13) Title Fights: The King of Pay-TV
In 1977, Jeff Bewkes was an affable 25-year-old MBA graduate out of Stanford, one of a number of similarly young grads in the trainee program of Citibank of New York, doing whatever bank trainees do in a nest of cubicles at Citibank’s training center in a drab Long Island City warehouse across the East River from the gleaming towers of Manhattan. One morning, Tony Wojick, a trainee in Bewkes’ Citibank accounting class, was talking about some movie he’d seen on TV the previous night.
That didn’t make sense to Bewkes; the movie Wojick was talking about hadn’t been in theaters that long ago. It was too soon for it to be on TV. “You saw it on the Monday Night Movie?” he asked Wojick, surprised one of the networks had gotten it for one of their movie slots so early.
“No,” Wojick told him. “You don’t have HBO?” Wojick described the service to him.
The light went on for Bewkes: “You mean pay-TV?”
Bewkes went home to his small Manhattan apartment in a four-story walk-up in the eighties and put in for a subscription. It cost him $10 for his basic cable, and another $10 for HBO (out in the ‘burbs, the typical price was $8 and $8).
Two years later, Bewkes was in the executive office of Citibank putting in his resignation.
“I’m going to HBO.”
To quote from Bewkes exactly: “I can’t remember the guy’s name, but at that point he uttered those immortal words, ‘HBwhat?'”
At first, Bewkes’ boss thought Bewkes was talking about the Hong Kong bank HSBC. After Bewkes clarified the point for him, his boss looked at him as if he were crazy. “You’re going from banking to TV?”
A little more than a decade later, Jeff Bewkes was President of HBO, elevated to CEO in 1995, and by 2008 was sitting in the CEO’s chair for HBO parent Time Warner, a post he still holds.
Bewkes was not the only one to have some idea of HBO’s potential in those early years. Not long after Bewkes had started his trainee program at Citibank, Gerald Abrams had left the Jozak Company to start his own production company, Cypress Point Productions. In the early 1980s, Abrams began hearing about the then explosively expanding service. He knew some of the people involved and knew then HBO was something “special.”
Movie-loving Josh Sapan, who would one day end up President and CEO of AMC Networks and become considered one of the most innovative execs in the TV industry, had begun his media career in the 1970s as a recent University of Wisconsin grad schlepping a couple of projectors around the country in the back of his station wagon to stage film screenings on college campuses. Sapan began hearing about HBO in the late 1970s. He can still recall one of HBO’s signature interstitial promo pieces in which a camera zoomed across a detailed model city then soared up into the sky to a gleaming HBO logo, accompanied by appropriately swelling music. “I was impressed by the grandness of the ambition (the piece) conveyed.”
At the time, both the grandiosity and the epic ambition were both amply justified.
HBO veterans look back on those days of the late 1970s and early 1980s and call them, “The Go-Go Years.” Twenty-seven years after John Walson had set up his little hilltop antenna, there were less than a thousand CATV systems in the U.S. Twenty years after HBO went on the satellite and kicked off the modern cable TV era, there are over 9,000 cable systems operating in the country.
When I joined HBO, the vets from the company’s early days were still telling stories about how easy it had been selling HBO during those first post-satellite years. One of the field reps told me:
The cable company would send a truck to hook somebody up. When he was done, the tech would head back to the shop. Somebody would see the truck, come running out of his house and literally chase the truck down the street, waving and yelling at him to stop so the cable guy could hook him up! You’d be amazed how many times that happened.
It was a boom, like the California Gold Rush of 1849, and, just like The Gold Rush, everybody wanted to get in on it. Beside the premium services that had launched within months of HBO’s 1972 debut, in 1976 Viacom Cablevision introduced its pay-TV service, Showtime. In 1978, Showtime, The Movie Channel, The Home Theatre Network and Spotlight — a service formed by a several cable operators — were on the satellite competing in the national marketplace with HBO. In the 1980s, there came The Disney Channel (which reconfigured as a basic channel in 1997) and Galavision, a Spanish-language premium service. And, four movie studios, figuring they could make more money with their own cable programming service than selling their movies to pay-TV, put their heads together and began planning still another pay-TV service: Premiere.
There were also a number of regional and stand-alone premium channels (a stand-alone service being one that only operated in a single market). PRISM (Philadelphia Regional In-home Sports and Movies) was an HBO-like service based out of Philadelphia formed by the United Artists and 20th Century-Fox film studios and the owners of three Philadelphia sports teams. The Teleprompter Corp. and Hughes Aircraft kicked off the Z Channel in Los Angeles which carved itself a niche market in the premium service business by doing things the larger services didn’t do, but which local film buffs adored (like the time Z made quite a splash by running the theatrical and director’s cut versions of Michael Cimino’s 1981 film, Heaven’s Gate, the movie reputedly responsible for sinking United Artists).
