Manhattan Cable has great hopes for data transmission as a future source of income and initiated service experimentally in 1974.

Computer Television, Inc., a company in which Time Inc. owns a majority interest, is an attempt to develop the hotel pay-TV field. CTI now supplies uninterrupted current feature films for a fee to guests in some 41,500 hotel rooms in 68 hotels belonging to the Hilton, Hyatt, Sheraton, Marriott and Loews chains, among others. Program cards are mounted on TV sets in hotel rooms. CTI is still in the early stages of development and holds all the risks of an unproved

venture.

[From TV Communications, May 1975]

THE OPTICAL EFFECT... 60,000 SUBSCRIBERS AND Now MICROWAVE NETWORKING Out in sunny California an aggressive, professional and young company is proving the future of Pay-Cable today. Optical Systems, already providing programming in 11 cities, is now expanding with microwave networking.

(By Paul Syhen Maxwell, Lone Star Media)

A "willingness to adapt" has brought Optical Systems Corporation from a bright idea to where it is today: an operating pay-cable company.

A real live operating pay-cable company is something everyone in cable television dreamed about back in the halcyon days of blue skies and rising stock prices. Then the prime rate began rising and cable stocks began falling. At the same time, cable companies began retrenchments (in manpower as well as dreams) and it began to look like a recession, if not a depression, had arrived... and especially in the cable TV business.

While all of that bad news was being reported on network and local newscasts, in newspapers and magazines, and in the CATV trade press, Optical Systems and its Channel 100 subsidiary were plugging along, making mistakes and learning from them, and inventing a whole new business... a whole new business that works.

"ARROWS AND WOUNDS"

Pay-cable originated, like most business dreams, with promotional ballyhoo based on entrepreneurial instincts. At first it was a seat-of-the-pants business. Today, Optical president Alan Greenstadt calls his firm's management philosophy that of "an entrepreneur with controls." From his Touche-Ross days as a financial analyst, Alan has imposed the "standard operating procedure" of rigid guidelines and controls. "There is something written down in this systems manual," Greenstadt asserts, "that tells the man in the field-whether he is a regional manager or a salesman selling house-to-house-what to do about any situation he encounters. This systems manual answers all his questions and sets policy... and everyone follows it."

He continues by saying, "We are not selling dreams here. We are an operating company, much like a cable MSO, but, perhaps, more like a television network. Optical Systems owns and operates, like TV O & O's, pay-cable outlets on leased channels. We behave in much the same manner a TV network does toward its owned TV stations. At the same time we sell our programming and technical knowhow to cable operators who then handle their own marketing, billing and so on... much like a network affiliate."

NEXT IN LINE

The next step for Channel 100 and Optical Systems is Micro 100 North. It's a comprehensive microwave network intended solely for the distribution of Channel 100 programming (eliminating bicycling). The new network, contracted through MTC (Microwave Transmission Corporation) and its general manager and vice president Noel Young, interconnects the entire San Francisco Bay area with Contra Costa, San Mateo and Santa Clara counties, the Monterey Peninsula and the San Joaquin Valley.

The Micro 100 North communities include Concord, Monterey Peninsula, Stockton and Walnut Creek.

Plans for Optical Systems' immediate future are basically more of the same: continued improvement in operating controls, further development of a "professional managerial staff" (more Greenstadts and Brutacos) and more service for Channel 100 customers.

At the same time this new breed of pay-cable businessmen plan to achieve a favorable earnings statement for 1975. "We will," Brutaco states, "have an earnings per share this year."

From its inception to the present history of Optical Systems has been exciting, trailblazing work riddled with arrows launched and arrows caught. From my observations, Channel 100's archers are on target now.

[From Television Digest, Apr. 21, 1975]

Pay TV & Satellites Lift Convention: NCTA's annual meeting in New Orleans could well be noted, in later years, as point when pay-cable got off ground, literally, as entrepreneurs committed themselves to use of satellites. It's reminiscent of 1960, when industry moved from peanut phase, convening in Miami's Fontainebleau (Old Vol. 15:25 p2).

History may prove pay-cable-satellite combination mere flash-in-the-sky, but nobody thought so in New Orleans last week. Pay-cable sessions, even those at 8 a.m., were SRO (for details see p. 2).

