Call Me Ted (32 page)

21

The Cable Operators

C
alling on John Malone turned out to be the best thing I could have done. Not only did he have a strong grasp of financial issues and an incredible knack for deal making but he also had a burning desire to see us all in the cable industry succeed. TCI didn’t yet have an investment in Turner but John already considered us to be on the same team. Our collective fight was against the broadcast networks, and while our immediate issue was losing control of a Hollywood studio, John could envision our assets eventually flipping to a Big Three broadcaster; and if ABC, NBC, or CBS added strong cable channels to their portfolio, their leverage over the industry would be enhanced significantly.

As hard as it might have been for me to have outsiders own a significant stake in the company, I did believe that TCI and the cable companies would be good partners. I listened to my father’s advice about getting to know your customers and in the ten years since we had launched the SuperStation, nearly all of them had become friends. For example, that past summer I had flown the group over to Moscow for the Goodwill Games and we had a fabulous time together. The industry was full of solid businessmen and while our negotiations were always challenging, we knew we needed each other. My sense was that if they also had a direct financial interest in our success, we could work collaboratively on new networks and we’d have a much better chance of launching these channels with distribution and subscriber fees. If there was ever a group that I’d welcome into our company as investors and directors, this was it.

A TED STORY

“We Didn’t Want to See Him Swallowed”

—John Malone

When I first looked at Ted’s deal for the MGM library, it seemed to me that it was a great asset but that Ted had gotten himself in trouble—not necessarily that he paid too much but he took his leverage too high and the structure of the leverage was a problem. So we had to raise equity for him and I became the junior investment banker to get this done.

It was critically important to keep Ted independent. We didn’t want to see him swallowed by anybody, especially a broadcaster. So what we were trying to do was preserve a major independent programmer for our own enlightened self-interest and for the good of the industry—and of course that also went parallel to Ted’s view of the world at the time. We set out to raise about $550 million for 35 percent of TBS, Inc. I became the guy raising the money and we came up with half of it ourselves and then we went out to syndicate it. Early on, we thought we had Viacom, which was run at the time by Terry Elkes, and we had the Cox guys and we had the Times Mirror guys, and that was our team.

We deliberately wanted to keep it away from Time Inc. As much as we liked their CEO, Nick Nicholas, we knew they had great aspirations to control CNN and we wanted people who would be supportive and passive, not ones who would try and take it over from an editorial point of view. That was Ted, too—he didn’t really want to run the risk of losing editorial control of his baby. And so that’s how we set out to raise the money. Well, at the last minute Viacom gets taken over by Sumner Redstone. Sumner’s not interested in playing team ball so he pulls out. So in order to replace Viacom we ultimately have to turn to Time Inc. Then, both Times Mirror and Cox say that if Time Inc. is in, we’re out. So then we ended up having to put it together with just us and our affiliated companies and Time Inc. and with a series of other, smaller cable operators.

John’s first discussion with the other cable operators began in January of 1987. By June, the deal was in place and more than thirty cable companies invested a total of $565 million for 37 percent of Turner Broadcasting System, Inc. For a number of reasons, we felt that this was a good transaction for Turner shareholders. I still controlled a majority of the company’s voting shares, we raised the capital we needed, and we had a dream team of industry partners invested in our company. As part of the deal, seven of our fifteen board seats went to representatives of our larger cable investors, including TCI, Time Inc., and Continental Cablevision. I liked the idea of having smart cable operators on our board so much that I filled one of my eight seats with Brian Roberts of Comcast. (Comcast’s investment wasn’t large enough to earn a seat but I wanted him and his company to be involved.)

While they didn’t own a majority of our voting shares, our new investors did attach strings to the deal. For example, TBS could not make expenditures of more than $2 million without board approval. But with that first restriction came a second. Both Time Inc. and TCI each had the right to veto any of these activities, so for any meaningful strategic moves or acquisitions, we had to get the approval of both TCI and Time Inc.

By the time we got to negotiating these finer points, not only did we not have a whole lot of leverage with our prospective investors, but both Bill Bevins, my vice president of finance, and I were exhausted. Between the planning for CBS, then negotiating to buy MGM, selling it back in pieces, and now this new arrangement, we were simply burned out. (Bevins, in fact, had a mild heart attack in my office and wound up leaving the company shortly after this deal was finalized.) Handing over veto power to Time and TCI would ultimately become one of my greatest regrets.

I’d been working with a board of directors for many years but these first meetings with this new group were an eye-opener. Not only had my authority been limited, I was now presiding over a board that included successful, strong-willed entrepreneurs who were also our biggest customers. It was a collegial group, but we all knew that there was some real competition and tension across their various companies. Recognizing that our arrangement was unusual, everyone worked hard to make sure we were acting in the best interest of our shareholders and trying to avoid conflicts of interest.

A TED STORY

“Not at All Shrinking Violets”

—Brian Roberts

(BRIAN ROBERTS IS CHAIRMAN AND CEO OF COMCAST CORPORATION.)

Back when I was a sophomore in college my father took me to the NCTA convention. At one point I walked by a room and saw a sign about the launch of a new network. I looked inside and there was a handful of people and there’s this guy Ted Turner up there talking about this new thing that was going to change the world. He was discussing the launch of CNN and at first I thought the guy was crazy but I realized that the business was changing from just transmitting broadcast signals to delivering original programming. It was going to make cable very interesting.

Years later, I was working for the company full-time and had been assigned to be the person at Comcast who worked most closely with the programmers. When John Malone came around looking for investors in Turner I thought it was a great opportunity and recommended to my father that we put in $100 million. He couldn’t see the benefit of such a big investment for a minority stake, so we wound up putting in about $5 million. Our investment was too small for a board seat but a little while later, Ted called up and asked me to join his board as one of his directors.

