Interview Date: Wednesday August 11, 1999
Interview Location: Grand Traverse City, MI
Interviewer: Liz Burke
Collection: Hauser Collection
BURKE: Welcome to The National Cable Television Center and Museum. This is The Hauser Foundation Oral and Video History Project on August 11 in the year of 1999. We're interviewing Mike Pandzik, president and founder of the National Cable Television Cooperative and we're here in lovely Grand Traverse City Resort in northern Michigan. Mike, do you want to give us a little background about how this meeting came to be here and a little bit about your organization?
PANDZIK: Well, it's hard to talk about today without talking about where we came from. The National Cable Television Cooperative is a member operated purchasing group. It's the cable industry's premier wholesale buying group and this is actually our fifteenth annual members meeting, so we trace our lineage back to the first formative meeting, which was October 17, 1984. I'll tell you how that got started. When, for those people watching who don't know a lot about the early days of the cable business, the cable business really has had several eras. It had the beginning of the business in 1947 and for the next thirty years, really not much changed. There was no satellite TV; cable operators generally served smaller towns rather than big cities, systems usually had three to five or maybe ten or eleven channels, a little later in that period maybe twenty channels but most of them weren't filled yet and the business really didn't change much in that thirty year period. But starting in '75, the winter of '75-'76, a whole new era started and that was the era of satellite distribution of programming and that was started by Home Box Office, which had been around since 1972, but they'd just been distributed terrestrially in the Northeast, namely New York State and Pennsylvania and that winter, they did a deal with GE, I'm sorry, it was RCA, to go on one of their commercial satellites; the first time any sort of private venture like this, a commercial venture, had ever been on a U.S. government satellite and that started the satellite age. Let's call it 1976, and a few months later Ted Turner started with WTCG, which later became WTBS, which we now know as the Superstation. That was a huge turning point in the business and HBO and others did contracts with cable operators, what we call an affiliation is just another form of contract, which authorized the cable operator to carry HBO in a certain way 24 hours a day and so forth for a three year period. At the end of that period, what happened was, looking back it was easy to see how it happened, at the time we didn't realize what was really going to be the effect, what happened was some larger multiple system operators, MSO's was the acronym we used, when those first three year contracts expired in the late '70's, they negotiated renewals for another three years and they included, the operators and the programmers, included the concept of volume discounts and in the early days, HBO gave operators advance volume discounts. When that round of contracts expired in the early '80's, say six years after 1976, that second round of renewals became a very important time because the volume of deep volume discounts at the wholesale level was really instilled and instigated in the business. The result was a couple of years later, say in 1982, '83, '84, the men and women who really started the U.S. cable business, what we always affectionately called "mom and pop systems", these are the families that really started the business starting in the late '40's and on through that period, they were the only ones left paying list price and it was a terrible irony and a wholly unintended consequence of all this. At that time, I'm trying to get now to the early '80's, I started to work with Home Box Office as I ran one of their sales and marketing offices, regional offices, out of Kansas City, and I was on, as many of us were in those days, we tried to get ourselves positioned as kind of the associate member of a cable TV operator association board. So I was the vendor representative of a group called the Mid-America Cable Television Association, which is headquartered in Lawrence, Kansas, and run then and now by a guy named Rob Marshall and Robbie would hold quarterly board meetings for his association and we'd all get together and have dinner and then after dinner we'd usually retire to our hotel room and play poker, actually is what we did, and we talked about what most industry people do when they get together in any industry, you talk about business and what's going on and so forth. This subject of volume discounting at the wholesale level for satellite delivered programming, particularly Home Box Office in those days because that was the biggest, most prominent programmer then, and the irony in the unintended consequences as the whole thing kind of snowballed into the little guys who were represented in that Mid-America Association were really being taken advantage of. And even though I worked for Home Box Office and you would think there would be this terrible conflict of interest and I suppose at one level there might have been, but it was always my experience that regional people – see Liz, you ask one question and you get about a two hour answer.
BURKE: That's what I wanted.
PANDZIK: I think then, as now, regional representatives of those networks, and I think it's true today too, the regional people have a deeper affinity and a deeper connection with local cable operators then do the headquarter guys in New York or LA or wherever they are and I think that's perfectly normal. I'm sure it exists in most other industries, but the regional people really had this affinity and much closer personal relationship with smaller cable operators in the Mid-West or anywhere in the country, so even though I worked for HBO and I was kind of the enemy, sort of, in one sense in this scenario, we sat around playing cards and talking about what would happen if the "Indians" ever got together and what would that group look like? Would it be volunteers; could Robbie and his wife Nancy do it part time? Would Rob's board do this? Would they need to hire somebody? Would it be a different group, the same group? All these myriad questions you think when you are going to spin off another organization and no one's ever done it before; you always wonder about all the possible combinations and how you might do it and it was decided that Robbie couldn't do it, shouldn't do it, that it needed another organization, a separate group. So they picked a name, almost before they picked anything else, and I think originally the name was the Mid-America Cable Television Cooperative, which was fine except some of us almost at the outset knew that we wanted to be bigger than just Missouri, Nebraska, Kansas and Oklahoma, so then for a few months we had this very cumbersome name, I actually have some letterhead somewhere still that says Mid-America National Cable Television Cooperative, Inc. Imagine answering the phone with that. So, a couple months after I got hired, I'll jump back a little bit in a second, but a few months after I was hired, I said, "Look, guys." What they wanted was to recognize the heritage of the Mid-America group and I fully understand that, but the name was too long so we cut to the chase and made it National Cable Television Cooperative, Incorporated. So that first meeting at Robbie's, the Mid-America's group annual convention held in Kansas City, I don't remember the hotel anymore, but it's probably near the plaza, I remember the date, it was October 17th, because I asked Robbie a year or so ago for a copy of his agenda for that meeting because he keeps everything. I keep nothing. So that was the date we trace our... and in that agenda it says, meeting, 3:00 pm, whatever, cable operators only, no vendors, organizational meeting for group purchasing and they had about twenty or thirty companies represented at that meeting from those four states. Basically about twelve of those companies over the next few weeks pitched in, basically, ten thousand dollars apiece. I think a few might have pitched in fifteen thousand, a few, maybe, five thousand, but the average was probably ten grand apiece as seed money to get this thing going and most of that, not most of it, some of that got eaten up by legal fees as is the case when you establish a corporation. Some of that got eaten up, and by the time I came into the picture - that was in October - so then in November and early December, the original board, which was drawn from those twelve companies, there were about eight guys on the board, that original board hired a law firm in Washington, Fleischman and Walsh, which is still in existence and they basically do communications, cable TV kind of law. All we really needed was a set of by-laws and an articles of incorporation, this is kind of overkill with these guys, but they incorporated the group in Washington, D.C. and then, as now, I was in the Naval Reserve and Robbie caught me out at Camp Pendleton in probably mid-January of 1985, a few months later. I think he forgot about the time zone difference; I was getting up real early and putting my boots on and stuff, ready to go out in the field and the phone rang and it was Rob Marshall. He said, "Remember that idea we always talked about of getting the guys together and figuring out a way to do this stuff and forming this co-op?" And I said, "Yes, I remember seeing a notice in your agenda a few months ago." He said, "Well, we met a couple times and we want to go ahead with it, we've got a little money together and we want you to set it up for us." So I said, "Sure." I didn't know anything about what this was going to pay or where I was going to be, or whatever. I didn't really care because I really thought it was an important thing that needed to be done and it was, frankly, probably a better gig than I had at the time. It was a long time ago, but I really did feel a real serious affinity for seeing that the right thing get done in this case because it was terribly ironic, as I said before, that the men and women that started the business, inadvertently now, years later, just about six or eight years into the satellite age, get left as the only ones paying list price and big MSOs like TCI and others in those days, they could negotiate volume discounts that were much deeper, much cheaper than what the little guy could get. So I had basically, you know, my charter was I was executive director, I had a one year employment agreement, I had basically $165,000 and as long as I could make it last to see whether this thing could go, that was basically it. I had a set of by-laws which were kind of incomplete and we added to them and revised those a few times over the years, but basically our goal is the same as it's always been, the goal of the co-op has never changed, it's to reduce the operating costs of member companies through group purchasing methods, master contracts and so forth. From the beginning, we wanted to buy cable TV networks; that was our first goal and still is our biggest piece of