Down-to-Earth Blue Sky: Home Box Office is putting its money where its mouth is in pay-cable and satellites-and it set tone of whole NCTA convention. In news conference, HBO Pres. Gerald Levin said company had contracted with RCA to buy $7.5 million worth of transponder time over 5 years-about 70 hours on each of 2 channels-5:30 p.m.-1:30 a.m. Mon.-Fri. & 1:30 p.m.-1:30 a.m. week ends on one, 8:30 a.m.-4:30 p.m. Mon.-Fri. & 4:30 p.m.-4:30 a.m. week ends on other. He said HBO is looking toward ultimate 24-hour service and he foresaw as many as million pay-cable subscribers within 5 years

UA-Columbia Pres. Robert Rosencrans outlined plans to spend $70-$75,000 each for 10-meter earth stations, said that applications will be filed within week and that he foresees no complications at FCC.

ATC Pres. Monroe Rifkin gave satellite concept another boost by announcing plans to build, "probably this fall," earth station in Orlando, feed HBO programs to its 9 systems and others in Fla., with potential of 250,000 subscribers. He said ATC "is preparing to develop" domsat reception at other ATC systems.

HBO will start Oct. 1, getting service from RCA, which will use Anik or Westar until it launches own domsat Dec. 11. Each transponder will have 24 channels. Rosencrans said contracts for stations hadn't been let, that ScientificAtlanta (SA) & Collins are 2 outfits prepared to build. SA Vp Howard Crispin said company has plenty of production capacity.

Levin also said HBO soon will add to its terrestrial network the system in Philadelphia (TPI), Rochester (Bert Harris), Buffalo (Gilbert). Rosencrans said UA became enthused about pay cable when its Wayne, N.J. system achieved 40% pay penetration only 25 miles from N.Y.C., while Suffolk Co. (Long Island) systems are adding 8-900 pay-cable subscribers monthly. Problems, he said, are "R movies" and time zones-former to be met by parental key at receiver, latter by use of 2 transponders on satellite-fed systems. He said that UA will build earth stations at both Yuma, Ariz. & El Centro, Cal.-though they're only 60 miles apart-because they give better control than microwave. "The wraps are off," he said, and "prices are in the range of most systems." Costs of building & maintaining earth stations, he said, are no more than for many multi-hop microwaves. HBO offers 8 movies monthly, has been producing about 250 live sports events a year-pro & college-plus children's, instructional & cultural shows. Though HBO has flat $8 monthly charge now, Levin envisioned per program charge for "large items."

FCC Comr. Washburn, in panel discussion, said that "government should not set up hurdles" for satellites; that "cost efficiency" will, by late 1970's, make satellites "highly competitive with bicycling videotapes and far below terrestrial microwave costs for similar networking."

Excerpts from comments at various pay-cable panels.—(1) Donald Berner, Allentown, Pa., said his company has developed "sophisticated" remote-control gear, $125 for terminals, offering scrambled pictures. (2) John Atwood, Theta Cable, L. A., reported that, despite 17 TV stations in area, system has 26,000 pay-cable customers; that total system revenues rose from $2.7 million to $9.7 million in 2 years-attributing $3.5 million of increase to pay. (3) HBO's Levin said that fastest growth is in metropolitan areas with good on-air signals; that new systems come on with 98% pay, as in Oyster Bay, L.I., at $14 monthly ($6 basic service, $8 pay); that movies are "lead item" but diversity is needed. (4)

Optical's Alan Greenstadt said film producers "have been very, very lenient about release dates." He also said recession hasn't hurt pay cable-"but accounts receivable are a problem." (5) Irving Kahn, former Teleprompter head, rose from audience to urge operators to "use your own product-then nothing will preclude national distribution." He ventured that pay cable "will change distribution patterns, as TV did. Cable will be first-run." (6) Scientific-Atlanta's Sidney Topol assured delivery of earth stations within 90 days.

In another panel, James Wicht reported on Columbus, O., experience, said 2-way per-program system with automatic billing via computer works well, gives chance to experiment with prices, and average pay-cable home produces_$7-$9 monthly; 50% of subscribers take pay service, Jerry Barge, reporting on Pensacola operation, said he uses "negative option," filtering out pay-cable for those who don't want it, charging $3.75 monthly for those who do-and 85% buy service. In Atlanta, on other hand, he had to use converters, because dial was filled. Of 11,300 subscribers, 3,400 take pay cable. Kenneth Canter, San Angelo, Tex., ran through 9 security concepts, from "very soft-honor system" to "very hard-addressable unit mounted on stand." He said technology is "lagging needs in the pay service."

APPENDIX B

[Excerpt from ABC "Reply to Opposition to Petitions for Reconsideration" in FCC Docket No. 19554, filed June 4, 1975]

IMPENDING GROWTH OF THE PAY CABLE INDUSTRY

Apparently, the principal factor which induced the Commission to relax significantly the anti-siphoning rules is that access to free television's program offerings-particularly, feature films and sports1-is necessary to enable pay cable to prosper. The Commission presumably is also convinced that pay cable is a relatively insubstantial industry that does not have enough subscribers or financial capacity to affect adversely the availability of programming to the free television system.

