Broadband Cable Association of Pennsylvania


November 4, 2013

Television shows "Game of Thrones" and "Boardwalk Empire" would not exist if it wasn't for Northeast Pennsylvania. Home Box Office, known more commonly as HBO, got its start in 1972 with about 365 subscribers in Wilkes-Barre. It was the channel's first affiliation. Over the next decade, the pioneer of "pay television" grew to boast more than 10 million subscribers in more than 40 states. But Wilkes-Barre is where it all began.

In the days before satellite transmissions, line-of-sight transmission systems were the only delivery system for the fledgling channel. Allentown-based Service Electric Cable Television Inc. founder John Watson put up $1 million so HBO could be beamed by microwave to the top of Bear Creek Mountain from New York. By the end of 1972, HBO had about 1,400 subscribers in Wilkes-Barre, all through the land-based microwave system. The biggest selling points for subscribers were the station's showing of first-run, unedited movies and some major sporting events - all without commercials.

By September 1974, the owner of Adams CATV Cable Systems contracted with HBO to introduce the channel in Carbondale, Mayfield, Waymart and the surrounding areas. In the fall of 1975, satellite transmissions began and HBO subscribers exploded. A full-page ad in the Nov. 9, 1975, Sunday Times advertised HBO for $7 a month with $20 installation to residents of Scranton, Moosic, Avoca, Taylor, Old Forge, Throop and Dickson City.

As the station's popularity grew, so did schemes to avoid paying for it. In May 1982, David A. Adams Cable Co. began disconnecting Upvalley HBO subscribers it suspected were tampering with a filtering device meant to prevent free HBO reception. The move led to complaints from Mayfield and Carbondale elected officials after residents claimed the cable company was disconnecting people without any proof.

And in 1983, Taylor resident Frank Cardamone was accused of selling illegal television converters between 1978 and 1983. The state attorney general's office believed Mr. Cardamone, known as "the HBO Kid," was the head of a group that manufactured devices that unscrambled HBO's signal. About 2,700 of the devices were sold locally; Verto Cable TV officials estimated the scheme resulted in a $98,000 loss for them alone. A jury convicted Mr. Cardamone of criminal conspiracy, theft of services and manufacture, distribution and possession of devices for theft of telecommunications services. Another person with ties to the area helped contribute to HBO's success. Scranton native Judy Santarsiero-Torello worked for the channel for years, rising to vice president in charge of national news media relations in 1984. A former history and special education teacher in Montrose, Mrs. Torello began working in the public relations department of New York's National Broadcasting Co. in 1965. After a series of jobs at New York television stations, she joined HBO in 1980. Scranton Times-Tribune

Television viewership may be stagnant, but as a business, television is booming.

The three big entertainment companies that announce earnings this week are likely to demonstrate that paradox. CBS Corp. , Time Warner Inc. and 21st Century Fox Inc. have all seen their stock prices climb substantially this year-far outpacing the market-even as most of their channels have lost prime-time viewers in the 18-49 demographic that advertisers care about in that period. The loss of these younger and most lucrative viewers remains a troubling long-term trend for the industry, but investors are more focused on near-term profits, which continue to rise largely thanks to steadily increasing pay-TV fees, the networks' own little slice of the bills that individual subscribers pay each month.

Analysts expect both CBS and Time Warner to report higher earnings for the three months to Sept. 30, helped both by growth in these fees as well as ad revenue. Television profits at 21st Century Fox, owner of Fox News, FX and Fox broadcast network, are also expected to be up, although the overall company's net income is expected to be down slightly, due to lower film profits and noncash accounting items. The steady increase in fees has created lots of tension with pay-TV operators, highlighted in the summer's bitter monthlong blackout of CBS, the country's top-rated TV channel, on certain systems run by Time Warner Cable Inc., the country's second-biggest cable operator.

