It’s Not TV: HBO, The Company That Changed Television: The Wall

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HBO

15) The Wall

 

I used to say this to the staff,

We’re all working very hard, but pause and reflect,

because not many people in their professional lives ever get the chance that we’re having.”

Tony Cox

It’s New York, the early 1980s, and if you were young, still relatively new to The City, looking for only your first or second job, it would’ve been hard to find a more exciting – or fun – place to work than Home Box Office. It was a great, grand time for the company, one in which it was hard not to feel you were part of what still felt like an adventure into unmapped territory, where success followed success, and where – as I remember one of my colleagues saying in reflection – it often seemed like one, big party. In an HBO 20th anniversary commemorative brochure, Tony Cox, one-time president of the HBO Network group, and who would go on to become chairman and CEO of Showtime, called the 1976-1984 period at HBO “…one of the unique professional business experiences that anyone could ever have…there was a unique bond amongst us. We were a band of happy warriors hanging together in a very frantic situation.”

When I joined HBO in 1982, the company was on a seven-year hot streak; one that seemed like it would never end…until it did.

*****

Les Read, one of HBO’s veteran salesmen, once told me that in those first years after the service went on the satellite, the service was still such a novelty that its debut in a new territory was actually a local news event. HBO and the cable company would stage a nice little presentation, an official from the city – sometimes even the mayor – would be on hand, the local press would show up, and then it was time to switch on. Only since an engineer sitting at a control panel hitting a button didn’t provide the necessary dramatic oomph, the HBO sales guy would show up with an electrical switch box – the kind with a big lever on the side like a one-armed bandit – and when the appointed hour came, the mayor (or whoever) would throw the switch.

The box wasn’t hooked to anything, mind you, and at that point that boring engineer sitting at his boring panel would be cued to do his boring button-pushing, but it all made for some effective pictures in the local paper.

By the early 1980s, HBO was becoming less and less a novelty, and more and more an ingrained, entrenched, dominating part of the media landscape. In the seven years since the company had gone on the satellite, it had grown from less than 300,000 subscribers on 101 affiliated cable systems to ten million subs served by over four thousand affiliates in all 50 states, Puerto Rico and the Virgin Islands, with no slowing of the expansion in sight (HBO does not retain foreign rights on the films it licenses and therefore cannot be distributed outside U.S. territory, but since Puerto Rico, the Virgin Islands, and later Guam were American territories, HBO could extend its distribution to them). As icing on the cake, the company had had an instant follow-up success with the launching of Cinemax. Reflecting the company’s growing national presence, HBO opened up a network of regional offices to provide sales and marketing support to affiliates around the country, while the Los Angeles office also served as HBO’s connection with the Hollywood community.

The company was growing so large and so fast, there was – literally – no place to put all the staff! In 1972, the entire organization took up only a few offices on a floor shared with Don Robbie clothing in the Time & Life Building, a massive glass obelisk across the street from Radio City Music Hall. By the time I came to the company, HBO had offices and hundreds of employees scattered here and there around the building wherever room could be found. Dave Baldwin, HBO’s one-time scheduling commander-in-chief, recalled in that same anniversary publication:

“People were setting up offices in broom closets; they were running phone lines across hallways. My first office was in a storage facility I shared with all of the Research department.”

I was working for what was then called Subscriber Information Services (essentially, the complaint department). When distributing our monthly report (in those pre-e-mail days, this was done by hand), I remember making rounds by taking one elevator to hit the lower floors, and another to hit offices on the higher floors. My department rarely ever saw our division chief because he and the rest of our division were on a separate floor from us.

At the same time, these circumstances sparked a decidedly uncorporate camaraderie. Offices were shared, common spaces were shared. Adding to the atmosphere was the energy that went with a young company staffed by young people. From the birth of the business through the 1990s, the average age of an HBOer was early 30s, and most of the junior staff was in their 20s, with HBO being the first job for many of them. Both the company and the staff were too young for there to be much of a gap between senior and junior staffers. Whether you worked under someone, or over someone, there was a general sense of feeling we were all growing together with HBO.

