Home Box Office, Inc.

Origins as Sterling Communications

HBO, Inc.'s origins trace to December 1, 1965, when Charles Dolan—who had already done pioneering work in the commercial use of cables—was granted a franchise permit by the New York City Council to build a cable television system encompassing the Lower Manhattan section of New York City (traversing southward from 79th Street on the Upper East Side to 86th Street on the Upper West Side). Along with Dolan, TelePrompTer Corporation (which was assigned most of Upper Manhattan) and CATV Enterprises Inc. (which was assigned part of the city's Upper West Side, extending north of the Harlem River, and The Bronx's Riverdale neighborhood) were also awarded cable franchise permits on that date. Dolan's maiden television venture was Teleguide, a closed-circuit television system started by his initial company, Sterling Movies U.S.A., in June 1962; it distributed a schedule of tourist information, news, interview segments and feature interstitials to hotels, and by 1964, apartment buildings and office buildings in the New York metropolitan area.

Through Dolan's Sterling Information Services subsidiary, Manhattan Cable TV Services began limited cable service in September 1966. Manhattan Cable (renamed Sterling Manhattan Cable Television in January 1971) was the first urban underground cable television system to operate in the United States. Rather than string up cable on telephone poles or use microwave antennas to receive the signals, Sterling had laid new cable lines beneath the streets of and into buildings throughout Manhattan, and repurposed Teleguide's existing cable infrastructure for use by the new operation. Sterling's use of underground cables complied with a longstanding New York City Council ordinance—originally implemented to prevent broad-scale telephone and telegraph outages, after a severe blizzard affecting the Northeastern United States in March 1888 had caused widespread damage to above-ground utility lines in the area—requiring all electrical and telecommunication wiring to be laid underground to limit weather-related service disruptions, and because the multitude of tall buildings on Manhattan Island subjected television signals to reception impairments. Dolan curried the financial backing of Time-Life, Inc. (then the book publishing unit of Time Inc.), resulting in Manhattan Cable becoming one of its first cable system properties. Despite the investments from Time-Life's share of Sterling (initially 20% at the beginning of operations), Sterling Manhattan consistently lost money throughout its first six years of operation; the company incurred much of its debt from underground wiring expenses (costing as much as $300,000 per mile), and its difficulties attracting new subscribers to generate income (Manhattan Cable managed to receive only around 400 customers by 1967). On August 27, 1969, Sterling Communications consolidated ownership of the cable assets: it acquired Time-Life's 49% share in Sterling Manhattan, in exchange for stock and other assets worth $1.84 million. (Time-Life's interest in Sterling Communications concurrently increased from 25% to 44.5%.)

Dolan was looking for a way to help his struggling cable company grow to become financially viable. In the summer of 1971, during a family vacation to France aboard the Queen Elizabeth 2, Dolan conceived "The Green Channel", a codenamed concept for a cable-originated television channel that would be distributed via Sterling Manhattan and other participating cable systems. The proposed service would offer unedited theatrical movies licensed from the major Hollywood film studios and live sporting events, all presented without interruptions by advertising and sold for a flat monthly fee to prospective subscribers. Dolan wanted to offset the service's start-up costs by having Sterling enter into carriage agreements with other cable television providers to transmit and sell the service to their customers, and draw revenue from fees charged to subscribers who added the channel onto their existing cable service (which then consisted exclusively of local and imported broadcast stations). Dolan later presented his idea to management at Time-Life, who, despite the potential benefit to the company's cable assets, were initially hesitant to consider the "Green Channel" proposal. In the early 1970s, the cable television industry was not very profitable, and was under constant scrutiny from FCC regulators and the major broadcast television networks (CBS, NBC and ABC), who saw cable as a threat to their viability. Attempts to launch pay television services had been done on an experimental basis in the United States dating to 1951 (among them, Phonevision in New York City, Chicago and Hartford; SubscriberVision in New York City; Telemeter in Palm Springs, California; and Telemovies in Bartlesville, Oklahoma) with little to no success, muzzled by campaigns backed by movie theater chains and commercial broadcasters meant to alarm television viewers to the supposed threat of pay television to the movie industry and free-to-air television access, limited user interest, and FCC restrictions on the types of programming that could be offered to subscription services. Undeterred, Dolan managed to persuade Time-Life to assist him in backing the project.

After the Federal Communications Commission ruled that local governments could not restrict the operation of subscription television services in cable franchise terms, in July 1971, Sterling Communications—now consisting of Sterling Manhattan; its Long Island-based sister system, Sterling Nassau Cable Television; production firm Allegro Films; and direct-to-cable programming firm Television Presentations Inc.—informed the FCC that it planned to operate a cable-originated pay television service. Because Sterling's New York City Council franchise grant specifically required FCC approval for that purpose, Time/Sterling filed an FCC request to authorize pay television operations. Sterling indicated that a subscription television operation would also help Sterling Manhattan fund its fledgling local origination channel, which had incurred $1 million in start-up debt on top of annual company operating losses of $250,000. On September 10, 1971, the FCC gave preemptive authorization to Time-Life and Sterling Manhattan Cable to begin a pay television operation. On November 2, 1971, Time Inc.'s board of directors approved the "Green Channel" proposal, agreeing to give Dolan a $150,000 development grant for the project.

