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Memory Lane: Let’s be friends. Again.

Wed, 09/11/2013 - 6:47pm
Stewart Schley, Media & technology writer

The 1980s were sweet times for cable programmers. Flush with cash from a dual-revenue stream economic model that was the envy of the TV business, they were rising in power and eager to grow. So eager that in the spring of 1985, Turner Broadcasting System’s founder Ted Turner attempted an audacious hostile takeover of CBS Inc. Although Turner was rebuffed, the very idea of the brash cable impresario gobbling up the venerable broadcasting company symbolized the bravado of the cable programming sector.

The rising confidence sprang from more than just the enviable economics of the cable programming industry. Beyond the revenue flowing from per-subscriber payments made by cable companies like Tele-Communications Inc. and Continental Cablevision was an almost parental devotion to companies like Turner’s and the offspring – CNN, TBS, TNT – they produced.

Cable companies recognized how essential these programming providers were to the growth of their industry, particularly as cable began to push into major metropolitan markets where consumers, unlike their rural counterparts, could choose from dozens of over-the-air TV channels. A protective, in-it-together symbiosis prevailed. Cable companies would willingly write out monthly checks for the ability to offer “cable” channels that helped to attract and keep subscribers.

Programmers, emboldened by the security these payments provided, plowed the money back into original content production and acquisitions of attractive syndicated shows.

This virtuous allegiance came into stark relief in 1986, when Turner turned his interests to another prominent target: the movie maker MGM. The once-grand Hollywood studio had sunk badly into disrepair, but it still possessed a deep film library that could fortify Turner’s entertainment channels. Turner was convinced it was the right deal at the right time, so much so that he ignored warning signs – a series of movies that badly flopped and deteriorating economics – to pursue a debt-binge acquisition of MGM from the financier Kirk Kerkorian.

Things went bad in a hurry. The deal’s reliance on “junk” bonds produced enormous amortization payments that Turner struggled to make. Desperate to remain solvent, Turner considered selling off prize assets, and rivals smelled blood. Time Inc. made an unsolicited bid to purchase a majority of Turner’s beloved CNN. And Kerkorian himself was circling.

Looking for a way out, Turner called TCI’s president John Malone, whose company at the time was cable’s largest operator. Malone recounted the conversation in a 2001 interview for The Cable Center’s Hauser Oral History Collection: “I’ll never forget the morning the phone rang and it was Ted,” Malone said. “It was about 6 in the morning and I was just barely coming awake and he’s screaming in the phone, ‘You've got to do something!’ If you do don’t something it's going to be the KNN.’ And I said, "’What the hell’s the KNN, Ted?’ And he says, ‘The Kerkorian News Network.’” Malone and his colleagues from across the cable industry convened an emergency meeting to come up with a plan of rescue. Its key feature: a cash infusion of $650 million that would preserve Turner’s independence.

Ultimately, 31 different companies purchased 37 percent of Turner Broadcasting.

The deal was emblematic of cable’s determination to nurture and protect the delicate relationships that helped to lift the industry’s overall economics.

“I think it’s testimony to how this industry works together that we were able to put together a refinancing plan for Ted to take Kerkorian out, leave Ted in hard control of his company, and do well by everybody who invested in the enterprise,” Malone said.

Since then, things have changed.

The once-cozy alliances between cable distributors and program suppliers have chilled as competition has intensified for pay-TV subscribers and programmers have insisted on ever-escalating license fees that now represent the largest operating expense line item for U.S. operators.

But the lessons from Turner-MGM may come back into present-day relief in light of some of the new challenges facing the industry. As the cable industry works to preserve its grip on lucrative program distribution across a new, Internet-powered video landscape, and as programmers angle to keep the dual-revenue model alive and well, a new argument for old-school symbiosis arises. Once again, cable distributors and cable programmers find themselves in a familiar place – needing one another to ward off a murky enemy. It’s not Kirk Kerkorian this time. It’s a constellation of technologies, consumer expectations and disruptive outsiders that threaten to bust apart the bundle. But cable has shown resilience against attack before by drawing on the common interests of operators and programmers. And there might be a second act yet to come. The fact that it’s still called CNN, and not KNN, attests to that.

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