In HBO’s 20th Anniversary brochure, one-time HBO Chairman and CEO Frank Biondi remembered his early years at the company in the late 1970s:

“Walking the halls you felt a lot of energy, a lot of enthusiasm. There were people from the best business and law schools in the country, all about the same age…(There) was a sense of almost unlimited opportunity…”

And there was the overriding fact that the company was making gobs of money. From 1978 to 1980, HBO’s annual profit growth was 80%. Salaries were good, benefits generous, expense accounts loosely regulated. My department chief used to pick a movie out of the company library and treat us to pizza and a movie in our offices every Friday. Once a month – or whenever someone had a birthday, an anniversary, a promotion, was leaving for another job, found out they were going to have a baby – we’d be treated to lunch at a restaurant under the guise of “staff meeting.”

It often seemed people in the company would party at the drop of a hat. Hardly a week went by when the work would stop, out would come eats and drinks (on the company’s tab, of course), and it was fiesta time! Bridget Potter, HBO’s Original Programming chief from the 1980s into the 1990s, described the environment at the time as “…work, work, work, party, party, party.” Entire divisions had summer outings at country clubs, and for the company Christmas party, HBO would rent out places like the Stardust Ballroom, or the lobby of Radio City.

In 1984, the company gathered up its scattered troops and marched downtown to its own home on the corner of 42nd Street and Avenue of the Americas overlooking Bryant Park (as the company continued to grow, we would punch through into the Grace Building next door and occupy several floors there as well). Because of its glass-walled appearance, some of us called the new building The Flash Cube (you young folk with your digital cameras will have to look up “flash cubes”).

HBO had always thought of itself as a different sort of Time Inc. animal. Time had had other non-print ventures, like Time-Life Films, but they hadn’t amounted to anything substantial. We would hear word there was a certain amount of jealousy on the print side of the corporation over this glitzy upstart company. Most of Time Inc. was about journalism – enlightening and edifying the public on everything and anything from politics and economics to sports and entertainment. HBO, on the other hand…that was Hollywood.

The separate quarters a dozen blocks away from Time Inc. helped foster an air of independence which HBO would always strive to maintain, even after Time Inc. became Time Warner. Time’s print brands – magazines like Time, Sports Illustrated, and Money – all shared a low-key journalistic culture. HBO had its own character; young, vibrant, showy, and free-spending, and with the earning power to justify it.

But we lost something in that move downtown, too. It was a sign that the company was growing up, maturing. In the 20th Anniversary brochure, Bill Roedy, then an HBO vice president of Affiliate Operations, recalled it as well: “The move to the HBO building was quite a significant cultural change for us…We had a new building, but we sort of lost our closeness.”

The building looked impressive, was even written up in several architectural and design magazines, but it also brought with it a more corporate seriousness and pettiness. Now, offices mattered. “Well, you can’t have that office because that’s a v.p.’s office with four windows, and since you’re a manager, you can only have an office with three windows.” And the big, shared opened spaces and sense of community were diminished as well. We had gone from being an enterprise to being a business, and with that, the halls had become a little less fun.

Undoubtedly there had always been competition and politicking and turf wars between company divisions (what organization with more than two people in it doesn’t have competition and politicking and turf wars?), but as the company’s divisions staked out their geographical areas in the new building, each seemed to develop its own, separate culture.

You could tell what department somebody worked in by their unofficial uniform. The buttoned-down people from Legal and Business Affairs wore conservative ties and white shirts pressed so stiff you could’ve shaved with the creases. The brassy crew from Sports went with a Larry King kind of look: suspenders and power ties but no jacket. Original Programming went for a Hollywood black-on-black motif, while the gang in the Art Department, which designed the company’s marketing and promotional materials, looked like a bunch of NYU Fine Arts students (I remember one guy who used to keep a pet rat in an aquarium in his office).

And as for the L.A. office, that was a world unto itself. I remember one of my bosses coming back from an L.A. trip and as the staff gathered for a briefing on his excursion to the west country, the first question he was asked was, “So, what’s it like?”

He smiled wryly and said, “They think you’re a fucking intellectual if you read The New York Times.”

Still, times were good, business was booming, money was rolling in.

And then it wasn’t.

*****

It was so often referred to as “hitting the wall” that it became a kind of quasi-official term, the way saying The Depression could mean only one economic downturn.

It was 1984, we were still settling into our new digs on 42nd Street, and there was a certain amount of hand-wringing over the money the Columbia exclusivity deal was costing the company. But, that was a situation we could tough out until the deal expired, and from there on out we’d learned our lesson about negotiating ourselves some kind of protection in these exclusivity arrangements.

Except that the company had stopped growing, and it seemed to happen almost overnight.

