Episode 6: Cable TV Matures

The Problem with Cable

By the time the FCC ended its first investigation of cable television in 1966, the commission concluded that the new technology was a serious threat to broadcast television. The basis of the threat was cable’s perceived ability to transmit unlicensed programming into protected television markets, the potential to create original programming that could siphon off lucrative advertising revenue, and the potential to link cable systems into regional or nation networks in direct competition to the NBC-CBS-ABC monopoly. Despite the fact that this “potential” was not realized for several years, the threat against the billion dollar television industry was enough to provoke regulatory action. Under pressure from the National Association of Broadcasters' lobby, the FCC initially planned to maintain cable technology as a system of wire relays.

Stating its intention to integrate cable services into the national television structure to promote broadcasting in the United States, the FCC added that the new rules provided:

"...the minimum measures [the Commission] believes to be essential to insure that CATV continues to perform its valuable supplementary role without unduly damaging or impeding the growth of television broadcast service."

The FCC had some reason for concern. In the 1960's cable television became firmly entrenched in large urban areas, including New York, Philadelphia and Cleveland, where the new systems could provide better reception. By 1966 there were 1,570 cable systems, most of which were capable of receiving 12 channels. An additional 1,026 local franchises had been signed but were not yet operational, while 1,958 more applications were pending. These “intrusions” were argued by broadcasters to affect not only large television stations, but also smaller VHF and UHF stations, the latter providing the only educational programming to urban markets.

To slow cable’s growth, the FCC enacted one of the most restrictive regulatory agendas in media history. Within the top 100 television markets, a broadcast station's signals could not be extended beyond its own range by any cable television system operating in the same market. This restriction could be based on a claim by any local broadcaster that new programming would do financial harm to their business, even though the broadcaster was not required to provide evidence to substantiate the claim.

The FCC also required cable systems in those markets to carry all local stations to prevent viewers from being "locked out" of broadcast television, and add any new stations that opened in the future. This rule virtually guaranteed that all programming for twelve channel cable systems, the industry standard in 1966, would come from broadcast television sources.

Cable system operators were also restricted from producing and originating their own programs, based on the Commission’s assumption that the growth of "fee television" (referring to cable’s monthly subscription fee) was inconsistent with the public interest to enjoy “free” broadcast television service.

Outside government, an additional obstacle was erected by AT&T and its mighty Bell System, the principal owners of utility poles in the United States. Above ground poles were the lifeline of early cable systems, which depended on wire strung just below electrical and telephone lines to extend service in a city’s neighborhoods. AT&T, a perennial partner with NBC’s parent company RCA in national and international communications, was apt to charge exorbitant pole rental rates, and in some cases, refused to rent altogether. Petitions to the FCC by cable operators were often ignored, with some rulings delayed or tabled indefinitely.

Coupled with negative press on “pay-tv”, juxtaposed to “free television” offered by broadcasters, the deck was virtually stacked against cable television in its early years.

Cracks in the Dike

Despite these obstacles, progress was made on a few important fronts. Some small market broadcasters did not support the FCC restrictions. Dissident members of the NAB, organized as the Association of Maximum Service Telecasters (AMST), openly criticized the argument that CATV would hurt local television, calling FCC sanctions "precipitous and ill-founded".

There was undoubtedly some self-interest behind this protest. All AMST members were TV station owners and cable operators who resented the restriction against program origination. Some had interests in publishing and radio.

Another advocate of cable was FCC Commissioner Nicholas Johnson. Writing in The Nation, Johnson rejected the broadcasters' argument that cable was “disruptive”, stating that cable’s real potential was the capacity to connect urban neighborhoods with distant information centers, and to provide a method of communications between diverse populations.

Other social commentators soon chimed in. Harvard professor Ithiel de Sola Pool wrote that unlike other media, which standardized information and became powerful forces for conformity, new wire television systems had the potential to serve individual needs. This was an early reference to cable’s ability to “narrowcast” or target specific audiences.

Rand analyst Herbert Dordick argued that cable’s greater bandwidth capacity will likely give planners more options when deciding what kinds of hardware to employ, but will place greater pressure on operators to develop services to put on local channels.

Local government also began to see the light. The City of Los Angeles, in the wake of the Watts riots, commissioned Rand to explore ways of using CATV to improve community awareness of local issues and communication between minority neighborhoods and City Hall. The City of New York considered a similar service in the five boroughs, and began exploring the possibility of operating its own system.

New York's interest was the catalyst for CATV advocacy in the United States among local agencies, public interest groups, religious organizations, educators and concerned citizens. Numerous articles soon began appearing in the New York Times, one by Ralph Lee Smith, who suggested that given the present debate over cable and the lack of investment, CATV's future remained clouded unless the FCC amended its ruling.

