision, swapped and clustered systems during the summer of 1997—Leo Hindery, the former president of TCI under Malone, has called it the Summer of Love—so that each company could act within clusters of subscribers, a proceeding that helped cut costs.46
The big companies’ acquisitions of smaller cable operators were also proceeding quickly. In 1996, the top five cable distributors controlled 66 percent of all subscribers: John Malone's TCI alone held a 20 percent market share. By 1999, the cable industry was dominated by just six companies: AT&T (which had bought TCI's systems for $48 billion in 1998), Comcast, Time Warner, Cablevision Systems, Charter, and Adelphia. Then, in December 2001, Brian Roberts scored a major coup by buying AT&T Broadband's cable and Internet divisions (including TCI's former cable systems) in a $72 billion quasi-hostile takeover, propelling Comcast into the top spot as the nation's largest cable company.47 FCC chairman Reed Hundt told the Wall Street Journal in connection with Comcast's bid that “the Roberts don't take ‘no’ for an answer. They repeatedly don't take ‘no’ for an answer.” More than a hundred million households were connected to cable wires by then, and Comcast now served twenty-two million of them, in forty-one states.48
RCN, a small cable provider based in Princeton, New Jersey, that has tried to compete with Comcast over the years, sharply opposed Comcast's acquisition of AT&T's cable systems in 2002, accusing Comcast of using “bullying tactics” in the form of non-compete clauses to prevent about fifteen Philadelphia-area cable-installation contractors from doing business with RCN. According to RCN, contractors were followed and photographed when they were thought to be in contact with or working with RCN, and those photographs were used as a basis to cut off the contractors from doing work with Comcast. Without access to construction and installation contractors, RCN could not offer services. The Philadelphia Business Journal noted in 2002 that Comcast responded by saying that it had taken four years for Comcast to obtain a Philadelphia franchise. “RCN chose to abandon its effort … after a significantly shorter period of time (of about two-and-a-half years).”49
By 2005, Comcast was more than twice the size of Time Warner, its closest national rival—but not its competitor in any major geographic market. The Summer of Love and the swaps and deals since then had ensured that no major cable-systems operator competed with any other. After family-run Adelphia, the nation's sixth-largest cable operator, went into bankruptcy in 2002, its assets were divided in 2006 between Time Warner Cable and Comcast. Comcast gave 500,000 customers to Time Warner in Los Angeles, another 500,000 in Dallas, and 100,000 in Cleveland, while Time Warner gave Comcast 750,000 customers in Houston, 50,000 in Philadelphia, and 200,000 in Minneapolis.50 Smaller cable providers did not share in the pie—the diminishing number of huge companies ran these trades for themselves.
As a result of this unofficial non-compete agreement, although Comcast as of 2010 had only about a 30 percent share of the nationwide market for video services (far ahead of Time Warner's 17 percent share), in the local markets where it operated it had almost no video competition from a cable operator; more important, it was just about the only choice in these markets for video-quality high-speed wired data services.51
Comcast historically has stopped at almost nothing to get strategically located exclusive franchises and subscribers that allow it to further cluster its operations. In 2011, the Third Circuit Court of Appeals allowed a class action to proceed that charged that between 1998 and 2002 Comcast increased its share of Philadelphia subscribers from about 24 percent to about 78 percent through a series of nine swaps of systems with AT&T, Adelphia, and Time Warner; acquisitions of competing cable service providers; denial to RCN of key sports programming owned by Comcast; requiring cable-installation contractors to enter non-compete contracts with Comcast; and persuading potential customers to sign up for long contracts with special discounts and penalty provisions in areas where RCN planned to compete—all with the result that consumers in Philadelphia ended up paying a lot more for pay TV than they would have in a competitive market.52
The family story continued. Ralph Roberts transferred much of his voting stock to Brian in 1998.53 And whenever additional shares are issued, the ratio of votes controlled by the supervoting shares to those controlled by ordinary shareholders is adjusted to maintain Brian Roberts's 33 percent voting power over the company.
Thus, through a well-timed series of acquisitions and swaps, as well as the helping hand of his father, by the February 2010 hearing Brian Roberts found himself at the controls of the nation's largest media company in a thoroughly consolidated marketplace. Rockefeller would have felt a twinge of jealousy.
But if other cable companies no longer were a threat, what about other technologies? Digital technology now provides the key differentiator on the high-speed Internet access side of Comcast's business, where its future growth and dominance lie: only Verizon's FiOS service, which uses fiber-optic lines (the “one competitor” Brian Roberts referred to when talking to analysts in mid-2011), represented competition with Comcast's DOCSIS 3.0 data services. But in March 2010, Verizon indicated that it was suspending FiOS franchise expansion around the country.54 Cities like Boston and Alexandria, Virginia, that had hoped to get FiOS would be left out in the cold; in the end about 15 percent of Americans (only those in zip codes whose characteristics satisfied Verizon's fairly high target rate of return) would have access to FiOS services.