Another stand-alone service was Wometco Home Theatre based in New York City. WHT’s approach, however, was unique. Launched in the earliest days of HBO’s operation, WHT tried a short-cut; instead of going through cable, the company resurrected the concept of an over-the-air scrambled signal like the one which had operated (and ultimately folded) in Hartford, Connecticut in the 1960s. Cable still hadn’t reached a lot of the metropolitan area. WHT’s customer pitch was, “Why wait for cable? Why bother with a cable company even if you could get cable when you can get all those same great movies from us now!” But, despite being one of the first premium services in New York to offer 24-hour programming (WHT ads called it “fat TV”), and backed by an aggressive marketing campaign, WHT couldn’t compete. While WHT had an advantage over the Hartford subscription TV system of the 1960s in that it could scramble color TV signals, picture quality still wasn’t so hot. Plus, people wanted cable. They didn’t just want the one channel WHT offered; they wanted that whole batch of new stuff that came with a cable subscription. By the mid-1980s, WHT was gone.
Like WHT, there were other vehicles trying to take advantage of the gaps in cable coverage to exploit the ballooning hunger for pay-TV channels and, particularly, HBO. One of these was MDS (multi-point distribution system). MDS companieswere not programmers like WHT, but a delivery system alternative to cable.
MDS companies used microwaves to distribute programming. A central microwave transmitter was set up in the target market, and each subscriber was given a small microwave receiver to put on their roof or plant in a window aimed at the transmitter. MDS companies needed a fairly dense population center to be profitable, but for many years that was the very slice of the market where cable penetration was weak.
At the time, the ideal cable market was suburbia. Even though people were a bit spread out, wiring the ‘burbs was comparatively easy. On the other hand, in major urban centers with a lot of multiple-dwelling structures (in English: big apartment buildings), wiring was a pain. Instead of just stringing cable atop utility poles along a pleasant suburban street and running a drop into subscribing households, it was a sometimes herculean effort to run cable through the walls of apartment buildings, particularly if they were old buildings which didn’t have a lot of wiring space in the walls.
Another obstacle was the simple reluctance of cable companies to want to deal with certain big city neighborhoods, particularly neighborhoods with a lot of low-income households, which is a nice way of saying cable ops didn’t want to deal with poor people. Cablers in inner cities had to deal with high rates of equipment vandalism and theft as well as unpaid cable bills.
City franchise offices, in turn, refused to grant franchises to operators who refused to provide service to everybody: “If you don’t give all our residents cable, you don’t give cable to any of them!” Consequently, major urban markets like Chicago, Newark, and particularly most of New York City (even though Manhattan had had cable since 1965, the outer boroughs — Queens, Brooklyn, The Bronx, Staten Island — only started getting wired in the late 1980s) were extremely late coming into the cable fold. This was the hole MDS companies looked to exploit, carrying premium services like HBO and Showtime to city dwellers that couldn’t get cable.
But the MDS business had a slew of problems. Signal quality was awful and very prone to interference. And, as you may remember from earlier chapters, microwave transmission requires direct line-of-sight on the transmitter. While MDS dealers got pretty handy at bouncing signals off buildings like billiard balls in a cushion shot to get service to subscribers, there were still plenty of people that were — literally — in no position to get service. Line-of-sight reception also put a practical range of just 10-15 miles on signal transmissions.
MDS signals were also outrageously easy to pirate. The joke used to be that anybody with a wire hanger and a coffee can could pick off an MDS signal. Some people who weren’t even trying to steal service found it coming through on their TV sets because the set happened to be sitting in just the right spot in their living room!
Some pay-TV programmers — including HBO — were occasionally reluctant to deal with MDS distributors. MDS guys claimed it was because programmers were prejudiced in favor of cable operators because cable ops made up most of their business. Pay-TV programmers made the point they didn’t like their service on a system you could steal for the price of a can of coffee. Plus, they claimed many MDS operators were way underfinanced. On more than one occasion, a programmer and an MDS operator would wind up in court with the operator pointing at the programmer and yelling about anti-competitive behavior because the programmer had cut off service, and the programmer yelling back that service had been cut off because the operator wasn’t paying his bills.
Still, for a while MDS operators did manage to carve a niche market for themselves in a few cities. In places where there was no cable it was better than nothing, but as MDS-served neighborhoods were cabled, the MDS business generally suffered and eventually evaporated.
(MDS operators, which could only offer one channel, tried to become more competitive with cable by introducing MMDS — Multichannel MDS — which provided several channels of programming. But MMDS didn’t solve microwave companies’ technological or financial problems, and it still couldn’t match the far greater tonnage of programming cable could offer.)
Then there were (and still are) Satellite Master Antenna TV — SMATV — companies. These weren’t so much alternatives to cable as an adjunct. What a SMATV outfit did was set up a satellite receiver for a particular structure — a hospital, a particular apartment building, and especially hotels and motels — and put together a package of programming for that one building; in essence, a building-sized cable system. SMATV systems serve sites either cable systems don’t reach, or an op figures is too much of a headache to deal with.