Early history; dissolution of Sterling

The namesake Home Box Office (HBO) pay television network was founded by Dolan—as a joint venture between Sterling Communications and its co-partner, Time Life Broadcasting Inc.—in 1972. The service—originally to have been called the "Sterling Cable Network", before Dolan and his development team settled on naming it "Home Box Office", originally intended as a placeholder name to meet publishing deadlines for the service's announcement memorandum and research brochures—launched on November 8, 1972, over Teleservice Cable (now Service Electric)'s Wilkes-Barre, Pennsylvania, system. Time Life originally planned for HBO to debut on a Teleservice system in Allentown, but, per an agreement with Teleservice president John Walson, moved the launch system to the company's Wilkes-Barre system to avoid blackouts of NBA games (specifically those featuring the Philadelphia 76ers, with which HBO was unable to materialize a television agreement to accompany its planned broadcasts of New York Knicks games) that were scheduled to air on the service. Programming on HBO initially consisted of theatrical films and event programming (much of which was sourced to the service through an agreement with Madison Square Garden that dated to 1969, and was extended to allow regional broadcasts one week before HBO launched), arranged in the form of a double feature, or a single movie presentation paired with either a sports or special event (often bridged by a short film or other interstitial content); by 1974, when the service began offering programming during the l concert specials and other music programs, daytime children's programs and various instructional series were added to the schedule. Originally headquartered from the Time-Life Building on Avenue of the Americas (Sixth Avenue) in Midtown Manhattan, HBO initially relayed its programming via a network of microwave relay towers throughout the Northeastern United States to participating cable systems carrying the channel;

On February 28, 1973, Sterling Communications announced it would spin-out HBO and associated assets into Home Box Office, Inc., a new subsidiary created in accordance with the sale of 9% of Sterling's HBO equity to Time Inc. (expanding its controlling shares to around 75% of HBO's equity) and a $3-million direct investment. Sterling also raised Time's equity in the company to 66.4% in exchange for the added HBO stake, through the purchase of additional stock and a converted $6.4-million note obligation. Dolan—who reportedly had major disagreements with Time-Life management on policy issues, claims which the company denied—subsequently resigned as chief executive officer of Sterling Communications and Home Box Office, accepting a $675,000 buyout of a portion of his stock while remaining on the board of directors at both companies in the interim; Dolan used portions of the sale's proceeds to repurchase Time's share of the Sterling Nassau systems and to start the Long Island Cable Community Development Co. (the forerunner to Cablevision Systems Corporation, that would be combined with the Sterling/Cablevision systems on Long Island) as the system's parent company. Gerald M. Levin—an entertainment industry attorney previously with New York City-based law firm Simpson Thacher & Bartlett, who had been with Home Box Office since it began operations as its director of finance, and later as its vice president and director of programming—replaced Dolan as the company's president and CEO; by September, he was joined by Time Life vice president J. Richard Munro as chairman of Home Box Office as well as Time-Life Broadcast's other subsidiaries, Manhattan Cable Television and NBC affiliate WOTV (now WOOD-TV) in Grand Rapids, Michigan (which became the company's lone conventional broadcasting property, after Time sold its other broadcast television properties as it began expanding into cable system ownership).

On May 9, 1973, reportedly because of high start-up and operating costs for HBO and other Sterling cable assets, Time announced it would sell its controlling share of Sterling to Warner Communications for $20 million. Time intended to convert the 260,000 convertible notes it held in Warner's cable television unit, Warner Cable Communications, into common stock shares totaling up to 20% in interest. Sterling would then maintain oversight of Home Box Office under Warner's purview. The Time-Warner cable deal was terminated on June 27, after both companies failed to reach a definitive agreement to sell HBO and the other Sterling subsidiaries to Warner; financial arrangements made between Sterling and the New York City Council as part of their 20-year noncompete franchise agreement were alleged to have curtailed the sale.

On July 19, 1973, Time Inc. reached an agreement to purchase and assume financial liabilities of Sterling Communications for $6.2 million (including $3.1‐million in redeemed public debentures). Time completed its acquisition of Sterling on September 18, 1973, formally dissolving the Sterling holding company and transferring Home Box Office and Sterling Manhattan Cable to its Time-Life division. The "Sterling" name was subsequently removed from the Manhattan and Long Island systems, with the Manhattan unit being renamed "Manhattan Cable Television". (Time's purchase of Sterling was the subject of a $97-million class action lawsuit filed in the U.S. District Court for the Southern District of New York on November 28, 1973, by 15 former Sterling stockholders who accused Time and its corporate board of "conspiracy" to depress the value of Sterling stock in order to "force" the sale at below market value "far less than its true value.") As the acquisition was being completed, the service had struggled to grow to complete viability: by October, it had around 8,000 subscribers and was carried on 13 cable systems in Pennsylvania and southern New York State with a combined 110,095 subscribers, and it was suffering from a significant churn rate as subscribers who found the channel's program scheduling repetitive, because of the limited allotment of movies outside of special events, decided to cancel their service.