Interview Date: Thursday August 22, 1985
Interview Location: Washington, DC
Interviewer: Kathleen Hom
Collection: Penn State Collection
Note: Transcript Only
HOM: What got you interested in cable TV?
MALARKEY: Well, my family owned a number of music and appliance stores throughout northeastern Pennsylvania. During an early spring buying trip to New York, I stayed at the Waldorf Astoria. When I checked in the room, I found it boasted a new RCA television receiver. Coming from the hills and mountain area of Pennsylvania where television reception was virtually non-existent, (witness our well-below-average sales of television receivers--and those that we did sell did not perform despite the elaborate antenna systems that we would sell and install) I turned the set on to see what the pictures looked like.
As I recall, there were only two, or perhaps three stations on the air in New York at that time. The pictures the set produced were, in my judgment, absolutely beautiful when compared to picture quality we were providing our customers back in Pennsylvania. I noticed that the wire coming out of the back of the set was a round, black, vinyl-covered wire. I had been used to seeing a flat twin lead coming out of the back of the set going up to the antenna. My curiosity was "piqued." I called the front desk and asked them if they would send someone to explain operating the set to me.
HOM: They had their own hotel engineer who took care of that?
MALARKEY: Well, most hotels have engineers who take care of the mechanical systems in the hotels. The front desk was kind enough to send up an engineer who explained the master antenna concept to me and who then took me up to the top of the hotel and showed me the system that had been installed by RCA. He explained to me that that system was providing service to five hundred television receivers in the hotel. This made one hell of an impression on me, because I had always believed that one antenna could serve but one television set.
I'm not a technical person, but I knew we were selling television sets and that they required an expensive antenna system that provided pictures of inferior quality. The engineer told me that the system had been installed by RCA and that they had recently completed this master antenna television installation that was then serving five hundred television receivers. The hotel was planning to install another five hundred television sets which would be connected to the same system. This meant then that they would be feeding one thousand television sets in the hotel from one master antenna system. This whole matter intrigued me. I found myself thinking more about this new "master antenna" system.
HOM: What year was this?
MALARKEY: Nineteen forty-nine. I lunched one day with a friend of mine whose family was in the department store business and I told him what I had seen. We began to theorize, if you will, as to what could be done with a system of this type if we were to install a master antenna system on the top of a mountain. We theorized that if that was possible, could the signal be brought down the mountainside on a coaxial cable into the community, hooking up various homes, tacking the wire on telephone poles and power company poles. The conversation reached the point where we both thought there was something to it.
I went to see our local RCA television set distributor and they told me to go see RCA directly. So, I went down to Camden, New Jersey to talk to RCA. They were so intrigued by the idea that they offered to send the engineers up to Pottsville to experiment, at no cost to me, if I would buy the equipment to experiment with.
HOM: From them?
MALARKEY: From them. Which I did and which they did and we found that we could pick up beautiful signals from the one or two television stations that were then in Philadelphia eighty-five or ninety miles away. On the top of the mountain the signals were amplified. Then we ran a line a couple of miles down the side of the mountain to a test home and hooked it up. The pictures were absolutely gorgeous. Word got around about what I was doing and people started coming in the store offering me money and asking, "How much do you want to hook me up to this system that you have?" I realized it was service that could be sold. So that's where the idea was generated. I decided to go ahead from there and put the funding together to build the system and it was very, very successful.
HOM: You had a degree in accounting from La Salle before you started this?
HOM: Originally your family business was in selling equipment and progressed to selling services. Does your family still have this business?
MALARKEY: No, we sold the family business years and years ago.
HOM: Who were some of the people that you worked with during the early stages when you first started out?
MALARKEY: Well, within a relatively short period of time a number of other people in the mountainous areas of Pennsylvania caught on to the idea and saw what we were doing. They decided to go ahead and do the same thing themselves. It was probably a year after we started the business that there were eight or nine or a dozen or fifteen similar systems in small, outlying communities that started to do the same thing.
There wasn't any secret about how you could do it; the material and the equipment was available and all you had to do was get the money together to buy the coaxial cable, the amplifiers, the strand wire and the lashing wire and pay for the labor of putting up the strand and cables and selling the service to subscribers. So, I guess it was about a year, year and a half, after I started that there were a dozen or two dozen systems that were started in nearby areas of Pennsylvania. It started to spread rather rapidly after that.
I also became aware that the FCC in Washington was curious about what was happening with these community antenna systems that were springing up in Pennsylvania and simultaneously springing up in the Pacific Northwest area. They sent an attorney by the name of E. Stratford Smith to see me, in the early fifties, and find out as much as he could about this new business that was developing. Strat was an attorney with the FCC and he evidenced a great deal of interest. I told him as much as I possibly could with the hope that he in turn would be as frank with me and tell me where the FCC was coming from and whether or not I could anticipate any problems from the FCC doing what I was doing. As a result of that visit, it piqued his (Smith's) interest in cable television.
Strat subsequently left the FCC and joined a legal firm here in Washington. He got in touch with me again and said, "If there are any problems with the FCC, I think that I'd be in a position to help you." Well, at that point I had already given thought to getting some people together to discuss the potential problems which were beginning to develop. Number one, we had problems with the telephone company. They were rather reluctant, after the initial flurry of granted permissions, to let cable on their poles. They were becoming more and more reluctant to permit attachment to their poles. Number two, the Internal Revenue Service was insisting that we collect a tax called an excise tax from the subscribers. Number three, the Commission was beginning--at the urging of the television broadcasters--to evidence more and more curiosity and beginning to ask questions about what we were doing and where we were going.
I decided we better get together, those of us who were building these systems, and find out a little more about what was happening here in Washington and statewide and at the telephone company level. So I called a meeting of nine or ten people.
HOM: Do you remember some of these people?
MALARKEY: Do I remember who they were? Yes, they were William Calsam and George Bright, Claude Reinhard, and I'll get the other names for you. I just found an old photograph here recently and it was one of the very early NCTA conventions and I'll be able to put some faces on it.
HOM: Was this the beginning of the NCTA?
MALARKEY: Yes, this was the beginning of the NCTA.
HOM: The very first meeting?
MALARKEY: The very first meeting.
HOM: Do you remember the date?
MALARKEY: Ancient history. Probably in 1951. As I recall, nine of us in a small meeting room in the Necho Allen Hotel in Pottsville. We discussed as knowledgeably as we could the issues that appeared to be confronting us. We decided that we had better take steps to learn more about what was going on here in Washington and each of us put a $1,000 in the treasury. We started with a $9,000 kitty and I was authorized to look into the hiring of legal counsel.
The first person I contacted was Strat Smith, who had impressed me with his knowledge, his ability to communicate and his grasp of the facts. He agreed to represent us with little or no fee initially until the Association got on its feet. He told me that it was his judgment that this was going to become a very big business. He felt that it would be appropriate for him to offer his services and those of his firm at little or no cost for the fledgling organization. He knew that if things turned out as he anticipated, they would be retained and there would be larger fees. He was absolutely right.
The first thing I followed was his suggestion that we change the name from the Community Antenna Television Council to the National Community Television Association. So, the first official name was National Community Television Association. The name today is the National Cable Television Association. So, following the initial organization, I found myself...(stopped to answer phone). [Old pictures were located and identified at this time of members of the first NCTA.] Here they are; Ned Cogswell, George Bright, George Uritis, and Frank Brophy.
HOM: Were all these people from Pennsylvania and all small local operators, entrepreneurs, as it were?
MALARKEY: Yes. Oh, and a fellow by the name of McLachlan, Chief of Police of Monterey City. Those are the only names I can remember.
HOM: Was Pennsylvania the major place for development and growth for cable TV?
MALARKEY: The Pacific Northwest and Pennsylvania were two of the very earliest and it spread out from there, gradually, I dare say, to the Pacific Northwest states of Washington, Oregon, and Idaho. In the east, Pennsylvania, West Virginia, and New York were the three states. Cable started in Pennsylvania, gradually spread out first to West Virginia, then to New York, and then to the rest of the world. The Pacific Northwest started in the states of Washington, Oregon, and Idaho; those were the three states where cable television systems began to proliferate rapidly. They were mountainous areas with towns and communities down in behind the mountains. They had no other way of getting television other than the cable television system.
HOM: At that time you were building from equipment and technology that already existed and not really trying to develop anything?
MALARKEY: We were attempting to build an industry using equipment that was designed to be used indoors for master antenna systems in hotels and apartment buildings. It was relatively crude equipment that was capable of delivering two or three or four channels and that's all. What we were doing was taking this equipment, designed for one use, and modifying it for another use, outside. It was a very unfriendly element, the outside area. We were quite successful doing that. Those were very crude systems in the beginning.
