Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (13 page)

The 1980s saw the company accomplish a number of big deals. The key was to get the right to operate new monopoly franchises; battles over these rights were fierce and expensive, and involved promises of lucrative payouts for cities, advanced and interactive services, and payments to favored charities. Bidders made sure that minority groups got a stake in the resulting system. Because of the up-front costs of building the system and the need to (legally) buy off local power brokers, these franchises were natural monopolies, and have remained so, even though federal law since 1992 has made exclusive franchises illegal.
³³

Brian Roberts stepped into a leadership role in the company by demonstrating his skill at cutting costs and trimming workforces in connection with a major acquisition of rival cable systems in 1986. The target at the time was Group W, then the nation's third-largest cable-systems operator. Comcast, TCI, and Time Inc. formed a consortium to acquire Group W's systems for $1.6 billion, a huge step for Comcast, which doubled in size with the addition of 520,000 new subscribers. Comcast moved overnight from being the sixteenth largest cable system to the eighth. But Group W also had 1,500 employees. Comcast thought that was too many paychecks, and the young Brian Roberts, who had been working in Flint, Michigan,
and elsewhere around the country learning the trade and installing cable lines, reduced the Group W workforce from 1,500 to 1,200 before the companies were integrated. Brodsky said years later that in the Group W transition Brian “gained a fair amount of attention within the company” and “showed that he had potential.”
³⁴

The company kept growing. In 1988, Brodsky was able to buy half of Storer Communications’ cable systems—Comcast got eight hundred thousand subscribers and nearly doubled in size again, becoming the nation's fifth-largest cable company with two million subscribers. John Malone's TCI got the other half.
³⁵
Other large acquisitions tumbled in. Comcast snapped up franchises in New Jersey, Maryland, and Michigan, and continued its growth in Mississippi. After a long tussle, Northeast Philadelphia became Comcast territory in the mid-1980s, cementing Philadelphia's role as Comcast's home territory (and loyal partner in resisting competitors). More important, from the family perspective, in 1990 Brian Roberts was named president and Ralph's successor. He was just thirty years old.
³⁶

Brian Leon Roberts's path to mogul status started early. Alone among Ralph's children, Brian, born in 1959, the fourth of five siblings and the second-oldest son, took a strong interest in the cable business. While still in grade school he spent his Saturdays putting bills together in the Comcast office. “Brian is very unique in that he made up his mind what he wanted to be when he was almost in junior high school to senior high school,” said his father. “He wanted to be in the same business I was in. And he would come out to the office and sit around; he couldn't get enough of it.” Brian wasn't interested in reading books or listening to music (though he excelled at squash), and his father has described him as “a one track mind … on how to make the business better.”
³⁷
Brian was always ready to work, and was already sitting in on deal negotiations and meetings with banks in his teens; by 1975, the summer before his senior year in high school, he was out in the field with a Comcast installation crew, and before he went off to college he managed to get Comcast listed in Standard & Poor's stock guide.

Brian graduated from the Wharton School of Business in 1981 with a B.S., played a lot of high-quality squash, and became a low-handicap
golfer.
³⁸
He could have had a comfortable life sitting on boards, dabbling in business, and playing even more squash and golf. But he had other aspirations. Things moved quickly for him; he joined the Comcast board in 1987 in the wake of the Group W acquisition, and he took part in the Storer Communications negotiations. Meanwhile, the cable industry continued to grow; cable in 1986 was in about 37 million U.S. homes, or 43 percent of all households with a television.
³⁹

Brian, like Ralph, had no interest in giving up control of Comcast, even for an enormous amount of money. He could see far greater profits ahead in the digital world. Given some well-timed deal making, a favorable regulatory context, and good financing, more riches were bound to come Comcast's way.

