The Battle for the Twenty-First Century
Vested interests are struggling fiercely for advantage, each hoping to refashion the medium to enhance its own bottom line. As for government officials, the protectors of citizen interests, they are entering the fray or retreating from it according to their ideological understanding of the role of the state in the regulation of private business affairs. Confused, destabilized, and uncertain, the industry is engaged in mortal conflict, the outcome of which will determine the future of television. In its essential form, it is a corporate war involving the traditional networks, major cable operators, Hollywood producers, and global communications interests.
The three broadcast networks have been the most aggressive in this struggle. Defensive and aware of their shrinking popularity, they have been fighting for their future viability. Network leaders have been loud in demanding regulatory assistance to meet the challenge of cable and Hollywood. They have demanded the right to produce much of their own entertainment fare, and they have been particularly hostile toward the old Financial Interest and Syndication Rules (FISR), which since 1972 have prohibited them from owning or syndicating entertainment programs. They assert that they are losing money as their rivals are making millions. At a time when series such as
The Cosby Show are reaping hundreds of millions of dollars in syndication fees for Hollywood producers, and foreign sales of U.S. programming are rising to unprecedented levels, broadcasters claim that they should be able to own part of these shows and share in their profits, since network TV made them successful in the first place.
Moreover, they suggest that the need for the FISR has passed. The fin-syn rules were established in great part because of pressure from the major Hollywood studios, which were in financial difficulties in the late 1960s. But the movie business has never been more lucrative. Box office receipts for 1988 were $4.46 billion; for 1989 they were approximately $5 billion. Receipts for the summer alone were phenomenal: $1.7 billion in 1988 and $2.05 billion in 1989. Conversely, network executives argue, without new revenue sources they will be unable to compete in the new video marketplace.
Unnerved, too, by the rapid spread of cable throughout the 1980s, the networks have moved against their rivals in the distribution of programs. Raising the prospect of the death of free TV, ABC, CBS, and NBC have called pay TV undemocratic and alien to American traditions. To protect the "universal free over-the-air broadcast system" they have asked for rules mandating that cable systems carry their stations and assign them the same channels they have on the VHF dial. Above all, the networks have demanded that the FCC or Congress begin regulating the burgeoning cable industry, an entity that Senator Howard Metzenbaum has labeled "an economic Goliath." After decades in which three national programmers monopolized television, the president of the NAB, Eddie Fritts, told members of his pro-network organization that the enemy was now monopolistic cable. "Together, we are agreed that cable TV's unregulated monopoly must be reined," he noted. "The unfair competitive advantage Congress gave cable by virtually total deregulation of that industry must be rectified."
The debate reached a momentous high point on June 21, 1989, when the Senate Communications Subcommittee, chaired by Daniel Inouye, conducted public hearings to obtain input from the contending interests. Although network leaders were unfamiliar in employing antimonopoly rhetoric to defend their interests, Robert Wright of NBC complained about the rapidly diminishing economic vitality of network TV, which had seen its 74 percent share of dollars spent on video entertainment in 1970 tumble to 24 percent in 1988.
Wright's alarm was amplified by Laurence Tisch of CBS. "Make no mistake about it," he warned the senators, "the long-term availability of the Super Bowl, the World Series, and the Olympics to all Americans over free television is in serious jeopardy."
He also threatened that if pay TV were not brought under control and networks allowed to compete in the video marketplace, over-the-air networks would have no one left to serve except the poor and socially neglected. "What if we then had a two-tier broadcasting system." Tisch wondered, "with a second-class, free programming service available to the less fortunate who are disproportionately minorities, children, and the aged located heavily in urban ghettos and rural areas?"
Describing network TV as "a service of irreplaceable value," Thomas S. Murphy of Capital Cities/ABC called attention to the deterioration of the national audience precipitated by expanded competition—in the past five years the average number of channels received by TV households rose from ten to twenty-seven—and continued application of FISR limitations. Murphy sounded another alarm. "Because what we broadcast is the staple of much of the television in the United States, the continued health of the network system is and should be a matter of public interest and concern. Today the health of that system is in jeopardy."