HOM: Were some of the people you mentioned earlier engineers for your project?
MALARKEY: No, they were in the television business and they were servicemen who understood the basics of electronics or electricity who quickly became, "experts," in the design and building of cable systems. As crude as they were, they worked. It wasn't until several years later that we began to attract the attention of the true engineers, the electrical engineers who were responsible for the most part for designing the equipment that was used in cable systems. We realized that they were going to have to improve the quality of the product and the durability of the product that they were designing.
It was an interesting process to watch the development of the equipment that was initially capable of delivering three channels. They developed the equipment to deliver five channels and then they developed equipment to deliver twelve channels and then it went to twenty channels and then it went to thirty-five channels, fifty, seventy-five. Now we can deliver using more than one cable, we deliver a hundred and twenty channels on two cables just as we have product development now.
HOM: When you developed this system you were initially thinking of your community and immediate area. Were you also thinking about the entire Eastern seaboard?
MALARKEY: Yes, I went on and began to develop other cable systems in nearby communities and I tied them all together into my original company. The original company was Pottsville Transvideo Corporation. Then I had the Schuylkill-Haven Transvideo Corporation, I had the Minersville Transvideo Corporation, I had Harrisonburg, Wilmington, they were all Transvideo Corporations and I put the name of the community on top of each.
HOM: What was the approximate range of service and subscribers in each of these areas?
MALARKEY: They were very small. In those days, we had a lot of subscribers, about twelve or thirteen thousand subscribers all together. Don't forget these are communities that have three, four, five thousand homes total.
HOM: Who were some of the people you were working with when you were developing each of these?
MALARKEY: I handled some from one area myself. Sure, it was a lot of work to get the system started but once they were built and once you had established your policies -- you just had to manage them. Remember these were systems being built in areas that had little or no television and people came to you and asked to be connected, "Please!"
HOM: What were the average fees and how did you arrive at them?
MALARKEY: The average fees were, at that time, it cost $150 to connect to the systems, all cash, up front. The monthly service charge was $3.75. How did those figures come about? I concluded the average antenna that we were installing at the time cost between $150 and $200. Consider also, these antennas were so huge, so cumbersome and so high above the rooftop that they were a continuing maintenance problem, and the average person was spending $40-50 a year to maintain these antennas. It seemed reasonable to me, not knowing how much it was going to cost to build this system -- I had nothing to guide me -- it appeared to me that a $150 connection fee was a reasonable fee, and the $3.75 a month was a reasonable monthly charge for the service I was providing. If I had to do it all over again there would have been little or no connection fee and $9.50 a month -- if I had to do it all over again.
HOM: It is fascinating to hear history concerning the video and television industry. So many of us tend to take the whole system for granted.
MALARKEY: Television was already there, all I did was develop a method that enabled us to bring television that was already there to communities that had no way of getting it. That's what I did.
HOM: Did you manage all of those companies that you created out of Pottsville?
MALARKEY: Yes, I owned them all and managed them all.
HOM: What did you do about personnel?
MALARKEY: Just hired people and trained them. Nobody knew anything about cable, I had to start from scratch. I had no idea when I started to construct this system the work involved. First of all, I had to get permission from the city, you can't just cross streets and go up and down the streets and across the highways and byways without getting permission from the city. You have to get a charter or a franchise or something because the city has to exercise its police powers to control the streets. Part of those police powers are controlling what goes up and down the streets.
HOM: Did the cities at first understand what you were asking them for?
MALARKEY: No, I had to explain what I wanted to do. I went to an attorney I'd found whose father was chairman of the city council and I said, "Would you like to invest in my new company?" I told him what it was all about and he said, "That sounds like a great idea." So I sold him one and a half percent of my company, then I enlisted his aid to go to his father to get a permit from the city. Then I went to the regional manager for the Bell Telephone Company and I told him about my idea and asked, "Would you like to invest in my new company?" He said, "That sounds like a great idea," so I sold him one and a half percent. Then I said that I needed permission to go one the poles, "Can you get if for me?" He said, "Yes, I'll get it for you." Then I went to the vice president of the Pennsylvania Power and Light Company because they had poles up that I needed to use. I explained my idea to him, "Would you like to become a stockholder?" He said, "Sounds like a hell of an idea?" So he had one and a half percent. Then I said, "Now I need permission from your company to go on your poles." So after I got all of these people in bed with me and I got all of the permission I needed, then I went out and I started to hire people who had experience with the telephone company and power company in putting their lines up.
One of my investors happened to be an engineer, by the way, who knew electronics and was fascinated with this idea. He was also with the power company and he was fascinated with this idea and he said, "I think I can help design this system if the fellows at RCA can explain a few things to me." He said, "Then I can carry the ball from there." So he was sort of my guide man and lead man in helping design the system. Since he had been with the power company he knew quite a bit about outside construction. He was able to tell me the kind of people I should have and who knew how to do this, who knew how to string the wires up to the poles.
So I had to start from scratch, coupled with the fact that my father was dead set against my doing anything outside the family business. He had sent me to La Salle University to learn business and accounting and come back and take over the family business. He just did not like it one bit that I was trying to do something outside the family business but I persuaded him to invest a little with me.
HOM: Were you doing any marketing?
MALARKEY: There wasn't any marketing really necessary. People came in and said, "How much does it cost to hook to your system?" You must remember, there was no television available, This was a brand new entertainment media and I was making it possible for them to see pictures on the screen that they had never seen before. Today, cable is purely marketing and the competition now is for the entertainment dollar. The question now is, "Am I going to spend any of my dollars with the local cable company or am I going to not connect with the local cable and go to the movies or am I going to just rely on my antenna that's on the roof now and the hell with the cable company? Or am I going to use this service called MDS (Multiple Distribution System) which will give me one channel of HBO and not worry about cable or can I use my videotape recorder and I'll go and rent movies and why connect to cable?" So cable's competing with all of these other things today. The entertainment dollar is a finite dollar.
HOM: Did you ever have to worry about someone else providing the same type of services you were when you first started?
MALARKEY: Yes, when I went to Wilmington, North Carolina to get a franchise I had to compete for it. I made a proposal to the city council and said, "Gentlemen I'd like to have a franchise to build a system here." They said, "There's one other applicant for this system and you're going to have to compete." At this time people were beginning to realize that a franchise was a valuable thing, though I was successful in every case, fortunately. Once I had the franchise, after I built the console system and the banks were able to assess what I was doing, I was able to get support from the local bank at least and that made it possible to go ahead and build other systems.
HOM: Did you sell your Transvideo franchises eventually to arrive at your position of a consultant today?
MALARKEY: I sold four of my systems in 1960. Early on, after I graduated from college I decided that I was going to make a certain amount of money and retire. I'm essentially a very lazy individual and I made up my mind that I was going to work toward that goal and when I attained that goal I was going to relax and enjoy life. I had started toward that goal early and I sold four systems out of seven and I attained my goal. I had hoped to reach it by the time I was forty, I missed it by one year, I was forty-one and by that time too I was deeply involved in affairs in the National Cable Television Association. I was living in Washington at the time.
I came to Washington in 1952 or 1953 for a weekend and decided that Washington was such a great city that I was going to run all my businesses out of Washington. I elected to live here and I initially got myself an apartment in Georgetown and then bought a town house in Georgetown. I've been here ever since in Washington. In the meantime I had acquired a number of radio stations and I had acquired some real estate interests in Washington, a number of hotels and apartment buildings that I thought were appropriate investments for me to make in addition to cable.
In 1960 I decided to sell four of the cable systems and I did and retired. It took me six months to realize that if I continued this luxurious living with nothing to do, I would become lazy, physically lazy. Also, during that same period of time people were calling me and saying, "What can you do about this," What can you do about the other thing?" I said, "This is what you do," and "That is what you do." While I'm selling I might as well be giving advice since I'm really not as much in the cable television business as I had been the year before. The systems that I had were running themselves. I had good managers at the radio stations and good managers at the hotels and running the apartment houses. Then I thought I'd become a consultant so I was a one-man consultant for a while from 1961 until about 1963.
Then I had an opportunity to join one of the major networks, to take them into cable television, and I jumped at that opportunity. But that network wasn't nearly as serious as I had hoped they would be about getting into cable, but as part of my arrangement with them I had agreed to put together a good management team with myself at the top of it. I had to get an excellent engineer, I had to get good financial help, and good marketing help so that we could acquire systems and run them the way they should be run. It was at that point in time that I persuaded Archer Taylor to leave Montana and come east with his family and join me in this venture with this major network. I had to sell him on the idea, and then I went out and found myself a very bright CPA and I found myself a very bright guy who had been with Jerrold who was a marketing specialist. So I had myself the nucleus of a hell of a management team.