So there I was, in my late twenties, sitting on this board that was full of very strong-willed entrepreneurs who were very colorful characters—not at all shrinking violets. It was not a textbook Harvard board but it was a great education for me and the dynamics were fascinating. I used to joke that our meetings themselves would have made a great cable channel!

At our first board meeting I pushed hard for us to develop a new entertainment channel. My idea was to compete directly with the networks with original programming and while the SuperStation relied primarily on reruns and sports, this channel would make original movies and pursue big, high-profile events. Our management team, led by Gerry Hogan, put together a list of the top one hundred events on television—everything from the NFL to the Olympics, the Oscars, the Emmys, Miss America, and Wimbledon. This collection became our shopping list and we used it in sales pitches to advertisers and cable operators to give them an idea of how ambitious we planned to be. Filling out the schedule would be movies, series, and cartoons drawn primarily from our library. Because we would target the networks directly, when deciding on what to call the channel I felt we should use the word “network” and came up with Turner Network Television, or TNT. We planned for this channel to be dynamite!

Advertising revenue alone would not be enough to finance such an ambitious channel. We needed subscription fees as well and we targeted 15 cents per month. While 15 cents might not seem like much, when you multiply that by twelve months and spread it across millions of subscribers, the numbers get big pretty quickly, and these revenues would provide a strong, steady foundation for our continued investments in original, high-quality programming. CNN had gone on the air in 1980 with about 2 million subscribers, but cable penetration had grown dramatically since then, and with our operator owners in agreement with our plan it looked like we would launch TNT with much wider distribution.

In addition to high-profile events and original programming, I envisioned TNT as a vehicle to maximize the value of our newly purchased libraries. We continued to invest in the preservation and colorization of our older films. In fact, the first step in the colorization process is restoring the original print to the best state possible. Colorizing movies was not inexpensive—it cost about $2,000 per minute or about $200,000 for the average length film. But updating these older titles helped us earn new syndication revenues, especially overseas, where many television stations had stopped buying black and white product. It also gave us the opportunity to “premiere” these newly colorized classics on TBS and TNT.

The publicity we generated from colorization was tremendous. It was more controversial than I had anticipated and when we announced our colorization plans, there was backlash from the Hollywood community. Some directors and producers—everyone from Martin Scorsese to Billy Wilder—were outraged that we would colorize classic films without input from their original creators, who were mostly deceased. We were accused of “cultural vandalism.” Woody Allen said that what we were doing was “criminal” and showed “a total contempt for film, for the director, and for the public.”

I was undeterred. It was okay for people to write negative things about me just as long as they spelled my name right—and I really didn’t think we were doing anything wrong. After restoring original black and white prints the colorization was done on a duplicate video copy, so the originals themselves weren’t altered, and by breathing new life into these old movies we attracted audiences that wouldn’t have seen them otherwise. Besides, movies had been altered ever since they were first shown on television. To fit a square television, widescreen feature films had to be squeezed and clipped, and they were edited for content (such as removing nudity or obscene language), and some were even sped up or slowed down to fit precise time slots on TV station schedules. What we were doing wasn’t any worse than what had been going on for the past thirty years and besides, if a viewer
really
didn’t like these changes, he could turn down his TV’s color knob and watch it in black and white!

The colorization controversy grew so great that Roger Mayer, the MGM executive that I had put in charge of managing the movie library, was asked to go on shows like
Today
and
Good Morning America
to defend our position. Roger had an excellent reputation in Hollywood but that didn’t keep people from getting angry. Eventually, we even had to make our case before Congress, and every time we were challenged, the laws were interpreted in our favor because we owned the films’ copyrights.

These victories were reassuring to me as they supported one of my fundamental beliefs about running a business: when you own an asset, your job is to maximize its value. For Turner Broadcasting, that might mean using unsold billboards to promote our radio stations, airing the Braves on the SuperStation, or disappointing some film purists by updating old movies. Our competitors had more resources than we did and we had to do everything we could to get the most out of what we had. While colorization wasn’t accepted in certain circles, TV audiences responded well. We had run
Miracle on 34th Street
on the SuperStation at Christmastime for years, and when we first showed the colorized version it did nearly
six times
its average rating (and when we added color to Santa’s outfit we had a high degree of confidence that we were getting it right!).

Over the years, the colorization debate quieted down, and ultimately our extensive film preservation work earned the approval of even our staunchest critics. Nearly twenty years later, partly in recognition of these efforts, Roger was given the Jean Hersholt Humanitarian Award from the Motion Picture Academy. The prize was presented during the 2005 Oscar telecast, and the man who volunteered to introduce him and did so with the highest of praise was none other than Martin Scorsese. No one deserved that award more than Roger, and it was a proud moment for all of us.

TNT debuted on October 3, 1988. We signed on with my favorite movie,
Gone with the Wind,
and our signal reached an amazing 17 million households, making TNT’s launch by far the largest in cable history. We didn’t charge a subscription fee for the first three months, but in January of 1989, we began collecting a monthly rate of 15 cents per household. By spring, we were up to 24 million households and by TNT’s first anniversary it was carried in 50 million homes and generated nearly $100 million in subscriber revenue alone. It would be a while before we landed any of the targets on our “Top 100” list but we did produce some great original movies—a first for basic cable—and viewers and advertisers responded well to the channel. TNT would eventually become home to telecasts of the NFL, the NBA, Wimbledon, PGA Golf, and other major events, and today it remains one of television’s most valuable channels.