The only other cable guy whose ambition has compared with that of Brian Roberts was John Malone, former CEO of TCI, who brought down Al Gore's ire on the cable industry by his arrogance in the early 1990s. But where Malone was rough, curt, and dismissive, Brian Roberts was smooth and polite. Roberts now owns Malone's cable systems; Comcast bought them from AT&T in 2001. Malone, for his part, is proud of what Roberts has done: “Brian has really matured as a business man, as a financial expert,” he told
Bloomberg News
in 2010. “I take enormous pride that he's come out of our industry.”
⁴⁰

The company grew even faster after Brian's ascendance in 1990. So had the cable industry generally, following CNN's dramatic coverage of Tiananmen Square and the fall of the Berlin Wall; by 1991, cable was in 60 percent of U.S. homes with televisions.
⁴¹
Comcast aggregated its Philadelphia cluster of systems through nine separate transactions that pulled together more than 1.4 million additional subscribers;
⁴²
it bought MacLean Hunter's systems and the Scripps systems, becoming the third-largest multiple-systems operator by 1995.
⁴³

Television viewers weren't the only ones taking notice. Julian Brodsky was proud of Brian Roberts for convincing Bill Gates at a dinner in 1997 that “cable is clearly going to be the way to go,” the best high-speed data route into Americans’ homes, far more promising than the phone companies’ copper lines. Following Brian's direct pitch, Microsoft gave Comcast a major shot in the arm by buying 11 percent of the company for
one billion dollars.
⁴⁴
The deal was a typical sledgehammer Brodsky arrangement: “They asked about the Microsoft discount. We explained to them the Comcast premium.” The Microsoft billion went right in the bank as general funds supporting Comcast, and Microsoft received no power in return.
⁴⁵

This was a turning point for Brian Roberts and for the cable industry. Gates saw that with television and the Internet becoming one thing, conduits capable of shipping massive amounts of information were going to be dominant. The cable companies could do this more cheaply than the phone companies because they did not have to dig up the streets and install a second network.

At about this time, “clustering” (“You take Philadelphia, I'll take San Antonio”) became the rage for cable-systems operators. The country had been wired; there was no more room for new cabling in metropolitan areas. As a former cable mogul told me in 2010, “I thought that if cable was going to be on the technology cutting edge; if we were going to compete with the likes of an RBOC [local phone company] or a public utility, we had to own whole markets, not parts of markets.” So the operators, primarily TCI, Time Warner, Comcast, and Cablevision, swapped and clustered systems during the summer of 1997—Leo Hindery, the former president of TCI under Malone, has called it the Summer of Love—so that each company could act within clusters of subscribers, a proceeding that helped cut costs.
⁴⁶

The big companies’ acquisitions of smaller cable operators were also proceeding quickly. In 1996, the top five cable distributors controlled 66 percent of all subscribers: John Malone's TCI alone held a 20 percent market share. By 1999, the cable industry was dominated by just six companies: AT&T (which had bought TCI's systems for $48 billion in 1998), Comcast, Time Warner, Cablevision Systems, Charter, and Adelphia. Then, in December 2001, Brian Roberts scored a major coup by buying AT&T Broadband's cable and Internet divisions (including TCI's former cable systems) in a $72 billion quasi-hostile takeover, propelling Comcast into the top spot as the nation's largest cable company.
⁴⁷
FCC chairman Reed Hundt told the
Wall Street Journal
in connection with Comcast's bid that “the Roberts don't take ‘no’ for an answer. They repeatedly don't take ‘no’ for an answer.” More than a hundred million households were connected
to cable wires by then, and Comcast now served twenty-two million of them, in forty-one states.
⁴⁸

RCN, a small cable provider based in Princeton, New Jersey, that has tried to compete with Comcast over the years, sharply opposed Comcast's acquisition of AT&T's cable systems in 2002, accusing Comcast of using “bullying tactics” in the form of non-compete clauses to prevent about fifteen Philadelphia-area cable-installation contractors from doing business with RCN. According to RCN, contractors were followed and photographed when they were thought to be in contact with or working with RCN, and those photographs were used as a basis to cut off the contractors from doing work with Comcast. Without access to construction and installation contractors, RCN could not offer services. The
Philadelphia Business Journal
noted in 2002 that Comcast responded by saying that it had taken four years for Comcast to obtain a Philadelphia franchise. “RCN chose to abandon its effort … after a significantly shorter period of time (of about two-and-a-half years).”
⁴⁹