The company hadn’t had a bad year since it had gone on the satellite in 1975. Because of the company’s explosive growth in those intervening years, few in the company had any kind of experience with downturns, let alone one so stunning in its size and suddenness. The bad news was consequently nothing less than a corporate-wide trauma, an apocalyptic sense of the world as we knew it coming to an end.

In the 1990s, HBO CEO Michael Fuchs would look back on those years and say of them, “The way HBO reacted to adversity as an organization says a lot about the spirit at the core of this company. We didn’t get mad, we got smart.”

Maybe that’s how it was on the executive floor, but in the halls…like I said: apocalypse, doom, end of the world as we know it.

And with that went the first layoffs in the company’s history: 125 heads (if I remember correctly, that was somewhere in the neighborhood of 8-10% of the company at the time). The company handled the layoffs as graciously and generously as I’ve ever seen it handled, but for a corporate population which had, in large part, never been through a bad time, it was both a mournful time…and a scary one. At the time, there was no guarantee times would get better, and the understandable fear of them getting worse.

*****

In retrospect, at least part of the problem could have/should have been predicted. It was a matter of math and finite space.

HBO has the lowest monthly churn rate of any of the entertainment-driven premium services, “churn” being the number of subscribers lost and which have to be replaced. In the 1980s, HBO’s churn was two percent per month, which doesn’t sound like much, but multiply that times 12 months and it meant HBO lost almost half its subscribers each year. About half of those drop-outs were relocations – people changing residences – and we usually got most of those back. But that still meant HBO had to replace nearly one-quarter of its subscribership each year just to stay even.

After 1975 when HBO went on the satellite, replacing even such hefty numbers wasn’t that much of a challenge. New cable franchises were opening all the time, and typically HBO could count on getting one out of every two cable subs to also pick up HBO.

The predictable, finite space part of this equation is that it was only a matter of time before cable hit its saturation point; that cable companies had cabled whatever territories were worth cabling. Because cable growth in the late 1970s had been so explosive, open ground had gotten eaten up incredibly quickly, and so the slowdown which came in 1984 was both massive and sudden: we’d hit The Wall. To put it in more statistical terms, HBO, which had always been the pay-TV growth leader, hadn’t pulled in less than one million new subs in a year since 1976. In 1985, the service grew only by 100,000 new subs, the lowest rate of annual growth since 1974 i.e. The Wall.

Saturation wasn’t HBO’s only problem. The company was being hit on two flanks, and the slowdown in new-builds was only one of them.

The other? For the first time, pay-TV was no longer the only game in town when it came to in-home movie entertainment.

*****

The first video cassette recorders (VCRs) for home use came onto the market in the 1970s, but they hardly shook up the entertainment business. They were as big as a medium-sized suitcase, clunky, there was, at the time, no pre-recorded content available for them, and they were head-spinningly expensive ranging from $1400 to over $5000 (keep in mind, that’s in 1970s dollars).

In time, all of the things we’re used to seeing happen with more contemporary technology like cell phones and personal computers happened to VCRs: they got smaller, sleeker, and, most importantly, cheaper. Toward the end of the VCR era in the 1990s, you could find deals on a machine for a hundred bucks and change.

By the 1980s, HBO – through what the company was investing in motion picture production, pre-buys, and licensing agreements – had become one of the largest, single sources of revenue for Hollywood, putting somewhere around a $500,000,000 into the movie business annually. If you have trouble reading digits, that’s a half-billion dollars. And then the movie business got a second kick-in when movies went to commercial TV. Home video promised them yet a third payday. Only for it to work, it had to come before pay-TV.

The usual clockwork was channels like HBO received movies 12 months after their theatrical release. Hollywood now saw a new paradigm that ran:

Theatrical release

Pay-per-view (five months after theatrical)

Home video (six months after theatrical)

Pay-TV (12 months after theatrical)

Broadcast TV (24 months after theatrical)

While you’re keeping that calendar in mind, also keep in mind that while HBO had been tremendously successful and was better at what it did than competing services, that didn’t mean all subscribers were happy with it. To a certain extent, we held subscribers because they had no place else to go. Now that they did, home video seemed to answer their chief complaints about HBO (and the other services as well).

*****

When I was in Subscriber Information Services, the two most frequent and regular complaints the company received were what we labeled Repeats/Returns, and Selection Negative.

“Repeats” were how many times a given movie played in a month-long period, while “Returns” were how many times a movie returned to the service over the course of its license period.