Responding to the popular sentiment in December 1968, the FCC began an inquiry into CATV rules governing local origination, mentioning the findings of the Mayor's Advisory Task Force in New York City. Noting the existence of program origination in a number of communities, the FCC wondered whether cable operators also could provide cities with local information channels, and suggested that operators could cover the costs by increasing subscriber fees, charging local users for information, and offering limited advertising between programs. In the same inquiry, the commission asked whether city and state governments should have the authority to establish and enforce local communication requirements, and to determine how those requirements could best be met by cable operators.

On October 27, 1969 the FCC’s "First Report and Order" openly encouraged a wide range of experiments in local programming and origination, concluding that cable systems with more than 3,500 subscribers were most likely to benefit. The commission also ruled that city governments had the authority to open “franchises” to local cable operators, as well as the right to create standards for channels and other communications services in their communities so long as those rules did not conflict with federal law.

A New Environment For Cable Emerges

While some cable operators were unsure about local origination, it was clear by the late sixties that many saw advantages to producing their own television shows. As early as the 1967 NCTA Convention in Chicago, Broadcasting Magazine reported that cable operators "talked openly for the first time about program origination and advertising sales”. The editors of Business Week also suggested that the involvement of major corporations such as Time, Inc., General Electric, Kaiser, Gulf and Western, Hughes Aircraft, General Instrument, General Tire and Rubber, and Westinghouse was a major inducement to produce programs for urban markets."Once cable men get used to the idea of originating their own programs", the editors added, "the next step is to sell advertising on them just like the standard broadcasters."

These investors had discovered a new incentive. Cable television systems were simply cheaper to operate than broadcast stations. Most cable operations consisted of low cost antennae, wires and few personnel, which meant low overhead. Broadcasting, on the other hand, required long-term investment in program production, equipment, trained personnel, and facilities. This was an advantage to cable operators in the short term, but proved to be a disincentive for long-range planning and capital investment beyond 10 years.

As cable investors waited for the FCC and the courts to make a decision on the industry's future, many were unwilling to plan long term. As a result, most investment strategies sought a faster rate of return than conventional broadcasters. This assumed an emphasis on cash flow rather than long term investment. As Business Week observed: “In cable, the name of the game has always been cash flow, not earnings. Cable systems normally are depreciated on schedules running up to a maximum of 10 years,…”

The result was that a larger amount of a cable system's purchase price was treated as a depreciable capital expense, a portion of which was written off each year, and recovered when the system was sold. Thus, write offs were usually high and taxes were held to a minimum. After the depreciation ran out, a cable operator could sell the system, take the proceeds to reinvest in or build other systems, and start the process all over again. This was a practice that evolved throughout the next three decades, and became the basis of numerous system sales and industry consolidation by the end of the century.

This practice, created by federal regulation and market conditions the new rules supported, also was the major reason why early investment in cable focused on developing different types of programs supported by advertising, rather than the services and benefits predicted by many technology pundits. It was also a major reason why the cable industry began to grow in a pattern more similar to broadcasting that most cable operators would have admitted.

The trend toward ad supported programming was evident by the late sixties. A 1969 National Cable Television Association membership survey, for example, determined that of the 1048 responding cable operators, 329 originated their own shows and 183 accepted advertising. Most systems averaged fourteen hours each week. By 1972 Broadcasting Magazine reported that the number of original programmers reached 400, while 428 cable systems accepted advertising.

At the 1969 NCTA convention in San Francisco, several companies including MCA, United Artists and CBS, offered program packages for sale. These included programs for children, teens, and women, independently produced movies, news and entertainment. A company called Official Films, Inc. signed up 14 cable operators to receive two adventure series, a foreign film package, and children's cartoons.

Several major cable companies were also aggressively pursuing original programming sources. In 1970 Manhattan Cable contracted with Madison Square Garden to cablecast 125 sporting events. National Trans-Video contracted to cover local parades, football games and local news events in Pennsylvania. Tele-Prompter, Inc. acquired a children's cartoon producer called Filmation Associates to compete for Saturday morning audiences. Television Communications, Inc. also proposed a pilot programming service to small systems for additional fees. Later plans revealed a move to larger cities.

As a result, the issues raised by social activists, educators, and other public interest advocates were initially lost in the debate. The day seemed to belong to well capitalized investors who saw new advertising markets opening as the business of cable television expanded.

The question remained whether cable operators could deliver on their promise of better programming and new services to the new communities they now served.

Next Time: The Origins of the Information Highway

Copyright © 2007 R.E. Xavier