By 2005, Comcast was more than twice the size of Time Warner, its closest national rival—but not its competitor in any major geographic market. The Summer of Love and the swaps and deals since then had ensured that no major cable-systems operator competed with any other. After family-run Adelphia, the nation's sixth-largest cable operator, went into bankruptcy in 2002, its assets were divided in 2006 between Time Warner Cable and Comcast. Comcast gave 500,000 customers to Time Warner in Los Angeles, another 500,000 in Dallas, and 100,000 in Cleveland, while Time Warner gave Comcast 750,000 customers in Houston, 50,000 in Philadelphia, and 200,000 in Minneapolis.
⁵⁰
Smaller cable providers did not share in the pie—the diminishing number of huge companies ran these trades for themselves.

As a result of this unofficial non-compete agreement, although Comcast as of 2010 had only about a 30 percent share of the nationwide market for video services (far ahead of Time Warner's 17 percent share), in the local markets where it operated it had almost no video competition from a cable operator; more important, it was just about the only choice in these markets for video-quality high-speed wired data services.
⁵¹

Comcast historically has stopped at almost nothing to get strategically located exclusive franchises and subscribers that allow it to further cluster
its operations. In 2011, the Third Circuit Court of Appeals allowed a class action to proceed that charged that between 1998 and 2002 Comcast increased its share of Philadelphia subscribers from about 24 percent to about 78 percent through a series of nine swaps of systems with AT&T, Adelphia, and Time Warner; acquisitions of competing cable service providers; denial to RCN of key sports programming owned by Comcast; requiring cable-installation contractors to enter non-compete contracts with Comcast; and persuading potential customers to sign up for long contracts with special discounts and penalty provisions in areas where RCN planned to compete—all with the result that consumers in Philadelphia ended up paying a lot more for pay TV than they would have in a competitive market.
⁵²

The family story continued. Ralph Roberts transferred much of his voting stock to Brian in 1998.
⁵³
And whenever additional shares are issued, the ratio of votes controlled by the supervoting shares to those controlled by ordinary shareholders is adjusted to maintain Brian Roberts's 33 percent voting power over the company.

Thus, through a well-timed series of acquisitions and swaps, as well as the helping hand of his father, by the February 2010 hearing Brian Roberts found himself at the controls of the nation's largest media company in a thoroughly consolidated marketplace. Rockefeller would have felt a twinge of jealousy.

But if other cable companies no longer were a threat, what about other technologies? Digital technology now provides the key differentiator on the high-speed Internet access side of Comcast's business, where its future growth and dominance lie: only Verizon's FiOS service, which uses fiber-optic lines (the “one competitor” Brian Roberts referred to when talking to analysts in mid-2011), represented competition with Comcast's DOCSIS 3.0 data services. But in March 2010, Verizon indicated that it was suspending FiOS franchise expansion around the country.
⁵⁴
Cities like Boston and Alexandria, Virginia, that had hoped to get FiOS would be left out in the cold; in the end about 15 percent of Americans (only those in zip codes whose characteristics satisfied Verizon's fairly high target rate of return) would have access to FiOS services.

Verizon stopped expanding for a simple reason. Its existing phone lines are made of twisted copper wire. To build FiOS, it has to install a complete
second network—roll in the trucks, rip up the streets, and put in fiber—essentially cannibalizing the existing network on which it still sells DSL service. That's an extraordinarily expensive procedure, and Wall Street hates steep, long-term, up-front capital expenditures. Wall Street wants to see high free cash flow, ample dividends, and frequent buybacks. Comcast, meanwhile, only has to swap out some electronics to shift its existing cable network to DOCSIS 3.0 services. Much, much cheaper. And a death knell to potential competition, even though FiOS services are objectively better because uploads and downloads across its fiber optics are evenly fast. (Comcast faces competition from Verizon's FiOS in less than a fifth of its territory; Cablevision, by contrast, is competing with Comcast in almost two-thirds of its territory.
⁵⁵
Some cable companies are bigger and more important to one another than others; Comcast and Time Warner are strategically aligned in a way that sometimes leaves out Cablevision.)