It turned out that the major network that I was associated with really wasn't ready for cable. After nine months of frustrated effort to convince them to buy several cable systems, I told them that I thought it would be better if we would come to a parting of the ways. Now I have this team put together, and it was at that point that I decided that I was going to make a serious effort to develop an important consultant firm. This was in 1963 or 1964, that's how we started MALARKEY:-Taylor and Associates. Archer and I just decided that we were going to provide the kind of services that we felt the industry had to have.
The industry wasn't fully convinced it was ready for a consulting firm like ours, but we had to stick to it and gradually the firm began to grow and grow and by the time the big money crunch arrived in 1973 we had built a firm which, at that point in time, was a fairly large firm. We had a total of ten people then. Then the big money crunch hit us in 1973, but the money crunch hit us when money was scarce, interest rates were twenty -twenty-one percent. There were no satellites up in the air to provide other products and cable systems that had been built in major markets were not prospering. Many of them were on the verge of bankruptcy, people weren't hiring consultants, financial, engineering or otherwise and we went through a very traumatic period. We had to contract and we contracted back to about half the size to weather the storm. Today we have about thirty people in the firm, we're the largest one of its kind to be able to do that.
HOM: What has developed as your firm has gone through its many changes?
MALARKEY: Initially, we were offering mostly feasibility studies, how much will it cost to build a cable system in this market and is it a feasible undertaking? That was primarily the type of work that we did, then gradually we branched out into helping people who wanted to apply for a franchise, prepare that franchise application, those were the basic things. Then, in later years, we became more financially organized; fair market evaluation of cable systems. We began doing due-diligence analysis for major investors, the banks, the insurance companies, investment banking houses in New York. We became well known as providers of expert testimony in tax cases and in technical cases, and anti-trust cases.
Today we provide research, marketing, full financial services and engineering services. We have full time graphics artists and staff who do design advertising for cable clients. We are expanding, we can't get cable into Washington, D.C. but it will happen, it's not going to happen as quickly as the city had hoped it will happen.
HOM: When clients come to you for services do they know what they specifically want and need?
MALARKEY: There are clients who come to us who know specifically what they need, they come to us for definite reasons. Then again, there are those who just know they need our help but aren't sure what we can do for them, what they have made up their minds for and what they should be doing and where they should be going. More and more of our work is in the research areas, tremendous amount of research to be done.
HOM: Do you do international work also?
MALARKEY: Yes, we have an office in London. We just finished a large project for the Saudi Arabian Oil Commission in Saudi Arabia, an engineering project. We've done work for the Sears Roebuck Australia Meyers and a big project in Australia. We've done work in the Netherlands, we're active in England and we've done work in Canada. We have not accepted any work in South America for several years. We turned down an offer to advise the South African government, that I turned down in writing but that was six to nine months ago.
Our clients are mostly in this country. They are mostly among the large MSOs (multiple system operators) and the large cable system operators. They include large banks and insurance companies and investment banking houses; a broad range of investors who are interested in developing investments in cable. In this country we have clients who retain our services to help them get into the cable industry, to make investments that they're comfortable with.
HOM: What's happened to some of the other people who started out as pioneers in the cable industry?
MALARKEY: Most of those people did pretty much the same thing that I did. They developed their systems and then sold them and retired. They didn't continue into the same business, didn't get into selling, they just retired and began to enjoy life. I wasn't that smart, I started working all over again. Many of them have passed on, by the way, a lot of the early pioneers are no longer with us. Bill Daniels is an early pioneer. His business is headquartered in Denver. Bill goes back and forth between California and Denver.
HOM: Are you still active in cable television and the Association?
MALARKEY: Yes, I'm still active but not in the Association. I have not been involved in the political aspects of cable for many years. I served my time in the Association, I gave my all. I was head of the organization for five years as its President, served on its Board of Directors for a number of years after that and then felt that I had paid my dues.
I decided that I had my own business to attend to and that I owed something to the community. I love Washington, D.C. and I've been active in two areas here in Washington that I think are important. One, I'm on the Board of Trustees at the Washington Hospital Center, which is the largest hospital in the Washington area, and I'm on the Board of Trustees at the American University. Those are my two interests.
HOM: Does American University have a telecommunications program?
MALARKEY: No, not the type program that I'd like to have, I'd like to see them have. I'm working on it, I'm working at developing it.
HOM: Are there any other topics in this portion of the outline that we may have missed which you'd like to discuss?
MALARKEY: You've taken me back a long time and it's difficult to remember everything, so I'm sure there's more we could talk about.
HOM: At the time you were developing your company there weren't many policies pertaining to cable, were there?
MALARKEY: No, we started from scratch. I'll never forget a conversation I had, this was a year or two after we were in business. I had completed the building of the cable system in Pottsville, Pennsylvania, my hometown.
The then regional manager of the Bell Telephone company was an investor, a shareholder. He saw the future coming and he called me one day. He said, "The executive vice president of Bell Telephone Company is going to be here tomorrow or the next day to see us and to visit with me and he'd like to see the cable system, will you show us around?" I said, "Sure." So this big, important man from Bell Telephone Company of Pennsylvania shows up the next day. I take him around and point out where our lines are and where our amplifiers are and where their lines area. He's walking down the middle of the street shaking his head and he says, "You know, you got a permit from us to build these things; we gave you a contract. But I have a feeling that heads are going to roll in the future over the fact that we permitted you to go on the poles without maintaining much more control over this thing than we have." And he was so right, he was so right. This was in about 1951, he was a very astute man. I said, "No, no there's nothing to worry about, a little ol' cable company like this, we weren't doing anything to you great big Bell of Pennsylvania, no we never would do anything that big." Now there's nothing they'd like better than to plunk fifteen or twenty billion dollars down on the table and buy the cable industry.
HOM: You saw a future and you gambled.
MALARKEY: Yes, I gambled every last penny that I had at that point in time on getting the system started. I convinced my brothers to invest some money with me, and convinced my Dad who didn't want me in the business at all.
HOM: Did he truly understand what you wanted to do?
MALARKEY: I don't think he really had the grasp of the potential. But he did begin to realize what I had when I gave him back his entire investment that he'd made, during the first year of operation. And every year after that as long as he lived he got dividends that were equal each year to five times what his original investment was. He got the message.
HOM: Did you ever have any regrets?
MALARKEY: One thing that I regret; shortly after I built my third or fourth system, during the first several years that I was building I had a visit from a fellow by the name of Gerard B. Henderson, "Gerry" from California. Gerry Henderson was one of the most dynamic men I've ever met. He was retired at a fairly early age, I guess Gerry at that time was probably between forty-five - fifty, and he retired as chairman of the board of Avon.
He had heard about cable television, he had heard about Martin Malarkey, and he had heard about the system in Pottsville, Pennsylvania and that I was building other systems. Gerry called me and said, "I'd like to come and visit with you." Adventurous me, I said, "Come visit." He came and he visited, he saw what I was doing. He was fascinated, we became very good friends.
Gerry went back to California and he built a system in Carmel, California, he started a system there. He called me one day and he said, "How about meeting me in Chicago. I have an idea I want to try on you for size." So at that stage in the game I said, "Sure, let's go out and have a good time." We went to Chicago and he said, "Tell you what I'd like to do; if you go along with me, you won't have to put up much money. You put up some money and I'll put up the rest of the money, and let's go out and buy twenty-five systems. Let's go out and get franchises, there were lots of franchises in 1950 to maybe 53, let's go out and get twenty-five franchises, hold them, we'll become millionaires." I said, "Gerry that's a hell of an idea."
I went back to Pottsville all excited and I went to my dad and said, "Now this is what Gerry Henderson provided to me." Well, my dad said, "Son, you have your hands full of the four systems you have now, tend to your own knitting." Well, he had threatened to disinherit me a number of years before when I had learned to fly against his wishes. I just didn't want to upset him again so I thought, "Ok." So I called Gerry and said, "Count me out."
Gerry didn't do it, he didn't go ahead with the idea. What he had proposed was exactly what Bill Daniels had in mind. Monty Rifkin and others started building their empires. That's the only regret I ever had; that I didn't say to my dad, "Well, I think maybe I really ought to take a crack at it and I'm going to take a crack at it."
HOM: Where would you get the backing for such a huge endeavor?
MALARKEY: Gerry Henderson was worth a hundred million dollars at that time. He was going to provide the money. All he wanted was my expertise, my know how. All I would have had to put up at that point was a couple of hundred thousand bucks and my good name. He was ready to put up whatever else was necessary. But you never look back - that was my only regret.
Cable has been very good to me. I've never been able, since I've been in the consulting business, to invest in cable stocks because of the conflict of interest. So that's another reason why I've kept my interest in real estate and radio stations, to be independent and make money.