While pleading their collective case, however, the executives studiously avoided the embarrassing fact that their corporations remained amazingly wealthy (a pretax profit margin of 48 percent)—and their future contained a bright silver lining. Although they promised to make their own totals available to the subcommittee, the executives denied the accuracy of revenue and profit figures for 1988 as published in
Those totals belied the financial desperation claimed by the networks. While Robert Wright was bewailing the decline of NBC's share of the communications pie, the corporation grossed $3.018 billion in network TV revenues alone. When added to the money earned through its owned and operated TV stations, the network grossed more than $3.6 billion and realized profits of $537 million. Even more successful, Capital Cities/ABC, with substantial investments in radio and other video enterprises, grossed $2.382 billion in network TV revenues, and almost $3.8 billion for its total broadcast group; the final profit for CCB/ABC was $767 million. Bringing up the rear, narrowly-invested CBS still grossed $2.777 billion and made profits of $232 million.
As if such profitability were not enough, the networks stood to make even more money with the lapsing in November 1990 of the judicial consent agreement that imposed production caps on the number of program hours they could produce and own. Each network regained the right to fill as much as 100 percent of its twenty-two prime-time hours per week with its own shows.
Already, they could produce and own five hours of primetime shows weekly—if such programming were 100 percent network-financed—and the fall 1989 lineup was stocked with their own productions. From the fourteen pilots it produced, for example, NBC filled two of its four one-hour slots with series from NBC Productions. NBC also bought a third series from itself as a midseason backup in case of an early cancellation, and it received the right to produce segments for a Walt Disney hour-long show. CBS bought two in-house productions for the fall; and anticipating total liberation in 1990, ABC announced that it was forming a new in-house entity headed by Brandon Stoddard, a former ABC Entertainment president, to produce new programs for the upcoming season.
Clearly, the FISR remained the only substantial impediments to the domination of American mass communications by ABC, CBS, and NBC. Among the related areas in which the networks were already deeply involved were movie production, movie theater ownership, movie distribution, network program production, pay per view, pay television, cable networks, cable program production, direct-broadcast satellite, home video, foreign syndication of their own internally produced shows, book and magazine publishing, and the phonograph record industry.
Appearing before the Senate Communications Subcommittee to oppose the network CEO's were representatives of the Hollywood film industry: Stephen J. Cannell, a major independent producer, and Jack Valenti, president of the Motion Picture Association of America. As a spokesman for more than two hundred independent programmers, Cannell appealed for a continuation of the FISR. According to the man responsible for hit series such as
The Rockford Files, Hunter, and Wiseguy, "I hope you understand how desperately the Hollywood production community views this situation. I'm not here alone, I'm really here for a lot of other people." He continued, "We're forced to live in an oligopoly with three dominant corporations, but at least we go from one to the other in our search for a home for our programming. It's not perfect, but it creates some balance, and it works." There was, however, a tone of industry and personal urgency in Cannell's concluding imploration: "I plead with you, don't repeal the Financial Interest and Syndication Rules. Without [them] I fear my company will perish."
Arguing passionately that the FISR should not be relaxed, Valenti explained that with all their wealth and power his constituents, the Hollywood movie studios, still needed regulatory protection against potential network coercion. He recalled the monopoly over production and distribution exercised by the three networks in the 1950s and 1960s, and he claimed that film studios now supplying so many TV programs could not survive a revival of unfair competition. Valenti forcefully asserted that "our government ought never allow any tiny group of corporate chieftains, or corporate entities, no matter how benignly managed, to ever reassert full dominion over prime-time television, which is the most pervasive moral, social, political, and cultural force in this country. The networks' monopoly troika just can't be allowed."