As ABC and others have demonstrated, however, all available evidence points to an opposite conclusion. Public pronouncements by the industry, reflected in trade press reports, indicate imminent and dramatic pay cable growth. In the face of these indicia of expansion, UA-MGM nevertheless insists: "Of course, in the first place there has been no dramatic expansion of cable operations recently, nor is there any evidence to show that expansion is imminent." (Opp., p. 15) This statement is misleading in the extreme.

Looking first to pay cable subscriber projections, the widely-publicized Stanford Report predicts 470,000 such subscribers by the end of 1976, and over 6.4 million by 1980.2 TelePrompTer, the nation's largest CATV multiple system owner, offers an even more optimistic forecast-over 500,000 pay cable subscribers by the end of 1975, with an increase of 300% to 1.5 million by the close of 1976. (Television Digest, May 19, 1975, p. 5). A recent newspaper article similarly notes that members of the CATV industry feel that new sources of programming, combined with reduced pay cable hardware costs, will increase the number of subscribers "to more than one million within the next two years." (Wall Street Journal, May 30, 1975).

What these projections mean in terms of potential pay cable purchasing power is reflected in the recent testimony of Robert Weisberg, President of Telemation Services, before the Senate Antitrust and Monopoly Subcommittee. In response to a question from Subcommittee Chairman Hart concerning the extent to which the prospective economic power of pay cable could be employed to siphon off attractive product from the free television system, Mr. Weisberg stated, "Even when we have 2 million subscribers on pay cable, we will only be able to pay about $500,000 to $600,000 per movie." (Transcript, p. 160). With 6.4 million pay cable subscribers by 1980, pay cable will thus have available "only" $1.6 million per film. far in excess of that which the television networks currently spend for such project. The Stanford Report contains a more sophisticated, but equally sanguine prognosis:

Broadcasting networks today can afford to pay about $800,000 for a good nonblockbuster film. . . . If a total of 60 million people watch a two hour film

1 The Commission has also invited comments on the question of relaxing the series rule. Second Further Notice of Proposed Rulemaking, FCC 75-370 (released April 4, 1975). 2 Stanford Research Institute. "The Outlook for Cable Television", Vol. 5, p. 43.

The Subcommittee has recently initiated hearings on the subject of feature film contract exclusivity.

on broadcast TV in two showings, then 40 percent of the viewing audience is watching and advertisers will pay $1,800,000 to sponsor the show. However, the same amount can be raised from 900,000 pay TV homes, which would happen as soon as there are 2,250,000 pay TV homes. This threshold level of a little over two million pay TV homes should be passed by 1977. (p. 33). Of equal significance, it should be noted that, even under present "oppressive" conditions, the fortunes of cable appear to be improving rapidly. At the recent annual meeting of Viacom International, Inc., for example, it was announced that the company's first quarter earnings were up 22%. (CATV, May 5, 1975, p. 8.) Similarly, American Television and Communications Corporation reported substantial increases in both revenues and earnings for the nine-month period ending March 31, 1975. (Ibid.) UA-Columbia Cablevision, Inc., in a recent letter to shareholders, stated that it was "pleased to report record results from our operations." TelePrompTer President Russell Karp has also stated recently that his company's revenues rose by 20% in the first quarter, to more than $23 million (Broadcasting, May 22, 1975, p. 58; Television Digest, May 19, 1975, p. 5). The optimistic outlook of these cable executives is also reflected in the dramatic escalation of CATV stock prices. A list of illustrative stocks is attached as Appendix A. Perhaps the single most critical development, however, is the prospective use of satellite technology to facilitate CATV networking. In April, Home Box Office, Inc. announced plans to utilize the satellite facilities of RCA to interconnect pay cable operations. At a reported annual cost of $2 million, a program service of entertainment and sports will be provided to cable systems commencing this fall. (Barron's, May 19, 1975, p. 9). Cable systems prepared to construct earth stations at a cost of $75,000 include UA-Columbia, American Television and Communications, Jones Intercable, and TelePrompTer. The satellite interconnection of TelePrompTer alone, involving the construction of twenty-four earth stations, will provide an additional 870,000 prospective pay cable subscribers to the CATV network. (The New York Times, May 30, 1975.) Attached as Appendix C is an article from Broadcasting which further details these developments.

The savings in distribution costs with satellite interconnection will be considerable. Paul Kagan thus includes a technical analysis of Robert E. Button (attached as Appendix D) which concludes that "the costs to the cable system operator for participation in such a network average out to approximately 10 per subscriber home or about 4¢ per potential viewer per month." (How Pay TV Will Realize Its Promise, April 28, 1975, p. 22).