HOM: Did you ever regret this?
MALARKEY: I went after a lucrative contract representing a major city, to assist them, a number of years ago. They were going to grant a franchise and they wanted to retain the services of the consulting firm.
I went down to meet with the mayor and the city council. This was a contract, probably a hundred thousand dollar contract, about ten years ago. During the course of the meeting one of the councilmen said, "Mr. Malarkey, do you, your wife, or any member of your family, or any member of your firm, or does your firm own any stock in a public or trading cable company or in any cable company." I said, "Yes." He said, "What do you own?" I said, "We have five shares of ATC, we have ten shares of United Cable, we have so many shares of this and of that. The only reason we bought those shares was that I wanted to have access to their quarterly and annual statements. When you're a shareholder, even one share, you're entitled to get those financial statements. We wanted those financial statements for our own use, for our own purposes." "Well," he said, "I consider that a conflict of interest and I am going to attempt to persuade my colleagues here that it's a conflict of interest and your firm should not get the contract."
We didn't get the contract. So, when I found out about this, the first thing I did was sell every share we had. It was peanuts, it meant nothing, nothing, but I wasn't going to take the chance again. I issued very strict instructions to my associates, the members of the firm, "Under no circumstances will you hold any interest, you or your family, or your wife, interest in any cable company because of the potential problems." We're very careful about conflict of interest, we have to be, it's one of the reasons why our firm has the reputation we have.
End of Interview 1, Tape 1
HOM: What was the initial federal regulatory response to the cable industry? This was during 1951 or so?
MALARKEY: Nineteen fifty one, '52, '53, '54, '55, during the formative years of the industry. The cable industry was then performing antenna servicing and bringing television into areas that were without television of any kind really. Even though the broadcasters were very much in favor of cable systems, they were still calling us pirates and said that we were stealing their signal and selling it. But the fact of the matter was they were getting into markets that they hadn't really expected to get into. It wasn't until after my tenure that the NCTA became active in opposing the broadcasters.
HOM: What had you done up until you (the organization) became the NCTA in 1952?
MALARKEY: I believe I told you the last time that the original name was the National Community Antenna Council. Strat Smith recommended we change to the Association. There wasn't really that much to be done, except that I recognized, and so did a few other operators, that there was going to be a continued and growing interest on the part of the FCC. Also that we should consider the potential impact that cable could have on broadcasting. That was why I recommended that the board recruit--hire Strat Smith for peanuts really--to guide us through the legal problems as they developed.
Strat was, in my judgment, one of the keenest minds that we could have had. This was because of his brilliant mind, because of his training, because of his experience with the FCC. It wasn't really too much of a concern at the FCC level at that time, during those early years except to keep a very wary eye on us. I don't recall whether there were any rules or regulations imposed.
One of the first problems the NCTA had to wrestle with was the eight percent excise tax problem and that took years to resolve but it was finally resolved in our favor, it was found not to apply to cable. We had to collect them, the taxes, but we got a rebate.
I guess I was active in NCTA until about 1956 or 1957 and then I retired, so to speak, to private life, stepped away from the NCTA. I became involved in my own business. Now as far as local regulations during those early years, the ability to obtain a franchise depended on if you had any kind of a persuasive argument to make before a city council you could go out and make franchises. It was no problem; my original franchise was a very simple two page document that gave me permission to go into the cable system in the city of Pottsville initially. Then I obtained similar documents from all the communities around Pottsville. I said, "This is what I want to do." Franchising became a serious event in the sixties, but until then it was fairly easy. However, as you progressed from the smaller, remote markets into the larger markets closer to the television stations it became increasingly difficult.
HOM: Did they have standardized franchising criteria in the beginning?
MALARKEY: No, that didn't happen until the early seventies, late sixties. They were so anxious to have television, they had no television and anybody that came along and offered to build a system for them they, the public, thought, "What a great guy."
HOM: What problems, if any, did you have with the telephone companies concerning your cable attachments?
MALARKEY: I fortunately never had any great problem with the telephone company. Pennsylvania Bell Company and the other telephone companies that I did service with--one down in North Carolina and one in Maryland--they were pretty forthright. I told them, "I would like to have an attachment to your pole." I showed them my original agreement with Pennsylvania Bell. They had never seen an agreement before or had never been approached before and they said, "If it's good enough for Pennsylvania Bell, I guess it's good enough for us." They charged us a dollar and a half per pole per year, now it's higher than that.
HOM: Who provided the maintenance of the wires?
MALARKEY: We built our own system. All I wanted from them was permission to go on their poles and then my construction crews took over from there. That's pretty much the way it is today. The telephone companies did for a while become involved in cable and built systems, the lease-back cable operators, in the late sixties and early seventies. But it didn't work out because of the telephone companies owning the lines and the amplifiers and leasing them back to the cable operators. The telephone companies were responsible for maintaining the signal in those lines; all the operator was responsible for was the service drop from the main line into the customer's home and marketing the service and telephone companies.
The operator would call the telephone company and say, "Hey, Mister Telephone Company, I just had a call from eighty subscribers, one hundred subscribers, and the line is out between Second Street and Fifteenth Street." The telephone company would say, "Sorry cable operator, it's ten minutes after five, we'll get to that Monday morning." Since it was their equipment, you weren't permitted up the poles to do anything to it. You weren't permitted to touch it and the quality of the service was never very good. The telephone company looked at the cable, and they said, "Well, we'll get our telephones worked on first and if we have any time left over we'll get out and repair the cable lines." If you can't control the quality of the product that's going into your customer's home you have a serious problem.
HOM: When did you consider building your own cable system?
MALARKEY: Well, that was from the very beginning that cable operators built their own systems. It was just in a handful of cases where the telephone companies were able to persuade people who held franchises to let them build the system and lease them back to the operator. It was too bad for the telephone company and the operators because it turned out that the operators were hurt very badly. The operators were attracted to this proposal because they didn't have to put any money up.
Cable is a capital intensive business, up front; you lay it out, you build your system and then you hope you get your subscribers to pay it back. I can understand why a guy would be attracted to a deal whereby the telephone company would put all of its own money at risk. But it's a short-sighted approach because unless you have control over the quality of your product you don't have anything to sell.
In virtually every case when the telephone company constructed the system, instead of constructing it as a separate system they lashed it in with their own telephone lines. They just lashed a coaxial cable in with all of their telephone lines, there was no way they could separate them. When the telephone company reached the point when, the lessee -- the operator, reached the point where he or she said to the telephone company, "We're not going to pay you any more lease payments, we're going to build our own system because you've fallen down on the job," the telephone company would say, "Well why don't you buy the system from us?" The operator would say, "How can I buy the system from you, you have it lashed in with your own plant? I can't get up there and work alone with all of your lines." So the net result was that the cable operator would buy from the telephone company its system but at a very reduced price because then he would have to go ahead and build a separate system over the next two or three years.
HOM: Did any of these survive?
MALARKEY: They're all gone. The C&P Telephone Company is proposing to build a lease back system here in the District of Columbia now. The difference however is, C&P will build the system and will lease it back and then the cable company will maintain the system. The cable operator, in my judgment, is very bold to permit C&P to build it. They're going to pay for it as C&P builds the system. They're going to be shelling out two million, five million, eight million, until they ended up with the whole fifty-eight million dollars and the telephone company will have gotten it's money back, or virtually all of its money back. Then they will start charging for a lease. I don't know why, it doesn't make any sense. Of course, the contract hasn't been negotiated or signed yet so a lot of things can happen. The city council is pretty well out of that now. The Council's only concern is whether or not they will be able to put the whole financing package together and get started.
HOM: Was there competition in the early times for the areas you wanted?
MALARKEY: Not in the early days, no.
HOM: When did the competition start getting tough?
MALARKEY: In the late sixties. I have never been in competition for any of my franchises. The only franchise that I had any competition for was the North Carolina franchise. When I applied for it along with some local people, the competing applicant was Brinkley, now the news anchorman from ABC. He applied for franchises in Wilmington, North Carolina and I beat him. That was the only time I ever had any competition. I got it because, first of all, we had the money and we had the experience and we had political power. Brinkley, of course, had political clout but not quite enough; it was his hometown but he had been out of Wilmington, North Carolina for a long time and the people that I was associated with were fellows that we knew.
HOM: Were you basically out of the cable business when the competition became extremely tough?
MALARKEY: No, I was very much in business but as a consultant. That was in the late sixties to the early seventies and continuing on through the early seventies and then it tapered off because it became apparent that major market systems could not be built and be buyable under the Commission's strict major market rules.