business and we also wanted to buy hardware and equipment and then, thirdly, we wanted to learn how to buy services like business insurance, casualty and property, inland marine, all kinds of business insurance stuff. And other services like, as we do now, marketing support and stuff like that. But programming has always been our biggest deal because you build your cable system once, you buy one tower, you buy a set of antennas, you construct it, but you buy programming every month, month after month after month. That's by far, and I know you know, today programming costs, wholesale costs, for cable TV networks is by far the biggest line item in any cable operations business plan. You spend more for programming than you do on salaries, more than taxes. It's pretty amazing. So we saw that opportunity and if we could just figure out how to do it, it was a great idea but it was a big leap from nothing to something because this had never been done before. I had been at HBO about seven years almost, I knew from my years before that in the cable business and before that, in the TV business, I knew this was not going to be an easy deal because I think many programmers sort of resented, in a way, putting TCI in the position they were in by granting them deep volume discounts. I think that the men and women with some vision could see where this was going to go over time. You give a guy a 10% discount this year, next year he wants 20 or 30 or whatever. I think everybody could see where this train was going and it was just important to us at the co-op and at the Mid-America Association to make sure that independent smaller operators were not left at the station while all this big train march down the road towards volume discounts. That's basically what we, if you want a basic background, that's how it started. A lot of people ask how we funded all this because the money, with no further income, was destined to run out. One decision I made very early on was to run this, for at least the first couple of years, out of my home instead of spending a lot of our money, limited money, on travel and office space. Office space wouldn't really be a productive expense because we're a wholesale group. We sell to members, we don't do any retail. I didn't need a fancy office, I needed a phone and a copier and that was a place to work. My kitchen table became our conference table and an old Queen Anne desk I had from my old HBO office, actually, I bought that when I left, became my desk and we bought a copier, which I think we actually still have and it still works, which is kind of amazing. But I worked out of my house for two years, maybe two and a quarter years, and then we moved into our first commercial space which was a whopping 550 square feet. That was probably 12 ½ years ago, something like that, and then about 10 ½ years ago, I hired Dave Clark, who was my third employee. My second employee... I want to digress for a second. My first full-time employee - I had a couple of part-timers, gals who would come in and work. They had kids in school, so they'd come in and work from 10-2 and stuff. I had a couple of part-time gals that summer, the summer of 1985, but in November of '85, we really had too much; if I was traveling the phone wasn't covered. I only had somebody there from 10-2; it just didn't look like we were really in business if everybody that called got an answering machine. So I hired a woman named Cathy Swaboda, who is still with us, as my secretary-assistant-Gal Friday, and Cathy worked in my living room with me and she's still with us. She's now our vice-president in charge of program billing, which is a huge job and I'll get to that a little later. But my third employee was Dave Clark. Dave came along; Dave just celebrated his tenth anniversary with us last December, so he's been with us about 10 ½ years. Like a lot of businesses that get going, one employee leads to two, leads to three, and so forth. Now we have about 37 employees full-time, but we are efficiently run in the sense we're really heavily computerized so we can grow our business pretty exponentially without adding a whole bunch of staff all the time. It's not lock step where you add another million dollars in sales and you add another ten people. We've probably doubled in size in the last two years and we've probably increased our staff by 20%. So we do pretty well along those lines. That's how the cable co-op got started. We are still basically operated the same way we've always been operated, which is a member operated for the benefit of member companies. Our members are not really individuals. When your company joined, your company was the member. We only sell to member companies; we don't sell retail, we don't sell to non-member companies. We've always been pretty picky about that. When we have an annual meeting like we just finished here in Traverse City, the only vendors and programmers we invite to come are companies we deal with, that we already have a deal with. We made that decision consciously a long time ago, so that our little tradeshow, our little tabletop tradeshow wouldn't be filled with people who were there to pitch our members about products which they would not sell through us. So we made a deal with ourselves, which was if we don't have a master contract with you, you're not invited to our annual meeting. That's always been the case. We've had a couple of bizarre cases over the years where companies who wanted access to our members but didn't want to do it through us would actually show up at our annual members meeting and kind of hang around the hotel lobby, which is pretty odd when you think of it. That doesn't happen very often, but it's happened. It even happened here, actually. But that is the heart of this deal. It's really pretty simple. It's one of those things that's simple in concept, maybe a little more complicated in execution, but we operate for the benefit of our member companies. We put together master affiliation agreements, these master contracts with programmers. The first one we wanted to do was HBO, and I'll get back to that in a second, but those master contracts that we negotiate, Frank Hughes, who's our senior VP of programming and myself – these days Frank does most of that, I usually get in towards the end – but we would go to a CNN or an ESPN or HBO or whatever and try and put together a master affiliation agreement that would meet everybody's needs. It would meet our needs as an association, it would meet the members' needs and meet the programmers' needs and those needs were sometimes the same and sometimes conflicting, but that's the nature of good negotiations. You try to put together a deal that's equally good for all the parties involved. A lot of times that works out great. Sometimes it doesn't work out so well. But that's how we operate. We started with one, actually the first contract we tried to put together was the summer of 1985, remember I started full-time on March 1st, so it took about a month to get things pulled together and then I immediately started to contact HBO in New York. Remember, I worked there so I knew all the top people and that was the first deal we wanted to do. We picked HBO for a couple of reasons. It was the biggest, most important programmer in those days. More money was sent to HBO per subscriber per month than any other programmer and so they represented the biggest opportunity to save money for our members. I probably ought to spend a second and talk about how the business works because there'll be viewers that don't have your background and mine. There's sort of a food chain. At home there is the subscriber, the individual family or person who subscribes to cable TV at retail and he or she is paying a monthly subscription fee to a local cable operator to provide that service at retail. Now the cable operator, and in the example I use here would be a company that might join the co-op, the cable operator then has to go to each – he does a couple things – he carries what we call local off-air stations, the local NBC, CBS, ABC, public TV and these days maybe the local FOX or WB guy, carries those local off-air stations and he picks those up off an antenna on his tower. Each antenna is tuned for a separate channel. He picks those up off the air and that becomes part of the offerings that he makes to his subscribers. But these days, this is a lot different than it was in those days when we had one or two satellite channels, these days we have scores of them available to us. The way our business works is that cable operator has to go then, and now, if the co-op didn't exist, he'd have to go to each of those cable networks individually: CNN, HBO, ESPN, ShowTime, whatever, C-SPAN, you pick them. Each cable operator, if the co-op weren't in business, each cable operator has to go to each of those networks and negotiate and execute a separate affiliation agreement for each channel between that network and his cable company. Well, you know, you go back fifteen or twenty years and there's only one or two channels, that's a fairly manageable proposition, even though the contracts in those days were pretty long and hard to read. When you only had to do a couple of them it was one thing. Of course, today, we operate about 95 individual master affiliation agreements, which is a huge burden. Imagine if you're this little cable operator by yourself today, just the contract negotiation and contract administration part is such a challenge. Most of our members are little companies; they don't have an attorney on staff, they don't have anybody that's really an experienced reader/negotiator type guy so if we did nothing else but solve that problem, most of our members would be satisfied. The fact that we solve that plus bring them savings is what really seals the deal. The first deal we wanted to do was with Home Box Office. I'm going to get back now to the summer of 1985. The board and I, the board at that time was about six or seven of us, of them and me, we decided HBO would be our first target and again, I worked for that company fairly recently and I knew the senior players and stuff and that was the one where the biggest opportunity was because in those days, volume discounting started as low, and I'm not just revealing the HBO wholesale contract arrangements, this is fairly common throughout the industry, volume discounting started with as little as five or ten thousand subscribers. So if your company had ten thousand HBO subscribers, you would get a cheaper price than me with five thousand HBO subs. I want to go back a second, I'm sorry; I left out the part about how this business works. The way it works then and today, not counting the local off-air channels, cable operators pay a certain amount of money per month per subscriber to each network. That is what I refer to as a wholesale rate and that can range from nothing, for a very few channels like some of the religious channels that are free or virtually free, to a couple of pennies per subscriber per month, to ESPN is the most expensive basic network, that is an ad supported network, to HBO. HBO is a very, it's probably the single most expensive