Above all, Valenti recognized that despite wondrous technological alternatives to TV and a dwindling network share of the prime-time audience, ABC, CBS, and NBC remained the most influential forces in American communications. "The three networks in prime time are the only national force in this country." he noted. "Cable only reaches 54 percent. The independent stations don't have that kind of reach. Only the three networks and their six-hundred-plus affiliates do. And they have total authority to say yes or no." As Valenti explained it to Senator Inouye, were network authority enhanced by a revocation of the FISR, "the most powerful media company, Mr. Chairman—Time, Warner, Paramount, Fox, if they all merged—would be helpless and hapless before a fuzzy cheeked little network vice president who said, 'No, buster, get out of here!' They're gone, they don't have any power."
Despite the great divisions between networks and producers, there were circumstances that suggested the differences were not as heated as their proponents suggested. Of the three broadcasters, only CBS was wholeheartedly committed to over-the-air television. Here the influence of William S. Paley endured. Much as the corporation had performed in the mid-1940s—defiantly refusing to develop black-and-white VHF channels because it was certain that CBS color technology and UHF would be the ultimate victors—Tisch and CBS launched a concerted campaign in mid-1989 to rally network affiliates and public opinion to blunt the cable revolution. "This is our biggest, toughest battle and it will require a lot of effort and vigilance, but we must win," Tisch declared. As for collaboration with the cable enemy, the CBS leader was consistent and candid.
In late 1988 he declared disinterest in cable because he feared it would become "the newest toy in the house," distracting CBS management from the priority of lifting the network from the broadcasting basement." Tisch reiterated this feeling six months later, noting, "I do not see cable TV as the right business for CBS to move into at this time. If we're going to get into any other kind of business, we'd be devoting our resources and attentions away from the core business that needs fixing. We would be distracted. This way we are singularly focused."
Ironically, CBS had already invested in cable and lost heavily. In 1982 the broadcaster had created a fine-arts network, CBS Cable. Its short and disastrous life produced uplifting ballets, wonderful plays, and insightful interviews with cultural leaders, but it never captured enough viewers. The collapse of CBS Cable in less than a year cost the parent network millions of dollars. It was exactly the type of financial miscalculation that CBS by 1990 would no longer afford.
Tisch's broadcast allies were less zealous in their resistance to the encroachment of wire distribution. Aggressive investment policies at ABC and NBC suggested that these networks were becoming deeply involved in an emerging cable future. By the end of the decade cable ventures of Capital Cities/ABC included 80 percent ownership of ESPN and minority interests in the Arts & Entertainment (A&E) and Lifetime networks. NBC was even more drawn to the rival technology.
As well as owning 25 percent of A&E, through its parent company, General Electric, NBC in December 1988 concluded a $325 million arrangement with an MSO, Cablevision Systems Corporation. By this partnership NBC entered cable as a major force—especially in sports, and potentially in all-news programming—obtaining half of Cablevision's investment in Rainbow Program Enterprises (American Movie Classics, Bravo); Sports Channel America; seven regional Sportsvision channels; and News 12 Long Island, a regional all-news operation. The arrangement also gave NBC ready access to the 1.14 million households receiving cable service from Cablevision.
In return, Cablevision received 50 percent of the new NBC cable venture, the Consumer News and Business Channel (CNBC) that was launched in April 1989. Cablevision also opened its door to a lucrative future in sports pay-per-view programming. It contracted to join NBC in televising the 1992 Summer Olympics—the American TV rights for which NBC had already paid $401 million—by setting up an ad hoc, multichannel cable network to package up to six hundred hours of the Olympics on a PPV basis.
The third force in the corporate communications struggle, the cable TV industry, also appeared before the Senate Communications Subcommittee in June 1989. Operating in an atmosphere of deregulation established in 1983 by the FCC under Mark Fowler, and reinforced through the Cable Act of 1984 by which Congress formally established the operational parameters of the industry, cable enjoyed its greatest expansion. Annual revenues from advertising and fees mushroomed from $6.5 billion in 1983 to an estimated $15.4 billion in 1989."