There are only three major networks and when the community had three major networks in the community and an educational station. The only thing they could do would be to import maybe one distant station with distant signal by microwave eighty or one hundred miles away. That wasn't quite enough to attract the subscribers required to amortize your investment. You can build a cable system in any community and put on a local origination channel and what we call a stand alone channel of some kind with movies maybe two hours or three hours a day.
If you built a cable system here in Washington and carry just the local stations and you want a local origination channel and maybe a news channel and you would put on a drama that revolves around a "character generator," you would attract what we call a first-nighter. You can always get ten percent of the people to hook up to anything. Ten percent isn't going to do it for you. You have to have a much higher percentage than that. They were building major markets, urban cable systems and attempting to attract subscribers. They were lavish and they were eight, ten, or twelve percent penetration because they really didn't have anything to offer, not very much other than maybe one distant station which the community could maybe receive a little bit, not very well. So they carried that on a cable system which was able to function with the then existing rules.
So from I guess 1972 to 1976 or '75 there was a hiatus in franchising applications because it had been shown by many of the major companies that tried to build systems in the big city that they were losing their shirts. The banks of New York were calling us regularly saying, "What are we doing? What do we do? These people are about to drop their keys on our desk and we don't want to run the whole cable system. They're behind, they're in arrears on their loan of $50 million, they're not making their payments."
Many of the big MSOs today were on the verge of bankruptcy in the early seventies. A great event took place in 1975, a satellite was launched and Home Box Office started to bring movies from that satellite to earth stations which were owned by cable systems. Once that happened all hell broke loose. Once it was possible to deliver movies directly to the home by satellite it made all the difference in the world. HBO is powered by several other satellite originated programs, ESPN, USA Network, Showtime, The Movie Channel, Cinemax, I could name over eighty of them now.
That satellite opened a whole new area of entertainment; different types of entertainment could be carried on cable systems. People didn't have to be satisfied with just the six or seven or eight local stations or two or three or four, twenty-five or thirty, so that made all the difference in the world. At that point franchising wars began, it could be seen that urban areas could support cable. It also became obvious if you were going to get a franchise you were going to have to promise to do this and to do that. The cities pretty quickly caught on to the fact that franchise was a valuable document and then began to ask for more and more, like local access channels, studios in every third corner, double lines, and seventy channel capabilities, then ninety channel, even one hundred five channel, then one hundred twenty channels through this, free connections to all the libraries and all the schools, plant ten thousand tress, and give us trucks. Suddenly everybody started promising the sun, moon, and stars to get franchises.
Franchise criteria began to develop in the late sixties, early seventies, and began tapering off about '72 until '75-'76 and then franchises became a real business. That's one thing, people in the major markets began to contact other cities throughout the country. The smaller cities that have adopted a standardized franchise form, say "Send us a sample, send us a sample, send us a sample, we want to look at all of your franchises." Now with the new law that's been enacted by the Congress it will be difficult for a community to disenfranchise the cable operator unless it can be shown that the company just didn't live up to the terms of its franchise, or they were in violation of its franchise and didn't make the necessary corrections when advised on a timely basis. They can find themselves in jeopardy.
HOM: What is this new law you're referring to?
MALARKEY: The Cable Communications Act of 1984. Even though its plain -- you do what you're supposed to do -- deliver good quality products to your subscribers and take care of the complaints. The only thing that a politician responds to is when the phone rights at eleven o'clock or eleven-thirty at home and a constituent says, "This damn cable company, I've called them three times and they haven't come out," and if he gets enough of those calls, he doesn't like that.
HOM: Did the FCC get involved in this?
MALARKEY: No, they left the franchising up to individual cities and towns except to set standards. Finally they set standards as to what limitations were that the towns and cities could ask for by way of a franchise fee. The Commission issued regulations at about this time and the cities started at one and two percent then they went to three, and then it went to five. There were cities that were asking for ten and fifteen percent off the top.
You can't build a system and take fifteen percent of your gross and make any money unless you were able to charge, pass it on to your subscriber. In Colorado, south of Denver, Colorado Springs, I think, they had a set ten or thirteen percent franchise fee, and when the gross reached three million dollars it automatically went to seventeen and a half or twenty percent. It was ridiculous then, they wanted to get the franchise and they got it. They didn't make it pay, and then it became apparent that they were either going to cut the mustard or lose the system and other arrangements would have to be made.
HOM: What were some of the developments in programming and subscriptions in the early days?
MALARKEY: Systems that were built in the early days started out with just three channels or five channels, that was the extent of the technology. The electronic equipment that had been developed up to that time was only capable of two, five, maybe seven channels. It wasn't until a number of years after we were in business that the company began to develop co-channel amplifiers.
You must remember the early systems were built in communities that had little or no television. The moment you opened your door you were overwhelmed with people that wanted to hook you up to the cable. In the early days, the what you call "traditional or classic systems" were ninety-five, ninety-seven percent penetrated and they were ninety percent penetrated within a year and a half or two years after they were built. You didn't have to have any marketing expertise or special talents to promote a cable system, you just began. We were smart enough to raise the money to build a cable system.
If you built it correctly and delivered a fairly acceptable product into your customer's home you had it made. It wasn't until systems were built in markets that already had two or three stations readily available to a roof-top antenna that the choice had to be made. Where cable systems were built and cable service was a discretionary buy, where you had the discretion of deciding whether you wanted to continue with your roof-top antenna and three signals that were available for free off-the-air, or connecting to a cable system and getting those three signals plus maybe one or two others and paying the cable company $7.95 a month for the privilege. That's when penetration dropped from the ninety, ninety-five percent level down to fifty, forty-five, forty, fifty-five, sixty percent level.
HOM: What percentage of a typical urban area would you need to have in order to make it profitable for your company?
MALARKEY: Before I could answer that question I have to answer several other questions. How many television stations are there in that community that can be received? That isn't nearly as important a factor today as it used to be but it's still a factor. How many miles of that system are going to be built as overhead plant as opposed to how many miles are going to have to go underground? Demographics of the community, is it predominantly blue collar? Is it in a growing area? Is it in an area that's losing its steel companies and it's automobile companies? Or is it in a high-tech area where there's growth? If growth is rough you're going to have to have anywhere from forty-five to fifty-five maybe sixty percent penetration to make it pay and that has to happen as you open up each section of the system. You should reach those penetrations within two years from the day that you start selling your product. Cable today isn't an antenna service, it's a marketing deal, we're selling entertainment now, we're not selling antenna services, we're selling entertainment and information.
HOM: Did you have any problems with the local governments, with regulations concerning taxes or fees when you first started out in the cable business?
MALARKEY: Well, in the early days I didn't have to pay very much; it was a very modest figure for a license, it might have been $5,000 a year, I've forgotten what it was. In other cities -- one arrangement that I made with the city of Minersville, for example, I didn't want to pay. It was a smaller system, and I didn't want to get stuck with the percentage of the gross and I didn't want them to impose an arbitrary bulk fee on me. So I went to them and I said, "All right, I'll tell you what, you gave me a license to cross the streets and byways under your police power. So what I'm willing to do is pay you so much per foot of strand that I have over the streets, that will compensate you, I think." It was a cent and a half per foot, something like that per year. It was a measure of the fact that I was crossing the streets and byways and they said, "That sounds like a good idea, we'll go along with that."
HOM: Were the states interested at this point at all?
MALARKEY: No, it wasn't until, again, as I recall, the early seventies that states began to take an interest in, "What can we get out of this?" That's when the states began to impose regulations.
HOM: Were you more concerned about the local response or the federal response?
MALARKEY: Federal. The "Feds" were the guys that were the black hatters at that time, or potential black hatters, broadcasters even had blacker hats.
HOM: What were some of your early "run-ins" with the Federal Government?
MALARKEY: In the early days we really didn't have too many problems. Except, the one major problem that popped up nationally in the communications area was the fact that the FCC authorized the building of translators. Translators are mini transmitters. If this (points to coffee table) was the mother station to cover this area, the Commission authorized the building of a little translator (points to phone). A mini transmitter picked up the signals of the mother station on one frequency and retransmitted within a limited area out here on a different frequency and retransmitted within a limited area out here on a different frequency that would permit you to receive it on a rooftop antenna on a local basis. These little translators started to spring up all around the outside fringe areas of the mother station and get it into territories where there were cable systems out in the boonies, out in the boondocks, and that was a very big concern of ours.
We used every trick in the book to slow down the growth of translators, unsuccessfully I might add, but it turned out they were so low powered and the frequencies they were using were so high that if the signal bumped into a venetian blind it wouldn't get through it. I'm oversimplifying it, if it had to bounce and hit at the back hill it wouldn't go through the hill, it wouldn't go through a building. They were only five watts, ten watts in power and they had a very limited range. The signal would be affected by the leaves of a tree, or the snow or the rainfall and they just didn't perform for them. These belonged to broadcasters, they built them for the most part.