channel per subscriber per month that a cable operator buys. I'm still amazed sometimes when I run into a cable subscriber on an airplane we'll talk about what we do for a living and he'll say, "Well, I didn't think they had to pay for that." I just kind of wonder how you could get this far, but I guess there are people that think cable operators get this stuff for free and just charge a lot of money from them but then just keep it all, which is certainly not the case. So, I'll get back now to the HBO deal. That's the one we wanted to do because that's the one that had the biggest potential to really make an impact. I called some of the players, the principles, at HBO at that time. Bill Hooks was the guy who was the head of their affiliate relations department, dealing between HBO and cable operators. Ironically, he was the guy who hired me at HBO seven years earlier, now he's the guy I'm trying to negotiate this master contract with. So we had some conversations by phone and we decided a couple of board members and myself would go to New York and sit with Bill and talk about what we wanted to do. The premise of our visit, of our first contacts, was I'd developed this approach and the approach was that I was going to ask every cable network, every satellite network, I was going to ask them to identify for us the standards, this is kind of engrave on the inside of my eyelids, identify for us the standards upon which they hold big MSOs in return for which they give them deep volume discounts and give us a chance to meet those same standards. If we can meet them in a reasonable and business like fashion, we want that same volume discount treatment and if we can't, we will leave them alone. I probably said it in fewer words than in those days, but that was basically what we were after. So I said that to Bill at HBO. I said, "Tell us what hoops we have to jump through that are the same hoops that a big MSO of our combined size would have to meet and give us a chance to show you how we can meet it." So we, as you can imagine, they identified some standards, some of which were easy to meet, some of which were difficult, a few which were basically impossible to meet. I don't just ping on HBO in this point, because that wouldn't be fair. Some of the earlier deals we did or tried to do with networks that we weren't successful with in the first few years, the first number of years, their representative would basically – here's the tactical part of the negotiations – I would present what I just described and they would come back and say, well, you need to do x, y, and z. Well, x might be fairly easy, like collect subscriber data. Y might be collect the money. Z might be something really hard, like provide joint and several liabilities for payment, which for an organization like ours was basically impossible. We had, for the non-attorneys, like me, in the crowd, listening, joint and several liabilities for debt is sort of like co-signing for somebody's car loan, only it's sort of the corporate equivalent of that. It means that five or six of us, jointly and severally, make ourselves liable for debts, say we borrow a million dollars from the bank and then we go into business with this money and then it fails, we are all equally liable for the repayment of that debt by ourselves, each of us individually. In our history, we've had some publicly held companies as members. No board of directors is ever going to let my corporation be responsible for your corporation's debts. We also often had the situation of bank loans and loans from insurance companies, not to the co-op but to our members, which had loan covenants which said, here's your line of credit, you agree not to borrow anymore without letting us know and permission and all that stuff, so for a programmer to look to my group, The Cable TV Co-op, and say well, we'll do this and we'll do this, but you must do this and the "this" they're talking about is sort of corporately, business-wise, the same thing as saying, well, I'll do business with you, just show me that you can jump flat-footed from the ground to the roof of this two story building. That's all you need to do, no problem, very simple. You do that and we'll do business. They put the hurdle so high, on purpose. And again, I'm not just picking on HBO, although they are not blameless in this area. There were others who did the same kind of tactic to us. So one of the things we had to do was go back to Kansas and figure out how to jump flat-footed to the top of the two story building. What I mean by that is, if they wanted joint and several liability, we went out and said, okay, what you really want is not that; what you really want is you want to be paid the full amount that somebody owes you each month in the full amount at the right time, promptly and in full. You want prompt and complete payment. That's a better way to say it.
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BURKE: We were talking about the early years of the National Cable Television Cooperative and in those years you were starting to negotiate big contracts, including attempting to negotiate with your former employer, HBO, and other programmers. You had to have a good idea of what programmers wanted and I want to get more into that and then later on talk about how you grew the members and learned what the wanted.
PANDZIK: Okay. Well, it's easy now to look back with some hindsight and find out what the programmers wanted. What the programmers wanted was for us to fail, basically. They had a vested interest, and I fully understand it, for the co-op not to succeed. I don't agree with it and I didn't then, but I understood it then and I understand it now. They'd had so much trouble with a few large MSOs who were negotiating ever deeper and deeper volume discounts; the last thing these programmers wanted to do was set up another one by themselves that didn't exist before, which would have been the co-op. If every cable network had just willy nilly did a deal with us with deep volume discounts and whatever, think of what that would have meant. They would have given up a lot of margin because they would have been giving us a discount that our members had not gotten before and they would have been giving up a lot of money that was on the table for them and now they were going to give it back to co-op members. They knew that the more successful we got, the bigger we'd get and the deeper the volume discounts... it's kind of circular in a sense. But of course, that's exactly what we wanted. If we had a million subscribers, we wanted the same prices, terms and conditions that an MSO with a million subs would get and I really was not inclined to take anything less than that. If there's one attribute that I have, and I think it's true throughout our board as well, is we don't quit. It may take awhile, but we never quit. I think once some of the programmers realized that paying lip service to us and empathizing with us and whatever thinking that we would go away, and once they realized that was never going to happen I think it's one of the things that sort of turned the tide a little bit. I want to go back to the joint and several liability issue because that is a key component that interestingly enough still rears its ugly little head today, in 1999. I described that as being like saying, well, I'll do this for you, just jump on top of this building flat-footed. It was a requirement that a few networks, a few networks, laid on the table for us, and it was just a few, that was easy for me to discern and my board to discern it for what it was, which was a bad faith negotiation ploy, an issue that they knew we couldn't do. We kind of re-trenched and thought about this a little bit and said, "Okay. I'm hearing joint and several, but I'm thinking prompt and complete payment every month." So in our view, what's another way that we could give them the prompt and complete payment without going over the joint and several. So we thought, well, you know, like a lot of deals, if you put some money in escrow or somehow show the guy you're trying to do this with that you've got resources and so forth. So we came up with a plan we called the escrow plan. It wasn't legally escrow and I'll get to that in a second, but what we did was we went to the cable operators and we said, "We're pretty sure we can get a deal if you're willing to put some money on deposit with us, the co-op, in Kansas City equal to forty-five days worth of service charges for your company for that particular service." We'll just do some math. Let's say this member had a thousand subscribers and they all watched CNN (I'll just make up some numbers) and CNN cost a dime per subscriber per month. That's a hundred dollars a month just for CNN. So I said to the members, "If you'll put an amount equal to forty-five days worth of your monthly service charges, which would be $150, it would be 1 ½ times the hundred dollars to get the forty-five days worth, if you'll put that amount on deposit with us, we'll keep it in a bank account in Kansas City. The co-op will keep the interest off of that account and then as your business grows and you add more subscribers and so forth, on occasion we'll bill you for the excess so that we always stay at about forty-five days." As you can imagine over a period of time, not only was it a successful approach to programmers because now we had something to offer them. We said, "Well, we can provide some liability for payment." Now, it's not cosmic universal liability for payment. We're not guaranteeing we'll pay this guy's bill to the end of the contract or to the end of time or whatever, but we said we'd do it for thirty days, a rolling thirty days. Remember, we were keeping forty-five days worth of payments, so our plan between the programmer and the member was, the member gives us forty-five days worth of service charges for that service for his company, we deposit it, we keep the interest and we operate the co-op largely on that interest for some years and then if this member ever stiffs us, and in effect stiffs the programmer by refusing to pay, we would give thirty days of that forty-five day service charge to the programmer as we notified the programmer that this guy wasn't paying his obligation, and we would retain the other fifteen days within the co-op as liquidated damages as a penalty to this guy. We had a pretty hard and fast set of rules that you can't do that and if you do it once, we'll give you one more chance, but you need to put in new escrow, a new initiation fee, and I'll talk about the initiation fee in a minute, remind me if I forget. We were pretty tough about that and if a guy stiffed us again, he was history. We threw him out and I've had, over the years, to do that six or seven times out of almost 1,100 member companies, which is a pretty small percentage and it was never very pleasant and sometimes heated with some of these guys, but I would just calmly remind them, all you have to do, all you ever had to do, to remain in good standing with us is pay your bills on time. I'm not going to use another member's money to pay this guy's obligation. We're not in that business.