Booming though the early days of the new cable era were, they didn’t boom enough to support all the players. By the time HBO went on satellite in 1975, Dore Schary’s TheatreVisioN was gone. Channel 100, Home Theatre Network, WHT, and Spotlight would follow It down the tubes. Los Angeles’ Z Channel would last through several changes in ownership until 1988 when it abandoned its film buff orientation and was folded into a network of regional sports services. Premiere never made it to air, felled by anti-trust charges.
Among premium services it was evident early on in the satellite era that the pay-TV business was going to be a two-contender bout between HBO and Showtime.
Compared to HBO, Showtime’s launch seemed to happen under more promising signs.
In the early 1970s, the FCC had declared that the broadcast networks couldn’t syndicate the programs made for their airwaves, nor could they own cable systems. CBS spun off its syndication and cable operations into a separate company called Viacom. Viacom was a great believer in the idea of pay-TV, saw the same opportunity in the business that Time Inc. did, and launched Showtime in July of 1976 primarily on Viacom cable systems. Showtime ended its first year on a more promising note than HBO. Whereas HBO’s sub count was kicking around 8,000 at the end of 1973, Showtime closed out its first twelve months with a count of 55,000.
Despite that strong beginning, looking back it’s obvious Showtime had been hobbled from the outset by several factors, the most obvious drag on the service being its late start. Showtime may have had a better first year than HBO, but about the same time Showtime was counting subscriber #55,000, HBO was on its way to subscriber #1,000,000. By the time Showtime got on the satellite in 1978, HBO was in 2,000,000 homes in 46 states.
It was a head start Showtime never overcame. By the late 1980s, HBO had a brand recognition level in the same league as Coca-Cola, meaning you had to have been living in a cave since 1972 not to know who HBO was. HBO had become so identified in the public mind with cable TV, that many cable customers thought HBO and their cable company were the same thing! In fact, a number of Showtime customers thought Showtime was part of HBO (I know this for a fact; I took some of those calls)!
Showtime also often suffered from a lack of financial resources and executive stability. In 1979, Viacom sold a half-interest in Showtime to Teleprompter, whose eventual parent, Group W, sold its interest back to Viacom three years later. Then, in 1983, Showtime merged with Warner-Amex’ The Movie Channel, then acquired Warner-Amex’ half two years later. All the buying and selling back-and-forthing meant Showtime never had the financial muscle to do what HBO was doing, and the changes in bosses that went with the back-and-forthing meant the company rarely had the kind of consistent, familiar leadership HBO had (since its earliest years, HBO’s chief execs have regularly come up from within the company).
Consequently, HBO was consistently able to outgun Showtime in the money it could pour into programming, promotion and marketing. Even when Showtime tried sudden catch-up strategies — absorbing Spotlight and its subscribers in 1983, and merging with The Movie Channel, the service was unable to convert those moves into sustained momentum, and the service continued to lag well behind HBO in subscriber counts (even today, SHO’s sub base is roughly half that of HBO).
Let me give you an illustrating event here.
Back in the 1990s, some of HBO’s senior marketing execs defected to SHO. I was in a meeting where some staffers expressed concern the defectors might reveal some of HBO’s marketing secrets to their new SHO employers.
The VP leading the meeting laughed. “What’s he going to tell them? There’s no secret! We spend more money! They don’t have it!”
Throughout much of the 1980s, HBO’s main marketing efforts were centered around the several free preview weekends it produced each year. During the preview weekends, cable ops were granted permission to put HBO on an open channel so non-HBO subs could sample the service. The preview was supported with an on-air and direct marketing blitz (at one point, HBO was one of the biggest direct mail marketers in the country), discount offers and 800 number call centers to take orders.
Looking back, the previews look kind of corny. On-air, they resembled PBS beg-a-thons with HBO’s usual, polished interstitial spots replaced with on-air hosts pushing viewers to buy buy buy now now now. Along with call centers, HBO set up complaint lines as well for regular subs beefing about the tedious buy buy buy message and the fact that new subs were getting a deal they hadn’t gotten, and non-subs beefing that their cable op wasn’t carrying the preview (participation was voluntary). Despite the beefs and some later attrition from new subs who, after a week or so of regular viewing, quickly picked up on the fact that HBO’s regular programming wasn’t quite as, oh, let’s say muscular as the specially selected preview line-up, the previews were the biggest source of new HBO subs for years.
But what drove the previews — what made them even possible — were HBO’s deep pockets, and Showtime’s pockets were never as deep.
Almost out of the gate, HBO had won the title as King of Pay-TV. And, while the marketing mavens at HBO and its competitors constantly strategized punches and counter-punches, in retrospect, it had never been much of a fight.
But Showtime — as anyone who has ever enjoyed The Tudors, Nurse Jackie, Weeds, and Dexter can attest — didn’t go the way of WHT and Premiere and the other pay-TV wannabes.
If Showtime couldn’t compete with HBO dollar for dollar, and it was going to survive at all, it was going to have to find another way.
14) The Movie Duels