Yet after years of unfettered capitalistic maneuvering, there were many areas of contention. The exclusivity enjoyed by cable operators within their service areas raised questions of monopoly and the loss of consumer protection. The desire of local telephone companies (telcos) to string cable lines into subscriber homes—most likely fiber-optic cable, which, compared to the familiar coaxial wire, would provide improved picture quality and greater channel capacity—prompted cries of unfair practices from existing cable operators. Rising subscriber costs, which by mid-1989 averaged $24.26 per month, raised questions about coercion of an audience used to feeless video. Televising current R-rated theatrical films and the absence of censorship raised questions about sexual explicitness, profanity, and violence on premium channels. And the concentration of cable systems in the hands of fewer and fewer MSO's provoked inquires about vertical integration and other monopolistic practices.
For John Malone, president and CEO of the largest MSO, TeleCommunications, Inc., such problems constituted no reason for Congress or the FCC to reverse course now. The imposition of regulations, he warned, would only slow the cabling of America. He explained increased subscriber fees as driven solely by the cost of programming. He felt, moreover, that the introduction of telcos into cable service would complicate matters and ultimately force government back into regulation. Malone contended, expectedly, that cable was already adequately regulated.
Although Malone was supported by other cable interests—James Moody, president of the National Cable Television Association; Robert Johnson, president of Black Entertainment Television; and John Hendrick, CEO of The Discovery Channel—the senators seemed unconvinced. As Senator Inouye remarked, "After listening to this panel, if I were a cable operator, it is time for Rolaids."
There were those in government, moreover, already convinced that reform of cable industry practices was overdue. Senator Metzenbaum, who testified before the Senate Communications Subcommittee, declared that "Congress cannot sit idly by. We're going to have to see to it that there is continuation of competition." And Senator Al Gore, Jr., was openly critical of the coercive practices of some MSO's, practices that reminded him of network maneuverings in the years before the FISR.
In blunt questioning of the president of NBC, Senator Gore revealed practices now occurring in the unregulated cable industry. Gore wondered why NBC had decided to drop its original plans to convert CNBC into an all-news service competing against Cable News Network (CNN). He also questioned why NBC would pay $20 million for "a shell company" that was "an asset of limited value"—the grossly neglected Tempo Network, owned by the largest MSO, Tele-Communications, Inc. (TCI)—only to convert it into CNBC. Gore's question to Robert Wright was unequivocal: "Was that transaction demanded by TCI during those negotiations?"
Wright: It'd been around for eight years, so it wasn't just an overnight issue. We elected to change the service entirely. Hence, the "shell company," I guess. But it was an existing service with seven million people. They owned it, we didn't. That was a way that we thought would give us an opportunity to, uh, instead of going from zero, we'd start with six or seven million.
Gore: Was this kind of a shakedown by TCI to ensure that you'd get access for CNBC?
Wright: No, I can't say that. We didn't have to buy it. We could have gone another route. We could have picked another service. Or, we could have started up from scratch. It's hard to say what things are worth....
Gore: Did you agree not to compete directly with CNN in making CNBC a full-scale news operation in direct competition with CNN because TCI owns part of CNN's parent company? Was this part of the arrangement also that guaranteed you access for CNBC?
Wright: We have an agreement in our affiliation agreement that was requested—required, if you will—by most cable operators that we not enter into general competition with CNN.
Gore: Isn't that anticompetitive?
Wright: Well, it's not exactly what we would have preferred.
Gore: Isn't it anticompetitive?
Wright: Well, it's hard to say. It, it, it does on the surface, anticompetitive—
Gore: Why is it hard to say?
Wright: Because their whole theory is
Gore: Because you don't want to offend TCI?
Wright: Well, we certainly have to deal with our own customer base. That's our customer base.
Gore: Well, you see, Mr. Chairman, this is an example of the kind of shakedown, and I use the word again, that cable engages in. And they just have the power and the arrogance to hold up one of the major networks and force them to agree not to compete and not to show news on cable television because the biggest MSO owns part of CNN and doesn't want the competition. And they just tell them, "We won't even let you enter the market unless you agree not to compete. And by the way, we have this mostly worthless company that we're trying to unload on somebody. How about giving us $20 million on the side for it?"
¤ Continue Reading