BURKE: So actually at that point, you had pretty much solved a major issue, a major hurdle.
PANDZIK: We solved it in a business like fashion, but now, remember there were some programmers who were saying, "Uh-oh, but we really need joint and several liability. We've discussed this with our attorneys." Fine. You know why they would go back to that, because they knew we couldn't do it, which sets up a kind of a drama on Capitol Hill some years later. I guess I have to kind of place this a little bit. The U.S. Congress, in one of the cable acts, there were cable acts in '92 and '96 and in one of those acts we worked behind the scenes and some of our members had good relationships with some key U.S. Senators and some Congressmen and we worked to get, there were many people involved with this, my role was very small really, we worked to get a rule passed through the FCC – through Congress and promulgated by the FCC – that said if you were a vertically integrated company, and I'll define what that means. Classic vertical integration is the movie studio owns the movie theater, owns the popcorn factory, owns the seats. In our business, it would be the company that owns a movie studio, or the particular definition for us was, if you own a cable network and you also own cable systems, you were vertically integrated and if you were in that position, then you were forced by this legislation to deal with the co-op. There wasn't any two ways about it and there was some hardball played at some quite high levels and some of this I didn't want to know about. We got to a point, before that happened about five or six years ago, where we did most of the other deals that we wanted to do and what was left was a bunch of really big important networks owned by vertically integrated companies, like for example, Time Warner or Viacom. Disney never owned cable systems so they were never vertically integrated in those days. So that's kind of how we got into business with some vertically integrated companies that owned networks such as HBO, ShowTime, The Movie Channel, MTV and so forth. That came just fairly recently, about four years ago. Now we're sort of new best friends, I guess, because they realize what I've been telling them all these years was really true – that they were going to love this. Yes, they gave up some margin, but in return, we took over the contract administration, the contract negotiation, the data, the subscriber collection. Look, every network wants to know every month exactly where their network is being carried, the name of every cable system, the area served, many want to know, I don't know why, but what channel it's on, and there's some other harebrained stuff they want to know and they want to know very accurately every month. So we collect all that data and we do all of that better than anybody else. We have a better wholesale billing system than anybody. You've got to understand, some of these little cable networks, they send the cable operator a bill that looks like a dentist bill – it says: August - $12,000. Who's going to pay that? What is this for? How many subscribers is this? We have a billing system that we've developed over the last ten or twelve years that I'd put up against any; it's the best in the business. So every month what we do now, here's the business, I'm going to kind of bring this all to the future, here's the business we've had the last ten or eleven years in an ever increasing, ever sophisticated way. Now if you're the cable operator, instead of you buying HBO directly from HBO and negotiating your own contract with HBO, we have executed, negotiated and signed a master affiliate agreement with Home Box Office. I sign it and they sign it and it has lots of provisions, among which are common expiration dates, where every member of the co-op in good standing who joins that contract, we all expire on the same date, which gives you some obvious advantage at negotiation time. It has volume discount schedules built into it, just the same ones, we hope, as we would get were we a big MSO that size. Many, many, many other provisions and the way this now operates is, if you the member are current in your payments to Home Box Office or any of these channels, except for a couple of them, of our 95 channels probably 92 of them have this automatic provision to them, if you are current in your payments to that network, you the cable operator, your sole option, whenever you want, you can look at our deal, you can look at your deal and kind of put them side by side and if our deal is better, which it almost always is, you can move under the provisions of our master agreement and your old contract is, as the attorneys say, of no further force in effect. It's terminated. From that moment forward, we call that the date of election, when you move in to our deal, from that point forward, the programmer does not bill you anymore, the cable operator, they bill us for you on your behalf and we collect the subscriber data from you each month, not the programmer. In fact, we tell our members if a programmer calls you and says, how many subscribers do you have in Wolf Point, Montana, say, you're talking to the wrong guy. You need to call the co-op in Kansas City, here's their 800 phone number, because as anybody knowledgeable about this business knows, the number of subscribers you have depends upon the day of the month. You do your non-pay disconnects, if subscribers don't pay you, you do those on the fifteenth of the month following the service month and if the viewer has not paid you, you disconnect him on the sixteenth of that month. Well, if you call on the fifteenth you're going to get one number, if you call on the seventeenth you're going to get another number. So we don't want programmers to call our members. We try to educate them, don't do that, that just confuses things because we do the billing, we collect all that data and we present the programmer, now, once a month with a huge itemized statement, a cumulative statement of wherever his service is, member company by member company, city by city, area served, number of subs, blah, blah, blah. And we send the programmer that huge statement. In a lot of cases now, it's quite interesting, the statements go out in boxes they're so big. They don't fit in envelopes. Some of them are several boxes that go to one programmer because our business is so big, and one big check. We write some, to me, I remember the first time I signed a check for a million dollars, I thought, this is pretty cool. Now it's very common. We sign those checks by machine now, we send so many of them out.
END OF TAPE 1, SIDE A
BURKE: So that's brought us current. Today, especially in the last four years, as from the beginning, you've experienced huge growth. For purposes of comparison, back in 1985, you started with zero subscribers and zero member companies...