Verizon stopped expanding for a simple reason. Its existing phone lines are made of twisted copper wire. To build FiOS, it has to install a complete second network—roll in the trucks, rip up the streets, and put in fiber—essentially cannibalizing the existing network on which it still sells DSL service. That's an extraordinarily expensive procedure, and Wall Street hates steep, long-term, up-front capital expenditures. Wall Street wants to see high free cash flow, ample dividends, and frequent buybacks. Comcast, meanwhile, only has to swap out some electronics to shift its existing cable network to DOCSIS 3.0 services. Much, much cheaper. And a death knell to potential competition, even though FiOS services are objectively better because uploads and downloads across its fiber optics are evenly fast. (Comcast faces competition from Verizon's FiOS in less than a fifth of its territory; Cablevision, by contrast, is competing with Comcast in almost two-thirds of its territory.55 Some cable companies are bigger and more important to one another than others; Comcast and Time Warner are strategically aligned in a way that sometimes leaves out Cablevision.)
Another possible competing technology, wireless access, cannot match the speeds cable lines provide. It cannot offer the same capacity unless there are towers connected to fiber lines everywhere—and that's another major up-front expense that the telephone companies don't want to incur. John Malone, among many others, has scoffed at the idea that wireless access could make a dent in cable's dominance: “The threat of wireless broadband taking away high-speed connectivity [market share] is way overblown,” he said in May 2011. “There just is not enough bandwidth on the wireless side to substantially damage cable's unique ability to deliver very high-speed connectivity.”56
Comcast has always been quick to adopt new technology. With Brian Roberts's assistance, in 1988 the cable industry created and funded a technology research center—Cable Television Laboratories, usually called CableLabs—that has played a key role in developing shared technologies and technical advances for the industry. CableLabs is an unsung hero of the cable industry; its founder, Richard Leghorn, predicted back in 1987 (before the birth of the commercial Internet) that the cable industry could become “a multi-channel, multi-format video programmer and publisher utilizing its own interactive, point-to-multipoint optical cable plant,” and this is exactly what happened.57
In 1997 CableLabs came up with standards that could be used to deliver packet-switched, Internet Protocol–based voice services over the cable lines (nicknamed VoIP, for Voice over Internet Protocol), and Comcast quickly adopted the technology, making itself the nation's third-largest telephone company.58 The company embraced the “DOCSIS” (Data over Cable Service Interface Specification) standard developed by CableLabs as soon as it was available, and moved its system to all digital communications in 2008–9. That freed up bandwidth inside its pipe (digital signals can be compressed more efficiently than the old analog signals) while enabling new revenue streams for convertor-box rentals (so that analog sets could continue to be attached to cable wires) and high-definition video. More recently, Comcast was the first to offer CableLabs’ DOCSIS 3.0 protocol, a digital channel-bonding technique that makes possible two-way capacity of Internet Protocol traffic of at least 100 Mbps. By 2011, Comcast had covered some 80 percent of its territory with DOCSIS 3.0, on a substantially faster sche-dule than any other cable distributor, and was selling this high-speed access at high prices.59 Again, only Verizon's FiOS service could hope to compete with the speeds possible with DOCSIS 3.0—and Verizon was backing off.
So Comcast was aiming to stand alone in offering truly high-speed Internet access in each of its markets. This was a sensible move: data access is vastly more profitable than video services—it takes two dollars of video revenues to deliver the same profit as one dollar of Internet access revenues—and Internet access uses only about one-sixtieth of a cable system's total bandwidth.
But technology was only part of Comcast's success. Content was also important.
Brian Roberts knew that Comcast needed to maintain, as long as possible, its power to sell subscribers large bundles of programming that included “must-have” content—particularly live sports. To do that, he needed to make sure that live sports would not be available over the Internet on demand, at attractive prices, without a subscription. The programmers and networks had to be assured that they would make more money selling to cable distributors than directly to online consumers. The Comcast-NBCU deal would stave off the day when programmers revolted; Comcast would become itself a major player in the programming market.
