Continental Cablevision, Inc. Business Information, Profile, and History

History of Continental Cablevision, Inc.

Continental Cablevision is a leader in the cable television industry and is renowned for its enlightened community relations practices and its commitment to customer service. Consequently, Continental Cablevision has enjoyed greater success than most cable providers when negotiating for new franchises.

The notion of paying to receive television signals over coaxial cable predates cable-exclusive programming by more than 25 years. When it was first proposed as a business in the early 1950s, cable television was intended to provide clear reception of distant signals to subscribers in remote areas. At the time, only large cities had a full range of television programming from the three major networks, while some cities also had an independent or educational broadcast system. Using large antennae mounted on tall towers, fledgling cable companies could pick up signals from these cities and bring television to vast unserved rural areas. With much of suburban and rural America without adequate television service, the industry was built for growth.

This fact was not lost upon Amos "Bud" Hostetter, a graduate of the Harvard business School class of 1961. In 1962, Hostetter, then an employee of Boston-based Cambridge Capital, became involved in a proposition to finance a cable television system for industry pioneer Bill Daniels in Keene, New Jersey. Hostetter recommended that Cambridge help finance the deal and found himself responsible for keeping an eye on its activity. Soon Hostetter developed a personal interest in cable television and invited a Harvard classmate, Irving Grousbeck, to join him in bidding on other franchises.

In May of 1963, inspired by the growth of television advertising, the popularity of television programs, and the introduction of color broadcasts, Hostetter and Grousbeck pooled &Dollar;3,000 and devised a narrowly-focused plan to serve areas that were underserved by conventional broadcast television. They settled upon two rural communities in northwestern Ohio, Fostoria and Tiffin, which they reasoned, would be unable to pull in a decent signal from major cities without the help of a cable system.

The two men negotiated franchises to serve the area but needed an additional &Dollar;650,000 to finance construction of the system. It took them both nearly a year to raise the funds, and after they secured backing from Boston Capital, they returned to Ohio to discover that local authorities had grown impatient with them and awarded a competing franchise to a local radio station that had already begun construction.

Faced with a situation in which the market was "overbuilt" and realizing that competition in the fragile market would destroy both companies, Hostetter and Grousbeck began negotiations to purchase their competitor's system and eventually reached an agreement to buy out the competitor for &Dollar;80,000--a steep sum at that time. Although Hostetter and Grousbeck were successful, the fiasco proved an expensive lesson in good government and community relations. With only a few thousand customers, the two men went into business, operating the systems, carrying out marketing initiatives, and answering the phones.

In 1965, Hostetter and Grousbeck took their Continental Cablevision venture to the Mississippi River community of Quincy in west central Illinois. The lessons they learned with their Ohio operations helped them establish a franchise in Quincy without a hitch. From that time, Grousbeck handled the Illinois operations while Hostetter managed the Ohio properties. This arrangement soon demonstrated to both men that local operating decisions were best made by the managers who worked and lived in the community. This philosophy of decentralization and empowerment would later be cited as the defining quality of Continental's success.

In 1969 Hostetter and Grousbeck appointed new managers for their Ohio and Illinois businesses and returned to Boston, establishing a headquarters for Continental in a warehouse in Boston's Lewis Wharf. From there, they planned the acquisition of additional franchises and began to assemble a crack management team.

By the early 1970s, Continental served 65,000 subscribers. While many franchise opportunities arose, Continental restricted its bids to only the most promising. Interestingly, despite its location in Boston, Continental never bid on a contract to serve the city.

Hostetter, a banker and corporate financier by training, also learned the importance of marketing. In order to fund the construction of a cable system, Continental first had to have enough subscriber cash flow to cover loan payments, maintenance, salaries, and other expenses. Subscriber cash flow could only be maximized through good marketing and customer service. This simple point drove the company through a period of explosive growth through the 1970s and remains the company mantra.

In 1972, for his efforts as a director of the National Cable Television Association, Hostetter was elected to the organization's chair, and he became an outspoken opponent of federal regulation that threatened to retard the growth of the industry. Hostetter joined the board of the Corporation for Public Broadcasting in 1975 and the board of the Children's Television Workshop in 1980. In 1979 he helped to establish C-SPAN, a network devoted to televising congressional proceedings.

In the mid-1970s, Continental continued to operate a group of small franchises scattered across Ohio and Illinois and around Richmond, Virginia. During this time, the industry experienced an investor shock. Faced with possible competition from telephone companies, the apparent exhaustion of undeveloped franchises, and the threat of overbuilding, banks and venture capitalists began to abandon the industry. Growth came to a standstill, forcing many cable companies to renegotiate their agreements with local governments. Continental, however, was not as broadly exposed to any of the dangers that caused investors to balk. Through conservative financial management and a measured construction schedule, Continental was able to weather the storm with no ill effect. In fact, because some companies were forced to sell off portions of their systems, it became a buyer's market for the stronger, smaller companies in the industry, such as Continental.

During this time antitrust litigation against the Bell System was entering its final stages and the federal government was beginning to address the major public policy questions related to cable television and telecommunications. Hostetter was instrumental in numerous FCC regulatory decisions, including one that guaranteed cable operators a fair rate for attachment rights on telephone and power utility poles. The new regulations ensured that utilities would not conspire to extract excessive funds from cable subscribers through high pole attachment rates.