PANDZIK: Well, that first group, we had about twelve companies, we had about 110,000 subscribers. I don't remember the number of cable systems, but let's say 100 or 150, or something, all together. Today, in mid-1999, we have 1,100 member companies, all fifty states, including Alaska and Hawaii, I think every U.S. territory including Tinian, Saipan, Guam, American Samoa, probably, I know Puerto Rico, I know the U.S. Virgin Islands. I'm not sure if there's any place that's got a U.S. flag, other than an embassy, that we don't have a member operating somewhere. We bill, every month, 6,100 cable systems throughout that whole big piece of real estate. The cable industry today, depending on how you count and what you count as a cable system, has about 11,300 cable systems, roughly, and we bill 6,100 of them every month. So, it's maybe 52%, something like that. I think that number will continue to climb, even though the industry is consolidating, because we tend to more and more specialize in smaller and smaller companies with smaller and smaller systems. So, it may only be 12, 15, 16% of the subscriber base, but it is a majority, slim majority, of the franchise cable systems. So basically, when Frank and I talk to a network today, we're already billing half of his customers anyway, so when I might talk to one of them about, maybe we'll take over all of your wholesale billing; we're already doing half of it, we're just talking about the other half. It's an interesting conversation. I haven't talked anybody into it yet, but it is an interesting idea since our billing system is so good and so efficient and in our position, we see everybody's billing system, every individual networks' wholesale billing system and some of them are quite good, most of them are kind of average and some of them are just atrocious, you wonder what they're thinking. But then I'm sympathetic, because you can't go to some software company and have them take off the shelf, ah, the wholesale cable TV billing program. It doesn't exist, you've got to do your own. Like a lot of things, you either grow it or steal it. In our case, we'd be interested in licensing it, I suppose, to somebody else. That may be something we'd do.
BURKE: So that's a lot of growth. That's a lot of growth in systems, a lot of growth in subscribers. You started it, you built it, you've been successful with the billing systems and that brings you up to today. I'm just curious, what's the number of subscribers you bill every month?
PANDZIK: It's over 10 million subscribers. It kind of depends. With consolidation in the cable business, we're going to be more effected rather than less effected and it just hasn't started yet for us. Typically what's happened is one of our members buys another member company. Over the many years we've been doing this, we've lost very few members completely out of the co-op. Look, our members are companies that tend to specialize in providing cable in small towns, rural communities, smaller towns. It's not the kind of thing AT&T is interested in, but we know those winds are not going to die down. We know eventually we will be effected and I remind my board and I remind my staff and my dog, I mean, I remind them all once in a while, we had a great business with 5 million subscribers and our staff was about the same size then as it is now, so we've gotten more efficient as we've gotten bigger and we haven't exponentially added the same number of employees. I don't know if we'll ever be at 5 million subs again, but it's not something we sit in fear and trepidation about, "oh, what's the future got?" because I think it'll be fine. One thing we've learned as we've gotten longer in the tooth is, we learn more things to do for members, we provide more and more services that they like. We have a very modest profit motive. We really just want to pay our own bills. If we make a profit, we pay corporate income taxes like anybody else, but there's no real deep seated profit motive for us. As long as we pay our obligations and our overhead and salt a little away for a rainy day, I don't own this, there's no stock, I don't have a piece of it, nobody does, really. The closest I can come to describing who owns this thing, some wag told me once, it's sort of like the Red Cross; you can join the Red Cross and get a member card, but you don't own a piece of it and I guess that's as good a way as any to look at how we're organized. We've never issued stock, I don't really know who owns it – it's kind of an interesting idea. If no one else claims it, I guess I will. We only exist to serve the needs of members and whatever need that they express to us that doesn't seem too crazy, we go out and try to figure out a way to do it.
BURKE: I think that's a good lead in to go back and talk about your early members, who they were, how you found them. Because while you were growing this volume business, you were out looking for companies that needed these services so that you could sign them in and get them signed up so that you would have the quantity to make up what I consider to be the critical mass to get these big contracts.
PANDZIK: Like any business, I wasn't a business school grad, but I think there's this theory of adoption of a new business curve once you hit about 30-35% of wherever you want to go. It starts to develop some momentum on it's own. We had, if you recall, 12 or 15 early adopters, early members that joined us that sort of had religion in this area about this and really wanted to see this through and felt strongly enough about it that they put some money on the table. Talking about it and putting a check for ten thousand bucks on the table are two different things, I think most of us would realize. Today, for some of these guys, it's not very much money, but this was a long time ago. So we had this little core group of true believers, like Eric Hoffer would say, but to go outside of that group, I mean, we had no history, we had no deals, we had no billing system, we had one employee, I mean two of us, my living room was my office, my kitchen table was my conference room. I mean to say that it was kind of uphill is really being kind of mild about it. We had a great idea and that's about all. In fact, we got to a point about a year and a half into it where I looked at Cathy, and I didn't tell her this, I don't know that I've ever told her this, but we were almost out of money. Of the original $165,000 we had about $7,000 left. I had the deal that I'd just done with The Weather Channel and another one that I was just about to get closed with what was then called Christian Broadcasting Network, which then became CBN, which then became Family Channel, which now is Fox Family. So I knew, I had the faith that we were just at the corner, but I was getting ready to start paying Cathy's salary out of my own savings account, my personal savings, and I went to my board. I remember I called a couple of these guys and I said, "We're almost there," but I said, "look, in another two months if I travel..., I mean I'm not traveling now on purpose because I don't think we need to, but if we could get a little more cash, I am pretty sure we can turn the corner and make this thing go." So we instituted, the board supported me unanimously, we instituted a one time assessment, that's the polite way to put that, and it was equal, it's been awhile, but I think it was a dollar per subscriber with a maximum of like, $2,500 per member company. I collected, I don't know, $30,000 or $40,000, something like that. That was enough, it maybe doesn't sound like a lot today, but that was enough to get us around the corner and get some money coming in from these other deals and in the meantime, I did another deal and so forth. We have always sold hardware equipment, cable kinds of coaxial cable and electronic gear and stuff, so we had a little money coming in. We'd buy for a nickel and sell for six cents or whatever, and that was enough really to turn the corner for us. We've never borrowed money. We never borrowed a nickel. Our bank, of course, would love to have us borrow some money, but we've never had to, thank God, and we never had another assessment. So the way we've operated, some people might be interested in where all this money came from to run this thing because this is not a volunteer job for me, I have other things. We always had a one time non-refundable initiation fee for member companies that was for the first several years, I don't remember now, let's say three or four years, five years, the formula was it was a dollar per subscriber, per basic subscriber, that you own or control at the time of application, it was subject to a minimum fee of $500, that's all, and a maximum fee of $10,000. That was it. It was a one time fee. If you started as a, what the industry still calls a new build, a company that has a franchise but hadn't yet built a cable system, it cost you 500 bucks to get in. That's it. The next month you could have 10,000 subscribers, but it was a one time deal. Actually, we stayed with the dollar rate formula for probably ten years and I think about five years ago we changed that to a dollar and a quarter and we raised the minimum went to $600 and the maximum went to $12,500, I think. Then a couple of years ago, we raised that to a buck fifty. I mean, it's such a steal. These guys, our typical member probably saves enough to pay back his initiation fee in less than a month, sometimes a few months. A real big company who gets in a couple of deals right off that bat can pay that back in a week. It's just incredible what the savings are. So those initiation fees have always been kind of an important piece of business and to us the income today is pretty modest because almost everybody who could join has already joined. You either sold out to AT&T or joined the co-op. Another piece of income for us has been interest off the float. We make no secret of the fact that we pay programmers and so forth a little later than we collect the money from the member and that interest has always been a significant piece of money for us and the sales volume we're doing today is significant so that about half of our operating expenses is covered by the interest off the money that goes in the front door and out the back door. And then there are some other really modest sources of income like newsletter advertising. We have never really had the goal of making money on an annual convention; I always was happy if it broke even. One year we made a couple of dollars, the other years we've lost a couple, but it's basically a break even deal. Those are the main sources of income for us. Over the years, we did charge and do now charge administrative fees to members and to the vendors who we buy from, which have generally been, it's been up and down over the years, but generally been equal to about 2%. So let's say the member owes us a $100, we charge the member $102 and if we owed the vendor, the programmer, whomever $100, we pay them $98. It's basically 2 points from each side and that has been a good source of income for us and again, like I said before, our cost of operation has not kept in lock step with our growth so we get a lot more efficient every year. We do more with fewer people, which the board's always happy to see of course. So that's how we fund this thing.