Time Warner Cable lost subscribers as a result of that dispute, the company reported last week. CBS's earnings on Wednesday will show whether the broadcaster sustained any wounds from a fight it is generally considered to have won. CBS CEO Les Moonves told investors at a conference in September that the company's third-quarter earnings would show "there was no harm done financially" by the fight. UBS Securities analyst John Janedis estimated the dispute cost CBS two cents a share, bringing down his estimate of the total earnings per share to 75 cents. Mr. Janedis noted, though, that "in the sense of getting long-term value for content, it was worth it." Indeed, RBC Capital Markets analyst David Bank estimates CBS negotiated a per-subscriber fee from Time Warner Cable of around $2 per subscriber by 2018, up from around $1 today-setting a precedent for other future affiliate deals that it believed should add $7 to CBS's target stock price.

The fees, which broadcasters have only started to receive as cash payments in recent years, have helped CBS reduce its dependence on advertising. Mr. Moonves told analysts on the second-quarter earnings call that nonadvertising revenue represented 43% of CBS Corp.'s revenue in the second quarter-"quite a jump from not too long ago when less than 30% was the norm." Non-ad revenue also includes program-licensing payments from online video outlets like Netflix Inc. Higher subscription fees-known in the industry as "affiliate fees"-are also expected to help Time Warner, which owns cable channels like HBO, CNN and TNT, in the quarter and longer term. Time Warner CEO Jeff Bewkes told investors last quarter that the company expected its Turner division's domestic subscription revenue would grow at double-digit rates for the next three years. "Part of the investment thesis for Time Warner going forward is that they hope to reset their affiliate fees at a higher rate to reflect the fact that they have some strong sports programming now that they have the NCAA," said Alexia Quadrani, an analyst at JP Morgan, referring to the 14-year basketball rights deal CBS Sports and Time Warner's Turner Broadcasting unit secured in 2010.

Twenty-First Century Fox, which until June was part of the same company as Wall Street Journal owner News Corp, also is expected to see both higher affiliate fees for its cable networks and higher retransmission consent fees for its broadcast network for what is the first quarter of its fiscal 2014 year. Longer term, analysts expect 21st Century Fox to continue to ramp up affiliate fees through its core cable networks, as well as newcomers Fox Sports 1, which launched in August, and FXX, which launched in September.

This week's earnings results are also likely to highlight the impact so far of ratings in the new fall season, which started in September. One bright spot for broadcasters: While they and ad-supported cable channels are down in the 18-49 demographic, the broadcasters are off to an unusually strong start in total viewers. After years of declines, particularly noticeable last season, the four big broadcast networks have actually added total viewers so far this season, while the ad-supported cable universe has lost them, according to Nielsen. Brad Adgate, research director at Horizon Media, says "you can count on one hand the number of times" broadcast viewership has been up and cable down "in the past 30 years." Wall Street Journal

After months of talk, the FCC could be poised for action.

According to Jerry Zremski of the Buffalo News, the FCC proposed on Friday eliminating the NFL's blackout rule. "Changes in the marketplace have raised questions about whether these rules are still in the public interest, particularly at a time when high ticket prices and the economy make it difficult for many sports fans to attend games," said FCC acting chairwoman Mignon L. Clyburn. The league said it will review the proposal. "But it is worth noting that there have been no local TV blackouts of NFL home games through the first 133 games of the 2013 season," league spokesman Greg Aiello added.

He's right, but only because the NFL has softened the definition of a "sellout," allowing teams to sell only 85 percent of all non-premium tickets in order to lift the local blackout. Also, several games have been televised this year because teams and/or sponsors bought he unsold tickets at 34 cents on the dollar. Nearly two years ago, the FCC sought public comment on the possibility of eliminating the blackout rule. The league previously has said that the rule helps keep games on free television. The billions of dollars the NFL earns for its broadcast rights surely helps keep the bulk of its games on free TV. Even then, two thirds of the weekly prime-time games are shown only on cable. Earlier this year, Senator John McCain introduced legislation that would block blackouts in stadiums that were funded in whole or in part by taxpayer dollars. In time, the FCC or Congress could finish the job that the late Richard Nixon first started more than 40 years ago.