Content was always part of the Comcast story. In the early days, there often was not much programming available to cable operators. In an early system in Sarasota, the community could pull in stations from Tampa through rabbit ears, and local televisions could even get the ABC network from Largo, Florida, about half the time. Roberts, Aaron, and Brodsky were offering Sarasota residents just half a channel of ABC in exchange for a monthly subscription fee—not a very attractive deal.60
As Comcast expanded, it looked for ways to build up content. Dan Aaron thought cable would eventually be bigger than just a reception business—that, in Brodsky's words, “there should be things we can do to bring people other than broadcast television.” Aaron's early attempts to offer content provide fodder for Comcast's autobiography. In Tupelo, one of the first Comcast locations, the trio was operating a three-channel system. Doing an electronic upgrade to five channels by moving amplifiers around within the system would have taken a large investment, and Brodsky worried about wasting money. Aaron said he had a feeling they would be able to use five channels. As Brodsky tells the story,
So what does Dan do with this fourth channel, pioneer that he was, a visionary. … He talks to Telemation out in Salt Lake City and they built him a diorama, and he mounts a videocam, a very cheap video camera on a post that rotated 180 degrees and in the diorama he had a clock, a thermometer, a wind gauge, a rain gauge, a barometer and at the end of it was a place to put in a placard. … The first one was Eat at Joe's Diner, which cost Joe's Diner ten dollars a month, could have been the first local advertising that I knew of, and he played background music behind this thing, and he had [the first] time-weather channel.61
Telecommunications, Inc., later known as TCI, made a similar attempt at local programming in the 1960s. As Mark Robichaux puts it in Cable Cowboy, it was “a TV camera aimed at a news ticker service, another fixed on a thermometer and, occasionally, a camera trained on a goldfish bowl.”62
Aaron's programming was hardly a hit, but Comcast continued to explore the content business. Its logic from the beginning has been that if you don't know whether content is king or distribution is king it is best to spread your bets. You want to be selling something that people can get only from you. When a key partner, the McLean newspaper family of Philadelphia, dropped out, Comcast had to sell its Florida cable franchises (a decision Ralph Roberts and Brodsky regretted for years), but it continued to acquire lucrative Muzak franchises across the country. In the end, Comcast became the largest Muzak franchisee in the nation, selling off its interest to Muzak managers only in 1993.63
Comcast's $20 million 1986 investment in the QVC (Quality, Value, Convenience) home-shopping channel, a hedge-your-bets deal made just after its acquisition of the Group W cable systems, was one of the best moves the company ever made: QVC eventually brought in a third to a half of Comcast's revenue. For little to no cost, through QVC, Comcast was paid by its subscribers to watch content that was presented by advertisers—the sellers—and then paid again when the subscribers phoned in their orders to QVC. In 1992, Barry Diller, former second-in-command at Paramount, took over QVC; when Diller made a $7.2 billion bid in 1994 to merge CBS with QVC, Comcast blocked the sale with a $2.2 billion offer to take over QVC entirely. Comcast and Malone's TCI divided ownership of QVC (with Comcast in control), and Diller promptly left. Comcast's $250 million investment paid off handsomely; to help pay for the AT&T systems in 2001, it sold its QVC shares to Malone for almost $8 billion. Comcast continued its diversification into content by buying a majority interest in E! in 1997, as well as the Golf Channel and Versus, its main sports channel.64
Comcast's more important moves by far have been in sports: in the late 1990s, it leveraged its majority interest in the NHL's Philadelphia Flyers, the NBA's Philadelphia 76ers, and Philadelphia's two major sports arenas into a twenty-four-hour regional channel called SportsNet Philadelphia. Within a few years, Comcast owned exclusive rights in broadcasts by teams and regional sports networks from coast to coast, with dominion over games played in the Bay Area, central California, Chicago, the mid-Atlantic, New England, New York, the Northwest, Houston, and the Washington, D.C.–Baltimore area—ten owned-and-operated Regional Sports Networks in seven of the ten largest television markets, which became the Comcast SportsNet. Because no competing video provider can hope to survive without access to local sports programming, Comcast's refusal to license Comcast SportsNet to RCN in Philadelphia helped keep that potential competitor at bay; it did the same thing to DirecTV and Dish Network.65 Comcast has used SportsNet as a sledgehammer in many contexts.
Brian Roberts's only public misstep came in 2004, when he made an unsolicited $54 billion takeover bid for Walt Disney in the mistaken belief that the Disney board would welcome it. He first approached then-CEO Michael Eisner with an offer, but Eisner turned him down without even consulting the board. Taking Disney under Comcast's wing would have doubled the number of Comcast employees and given it access to premium content, not to mention theme parks and merchandising. But Roberts also wanted the Walt Disney Company because it owned ESPN—the QVC of sports. The lucrative ESPN channel, launched in 1979, had become the highest-priced must-have content in the cable world, and Comcast had little leverage against it. To give Comcast a sledgehammer it could use against all other pay-TV distributors, Roberts needed ESPN. If it took acquiring the under-performing broadcast network ABC (also owned by the Walt Disney Company) to get it, he would do it.