BURKE: I think you could look back and say, this has been a really exciting ride and a really exciting industry and a very high growth organization and if you talk to the members, you get a lot of excitement about being part of this organization. What was it that excited you about cable and still excites you about cable?
PANDZIK: Well, I got into the cable business like a lot of people get into jobs; you just kind of fell into it. I think most of us, whatever we do for a living we look back and we think, well, I didn't really have a plan, it just kind of happened. I had done my undergraduate work at Nebraska, in Lincoln and in 1966, after three years of college, I was such a miserable student, I did not want to be there. So I dropped out of college and went to work in May of '66 for the phone company, the Lincoln Telephone Telegraph Company, as a tree trimmer. I don't know if you know anything about commercial tree trimming, but it has a lot to do with lumberjacking. It was one of the hardest, and I had a lot of hard jobs when I was young, cement finishing and stuff like that, this was a tough one, because this was an axe, a ladder, a rope and a chainsaw and in those days, long distance calls, well, you were in the phone business, long toll lines and it just seems like every farmer plants his tree directly under your line. So I worked for about 5 ½ months trimming trees and it got to be the fall, and I thought, hmm, Nebraska, winter time, not a smart place to be, working outside with an axe. So right after Labor Day, I walked into the local public television station in Lincoln, Nebraska, KUON TV, and I just walked in and said, "I'm looking for a job." And they said, these guys will love this, they said, "Do you know anything about running a TV camera." And I said, "Sure, no problem." I had never seen, in person, a TV camera. I'd seen pictures and I figured a picture is maybe good enough to get started. I'd done a lot of photography work, so I had a good idea about lenses and all that stuff. So they'd just happened to can some guy that morning and they said, "Great! Go to studio A." So I walked down, didn't fill out any paperwork or anything, walked down the hall, walked in, there was a camera sitting there all locked down, so I figured out which knob unloosened it and I did that for two years, mainly on their mobile unit which was a lot of fun and a great way to learn the business. A great way to learn the business. We gone all the time; 1968 was a really interesting year because it was probably the single biggest political year of this century, the '68 presidential elections. It seemed like everybody that could stand up was running for office, was running for president and we did shows with every candidate. Hubert Humphrey and Bobby Kennedy...
BREAK IN VIDEO TAPE
BURKE: Mike, we were talking about some of the exciting early years of you being a cameraman and being involved in video and television and in particular, your memories of 1968 because at that point there was a lot going on in early television.
PANDZIK: There sure was. Well, it was right in the middle of the Vietnam War, which was really tearing this country apart and the position I had was this little, tiny cog in a little, tiny wheel but we did get an opportunity being on that mobile unit, I got a chance to meet all those guys and set up situations like this and video tape them and stuff. It was really interesting to have that little role and it included everybody who was running for office that year. But eventually, I did that for a couple years, went back to college, graduated, got an undergraduate degree, got married, went to New York, worked at a lighting company in New York, a theatrical lighting outfit and decided to get back in the business, the TV, that kind of business. So I went to grad school. From New York City, I applied to three or four grad schools in the Midwest and I needed an assistantship, I had a wife and I couldn't just pay all of it myself. So I got a couple of offers for a grad assistantship and I picked the one at University of Kansas in Lawrence, Kansas and did an MS in Radio, TV, Film in two years. When I was about ¾ of the way through that, I got interested in cable TV. I didn't know anything about it. I just kind of heard the two words strung together. This was 1971, something like that, and I'd found out that a guy named Dolph Simons, who's family owned the newspaper in Lawrence, Kansas, The Journal Daily World, let's see, The Lawrence Journal World, had a franchise to build a cable system in Lawrence but had done nothing with it and so I called his office, I got an interview, I said, "Look, I'm a grad student. I'd just like to spend fifteen minutes with you and talk about what your plans are." So I went down and this has happened to me several times in my life, I guess it's something there, but instead fifteen minutes, I spent the rest of the day with him and we really hit it off. I had some, what I thought, were pretty good ideas about what to do and so forth and so a couple of weeks later he hired me as his second – he'd already hired a manager for the system – I was the second guy he hired to do all the programming and that side of it. So I finished up my thesis that summer and fall and graduated in October, but in '72 I went to work for him. That was my entry into the cable TV business. Remember, that was at the end – I wanted to talk about these three eras – that was at the end of this first era because none of the satellite age had started yet. In a city like Lawrence, Kansas, which had about 35,000 or 40,000 population then, about 30 miles from Kansas City, we always said with a wire coat hanger hooked up to the back of your TV set, you could get a dozen or fifteen channels, so there was a huge challenge to us in that cable system in those days to figure out what we could provide to people that would make them want to pay for something they could sort of get for free, most of it, anyway. So we did a lot of local origination, weather channel stuff, maps, advertising, community bulletin boards, all the stuff everybody did in those days and I was there a couple of years and then took a job with Hallmark in Kansas City as a TV director and did a lot of this production stuff for a few years. Eventually, in 1978 I was reading the Wall Street Journal, I was working for BF Goodrich in Akron, Ohio as manager of their visual communications department, and I was absolutely miserable in Akron, Ohio and I wanted to get back to Kansas City, I wanted to get back in the TV business and I was reading The Wall Street Journal and I saw this ad for Home Box Office and it said, "Need somebody to open a regional office in Kansas City" and it was just like a cartoon, you know, a little light bulb goes off over my head and I thought, that's for me. So I made some phone calls and I'll kind of compress this story, but I started interviewing. In those days, HBO, and they probably still do it today, in those days we interviewed new candidates until everybody was sick of the process. I probably had 14 formal job interviews with HBO, including the president of the company, before I got hired. I was one of nearly 500 applicants for that one job in Kansas City, and I thought, "Hell, if they put the rest of them through this, it's no wonder they haven't filled it yet." But there was kind of a if you hung in there long enough I guess they gave you points for that. So I started doing that. I replaced Bill Grumbles, who was at HBO Kansas City. He'd opened that office all of about three months earlier and then he went to Dallas and opened an office. So here I was brand new with HBO, maybe been there two months or three months and there was no one else to be the regional manager. I'd only been there three months, but I was there longer than anybody else, so I got promoted to be regional manager and I ran that office. When I left, we were probably, I think I saw an article in the Kansas City Business Journal once about that time that had the biggest companies in Kansas City by gross sales and stuff. We weren't listed, thank God, because HBO's always liked to have a low profile in that area, but I looked at that chart and I thought, "I'm equal to the 7th biggest company in Kansas City as far as the money coming through this office." So I ran that regional sales and marketing office with HBO for about five years or so until the early '80's. I went to New York with HBO, worked in new business development for about a year and a half and one other little gig in between for a few months, some consulting, and then I went to work at the co-op. That's when Rob Marshall called me, so that kind of ties it all together. I've got a good background for this kind of work, because I have that natural empathy for the little guy. It's a very American trait anyway, it's probably one of our biggest failings too, because it gets us in trouble sometimes. On a national stage we're so interested in looking out for the little guy you sometimes maybe let that get away with us, but when I talk to college classes, I often tell them, "I've got the perfect job for an unreconstructed '60's radical." Now in 1999, the kids go, "Huh?" I was never one of those but this job does have a certain amount of mission to it. It's not just, and I mean no disrespect, but it's not just selling a product, it's not just doing x and then you get a paycheck on Friday. There's more to this than just that because you can't sit back and let good people get taken advantage of and that's really what happened. It's important to state, I don't think, except for a few personalities, who probably felt this way, the industry did not start out to really do in the little guy. I don't think there were any huddles of big businessmen in New York saying, "We've