Cable TV, after start-up losses, begins to get profits into focus
In his roomy Rockefeller Plaza office, Drew Lewis rocks back in his comfortable leather chair, tucks his feet up, and talks plainly about losses at Warner Amex Cable Communications, where he is chairman.
Mr. Lewis, former secretary of transportation in the Reagan administration, heads a company that builds and operates cable television systems - and that lost $47 million in 1982. Projected losses for last year float somewhere around
But in a phone interview from his Englewood, Colo., office another cable chairman, Trygve Myhren, said his company's performance is ''getting better every year.'' Revenues and net income are ''up sharply,'' says Mr. Myhren, who heads American Television & Communications (ATC), a Time Inc. subsidiary.
Warner Amex and ATC are in the same business - only ATC did not lock itself into uneconomic franchises with major cities, while Warner Amex bid aggressively for them and is now trying to renegotiate contracts in Dallas and Milwaukee.
Still, despite current problems, the cable-TV industry has managed to pull itself up from a $200 million loss in 1982 to an estimated profitability of $400 million last year. Construction costs have peaked, interest rates are down, profit margins are strengthening, and subscriber numbers and revenues look good. (Cable operators such as Warner Amex and ATC should be differentiated from the dozens of cable programmers such as Home Box Office, Music Television, Cable News Network.)
''Underneath the ripples, there's strong growth. The cable system by and large is a healthy animal,'' comments Charles Dolan, the sandy-haired chairman of Cablevision Systems Corporation, based on Long Island.
But Mr. Myhren says the business can't be looked at as a monolith: ''It's a two-tiered business. A growing number of companies are doing very well and expect to do better, while another group has overextended itself in the major markets.''
Cable executives say city councils in many large urban areas want too much from them. Franchise negotiations have dragged on for years in some cities, ''and the consumer still sits there with no cable,'' says Myhren.
While cable operators have laid systems like doughnuts around Chicago, St. Louis, Philadelphia, Baltimore, and Washington, their cores have not been touched. Last week, Cox Cable pulled its bid out of Baltimore proper.
Back in the '70s, operators bid aggressively for franchises in big cities. This was the strategy at Warner Amex, jointly owned by Warner Communications and American Express. Companies that followed the Warner strategy of ''get the franchise first, worry later,'' wound up with money-draining operations.
''Fundamentally, the problem is the large metropolitan areas, none of which are profitable,'' says Mr. Lewis at Warner Amex, with legs stretched out on his desk. ''And the reason they're not profitable is that we've promised too much and the cities demanded too much.''
There was ''cockeyed optimism in the late '70s toward what urban cable could generate,'' comments Barbara Russell, a communications analyst at Prudential-Bache Securities, the New York brokerage firm. Cable operators had visions of home banking and shopping via cable, and thought urban dwellers would go for cable television that offered a huge variety of channels. So they went after the market vigorously, offering cities two-way cable that allowed consumers to send information and promising systems that had room for more than 100 channels.
Meanwhile, cities took advantage of the hopefuls and tried to make the best deals they could - asking cable companies, for instance, to plant several thousand trees in the deal, build local studios, and pay fat franchise fees.
''The cities were trying to solve their fiscal problems with cable by viewing us as a golden goose,'' says Edward Dooling, a National Cable Television Association spokesman.
Cable companies see renegotiation as the way out. Cox Cable has successfully renegotiated in four cities. Warner Amex is asking Dallas and Milwaukee to let the company cut back on the number of channels, restructure subscriber rates, and reduce local program capacity and the number of local studios. It has found that consumers don't want 108 channels and that many local programs go unwatched.
Mr. Lewis refuses to call Warner Amex ''troubled,'' explaining that parent companies are ready to back the venture and that ''in the long term, cable TV is going to knock the socks off the nets (major networks).'' The renegotiation progress is ''very encouraging,'' he says, although if renegotiations don't work out, ''we will have to gracefully get out of the cities.''
Meanwhile, the industry is regrouping. Programming companies have spent the last year merging or withdrawing from the industry. Advertisers have not rushed to the scene as expected because of an undefined - and too small - viewing audience. Cable operators are attacking this problem by ''clustering,'' buying up or building cable operations in one region. ATC has been successful with this , and Mr. Myhren says advertisers are finally hopping on in significant numbers.
Analysts worry, however, that cable faces another problem - competition from other media, such as direct-broadcast satellite and videocassette recorders. But the industry is beginning to broaden its conception of itself as a communications business and not just a cable business. It, too, is willing to try its hand at something like direct broadcast satellite - where satellites beam programs directly to a receiving dish on a home or business rooftop - if it's economically viable. And ATC has set up some retail stores that, among other things, service videocassette recorders and sell videocassette tapes.
The cable companies that have avoided the money-losing franchises are well on their way to strong growth. Those tied up with the urban areas - if they survive - have a lot to look forward to. As one executive put it, ''It's worth hanging in there.''