HBO usually was granted a license period on a film of a year. The license stipulated how many times HBO could play the film, and even in what dayparts. In those days (scheduling philosophies would change over the years), this played out in the following fashion:

During the first month of the license, a movie would show up on HBO with a certain amount of promotional hype behind it, and play – if it was R-rated (HBO had a self-imposed policy of only running R-rated films at 8:00 PM Eastern and Pacific Time and after) at least once in prime time, maybe two or three times if it was a particularly strong draw. It would then run another five or six times at different non-prime slots (which, for R-rated titles, meant mostly late night hours). If it was a PG (there was no PG-13 in the early 1980s) or G-rated film, it might run as much as a dozen times in the month throughout all dayparts. About halfway through the title’s license, it would get another full month of plays although prime time would be reserved for new-to-the-month features, and then another full month toward the end of its license. In between those full months, there’d be some scattered airings maybe as part of a programming stunt, or to beef up free preview line-ups.

The planning concept behind HBO was for the service as an occasional use medium: ideally, subs would pick only what they wanted to see at the time most convenient for them. It was never designed – or intended – for regular, daily, heavy viewing. Even if a sub only used the service a handful of times over the course of a month, compared to going to the movies, HBO had paid for itself.

That was the company thinking.

Subscriber thinking was something else.

Conditioned by decades of commercial broadcast TV in which every hour of every day brought something different, subs didn’t plan their HBO viewing. They tuned in randomly, daily, looking to draw more water from the HBO well than the well held.

For example, when I was in SIS, it was not uncommon to get a sub complaining that a movie they’d seen in the morning was on the service again that night. We tried to explain that our scheduling wasn’t designed with it in mind that someone was going to sit watching HBO for 12 hours at a stretch.

There was also a natural disappointment that came with having the service for any length of time. For the first few months of a subscription, everything on the service seemed new to the viewer. Over time, however, HBO’s recycling of programming became increasingly apparent, with the Repeats/Returns issue aggravated by Selection Negative.

Selection Negative can best be translated into the subscriber view that “All your movies suck.”

Truth was it wasn’t that all our movie selections sucked. What was happening was that many subs, for the first time, were becoming aware of just how many movies Hollywood turned out sucked.

I interviewed The Star-Ledger film critic Steven Whitty two years ago, and he touched on the problem:

“A typical person who likes going to the movies might go three times a month.  A more casual goer; maybe once a month.  A lot of people go to the movies only three times a year or so.”

The-Beastmaster-Dar

Meaning that a lot of subs were getting more new movies in a month than they had been going to see in theaters in a year. HBO – even after the exclusivity wars had escalated – was getting the lion’s share of new movies for its service, and what subs were getting was a fair overall sampling of what Hollywood was turning out. That was the problem.

Most of our subs were older than the bulk of the movie-going audience. “That’s why I stopped going to movies,” they’d carp, “because all they do is make crap for kids and teenagers.” Why – since Hollywood was making so much crap for kids and teenagers – they thought things would be different on HBO – which was putting a movie theater in their living room – I have yet to figure out. Bottom line: they thought it would be different, it wasn’t, in fact because HBO was throwing so much programming at them it multiplied what they didn’t like at the movies, and so they were – understandably, I think — ticked off.

Steven Whitty remembers a joke among his friends in the 1980s that HBO stood for, “Hey, Beastmaster’s on!” (the unspoken part being, “again”). That kind of sums up what a lot of subscriber discontent was like.

In the early 1980s, subs – particularly older subs — were especially irritated because this was, after all, the post-Star Wars era when studios large and small were jumping on the space opera bandwagon. This was also the era that saw Leatherface, Jason, Freddy Kruger and an army of other miscellaneous miscreants slice, dice, maim and dismember countless teen types with a variety of power tools and farm implements. There were enough complaints on this particular point that HBO even had a form letter for it, pointing out that it was inevitable that trends in entertainment would show up on the service and that, at that time, somewhere around one-third of Hollywood releases were some kind of horror, chiller, sci fi or fantasy flick.

And then there was the issue of what exactly constituted movies that sucked and movies that didn’t. Any phone conversation or letter which began with, “Why don’t you show some good movies for a change?” typically led to suggestions which only demonstrated that “good” was a relative term.

