Telecommunications: The Cable Guys

Comcast, the Philadelphia cable-television giant, must be the only media powerhouse that owes its start to beltless pants. Ralph Roberts was running a belt-and-cufflinks business when he saw something alarming: an ad for slacks that didn’t need a belt to stay up. Roberts already knew cuff links were history. Fleeing the beltless revolution, he sold the company and bought a cable franchise in Tupelo, Miss., in 1963. During the next few decades, he and his son Brian built that tiny system into the nation’s third-largest cable-TV company.

Or the largest. How that story ends will be determined by AT&T’s answer to Comcast’s bombshell offer last week of $58 billion in stock and debt-assumption for Ma Bell’s struggling cable operations, now the largest in the U.S. If Comcast prevails and adds AT&T’s 13.5 million subscribers to its 8.4 million, it would serve a good chunk of the nation’s 100 million homes, and 9 million more than No. 2 AOL Time Warner (owner of TIME). The deal would also significantly increase the media-mogul profiles of the Robertses, the father-and-son team who have quietly engineered Comcast’s remarkable rise.

In the close-knit and often sharp-elbowed cable fraternity–eight companies control 90% of the market–the Robertses have an unusual claim to fame: just about everyone seems to like them. Ralph, the 81-year-old patriarch, had a colorful rise that included, along with his belt work, a stint as vice president of dentist-chair tunesmith Muzak. He bought the Tupelo cable franchise when he was passing through town and got a tip, over a craps game, that the city council was selling it the next day.

Roberts was there for cable’s low-rent days. Early programming: a paleo-MTV, with a goldfish swimming in a bowl as music played. He induced subscribers to sign on by handing out shoeshine kits. Roberts added systems in the South and then outside it. Later Brian took a hugely profitable stake in home-shopping giant QVC and bought a majority ownership of hockey’s Philadelphia Flyers and basketball’s 76ers, including cable rights for the hometown crowd. “This is an overnight success,” says Jim Boyle, managing director at First Union Securities, “even if it took more than 30 years.”

Ralph Roberts deftly dodged the limelight, while creeping onto the Forbes magazine list of the 400 richest Americans. He’s one of the least well-known owners of two major sports teams, and he eschews yachts, vacation homes and other luxuries. “He’s the most low-key, nonarrogant, extremely wealthy person I’ve ever met,” says former Philadelphia Mayor Ed Rendell. “He went from selling belts to being a high-tech leader and never changed.”

The Robertses own only 2% of Comcast shares, but they hold a dominant 86% of its voting shares. The company has never been riven by the succession wars that have laid waste to so many family businesses: it was always clear Brian was the man. None of his siblings–two brothers, two sisters–wanted in. Brian, on the other hand, has been helping his dad out since, at age 13, he proofread and found a formatting mistake in the company’s prospectus before it went public in 1972.

Ralph forced his son to follow his up-by-the-bootstraps route to the executive suite. Brian, a graduate of the University of Pennsylvania’s Wharton School, helped bring Comcast to Trenton, N.J., installing cable and selling door to door, after a string of summer jobs. “I think the fantasy ended and reality began when I went to Trenton,” Brian says. He did a two-year stint in Flint, Mich., then it was back to Trenton to manage Comcast’s 40-person system there. In time, Brian reached loftier heights, ascending to Comcast’s presidency in 1990.

Brian, an All-American squash player as an undergraduate at Penn, is harder driving than the old man. It was Brian who had the nerve in 1997, over an informal dinner in Seattle, to ask Bill Gates to invest $1 billion in Comcast. He got the money–Microsoft’s biggest outside investment at the time and a critical component in Comcast’s success.

Brian, 42, has also been more than willing to butt heads when business demands, and the cable business demands it a lot. In July 1994 he and his father quashed Barry Diller’s plans to merge QVC with CBS–they didn’t want Diller diluting their stake in the shopping station–and dumped him as head of QVC. And in 1997 Brian got into a well-publicized blowup with Liberty Media chieftain John Malone when Brian tried to buy up TCI shares owned by the estate of Malone’s late mentor, company founder Robert Magness.

Wresting cable operations from AT&T would be sweet payback. The Robertses were set to buy Denver’s MediaOne in 1999 when AT&T swooped down and took it away. AT&T offered $62 billion to outbid Comcast by several billion. The sweetest part: Comcast could get AT&T’s entire cable operation–including MediaOne–for about what AT&T paid for MediaOne alone. The Comcast camp insists that this is not about revenge but about getting the critical mass to influence programming and gain economies of scale.

Will the deal happen? Assets have a way of ending up with whoever can extract the most value, and Comcast has efficiency on its side. AT&T’s cable operations have been floundering, with industry-trailing profit margins of 16%. Comcast, by contrast, runs on 42% margins. If Comcast could bring AT&T’s $8 billion-a-year cable operations up to similarly stratospheric margins, it could squeeze out an additional $2.6 billion in operating profits annually. But even Brian Roberts admits that may not be easy–or possible–and has set Comcast’s sights on squeezing about half of those savings. (The AT&T cable properties include a 25% stake in Time Warner Entertainment, a division of AOL Time Warner.)

Not that AT&T wants to sell. Embattled CEO Michael Armstrong, Ma Bell’s would-be savior, has watched the stock plummet 41% over the past year. And he has bet heavily on cable, which figured to be central to Armstrong’s grand strategy of making AT&T a vertically integrated media company that could deliver telecom, Internet, cable and wireless services seamlessly. Now he is pulling those seams apart by dividing Ma Bell into four sectors. He is said to want to take over the cable unit himself if it is sold to the public in an IPO as planned.

He might not get the chance. If AT&T’s big investors think Comcast offers value, they may pressure the board to take the deal. With Comcast, shareholders would get not just cash but also two of the canniest managers in the business. It’s hard to argue with industry-topping profit margins. And in an age when communications technology is changing at the speed of light, it may be the wrong time to bet against the family that knew just when to get out of belts and cuff links.

–Reported by Eric Roston and Julie Rawe/New York