Other people in a local community, there were lots of communities out there, small communities, with cable systems, there are always activists in every community and these activists would get together and say, "Why should we pay $4.95 a month for cable service? Pay us a one time charge of say, $5.00 or $10.00 and we'll go out and we'll build a translator and we'll give you those signals for free. Or we'll build three translators or whatever." In quite a few instances they raised enough money to go out and build two or three or four translators designed to serve a given community, pulling signals from different stations over the horizon but it never seemed to work very well. After they'd get their first contribution, they'd spent the money building the translators. What they'd failed to take into consideration is that those translators have to be maintained. You have to replace tubes, you have to fix them when they go down and more often than not they were always breaking down and they'd be down for days at a time or week at a time and nobody would come around to fix them. So the people just lost interest and said, "Back to the good, old, reliable cable system." That was our major hassle.
HOM: When did the FCC start seeing that cable may be a responsibility that they should handle?
MALARKEY: They were curious about us from the very beginning, but when cable systems started to appear in communities that had one or two television stations that's when they perked up. The local broadcaster would crank up his phone and say, "Hey, these guys are building cable systems down here, dammit, I'm the only guy in town. They're going to bring in other systems and I'm liable to go out of business and then you won't have any local expression like you want." That was the whole idea behind the Communications Act, to preserve local expression. When enough of the broadcasters called in, the FCC started to get uptight about it because they were very much broadcaster oriented and it seems that any agency that's designed to regulate somebody sooner or later gets pretty close to that somebody, it's done to protect them.
HOM: What types of CATV litigation were you involved in?
MALARKEY: In the early days, not much. It wasn't until the famous Black Hills case, if I had a little refresher on that I could elaborate some on it but the biggest case that we won in the earlier days was--and this goes beyond my tenure at the NCTA--the case that permitted cable operators to import distant signals using microwaves. That was the big one. I think it was...I don't remember, Mid-West Video, 1965?
HOM: Did you personally testify at any Congressional Hearings?
MALARKEY: No, I did one time, but it was very limited. It was in the very old days and I don't even remember what the issue was. I dislike getting up on a stand, I do enough of it as an expert witness and I hate every moment of it. I guess I don't mind it as much as I did then. There you get up and you testify in front of a Congressional Committee. We provide a lot of opinion, a lot of data not necessarily based on fact, by the way. But when you get into the court room, which is what I really disliked, you get up on the stand and you're cross-examined for three or four hours. That's scary, tough duty for me. I find myself doing it more often than I like to, I shy away from it whenever I can.
HOM: How did your organization obtain legislative representation at Congressional Hearings?
MALARKEY: No, we didn't have any, we were too young. In fact back in the early days, Strat Smith was working for free for the first year. Then the next couple years he received a relatively modest retainer and we only had a secretary of Strat Smith's. I guess after the fourth or fifth year we began to expand a little bit but it wasn't until maybe ten years ago that the NCTA began to develop a lobbying staff, an active lobbying staff. There was about twelve years of that until 1973. From 1951 until the early 1970s, there was virtually no professional lobbying. Strat Smith did a lot of the lobbying work and the Executive Directors of the Association who were quite capable did some, when someone was hired as Executive Director.
In the early days there was the president of the Association, the board of directors, and then the executive director of the Association. Today we have the president of the Association and chairman of the board. It has changed a little bit. An executive director and general counsel were hired not only for their administrative abilities but their ability to articulate the concerns for the industry to the right people. That's still available today; Jim Mooney, president of the Association is very articulate, a very effective lobbyist and he has a very good support staff.
HOM: What do the broadcasters think about you now?
MALARKEY: The broadcasters have lost virtually every major battle and now it's been established that cable, like newspaper, has a First Amendment right. The broadcasters now realize that they should have gotten into cable themselves, some of them did.
HOM: Is there anything else from this period you'd like to talk about?
MALARKEY: I thought everything was so great in those days, there were no great problems, locally or on the state level, or the national level except for those translators which turned out to be of limited value. Yes, they still use them. Cable at that time was selling for $4.00 to $10.00 a month basic cable service.
There wasn't any movie services, but you know I went to the Commodore Theater chain in the middle fifties and proposed--made a proposition to them--to run their movies in the Capital Theater in Pottsville. Then, when they were finished running in the Capital Theater, to put them on cable and transmit them to our subscribers for so much per subscriber. They refused to do it, there was just no way they'd do that. I talked to the family and I felt it was a great idea and told them that what we would do is we'd develop a box that would permit us to control who would receive the movies on cable. We would sell those boxes in the homes of people who wanted to watch the movies. Only those who had the boxes could watch the movie. We'd charge them so much for each movie that was transmitted, whether they watched it or not they'd be charged for it. I thought it was a neat idea and they said, "No way, no absolutely not, we're not going to share any of our revenues with you. We're going to show our movies in our theaters and others if possible, and once the run is down well that's it." I said, "Well then I'll go out and buy movies." They said, "Good luck."
There was no way I could buy a movie then. The movie distributors had never heard of cable. They didn't know what cable was all about, I couldn't buy a movie to show. The only movies that were available were the movies made by companies for Morton Salt or U.S. Steel, you know, the commercial type thing. They still make them today, they do them much better today than they did in those days. The soft advertising, soft sell type. I knew that I couldn't collect for those, people wouldn't pay for those, I wanted the kind I could sell. I knew the day was going to come when movies would be going into the home but it took them many years.
From the time cable started, in the period between 1949 until 1975, HBO delivered movies into hotels. Before 1975, they were doing it over cable in New York City and in other markets. I remember the theater people and I thought it was a ripping idea and I didn't know nor did they tell me that their contract with distributors precluded their making a deal with me. I went to the distributors and they said, "What are you talking about, what do you mean "cable?" When I tried to explain what cable was, they said, "A cable system all throughout a whole community? I can't believe it." This was fairly early on, there weren't too many cable systems in 1955.
HOM: Were the distributors afraid that no one would go see movies?
MALARKEY: I don't know what they thought, they had a good thing going then you must remember. Movie theaters hadn't been affected seriously by TV. It wasn't until the sixties that movie theaters began to feel really gloomy about television, this was in the early sixties. Then of course the movie distributors started to make deals with TV broadcasters, up until then they had very few deals. Now we have movies made for cable, just cable. We have series being made just for cable, it's only the beginning.
HOM: Have you thought about going back into the business?
MALARKEY: Yes. Oh sure, I loved it. You mean in the business of owning and operating? Yes, my younger associates feel that we should so we're going to. But we'll take it a step at a time because we know where all the bodies are buried. We know where all the systems are, we know we have all the talent within our firm necessary to go back into the business. With the team that I have here we could take over a cable operation with over a half million subscribers without any problems. I have all the "know how" right in this firm.
HOM: Will you do something for the District of Columbia?
MALARKEY: I tried to but I was one of the unsuccessful applicants, only because I didn't have enough political clout.
HOM: I've done some of the research of certain bills and things and I was wondering if these had affected you at all, could you comment on them?
In 1948 the FCC established a television allocation program and they had said that there should be twelve VHF channels to three hundred forty cities and they passed this. Did that affect you at all?
MALARKEY: The answer is no. We thought it would have an effect. You see that was the original allocation plan, then they came out with the second allocation plan and we thought that when the second round of allocations came round that that would affect us, but the answer is no, it did not. It helped more if anything, it made more stations available to be carried on cable systems.
HOM: In 1958 they had the Frontier Broadcasting Opinion by FCC, where the FCC would not regulate CATV?
MALARKEY: I've forgotten all about that one, that was a helpful finding, I don't remember the details.
HOM: And then in 1959 they brought it up again and they said during the hearings that CATV was not a common carrier and would not be regulated.
MALARKEY: The FCC was still not getting that much pressure from broadcasters.
HOM: And then by the time they did get the pressure in the sixties it was too late for the broadcasters? It seems like the broadcasters did lose every battle.
MALARKEY: Well, broadcasters inhibited the growth of cable for a long time because of the rules that were adopted by them, it seems fair that the broadcasters be hassled. If the shackles had been taken off cable early on, we'd be much farther ahead today, but we'll make up for lost time. Broadcasters really were, justifiably, I guess, concerned about the impact cable would have on them. The fact of the matter is though that television broadcasting properties are going for the highest prices in history today. You'd have to pay $60 billion for KTLA in Los Angeles. The station was sold twenty years ago for ninety million dollars.
HOM: What about the price to run a station though?
MALARKEY: They're all profitable themselves. The only stations that have gone out of business are poorly run UHFs. No sympathy at all, none at all. And I have no sympathy for the cable guy who didn't know how to run his systems and lost it.
HOM: Cable TV seemed very safe with the satellites and new technology, is this true?