Thirty years later, I can still remember one such letter which, after complaining about our lousy movie selection, then offered up a list of “good” movies which included every slasher gorefest released within the few previous years. Name it, it was there: all of the Friday the 13ths released up to that point, all of the Halloweens, Prom Night (1980), My Bloody Valentine (1981), Terror Train (1980), and so on, maybe two dozen such titles all told. And then this P.S.: “And some Disney movies and Jacques Cousteau specials would be nice, too.”

MyBloodyValentine

To sum up: All subscribers, no matter their individual tastes or schedules – be they night shift workers, stay-at-home moms, retirees – expected HBO to provide something fresh and satisfying whenever they tuned in, and they wanted it for – at the time – about $8-10 per month. And every time they tuned in and didn’t get it, they wondered what they were paying for.

If that was an unrealistic expectation, even more fantasy-like was the one that went with the complaint, “That’s why I got HBO! Because there’s nothing on regular TV!” In other words, they wanted our one channel to do what the myriad broadcast and basic cable channels couldn’t do combined! And then were ticked off when we couldn’t.

Then, riding a white horse and carrying a banner of liberation from the yoke of cable TV, came the VCR. You didn’t need cable anymore to get movies in your home! the VCR declared. Make your own pay-TV! Watch whatever you want to watch, whenever you want to watch it! Exclusivity doesn’t matter; whatever is on the video store shelves is yours to have. Repeats? Never have to happen; you have a whole video store’s inventory at your disposal! Say it with me, people: Hellooo home video; good byyyyye cable company!” And with it, HBO.

In those early years, home video was so popular, it seemed like you could rent movies from anywhere! Convenience stores, corner stores, music stores, supermarkets, even gas stations. Who needed cable? Who needed HBO?

Only that’s not how it played out. Oh, for a few years, home video looked like the way to go and every trade reporter and his brother/her sister was writing that the VCR spelled DOA for cable TV and especially the premium services. But everything has its downside and home video had one, too.

Yes, you didn’t have to futz around with the limitations of exclusivity, but side-stepping exclusivity didn’t open the available variety all that much. And speaking of variety, eliminating the cable middle man didn’t change what movie companies were making. Turned out that, percentage-wise, there was just as much crap down at the video store as there was on HBO.

You couldn’t watch whatever you wanted to watch because of what people in the home video trade call “depth of copy.” Simply put, that means how many copies of a particular movie a video store keeps on the shelf.

Movie companies didn’t get any money when you rented a movie from the local Blockbuster. The only time they got paid was when a Blockbuster store bought a copy of the movie. So, the movie studio usually put a hefty price on each of those cassettes. The local Blockbuster would buy one for $90, rent it for $2.49 a throw which meant the store didn’t begin to turn a profit until that copy was rented something like 60 times (and I’m not even figuring in store overhead costs). If the store had more than one copy of the movie, it needed 120 rentals just to break even and so on and so forth. Each additional copy provided more convenience for video store patrons, but required more “turns” of that title to break even. Therefore, the store only kept as many copies of a title on hand as it thought it could successfully rent. That might’ve been a half-dozen copies of the latest Indiana Jones, two-three copies for most big studio pictures, and one copy of anything else. What that meant for the consumer is that if they got down to Blockbuster too late on Friday night, their choices were pretty well limited to work-out videos (and we haven’t even discussed the hassle of going down to the store for the rental, and going back to return it).

Ok, that’s not strictly accurate or fair, there was a bunch of other fun stuff on the shelves: oldies, not-so-oldies, classic TV shows, direct-to-video movies. But, the point remains that while video stores added still another choice to the home entertainment menu, in the long run, once the novelty wore off, it turned out to be an adjunct to cable — not a replacement.

But that plateauing of VCR excitement was years away. In 1984, potential subs were giving us the finger as they ran out to buy themselves this new home entertainment gizmo and swing by Blockbuster or Sam Goody’s, Wherehouse, Coconuts, Hollywood Video, Movie Gallery to grab a movie or two for the weekend.

One of the keys to HBO’s survival in that reconfiguring environment– and the ultimate reinvention of the brand — was to offer consumers something they could get nowhere else; not on TV, not on other premium channels, and certainly not on home video.

Next week: HBO: The Originals
Click here to read every article in this series!

Preface

Introduction 

Towards Felix The Cat

Baby Steps

In The Beginning Was The Word: Radio

The Numbers Racket

Wasteland 

Greener Grass

Walson’s Mountain

The Green Channel 

Into The Skies, Junior Birdmen!

 Title Fights: The King of Pay-TV

The Movie Duels





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