Another regulation prevented telephone companies from competing with cable companies, thus preserving exclusive cable franchises. This allowed cable companies to build out their systems, free from potentially ruinous competition from multi-billion dollar monopolies. Both industrial guidelines later were incorporated into the 1984 congressional Cable Act.

In 1978, Continental claimed more than 200,000 subscribers. The company continued to purchase smaller 3000- to 5000- subscriber systems, favoring a gradual expansion incorporating proven technologies. this approach won the interest of Dow Jones & Company, Inc. which was looking for strategic investments in information industries outside the print medium, and in 1981, Dow Jones negotiated the purchase of a 25 percent share in Continental for &Dollar;80 million. The deal also marked an important alliance against telephone companies who, it was feared, were committed to building cable systems to compete with publishers for the attention of readers--and advertising dollars.

The Dow Jones investment provided Continental with enough capital to bid on or buy out franchises in lucrative suburban markets around Boston, Cleveland, Detroit, Chicago, and St. Louis. The company scored its first major buyout in 1984, when it acquired a mismanaged, 82,000-subscriber system in Jacksonville, Florida. By redoubling service efforts in that market--and applying its marketing charm--Continental succeeded in doubling subscribership in Jacksonville within three years.

Continental's local management in the city later negotiated exclusive rights to carry the United States Football League's Jacksonville Bulls home games. This move brought in 5,000 new subscribers overnight. In another notable marketing effort in 1987, Continental sponsored a three-hour special promoting cable television--on a Jacksonville broadcast station. At the time, the Jacksonville deal was the largest in the industry. Continental paid nearly &Dollar;1,600 per subscriber but, as penetration increased, that figure fell to about &Dollar;600 per subscriber--representing a bargain.

Continental also began a foray into the cellular telephone industry by purchasing an operating license to serve some communities in the northeastern United States. This experiment, however, was unsuccessful, as the cellular phone and cable businesses proved too dissimilar. The company had not purchased enough cellular licenses to realize profitable economies of scale, and the investment languished for some time as an alternative to land-line telephone service. In 1986, Continental negotiated the sale of its troublesome cellular telephone operation to Colony Communications. In exchange, Continental received cash and several of Colony's cable systems in eastern Massachusetts.

In 1984, Continental purchased a poorly run cable system from McClatchy Newspapers serving Fresno, California. The following year marked its one millionth customer with the opening of a 1000-mile cable system in St. Paul, Minnesota.

In 1985, however, Continental made its largest acquisition to date, taking over American Cablesystems, a company modeled after Continental by its founder, Steven Dodge. Five days after the deal was announced, however, Wall Street experienced the worst one-day stock crash in history; investors were dazed by the 500-point drop in the Dow Jones Industrial Average. Undeterred, and buoyed by an excellent record of financial management, Continental pressed forward. The sale was completed in 1988, giving Continental access to 900,000 customers in greater Los Angeles.

The newly acquired system presented Continental with several new challenges, particularly that of attempting to increase sales in areas where previous franchise owners proved unable to bring market penetration above 25 percent. Nevertheless, Continental eventually saw penetration rates nearly double that.

Also in 1985, Hostetter negotiated the repurchase of Dow Jones' 25 percent interest in the business, ensuring that Continental's management would retain full control over the company. Irving Grousbeck, a partner in the business for more than 20 years, left Continental two years later to pursue other business ventures and to take up a teaching position at Stanford University. Hostetter remained to chair the enterprise.

In 1989, Continental Cablevision began making large investments in programming from Turner Broadcasting System, Inc. and the Viewers Choice pay-per-view network. Continental is bullish on pay-per-view, one of the few high-margin premium services in the cable market. The company also began to profit from locally programmed advertising on its systems.

In 1992, isolated abuses in the cable industry led the United States Congress to enact legislation that would allow reregulation of the cable television industry. while all cable companies argued that this would load regulatory costs into customers' bills, Continental was particularly chagrined that, after doing its job correctly for nearly 30 years, it was subject to a punishment intended for other companies.

Continental attributes its success to three factors. First, after trying, and ultimately failing, to make a success of its cellular properties, Continental focuses only on those things it can do well. Second, the company maintains a decentralized organizational structure that will not support a large bureaucracy. In 1989, Hostetter told Multichannel News, "We at headquarters are not smart enough to know what the right answers are. We're not there day in and day out. Our decision makers have to go home and read the town paper and see the mayor the next day. That's a different approach from two guys in dark suits who fly out of New York to renegotiate a franchise and leave the next day." In fact, the company's senior marketing managers are in the field. They are given responsibility for drawing up their own budgets and are expected to make major decisions on their own authority in the belief that decisions must be made as close to the customer as possible. Finally, Continental concentrates on hiring creative, energetic managers under the assumption that they will, in turn, hire staffers with similar values. Company vice chairperson Tim Neher told Cable Marketing, "We don't lose a lot of people, because they like what they're doing and where they're doing it. It's fun to be in a job where you have all the authority to do the job well."

These precepts helped Continental to become the third largest Multiple System Operator in the United States, serving 2.9 million subscribers in 600 communities in 16 states. In addition to being highly profitable, Continental is renowned for its exceptional customer service and is consistently chosen by its peers in the industry as one of the best- managed companies in the business.

Principal Subsidiaries: Insight Communications, Inc.; Teleport Communications, Inc. (20&percent;); Turner Broadcasting (Minority Stake); E! Entertainment Broadcasting Company (Minority Stake).