got to make decisions now that will really put the screws to the little independent operator in ten years." It was all an inadvertent consequence. It was unintended. But that doesn't mean it shouldn't be resolved, this whole volume discounting inequality, this whole tilting of the money toward New York and LA and so forth and away from Middle America. It was a problem that needed to be resolved and we're still resolving it. We're still not there. Even after fifteen years, we know that big MSOs get better prices on many of the networks they buy then we do and it's not right and we haven't quit yet and we're not going to quit. I guess, one thing I've learned over the years is while government can help you here and there, there is no free lunch there. You let that camel's nose get under your tent and I guess, on balance, the times the government has helped us have probably been offset by the times they've hurt us, you know. It was important in a couple of places that we get a little helping hand, but when I look back, I think we would have succeeded anyway and we probably wouldn't have paid the price that cable operators have paid by what I consider interference on the part of government in a great little business that's not hurting anybody. Look, at the end of the day, it's people watching TV at home, through their toes. This is not rocket science, what we do, it's just entertainment and we're trying to bring it to as many people with as much variety as we can at the lowest price we can and that's kind of where the co-op enters the equation again. We know if we can hold down wholesale prices, then our operators can hold down their retail prices, but if we don't do that first job, they are dead meat on the second job because if there is a financial food chain with subscribers on the bottom of it, studios at the top, the next bump up from the bottom is the cable operator and the next bump up from there is the cable network and then the studios and stars, and whatever. And there is this food chain and cable operators are basically, they basically have no control over their wholesale prices other than the little work that we do trying to balance the field in terms of volume discounts. I have a lot of empathy for the subscriber as well as the cable operator because these rate increases that we all receive at the wholesale level naturally someday, somehow, in some proportion have to be rolled into subscribers. In any business, you think where the money comes from, it doesn't come from suppliers, it comes from customers. It comes from the eventual, in our case, this retail cable TV customer. Every nickel in our industry comes from people watching TV at home. So when the sports teams and sports franchises and the movie studios start jacking up their prices and putting competitors in bidding wars for product and stuff, when companies buy rights for the Olympics and other big events like this, and pay way too much for them and then what do they do? They turn around to the next chain down which is the cable operator, the only place cable operators get money is from subscribers unless they're making it in the backroom with a Canon Color Xerox machine, it's got to come from subscribers. So I guess it's a topic, you can kind of tell, I get a little exercised about because it's very important. All money in any industry comes from the eventual, the last consumer and I did a study a couple of years ago. I had a really good student intern, a guy from KU and I kind of laid out this project. I like to do projects with interns, something they can really do during the summer, and I said, "Look at our wholesale rate increases over the last year or two or three and then compare them with typical retail rate increases by our members and do it in broad brushstroke, it doesn't have to be perfect. I just want to get an indication for every dollar of wholesale rate increase, what is the dollar, or whatever, what value, what retail price increase is there?" And he did a really nice job. A very statistically valid little study the basically showed the cable operators only passed on to their subscribers less than 70% of the wholesale price increases they received from programmers, which means that our members are eating at least 30% or thirty cents on every dollar of wholesale price increase. They're not passing that on, they're eating it. You don't have to be a rocket science to figure out that if widgets cost you ten bucks to make and you sell them for twenty, you've kind of got a business there. If they cost fifteen dollars to make and you sell them for eighteen, you almost don't have a business and when they get sort of equal or even close to being equal, you've really got a hobby and when it gets upside down, you're out of business. I think one thing we tried to convince members on Capitol Hill of is that cable systems are no different than any other retail business like a shoe store or a grocery store. If we charge too much for our products we'll go out of business and if we don't charge enough for them we'll go out of business. There is a margin, a balance in there of fair play and fair profit that I've never seen abused really, from my end of the telescope looking at the cable business. I know some politicians don't see it that way, but that's their problem. Some of these guys have never had an honest job in the private sector in their whole life. I'm not just talking about cable guys, when you look to Washington and you see people who have made their whole career and never had a job in the private sector, it's easy to get a little bit bitter about them telling us what we ought to be doing. Anyway, I got a little off the subject.
BURKE: Well, I want to sort of build on that, that I can't help but notice and I've always known you to really enjoy what you do and your very amazing insight and understanding of the industry...
PANDZIK: Oh, shucks.
BURKE: From the subscriber to the operator to the programmers, and your sense of mission and I'd like to tie in with that the fact that you're involved with other cable associations including C-SPAN, Cable in the Classroom, The Cable Society of Cable Pioneers, the Mid-America Pathfinders, and now The National Cable Television Center and Museum.
PANDZIK: I think that's just proof if you stay around long enough you become a neo-geezer that gets invited to some of these things. I've been on Brian Lamb's board at C-SPAN for five years. I've had a great time doing it. It's a wonderful group of men and women. For those of you watching who don't know, C-SPAN is the cable industry's gift to the Republic, is the way I like to put it. It wasn't started by the government, it wasn't started by some clown with a crazy idea about making money. It was founded and run today, still run, by the cable industry. We support C-SPAN through our monthly subscriber fees we pay to C-SPAN. It's a great organization. Cable in the Classroom is another one of these really great ideas writ large to provide – if you're not aware of what it is, it's a program where cable networks have voluntarily, they run two or three hours a day during the school week of some of their best programming. They run it without commercials and they run it usually between 4 am and 7 am, or something like that, which is okay because many cable operators have provided free cable service to high schools and junior highs. Many of them have provided free TV sets and VHS tape machines and so forth. That way a teacher, if they're studying in the history class studying Panama Canal or early twentieth century politics, they can record an hour show or a thirty minute show on the Panama Canal with no commercials in it whatsoever and this is a gift to the schools. We don't charge anything for that. And then The Cable TV Pioneers, which is a national group, and the Mid-America Pathfinders, which has sprung out of Rob Marshall's Mid-America Cable TV Association, are groups that do some good work and try to recognize men and women who have made a contribution over the years and they're kind of honorary. It's kind of nice to be included in some of those groups. It's a great industry. When I've talked to college groups I say, I've worked a little bit in commercial TV (I left some things out when we were talking), commercial TV and public TV and corporate video and cable TV and from my experience, cable TV is by far the best place to be. When I worked around commercial TV, the only guys who ever retired with a paycheck were the owner, the chief engineer and maybe the owner's secretary. Everybody else was a bunch of kids getting burned out by the time they're 25 years old. The cable business is a wonderful spot for young people to get into. As you know, many of the biggest networks in the business are run by women, which show me a commercial broadcast network like CBS or NBC that's got a woman at the helm. A great place for minorities, a great place for young people. I think one thing I like about it is it's not a bobby pin technology where everything got figured out 20 years ago and we're doing the same thing, just another day. This is an industry that is a long run of interim technologies. We never resolve the end deal. It's just as series of interim technologies and it's sort of this technological river that comes screaming by your front door and you kind of wonder, cable operators today are trying to figure out how to enter the digital age. When do they step into that river; what are the chances of buying something that won't work in five years because it'll be overtaken by new advances? Well, the chances are pretty good, frankly. How do you pay for all this stuff? How do you compete against Direct TV and Echo Star and these other technologies? Congress, some of those guys think we have no competition. If they'd cross