MALARKEY: That's the answer right there. The launching of HBO made it possible for cable systems to deliver movie products directly to the home without commercials for a charge, night and day. That's the turning point, that's when the light came on.
End of Interview 2, Tape 2
HOM: Today we were going to discuss what Malarkey-Taylor Associates is currently involved in and what you foresee in future activities.
MALARKEY: My firm currently is devoting a majority of its time to financial matters involving sales and acquisitions and refinancing of cable television properties. We're acting as financial advisors to a number of companies who are interested in making substantial investments in the cable industry, new players if you will.
HOM: Is your data research program a new, separate division in your firm?
MALARKEY: Yes, it's relatively new. A large proportion of our efforts are devoted to the research and marketing areas of cable. We recently added Dr. Sam Book to our staff. Sam is an economist and he came to us from the National Research Group, a Los Angeles based firm that did a lot of work for the major movie companies in the research area. He is president of the new division of Malarkey-Taylor Comdata Research. He and Judy Bean, who was our vice president of marketing, are working as a team and are developing a number of important research projects. They've already completed several important research projects.
HOM: Are these for separate clients?
MALARKEY: Yes, well one was the National Cable Television Association and several others are for clients involving matters that are of a proprietary nature. We're currently involved in a multi-client study that's being done on a nationwide basis. We're conducting personal telephone interviews of some sixteen hundred subscriber homes across the country.
HOM: For your clients or for general TV?
MALARKEY: This is a multi-client study and we're using the nation as a base. We're doing it for the clients in their communities, in their specific area. It's a very, very large research project and the results of the national survey will be made available to our client universe.
HOM: Do you handle your own field work?
MALARKEY: No, we subcontract it out under terms, conditions, and specifications we develop. The major direction of the firm today is financially oriented. Second in importance would be the research, the marketing, the engineering areas. We're doing what we call management audit work; that is becoming an increasingly important function of the organization. Many companies will call us in to do an independent audit of how they're running their particular system or group system. An outside look seems to bear fruit, when you look at things objectively you can weed out areas that can be improved. I think it's fair to say that there are quite a number of them, they can be broken down into four or five major areas. Financial areas of the industry are our most important function followed by research, marketing, engineering and management functions. Our firm is currently the largest and most diverse of its kind in the industry.
HOM: How did you determine that the company should be divided into these five functions?
MALARKEY: I determined by sitting back and looking at where the industry was going and where is there business for my firm? When it became apparent that assistance was needed in the areas of due-diligence, system-valuations, limited partnerships, and financial restructuring or refinancing, it became obvious that those areas all seemed to offer great opportunities. I recognized that I had to surround myself with accounts that could take on each of these.
HOM: How do you find people for your firm to do these types of work?
MALARKEY: I go out and find them. You go out and find them from the bank, from the insurance companies, from other cable companies.
For example, it wasn't too many years ago that we were doing some work in the public sector, we were under contracts for the city of Philadelphia, the city of Tampa, the city of Chicago, the city of Boston, to name four major cities, and probably forty or fifty minor, smaller cities. We were going to help them through the franchising process, or a refranchising process and that work constituted perhaps fifteen percent of our total volume. We had very high profile, we had an awful lot of press on the head of those representations and in the public sector, but it was really only fifteen percent of our total business.
With the ending of the rather frantic franchising process a year ago, there were very few remaining major markets, that business is gone. I was looking for something to fill that fifteen percent and I felt that our industry was going to require a substantial amount of research because we had not really become marketers. We're still selling a cable television service and antenna service and that's your antenna type thing. The industry only recently has begun to recognize that they're not cable television people. They're marketers, and in order to do an intelligent marketing job there was an awful lot of knowledge that we didn't have. For example, we had to ask, "Why do people connect to cable? What do they look for in cable? How much are they willing to pay for cable? Why are they disconnecting cable?" We decided that we had to look into this area.
I knew Dr. Book was keenly interested in moving into the cable area and the company that he was with was doing cable television research. It was just a trickle compared to all of their other areas but it was growing and Sam noticed that it was growing. The company that he was with didn't feel as if they wanted to place too many of their assets in that area because the vast majority of their business was in the movie area. Sam felt that this was an area they should expand. When he and I talked and he realized that I wanted to expand our role in the research area of cable, it was sort of a natural marriage, it was very good timing. Sam is doing a wonderful job. He and Judy Bean work very closely together. Our research organization is growing quite rapidly.
HOM: How many people do you have on that staff?
MALARKEY: Today? When Sam came we had Judy Bean and one person. Now we have Judy, Sam and three other people so it's grown over a hundred-fold in six months.
HOM: They do primarily research?
MALARKEY: First it was just cable research.
HOM: Are you doing the financial work in the United States only?
MALARKEY: No, we've been involved in the UK, we've been involved in Australia, we've been involved in the Middle East, we've been involved in Hong Kong--that was an engineering and a financial contact--those are our major areas. In the Middle East, in Saudi Arabia it was primarily an engineering project, in Europe primarily financial and engineering; in Australia it was both financial and engineering. We find many of these things go hand-in-glove. If you have an engineering problem, inevitably it seems that the dollars become involved and you have to bring the financial people into it. If it's a research project and the results of that research tend to be such that there's always a cost factor involved, inevitably it always come down to money.
HOM: Where do you think your new clients will be coming from?
MALARKEY: There's an ever expanding client universe. We've worked for probably forty-six or forty-seven of the top fifty MSOs. There are still several hundred smaller multiple system owners in cable that we have not yet had the pleasure of working for. There are any number of companies who are seriously considering investments in cable we would like to work for and will probably be working for. We are now involved in a project for several of the major telephone companies.
HOM: It sounds like you have an unlimited future.
MALARKEY: Well, if you're willing to devote the resources, if you're willing to bring people into your organization with the talent required. If you reach out to attract those clients then you go after those clients and convince them that you do have the capability of giving them answers to the problems that they have. The work is there, but you must have the resources available.
HOM: It seems that you have to have flexibility in determining the route you want to take.
MALARKEY: Exactly. I see ultimately a fairly close working relationship developing between the telephone companies and the cable companies in the future. I think it's inevitable; we're both in the communications business, slightly different type of communications, but our facilities parallel one another. There's no reason why we can't work together, at an appropriate time. If we can provide a service to the telephone companies that will be useful to them, we should provide it. They can provide a service useful to us that we are not currently providing our clients but if we could do it through the telephone companies we should do it.
HOM: Is there anywhere in the United States where you see that happening now or in the near future?
MALARKEY: Well, Palo Alto, California. Pacific Telephone is, I understand, under contract to build a cable system to provide cable service to the city of Palo Alto and surrounding areas. The system is going to be managed by Heritage Communications. It's one of the top twenty-five multiple system owners and the system will be owned by a cooperative group in Palo Alto; it's a very unusual arrangement.
HOM: Who's putting this all together?
MALARKEY: A cooperative group in Palo Alto who have convinced the city authorities to grant them a franchise. They have entered into a contractual arrangement with Pacific Telephone to build the cable system and they've entered into a contractual arrangement with heritage to manage and to operate it; it's a very unusual arrangement.
HOM: Do you think this is the beginning of a trend?
MALARKEY: No I don't. But it's an example of a telephone company and a cable company working together. How well they will work together remains to be seen.
HOM: When something like this happens, do they call in a firm such as yours to determine what the possibility of success will be?
MALARKEY: Yes, that normally happens. I have no idea who was used in Palo Alto to perform that function but I'm sure someone quite knowledgeable was asked to put figures together, to determine whether or not something like that would be workable.
HOM: What do you think will happen in the future in your firm as the industry grows?
MALARKEY: For our part we will continue to look for areas of need within the industry that we are not currently serving and provide the tools within the firm to go after those areas.
HOM: Do you have any ideas of what's going to happen?
MALARKEY: Well, our next expansion is going to be in our engineering area. Archie Taylor, who's my partner and senior vice president of engineering, feels that there are areas in the engineering field in cable specifically and telecommunications generally that we are not now addressing. To do so will require specialized engineering talent within the firm and we're moving in that direction over the next year, we will be developing that talent. We will be adding to our engineering resources.
HOM: Are there companies that just specialize in engineering and just specialize in financial matters?
MALARKEY: I think we're unique in the industry in that regard. There are many individual engineers or engineering firms who stick strictly to the engineering area. There are others in the financial area, they do nothing but financial. There are firms that do research and nothing but research and marketing people. I've combined all of these talents because more often than not they do fit together. We have a number of projects in house right now that involve engineering, financial, and research.
HOM: And in your firm one department can go talk to another?
MALARKEY: Exactly, there's a cross-pollinization that's always taking place and this is to our client's benefit. We can bring them all of the talent that they need. There's some very interesting projects that we've become involved with because of our diversity of expertise within the firm.
