The U.S. Cable Television Industry, 1948-1995: Managerial Capitalism in Eclipse.

Alfred D. Chandler, Jr., observed that under managerial capitalism, salaried managers tended to pursue policies that promoted the long-term stability and growth of their enterprises. The U.S. cable television industry provides a case study of how managers responded when stability and growth were mutually consistent objectives, and when they were mutually exclusive. From the late 1950s through the early 1980s, agent-led newspaper publishers and television broadcasters invested aggressively in the cable business. Beginning in the mid-1980s, however, investing in cable implied a tradeoff between stability and growth objectives. As a wave of mergers swept the cable industry, agent-led companies avoided acquisitions that might dilute earnings and depress stock prices. Confronting an increasingly turbulent competitive environment during the first half of the 1990s, agent-led companies were much more likely to divest cable assets than owner-managed firms. In agent-led companies, managers believed that their cable units would require massive capital investments, and they were reluctant to "bet the company" on a business facing so much competitive, technological, and regulatory uncertainty. Owner-managers, emotionally attached to the cable industry and to the firms they had built, and often harboring dynastic ambitions, were more reluctant to sell: they were willing to gamble on growth.

Joseph Schumpeter would have loved the U.S. cable television business: twice in its short history, the industry has been the instrument of creative destruction. First, cable programming services took considerable audience share from television broadcasting stations. By 1995, in the 64 percent of U.S. households that subscribed to cable services, cable programming had captured 46 percent of total television viewing hours; the balance went to local broadcasters. [1] Second, cable TV companies had begun offering local telephone service during the early l990s, challenging incumbents that had monopolized that market for one hundred years. The task required the deployment of leading-edge technologies, and had provoked retaliatory entry by phone companies into cable companies' lucrative video entertainment business.

Very different types of organizations unleashed this Schumpeterian gale. The first U.S. cable systems were built in the late 1940s by entrepreneurs. By the 1960s, however, these owner-managed firms that were focused exclusively on cable shared control of the industry with companies that had diversified into cable from the newspaper and television broadcasting businesses. Like the entrepreneurial startups, many of these diversified media companies were run by owner-managers--often second or third generation members of the founder's family. In other cases, the founding family had yielded control to professional managers. In these agent-led diversified media companies, family trusts sometimes remained the dominant shareholders. Usually, however, the trusts' equity had been sold or diluted, resulting in dispersed ownership. Thus, in the U.S. cable television business, we see the coexistence of three of the organizational types in Alfred D. Chandler, Jr.'s, taxonomy: entrepreneurial capitalism, family capitalism, and managerial capitalism. [2]

Through its history, the cable industry has been extremely capital intensive: its managers regularly have confronted decisions regarding large, irreversible investments with long payback horizons. Confidence regarding prospective returns on these investments has varied over time. At points, cable companies have faced high levels of uncertainty regarding customer demand, technology, competition, and regulation; at other times, uncertainty over such factors has ebbed. This paper examines the influence of two aspects of organizational form on firms' responses to changing levels of risk in the cable industry: the firms' degree of diversification and their governance arrangements, specifically, the extent of their CEOs' equity ownership. Theorists have presented conflicting arguments regarding the impact of governance on risk taking behavior, but past empirical work generally has indicated that management equity ownership and risk taking co-vary positively. [3] Likewise, theorists have disputed the impact of diversification on strategic risk taking behavior. Only two empirical studies have previously explored this question; both found a negative relationship between diversification and risk taking. [4]

The research presented in this paper on the influence of organizational form on risk taking behavior is broadly consistent with past empirical findings. In brief, following a decline in uncertainty about returns on cable industry investments during the second half of the 1970s, agent-led diversified companies expanded their collective share of cable industry customers. However, following a sharp increase in uncertainty about technology, regulation, and competition during the first half of the 1990s, agent-led diversified companies were likely to divest cable assets; in aggregate, they lost considerable market share to owner-managed firms focused exclusively on cable. Thus, Chandler's observation that entrepreneurial capitalism tends to give way to managerial capitalism has not yet been validated in the U.S. cable television business. The industry's recent history has seen managerial capitalism in eclipse.

The Television of Abundance: 1948--1969 [5]

John Walson launched the first commercial cable television system in Mahanoy City Pennsylvania, an Appalachian town eighty-six miles from Philadelphia. [6] Walson worked as a lineman for Pennsylvania Power & Light and also owned a local appliance store, which held an inventory of unsold TV sets. To demonstrate the sets, he secured informal permission from his employer to string an electrical wire from a local hilltop to serve as an antenna for the reception of signals from Philadelphia stations. When customers who purchased TV sets asked to be connected to Walson's antenna, he recognized a business opportunity. Walson charged two dollars a month for this service, and by the middle of 1948 had 727 customers. He and other entrepreneurs soon began setting up similar "Community Antenna Television" systems in rural areas where television reception was poor. By 1955, there were about 400 such systems with a total of 150,000 subscribers. Thus, cable TV was born of necessity very shortly after the mass market for television broadcasting began to grow. [7]