Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (12 page)

At the Antitrust Subcommittee hearing, Brian Roberts earnestly focused on the “American icon” NBC network and its “storied past and … promising future.”
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But when speaking to analysts at the time the deal was announced in December 2009, Roberts struck a different and more confident tone: the NBCU transaction was about making Comcast “strategically complete.”
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That same confidence came through in March 2011, after the transaction was cleared, when Roberts told analysts that despite steady price increases in its high-speed Internet access service, to which more Americans subscribed than any other, Comcast's sales were “tremendous.”
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In each market where Comcast operated, it already controlled a third of the high-speed Internet access subscriptions. But Roberts knew that Comcast could handle more: “So,” he told analysts, “the goal would be 100 or 90 [percent of high-speed Internet access subscriptions in each market]. We have one competitor.”
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How did America get to the point where one man was within striking distance of controlling most of the major metropolitan markets for high-speed Internet access?

The family story of Ralph and Brian Roberts is often told by Comcast. The company has its epic narratives, all of which are useful on Capitol Hill, whose members love a homespun American success tale. The story has the advantage of being true, and Brian Roberts genuinely considers Comcast a family company. That said, there is a jarring contrast between this family storytelling, with its connotations of intimacy and support, and the brute strength with which the giant company wields its economic advantage. Through canny skill, dogged persistence, and political heft, Comcast has put itself in a position to squeeze all the other players. Everyone, media conglomerates and small cable companies alike, has to work with Comcast on its terms. This allows Comcast to reap the rewards of dominance in the form of ever-increasing prices for data access and content in the twenty-first century. Comcast got where it is today through clever financing strategies, clustering of its operations to take advantage of scale economies, careful and constant cost cutting, the quick embrace of new technology, and shrewd investments in content, all within an environment of regulatory passivity. The idea of “common carriage,” the centerpiece of public-communications policy for most of the twentieth century, has ceased to be a credible threat to Comcast's domination. The result: wide moats around an infrastructure business that cannot be crossed by competitors, and ever-increasing power and profits. In a very real sense, Comcast now owns the Internet in America.

Yet the genial family story continues to be put on display: Ralph Roberts's presence behind his son during the Antitrust Subcommittee hearing may have made some legislators worry that they were wearying him by going on too long. Looks can be deceiving: media mogul Barry Diller, bested by Ralph and Brian Roberts in his effort, as chairman of QVC, to buy CBS in 1994, told the
New York Times
in 1997 not to be fooled by Ralph's appearance. “Ralph is tough,” he said. “Under that bow tie and courtly manner beats the heart of one tough man. He is steel.”
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If Ralph is steel, Brian is, by all accounts, titanium. “He's a hard guy to work with,” said one former cable mogul to me who did not wish to be named. “When I did deals, we had the idea that both sides needed to succeed in order for the deal to work. For Brian, it's ‘If I haven't left them dead I haven't gotten enough.’” More pithily, as one satellite company
executive said to me of Brian Roberts's company, “They'll gouge your eyeballs out.”

Ralph Roberts could not have imagined what was ahead for American Cable Systems, his first cable company, when he opened its doors in early 1963. After selling his men's accessories business in Philadelphia and leaving a job writing advertising copy for Muzak—run by his brother, Joe—Ralph had been looking for a place to put his money. About a year before Ralph took the leap into cable, Joe encouraged him to investigate cable franchise opportunities, which served distant rural markets that were then just taking off. (Joe's Muzak business and Ralph's cable businesses intertwined over the next few decades; having a local exclusive franchise with high initial costs and steady subscription revenue, the case with both these industries at the time, is great for business. In a July 2000 interview, Ralph described both Muzak and cable businesses as a “license to steal as recurring monthly income. … You put in the equipment and every month they send you money.”)
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Ralph decided to buy some cable franchises in Tupelo, and later West Point, and Laurel, Mississippi; cable services could use marketing, he figured, and he was good at that.

Ralph's Tupelo franchise covered just twelve hundred subscribers by grabbing signals from Memphis broadcasters and running them along wires to the subscribers’ homes. It was a risky move: he had to put up 51 percent of the half-million-dollar franchise cost. That was the last personal money that the Roberts family ever invested in their empire.
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Roberts didn't go into the venture alone. Julian Brodsky, an accountant with a deep commanding voice, prominent J. P. Morgan nose, and a frank, street-smart manner, was his financial wizard (and, later, Brian's mentor in deal making). Brodsky had been Ralph's accountant before they went into business together, and he helped Ralph found the company in 1963, including setting up the Class B supervoting shares that the Roberts family still controlled absolutely as of 2011.

Brodsky was the right man to push the tiny new company along. As he describes himself, “There were people whose weapons in business are the stiletto and there are people like me … whose weapons are the sledgehammer. And there's no conniving, no deceit. You just say your
position and that's that.”
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Brodsky had the accounting and legal finesse to make Roberts's fledgling company tick.

It was Julian Brodsky whose sledgehammer drove the big deals and who fought the franchising wars that made Comcast grow. According to Dan Aaron, Roberts and Brodsky's third partner, Brodsky was the “maniac,” with his foot on the pedal, “trying to go a million miles an hour,” making deals. His goal was to buy cable franchises without either taking on enormous debt or losing control of the company. “We just knew that if we could continue to make good acquisitions and find opportunities to build cable systems, then things would sort themselves out for the long haul,” Brodsky said in 2009.
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The early escapades of Roberts, Brodsky, and Aaron (a refugee from Nazi Germany who as a young journalist had become fascinated by the cable industry) in Mississippi involved shrewd uses of Roberts's sociability—he met one new franchise holder through a newfound friend at a local craps table—and the skillful avoidance of a requirement to provide everyone with service.