So after Comcast's bid was rejected by Eisner, Roberts sent a letter to the Disney board, making the offer public. But whoever had hinted to him that the Disney board had had enough of Eisner's leadership and was willing to see him outmaneuvered had been mistaken. Following Roberts's hostile takeover announcement, Comcast's share price swooned while Disney's went up, making Comcast's all-stock offer—based on giving shareholders 78 percent of a Comcast share for every Disney share—less attractive to the Disney board, which publicly rejected the bid.66 After a few weeks, Comcast backed down. Roberts claimed that stepping back from the deal showed discipline, but the reality was that he had miscalculated the board's reaction. This signal failure on Roberts's part led directly to the Comcast-NBCU merger, which gave him another chance to acquire giant sledgehammers in the form of must-have cable channels and premium sports content.
The Disney bid sheds light on the concentrated nature of the content industry. Merger mania has been widespread on the programming side since the 1970s, and by the time Brian Roberts made his attempt to buy Disney there were few media conglomerates left to choose from. In 1999, Fox, Time Warner, Disney, and John Malone's Liberty dominated the programming industry; by 2005, News Corp. (News Corporation) controlled Fox and its valuable networks and the New York Post; CBS and Viacom (owner of DreamWorks, Paramount Pictures, MTV, Comedy Central, BET, and Nickelodeon) were both controlled by Sumner Redstone; GE owned NBC Universal, USA Network, and its long list of popular cable channels; Time Warner owned HBO, Warner Bros., and TBS; and Disney owned ABC, Miramax, and ESPN. Since Robert's Disney bid, media conglomerates have become even more global, owning television, newspapers, magazines, publishing outlets, and sports rights in many countries.67 Many voices speak, but there are only a few ventriloquists behind the screen.
Brian Roberts's announcement in December 2009 that the Comcast-NBCU merger made his company “strategically complete” represented a moment of extraordinary personal and professional achievement. Comcast had grown by shrewdly rolling up independent cable systems—just as the enormous railroad combinations of the nineteenth and twentieth centuries were created by buying failing systems throughout the country. Together with the other major cable operators, Comcast found a way to geographically cluster its operations to take advantage of the enormous returns to scale that characterize the cable industry. It had achieved success by embracing innovative technology and paying what it took to install upgrades that others could not match without enormous investments. It had also achieved scale and diversification by buying up content—first Muzak, later regional sports operations—that people couldn't live without. Thanks to its powerful business model and desirable sports content, among other factors, Comcast weathered the 2009 recession well: cable revenue growth rates were unaffected.68 Comcast was becoming a high-speed Internet access company; that's where the growth was. The Comcast model was extraordinarily resilient economically, and it came with enormous amounts of free cash and a vanishingly low level of default risk.
Comcast achieved all this by keeping its costs low and targeting dense, urban centers rather than far-flung rural communities that might be more reluctant to pay high subscription fees. It consolidated its back-office and other overhead services and was extremely careful with its finances. “We were lucky, and we were good,” said a wistful Brodsky as he stepped down after decades of service. “We never saw a cable company we didn't like.” Mark Cooper, one of the consumer advocates who testified against the merger in February 2010, might rail about Comcast's being among the lowest-ranked companies in America for customer service; Comcast had bigger fish to fry.69
The company achieved all this while maintaining the image of family management. Wall Street believes in the Roberts family story. Legislators believe that Brian Roberts is a highly competent, low-drama executive who does his best to treat his employees like family. It is a trait Brian shares with John D. Rockefeller; Rockefeller “presided lightly, genially, over his empire,” according to Ron Chernow's biography of the ruthless mogul, and “placed a premium on internal harmony.”70
In Brian Roberts's view, as he testified in early 2010, Comcast was more than ready to take on the mantle of the world's foremost media company. The NBCU acquisition would be the icing on the cake. As John Malone told Bloomberg News in 2010, “Comcast is so big, there's no exit scenario. They are what they are. Nobody is going to buy Comcast, the company. It's too big.”71 Malone's TCI cable-systems business had ended up in Comcast's hands, and he admired what Roberts had been able to do. As he told analysts in a conference call in 2011, “As always in the cable business, in my—whatever it is—40 years in it, it's all about government regulation and technological change. But for the moment, cable looks terrific. … In broadband, other than in the [Verizon] FiOS area[s], cable's pretty much a monopoly now.” Malone sounded gruffly wistful. “I never should have sold to AT&T.”72
The word monopoly prompted nervous laughter among Malone's colleagues. “Okay,” one of them said. “Any other questions?”