Welcome to Monopoly World
At this point, our primary business plan was focused on launching a 24-hour network. We wanted to start with a block of shows to prove viability and then roll that into a full network as soon as feasible. We were in store for a real lesson on power — who had it and who didn’t which was us.
It is worth doing a step back about the cable industry. The pioneers of the industry had literally helped string and bury cables through huge swaths of the U.S. For agreeing to do that, they were given exclusive rights for an area meaning that had their own little monopoly. There were big companies like TCI (John Malone), Time Warner, Comcast, Cox, Cablevision and they acted and thought of themselves as little monopolists. For us to launch, we would be dependent on these systems giving us distribution or “carriage”.
This was 1994 and as cable started to get material penetration in the US (around 60mm homes at this point), it became clear that there would be huge value creation in the programming side with cable channels. Some big established networks existed like CNN, MTV, E!, Discovery, CNBC, USA, Family Channel, ESPN, HBO, etc. Most of their revenue came from subscription fees where part of your cable bill went back to the content provider as part of a bundle. So if you signed up for basic, in that line up of channels a percentage of would be shared to channel. These were negotiated so the better pull, if you were ESPN or CNN, you had more leverage in asking for higher subscriber fees. Additionally, there were channels that existed in tiers like HBO who would get dollars if a consumer took the tier. There had been little money in cable advertising since their reach just didn’t match that of network TV. That was just starting to change.
It was also the case that cable networks tended to be a high fixed cost and low variable cost businesses. It cost you essentially the same to produce the programming if you were in a small regional market or if you were available nationwide. So costs were largely fixed and revenues scaled based on how many homes in which you were available. Therefore most of the value was in how fully penetrated you were on systems. This wasn’t lost on the monopolists. As gatekeepers of distribution, they could create significant value by agreeing to put a channel on their system.
Knowing this, they worked as a group where one company might have an idea for a new network like E! and then go to all the other companies and offer them either equity in the network or a trade to launch something the other company was launching. It functioned as a club and it also had less to do with what consumers wanted and more “can I increase prices as a put more things in a basic or premium tier?”. The one other option was to have a ton of money as a start-up and literally pay the systems for carriage. Clearly, we were not in this position but would find a competitor trying this path in the future.
Channels like Home Shopping and QVC were also making money for cable companies by just being retail outlets that used their channels to sell things like the Miracle Mop. Barry Diller took over QVC and had brought a lot of sizzle and interest to this area. These were surprisingly sophisticated businesses. They focused on revenue per minute and ran live dashboards to know how long to push a particular product and when to shift to something else.
The other trend underway was that cable companies were playing with new digital boxes that would allow them to put more channels on a system by being able to compress signals and shooting them through the same coaxial cable. You were also seeing experiments with interactive services.
So here we show up with an idea for launching our own stand-alone network. We were incredibly naive and showed up with research that the CNET Diety, Marshall Cohen, had prepared showing how much interest there was in technology and how interesting it would be both to users and advertisers. We had thought we could give them a little equity and maybe a really low subscriber fee and they would be excited to take us. We were in for a rude awakening.
To give you a lens into how these companies thought, later in 1994 we would be told by one of the guys who ran a major system “if you give us all the equity in your company we will consider giving you carriage.” Think about that for a second, basically giving them the enirity of fledgling CNET wouldn’t even assure carriage only consideration of carriage.
As 1994 went on we were trying to do two things 1) get carriage for our programming block and 2) interest cable operators as potential investors and carriage to get the 24-hour network off the ground. Both of these pursuits would be really hard and frustrating.
Here is a model I put together in 1994 on the economics of our suggested 24-hour channel. You will see that added a home shopping section with the idea that we would be a viable place to sell computers and other tech products during those times that we weren’t producing programs.
Here is the model I created for the nested programming blocks.
You will see that I have about $4.5mm in for delivery payment to whoever would give us carriage. Looking back now, maybe the CNBC deal wasn’t as bad as we thought. I spoke with David Zaslav a couple of weeks ago and he said something that stuck with me. I am paraphrasing here, “you are lucky the deal fell through, we were such a structured corporate organization and the flexibility you would need to move into online aggressively over the following three years is probably something that would be antithetical to the GE culture.”
Here are some follow ups from the last couple of posts.
First, our hero Fred Sotherland was able to find the pilot from Double Click on Multimedia. The two hosts were Gina Smith and Justin Gunn. During this time period, Gina was doing a radio show with Leo Laporte and was a star in the computer world where tech women were extremely rare. Justin would go on to work at Current TV at which point his tv resume ends. Matthew Barzun told me he was a big libertarian and that he heard he was working with Ron Paul on his video projects.
Second, Fred also found this explainer on the on screen icons.
Again, I am doing my best with putting this together. If there are things to correct or additions to the story. Please send them on.