From the beginning, like other cable operators, they tried to “skim a little bit off the top,” in Brodsky's words, to get “better demographics.”
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Cable was expensive to build. Meridian, Mississippi, required American Cable to put up a $125,000 bond that would not be released unless the company provided service to 90 percent of applicants. This was a problem. If everyone applied, the fledgling company would have no chance of surviving—it did not have the capital to lay enough cable to serve the entire town. So instead of creating a buzz about the new cable franchise, Aaron took space in the sole high-rise in Meridian and proceeded to set up shop extremely quietly. He did no advertising, put up no signs, and used unmarked trucks. The company sent out a direct mailing to one demographically promising block at a time and deployed clean-cut college kids to follow up on the mailings. When they had enough orders, they wired up one block at a time, and thus ended up serving 100 percent of their “applicants”—because, in Brodsky's words, “it was really hard to apply.”
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Brodsky, telling the story, considered it amusing; a company that is hard to find is a company that will be able successfully to serve all its customers; and a company that cherry-picks the best areas will be successful. The bond was released. The money flowed in.

The little cable company replicated this marketing model for years. Brodsky loved the new business because it was so straightforwardly lucrative. Ralph Roberts felt the same way. “I was never, never nervous about buying a cable system,” he told
USA Today
in 2001. “You have recurring billing, reasonable rate increases, you keep your costs down and it's like chicken in a grocery store. It's very nice.”
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The company rolled on, acquiring exclusive franchises in Mississippi; it charged up-front installation fees to keep cash flowing and achieved adoption numbers and monthly service rates that covered its costs with enough left over to make the business grow. Depreciation rates as short as five years on cable equipment meant that the company could avoid paying much in taxes.

But there was a limit to how far the company could go in its new territory. Cable adoption in Mississippi was a tough business because many people were too poor to commit to making monthly payments for broadcast television that other Americans received for free. So Roberts and Brodsky turned their attention to their home city of Philadelphia and its surrounding towns, acquiring a group of suburban systems. These early acquisitions allowed American Cable, renamed Comcast (from
communications
and
broadcast
) by Roberts in 1969, to consolidate its back-office operations with these other franchises, so that they could take advantage of scale economies for their internal operations—accounting expenses, legal fees, overhead—as well as their purchases from vendors.

For many cable guys in the 1960s, building and consolidating systems was exciting. “At the beginning, middle, and end, nothing is more fun than building a cable system in a town that had never had a cable system before. This is a cable company and we are all cable guys,” Brodsky said. They were also talented, disciplined, and highly intelligent. “We were absolute deal junkies, and driven by a need for growth.”
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Reminiscing in 1998 about how things had changed in his industry, Brodsky remembered that back in the 1960s, selling cable was a difficult generational issue. Older people were “not in the mood … to make fixed commitments to spend money.” But his view then, which he conveyed to the bankers backing Comcast in the early days, was that it was “just a matter of time” “all these people go. The young people grow up who grew up with cable, and sooner or later cable will be a way of life.”
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And Comcast
would feed the demand. This was only one of many prescient calls made in the company's early years.

At the time no one thought a company like Comcast would one day try to feed all that demand by itself in every large market it entered. Cable was smalltime: despite the franchising energy, in the 1960s few firms had more than a dozen systems each; the four largest combined held just under 20 percent of all subscribers. Even though companies owning multiple systems were growing in the 1960s, there was so much territory to wire that concentration was not an issue. Today, in the areas where Comcast operates (it never tries to compete with its big-cable peers Time Warner and Charter), it routinely controls more than 50 percent of subscribers.

One of Comcast's biggest advantages in its early days was Julian Brodsky's financial and technological acumen. In a 1998 oral history, Brodsky recalled in detail the company's strategies in the 1960s and 1970s. He would fight to get long-term fixed-rate reasonably priced loans for each new system—financing the cable industry had been unable to get before—and he required each project to be self-sufficient, so that the whole operation would not be threatened if one system faltered. It was a good plan, but Comcast still nearly folded in 1969–70 when its partner at the time, McClean Publishing, pulled out. Comcast found a way to survive by stepping up its acquisitions. (Comcast learned its lesson; as Executive Vice President David Cohen said in 2011, “We're not very good partners. We like to run things.”)
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In an early, adventurous use of technology, Comcast employed computerized cost projections to obtain the longer-term loans Brodsky wanted. “[What] gave Comcast firepower in excess to any other cable operator,” Brodsky explained, “was that we got access to computers [in 1965–66]. I leased a TTY 33 teletype that was used in Western Union offices. And I subscribed to GE's time-sharing services. … I devised models for cable projections [that were] all externally driven. … I was the only person in the cable business getting computer cash flow projections in the early and mid-60s.”
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Other cable companies consistently underestimated the costs of maintaining and expanding their installations, but Brodsky could make accurate projections. Technological agility became a company hallmark.

Innovative financial structures were another strength. In addition to getting good deals on new debt, Brodsky figured out how to use the same kinds of limited partnerships that had been popular in the real estate, oil and gas, and trucking businesses to raise money. The equity investors in the limited partnerships—doctors, dentists, lawyers—would get back more than they invested and be able to take advantage of the enormous deductions Comcast would generate based on the initial losses associated with construction of new cable systems, while they supplied the money to pay for the building of new systems. Meanwhile, because the limited partnerships did not show up on the balance sheet, Brodsky could keep Comcast's more traditional investors happy as well.

At the same time, Brodsky took an extremely conservative approach to deals. Comcast was not interested in loading up its balance sheet with debt. Each deal had to pay for itself, and those loans had to be paid off. Comcast went public in 1972 to get access to funds that would finance its expansion, and marched ahead to acquire franchises in Kentucky and Michigan.
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