The insignificant cost of pay cable conversion is summed up by Kagan:

It is possible to set up pay-cable TV for as little as $15 per pay TV subscriber (using "notch-filters" to block out non-subscribers) or, more typically, $50 (using a scrambled-picture, set-top converter). Even padding the investment with labor charges, promotion costs, selling commissions and trial-and-error, it is clear that the cable TV industry could saturate one in every three of its current homes at a total cost equal to just one year's worth of its internal cash flow. (Ibid., p. 11) *

Company

ILLUSTRATIVE MARKET PRICE INCREASES OF PUBLICLY-TRADED CATV STOCKS

American TV & Communications.

1975 Low June 2-19, 1975

174

'The Barron's article is attached hereto as Appendix B.

Kagan also notes: "All of our pay TV projections have been predicated on singlechannel service and outlays per home of up to $10 per month. At some future point, perhaps by 1980. pay TV is likely to have a multi-channel capability able to stimulate greater consumer expenditures." (Itid., p. 13.)

[From Barron's, May 19, 1975]

HOME BOX OFFICE, INC.

PAY TELEVISION IS FINALLY MAKING THE SCENE

(By Margaret D. Pacey)

This October, if all goes well, pay television, which for over two decades has been long on promise and short on performance, will take a critical step toward emerging from its experimental, localized status. More specifically, using an RCA satellite, Time Inc.'s Home Box Office subsidiary, a network packager of entertainment and sports programming in the Northeast, will transmit movies and sports to UA-Columbia Cablevision operating in Florida. Subsequently, similar signals will be beamed to Southern California and the Midwest.

A national audience could be just the shot-in-the-arm Pay TV, an adjunct to cable television offering extra programming for a fee, needs to get off the ground. Thanks to the growth of cable TV systems around the country, the physical base for the business is now in place. And, as a matter of fact, even in its present form, serving only chosen localities, Pay TV, via cable, has been increasing the number of subscribers and improving the quality of its offerings.

EMBRYO STAGE

A national audience could enable the budding industry to become more aggressive in bidding for entertainment vehicles, which, in turn, presumably would further enlarge its subscription rolls. Right now, to be sure, the project is still in the embryo stage. The satellite has yet to go up, nor has the FCC okayed construction permits for the earth stations which will receive the signal. Worth noting, too, are the inevitable technological and programming bugs. More important, perhaps, before Pay TV can hit the big leagues, it must gain relaxation of FCC regulations, develop more sophisticated hardware, come up with the shows to attract big city customers and pick its way through a thicket of legal and union disputes.

Nonetheless, despite the recession, cable subscribers in growing numbers are plunking down $10 for installation and $6-to-$9 monthly for new programming. According to the National Cable Television Association, Pay TV, as it exists today, was launched in Wilkes-Barre and San Diego in late 1972. By the end of 1973, it boasted 16,000 customers.

In March 1974, the figure was up to 60,000 and by January 1975, it had more than doubled, to 130,000. On May 1, there were 187,000 subscribers in 16 States (100,000 in the Northeast). Paul Kagan, a consultant who closely follows the fortunes of the industry, estimates that more than two million homes could be hooked into Pay TV by 1980.

CUT IN COSTS

Sparking the growth has been stepped-up marketing efforts by the cable operators, advances in the transmission end and, not least, more attractive viewing fare. Moreover, the industry has settled on a monthly subscription price rather than individual program charges, which has brought a degree of uniformity to the field and simultaneously cut hardware costs. Thus, the willingness of a Home Box Office to shell out $2 million a year for satellite facilities is more of a natural evolution than a radical departure.

Since newcomers are flocking into the picture steadily, it's difficult to get a hard fix on the number of companies in Pay TV. The list, though, includes around a dozen publicly-held CATV concerns. Among them: another Time subsidiary, Manhattan Cable, UA-Columbia Cablevision, American Television & Communications, Viacom, Cox Cable, Warner Communications, TelePrompTer, Communications Properties and Optical Systems.

Scientific Atlanta is the leader in building Pay TV earth stations, an activity in which Collins Radio, a Rockwell subsidiary, also boasts a stake. Aforementioned Home Box Office is the No. 1 packager of pay network programming, with Optical Systems furnishing part of the competition.

To date, Pay TV had more impact in the stock market than on corporate earnings. For instance, sparked by the April satellite announcement, Time's stock climbed from 344 to a recent 1975 high of 531⁄2, and is now at 51. Nor were buyers deterred by the fact that the publishing giant suffered a pretax