the Potomac sometime and come back home and go with cable operators to their cable systems, they'd see we have plenty of competition, yet we're still rate regulated. Well, actually, as of March we're not, most people aren't, but that took years to get to that point. It's a great business for young people to get into because it's not a bunch of, actually, a guy like myself, anybody in their 50's or 60's really doesn't have, other than maybe some more wisdom and some vision that maybe a young person doesn't have from experience, we don't have a huge advantage. I wanted to talk about those three eras, the first era went from say, '47 to '76, let's call it thirty years; the satellite age started in the winter '75-'76 and continues today; but a third era started about 1992 and that's the digital era and that has been a sea change for all of us. Kids watching this tape probably own a CD player of some kind, which is digital audio. For many years, the audio portion of Home Box Office and other satellite feeds has been fed as digital audio. The video might have been analog, but the audio was always digital ever since it was scrambled. The business, all of television, all of audio, all of radio, cars, anything with electronics in it is on this headlong rush to become digital and one of the last areas to be – the audio business, stereo business, that's been digital for a long time. You see a digital video disk, which is still kind of a new deal, that's such an improvement over VHS video tape, but probably the last thing is the hardest thing and that is the television business. Commercial broadcasters, cable operators, studios, everybody's struggling with what system to use, how to get the cost down. I'd love to jump ahead ten or fifteen years and see where this all ended, but you're going to see in the next couple of years, for example, you're going to see the end of movie theaters as we know them with actual film with light projected through them and displayed on the big screen. By the end of the first decade of the next century, other than film collectors, film buffs and film school, you probably won't see those anymore because there's technology now perfected that will allow movie theaters to use video projectors in their theaters instead of film. The films will be distributed via satellite rather than by truck and by huge reels and big heavy cans and stuff. That's going to be a major change. One of the great things about that is, you'd be amazed at the amount of money it costs to just ship these stupid film canisters around the country. Whole truck lines have sprung up over the decades just to move films around. That will be eliminated. A small town movie theater that struggles to play a big film like Saving Private Ryan or something like that, or this new Star Wars movie because of all the contractual obligations, when the film is beamed to your theater via satellite, you can have a different movie every night. You can have three or four different movies on the same screen every day. So that's going to be a real big change. Flat screen TVs are here to stay. It's such a great technology. I've got one of the new 27" flat screens; it's not one you hang on a wall, it's still a big picture tube, that Sony's just come out with and the screen is absolutely flat. I have no idea how they do that, it should not work but it's such a great picture. We're moving into this area of flat screen TVs you literally hang on your wall. I've seen a bunch of those now. They're for sale at retail right now, absolutely great pictures, unfortunately great prices. They're very expensive still. The whole industry is struggling with what to do with how to record this stuff at home. Analog is really a dead duck. It's going to be a digital format of some kind, I'm not sure exactly what that's going to be. We haven't even talked about high definition television, which is in my view, there's people that don't agree with me, but in my view it's the most superior way to watch television ever. It's a bigger leap for me from our normal NTSC color TV that we have now, to digital high definition, that's a bigger leap than going from black and white to color. It's a huge leap! The problem is we haven't figured out how to do it yet. We have hundreds of thousands of movies shot on a 3 x 4 aspect ratio screen and now we're what, going to play them on an aspect ratio that's 3 x 5.5 or whatever, I've forgotten some of the numbers, but that doesn't work very well. John Sie, who has been in the cable business for a long time, did a great tape I saw last year talking about how to fit a 3 x 4 on a wide screen and vice versa, and it doesn't work. So I think the solution, unfortunately, is going to take a long time. CDs took ten years or so to really become pretty common and I think this is probably going to take fifteen years, but I think people that can afford it will dedicate a room to their house as a kind of a viewing room and put a wide screen high definition TV in there and then the rest of the TVs in their house will be 3 X 4 analogs for a long time to come. Cable operators are struggling with the same kind of deal. How do you go digital? W have the technology to make a completely digital system today. The problem is, you can barely afford to build it for what you can charge at retail because of the wholesale prices you're paying on programming you're kind of stuck in the middle between those, so we got the technology, it's just kind of hard to roll out. In a big city system you can do that. If you're starting from scratch today you'd build a much different cable system then you would have built ten years ago. But now I'll come back to the co-op, what I do for a living, our 1,100 companies with 6,100 cable systems and 10 million basic subscribers or so, we know from studying it that the median number, if this is number 1 and this is number 6,100, number 3,050 halfway in between all of our cable systems, that system is 305 subscribers. That means half of our cable systems are smaller than 305 subscribers. That's a huge number of tiny cable systems. Half are bigger, but still, predominantly most of our cable systems are under 500 subscribers. Well how do you, I mean even if you don't have the technological background to understand what I'm going to say here, how would a little town of 1,200 population with 400 subscribers or whatever, ever build a completely digital cable system today? You could not make enough from subscribers to pay for what it would cost you to build it. So the industry is looking at some other methodologies that are digital, but other ways to skin the cat to bring digital TV to the home that don't require a complete rebuild of your cable system to a digital standard. There's a technology called HITS, head end in the sky, HITS, which is a system bringing several bundles of cable services through the satellite into the head end, down the cable system and then to a set top box on top of a subscriber's TV and that's a great interim technology. There are a couple other systems we're looking at as well. I don't know all the steps of how we'll get there, but I do know that digital is such a wonderful method of recording, of archiving, of playing back, of transmission, of reception, no question in mind this whole business will be fully digital at some time, I don't know what that date is when the last guy gets rid of his analog widget, ten or twelve years from now, probably fifteen years from now we'll all be completely digital, but it's where we need to be. It's a wonderful technology. We will think back on analog then, twelve or fifteen years from now, like some of us do wistfully thinking about crystal sets we built and one and two transistor radios we built and tube type radios that we used to have years ago. We'll look back at that as such an archaic kind of a deal, analog, but that's where we're going. We're going to make sure cable operators stay there and really can participate in that too. That's what I do for a living.
BURKE: Great. Well, if we have a few minutes left, I was just curious: how would you like people to remember the National Cable Television Co-op and any of the other very special cable organizations you've worked with. It's a two minute question.
PANDZIK: I'm old enough and a student of history enough to know that nothing lasts forever, nothing built by man lasts forever, and I'm sure there will come a day when the cable TV co-op that I started with a lot of other peoples' help and got to this point, I'm sure there will come a day when it is not necessary anymore. Frankly, I kind of hope that happens. I don't want it to happen tomorrow because I've got two kids in college, but I hope it happens where the day comes when what we do is not necessary anymore. What that will take is for programmers to charge every cable operator the same price for their services. If they would do that, I will go do something else, gladly, and I will make sure my employees are taken care of and we'll sell our used furniture and move on down the road. Nothing would make me happier than to have that happen, but I guess if there's a legacy, if anybody watches this tape years and years from now and they think back, how did this all get there, the fact that we helped the little guy is worth a lot.
BURKE: That's a wonderful sentiment and I want to thank you again for your time and your insights.
PANDZIK: You're most welcome. You asked me a couple of questions and I can go for about an hour and a half!
BURKE: I really appreciate it and many thanks from the folks at The Cable Museum.
PANDZIK: You're welcome, Liz.
BURKE: This oral and video history of Mike PANDZIK: was made possible by a gift from The Hauser Foundation Oral and Video History Project of The Cable Center Oral and Video History Program.