HOM: What predictions do you have for the role of CATV and the development of telecommunications?
MALARKEY: That goes to something I said a little earlier about cable entrepreneurs, cable companies, and the telephone companies. Sooner or later working more closely than they have in the past.
HOM: At one point when you first started your cable company in Pennsylvania you worked closely with the telephone company and your goals were the same. You then separated as time went by. Do you see your goals moving back together again?
MALARKEY: Well, early on, the telephone companies were willing to grant pole attachment rights to the early cable companies because they didn't really see any threat to their business from an antenna service. But it wasn't too long before they came to realize that the cables that were being put up on their poles were capable of carrying not only television pictures but the type of information that they were then transmitting over their telephone lines. As a matter of fact, the systems that we were building above theirs on their poles were, in many respects, a hell of a sight more efficient for the transmission of information than their lines were. A coaxial cable is always more efficient than a twisted copper pair. They then began to realize that, "Maybe these guys have something that we should have, we should perhaps not let this new business get out of hand." They began to make it very difficult to get pole attachment rights, and they made it very difficult to build systems.
HOM: When did this period begin?
MALARKEY: I guess it was sort of from the middle fifties onward until today. There's been a clashing between the telephone companies and cable. The telephone companies wanted to get into the cable business and they were using every tool at their command to slow the growth of cable until the FCC said, "Enough of this. You guys are made into telephone companies, you're not going into the cable business unless we give you a special waiver to do so and you telephone companies are going to have to make your poles available on a reasonable basis to the cable guys. You're in the telephone business, stick to that business."
Now, however, I sense a change, due in no small part, to the breakup of Ma Bell and the ability now of the seven regional companies to go into businesses other than strictly the telephone business. And they're doing just that and I think they're looking down the road to the time when they will either be working with us or buying us out, or selling to us or any combination.
HOM: Have the telephone companies come to Malarkey-Taylor Associates yet?
MALARKEY: Yes. We're currently working with two of them. Actually, we're working for three major telephone companies.
HOM: What do they ask you to do?
MALARKEY: Various things. In one matter we're doing a proprietary research project and in another we have just completed an in depth research project and are about to begin another research project for that same company. In the third case it's a matter of acting as a financial advisor to them. Their telephone company owns a number of cable systems outside their territory and they have asked us to act as advisor and dispose of those. Our relationship with telephone companies goes back now about a year, year and a half.
HOM: They were interested back in the mid-fifties and have now gotten to the point where they have hired consultants and asked for help?
MALARKEY: Where is our niche, where can we fit into the cable industry, that's exactly right.
HOM: What future regulations do you think Congress will develop and who do you think they will try to regulate?
MALARKEY: Well, if the National League of Cities had their way they would like to see us regulated much more closely than we are on a national basis. The Congress enacted into law a bill--the Cable Act of 1984--that in effect virtually deregulates the cable industry and removes many of the rules and regulations that the cities were attempting to impose on cable television systems as the price for getting a franchise or getting a franchise renewed. The cities, because of the frantic franchise fights over the past ten or twelve years, have gotten to the point where they believed cable systems once built in a community was just an unending oil well. The cable system was just pumping money and they wanted most of that money, as much of that money that they could get into their treasury. They were making very unreasonable demands and reached the point where the Congress of the United States decided that they better bring a halt to all of this nonsense and put the control where it belonged, in the federal level, and to make that control factor a minimal one. So they deregulated rates for cable now effective at the end of 1986; cable companies can raise rates without permission except in those instances where the communities are not adequately served by off-the-air television stations, where they have more or less a monopoly position.
You see, here in Washington, with a little antenna on my roof, I can get nine television stations so a cable system has to compete with the free off-the-air service that I can get. I can also get HBO; I don't have to connect to a cable system. So when the cable system is finally built in the District they're competing with off-the-air signals, they're competing with the fact that HBO's being provided by another supplier, they're competing with the fact that I can turn to a third supplier and get cable news network, C-Span, The Movie Channel, they're competing with the video tape stores, the VCRs. It's not the kind of an environment that you would ordinarily expect rates to be regulated but the public has not regulated the rates. If you came in and offered a cable service and you charged this much money for it and it's too high for the vast majority of your potential subscribers they aren't going to buy your service until you bring it down to something that's reasonable, that they consider to be reasonable. So no, I don't see the League of Cities prevailing upon the Congress to change its minds and the only other group of people that would be marching up to Capitol Hill would be the television broadcasters. I don't think that they will be successful in their efforts to obtain the regulation that they want. I don't blame them, everybody has to protect his turf and if I were a television broadcaster I'd feel the same.
You're going to see a change, I believe, in television broadcasting over the next ten years among networks primarily. Networks will not be nearly as dominant as they have been in the past, they'll change. They're still going to appeal to mass audiences, how many million people do we have, one hundred twenty-five million people? They'll appeal to the vast majority of one hundred twenty-five million people.
HOM: It will no longer be ABC, NBC, CBS?
MALARKEY: Oh no, I didn't say that. I said they'd change, I didn't say they'd go out of business. They will adjust to the fact that a meaningful percentage of their audience is being diverted to other channels of entertainment provided by cable television.
HOM: Will they improve their programming?
MALARKEY: What do you mean by improve their programming?
HOM: Giving us more variety. It does seem that every year the new programs are the same as the year before.
MALARKEY: Well, those programs are geared to the American public, what the American public wants. If the American public wants situation comedies and they're willing to sit there watching situation comedies for three hours a night then that's what they're going to get. Now that proportion of the population that wants something better than situation comedies, they can turn to Channel 26, they can turn to C-Span, they can turn to sports-minded ESPN or USA. They want movies they can go to HBO or the Movie Channel. The variety of programming, the menu of programming available is mind boggling today.
HOM: What sort of changes do you think the broadcasters will make within the next five years?
MALARKEY: They will be constantly testing the public tastes to determine what the vast majority of our television viewers want from them. If it's for blood and guts that's what they'll give them; situation comedies, that's what they'll give them; adventure, that's what they'll give them; love and romance, that's what they'll give them; or any combination of that. That's my opinion.
HOM: What type of tools or surveys will they use to determine what the market is?
MALARKEY: I think they will turn to the old reliables, the Nielsens and the Arbitrons, and the others in the industry to make a living. Telling the networks what the American people want.
HOM: Do the cable companies also use these resources?
MALARKEY: The cable industry will begin to use the research resources available to them more than they have in the past to get answers to the needed questions that are being asked and will continue to be asked. They're just learning how to market their product now. The broadcasters are good marketers, the networks are good marketers, the movie industry are excellent marketers.
HOM: How much money is spent on marketing in cable compared to the broadcasting and movie industries?
MALARKEY: (MFM calls Dr. Sam Book) "Sam, do you have any idea how much is being spent by the movie industry each year selling their product on the marketplace? On advertising their product to the American public? Or, do you have any idea what the broadcasters spend? All right, if you don't have it on the tips of your fingers, don't worry. I imagine it's a pretty substantial amount of money. The typical movie, yes, but the smaller, less expensive movies they don't spend near that amount but they spend something. Do you have any idea of how many of those types of movies they put out a year? OK, thanks Sam."
The movie industry is currently generating somewhere between ninety and one hundred twenty major movies a year and they're spending between five and eight million dollars per movie for advertising. For the lower budget movies the minimum amount ever spent is about one million dollars, and there are probably fifty or sixty of those a year. They vary anywhere from millions to three or four millions so you're talking about anywhere from five hundred to eight hundred million dollars a year purely in advertising by the movie industry on the one hundred fifty movies they produce. Major movies are about ninety to one hundred twenty total movies a year.
I don't have any idea how much broadcasters spend. That's hard to get a fix on because there are so many of them. In addition to the three major networks there are 1,600 or 1,800 independent stations. I may be wrong. I'm not an expert in that area.
HOM: What about cable? Do you have any idea how much cable companies spend on advertising?
MALARKEY: No I don't, that I do not know.
HOM: About how many cable systems are there?
MALARKEY: Maybe about three thousand, over three thousand cable systems.
HOM: Are most of these systems very small?
MALARKEY: Oh, yes.
HOM: How do they pay?
MALARKEY: I don't know. They just don't make it.
HOM: What exactly is the management audit? Do you do many of these?
MALARKEY: We're doing more of those particularly in connection with financing matters. Believe it or not, there are companies out there who have borrowed substantial amounts of money who, for one reason or another, have not been able to meet their financial obligations. At that point, we're called in by banks. No one wants a cable company to go bankrupt, what do you do with it? We're able to help them with their problems before they get out-of-hand.
End of Interview 3 (Tape 3, Side A)