Excerpts from Remarks by Stan Smith, Cable Co-op Board Member
at the Annual Meeting
September 26, 1999


I am one of the four Directors who opposed the Sun Country/Carlyle sale a few years ago. I now support the proposed sale to AT&T. As your elected representative, I feel obligated to tell you what has happened in the last few years to make me change my mind.

Hindsight suggests to me that the sale to Sun Country was premature. I thought it was not a good deal for the members or for the community and that not all possible refinancing options were seriously considered. But let me explain my new attitude towards a sale.

To start, I would like to share with you some ideas about the new kinds of programming and other services that I think our community needs and deserves; also some ideas about the new technology it will take to make this possible.

Next, I would like to address the refinancing of our debt, and what financial resources it takes to run a business like Cable Co-Op. And what the "real" possibilities are for new money as contrasted to much of the wishful thinking I have heard recently from some well meaning, but misinformed, Cable Co-Op members and opponents to the sale.

Finally, I would like to address the business environment we are facing--the competition we have now and can expect in the future and what this competition will mean to our survival and what our Federal Government's regulation of the telecommunications industry means to a small "fish" like Cable Co-Op swimming in an "ocean" of big, hungry telecommunications "sharks".


When we first opened for business in the mid-1980's, we provided to our subscribers almost every channel that was available--"over the air" or from a satellite--and we even had "spare" channels for new services. We had a state-of-the-art coaxial cable system with 77 channels on our "A" cable and another "B" cable held in reserve for future needs. Of course, we didn't "own" the plant; it was constructed for us by our telephone company, Pacific Bell. We just leased the plant it the same as many companies would lease their own private telephone network. We didn't have much money; but we would add new channels as they became available. Our rates were low, and although we would increase rates each year, we could justify the increased cost to our members by the addition of channels. Local control over programming and rates meant something in those days. We even had some limited funds available to give to MPAC for public access, and we produced a few shows on our own.

But now things are different. We have no capacity to add additional channels, although some very good services are available. The government's "must carry" rules force us to provide channel space for all the "over the air" TV channels in the Bay Area. And it has proven almost impossible to "drop" an existing channel--even if it is one of those "shopping" channels that some people find so annoying but others love to substitute something that more of our subscribers would enjoy. Our rates are about as "high" as we can make them--we can't increase our prices very much anymore. And we are "locked in" to long term contracts with many program providers. So that now we have very little "local control" over services or rates. These are just the facts--and there is very little we or anyone else can do about it.

Now about the future:  I think our community wants and needs more channels. It wants digital TV and new services such as HDTV. (If you haven't seen a demonstration of HDTV, you should.  It's just great--no lines and a picture as sharp and clear as a good slide projection.) I also think our community needs a more reliable and faster Internet access, and, within a few years, telephone service as an alternative to PacBell/SBC.

To provide all this will take rebuilding our old cable plant--remember it was "state of the art" in the 1980's--but it is now technologically inadequate. We will need fiber optic cable to every neighborhood in the service area and connections to the existing co-axial cable that comes into your house. (This is called HFC or "hybrid fiber co-ax".) We will need new converter boxes for everyone--except the most "basic" of our subscribers. And we will need new equipment in the "head end" to receive and process the signals for these new services.

A new cable plant like I have just described means money--big money--tens of millions of dollars. And unfortunately, Cable Co-Op just doesn't have access to this kind of financing anymore.


Consider financing, or more accurately refinancing of our existing debt and raising the additional funds needed to upgrade our cable plant. Back in the 1980's, when we were just getting started, we received a loan from the National Co-operative Bank in Washington, D.C. That's why we are a co-operative. It was willing to provide the initial funding that we needed. But it couldn't provide enough money to build the cable plant. So we arranged with Pacific Bell to do that for us. Later, when it became necessary to pay back the Co-op Bank, we hired some people who made a business of helping cable systems borrow money. They arranged a loan from the Canadian Imperial Bank of Commerce or CIBC. (Incidentally, we will have paid back CIBC almost all of the interest and principal on that loan by the end of this year.) During this period we also issued preferred stock to certain local investors. We needed immediate cash to pay our bills while the very complicated deal was being worked out between the Co-Op Bank, CIBC, Bank of America and Pacific Bell. But the people who were helping us refinance our system told us that to secure new financing, we also needed more assets to serve as security for a new loan. So we arranged with Pacific Bell to buy the cable system we had been leasing from them. PacBell wanted to get out of the cable business, and we needed to have more control over the maintenance of the plant. PacBell employees had evidently lost interest in keeping the system up and running all the time, as our customers were complaining that they had difficulty receiving service--especially after normal working hours or on weekends.

We used a loan from Bank of America guaranteed by Pacific Bell to purchase the cable plant from Pacific Bell. If we hadn't made such a favorable arrangement with PacBell, we would have been out of business long ago. We just didn't have the credit rating to borrow the kind of money needed to purchase the plant. Pacific Bell had arranged with Bank of America to guarantee the loan so none of the bank's money was really at risk. And they and we were able to make it possible so that we wouldn't have to make payments of interest or principal until the year 2000--next year. The interest was allowed to accumulate, so that it was not a drain on our limited cash flow. If we hadn't been able to handle the Bank of America loan in this way, we would never have been able to continue as a Co-Op for as long as we have or to provide the high level of service we have provided.

So what refinancing alternatives are realistically available to us now?

One thought is to continue rolling over our debt with another Bank. Bank of America has told us that they are not interested in continuing the special arrangement with Cable Co-Op. However, considering our financial prospects, no other bank is interested in loaning us enough money to retire our existing obligations and provide for future plant upgrades. And certainly no ordinary bank would allow us to defer interest and principal payments for 10 or 15 years like our arrangement with the Bank of America where Pacific Bell guaranteed the repayment in the event of default.

Another idea was to issue long-term municipal-type bonds--20 or 30 years to maturity--and pay them off or "roll them over" when they came due. We worked with investment bankers from Salomon/Smith-Barney who had experience with revenue bonds for sports stadiums, toll roads, etc. But we needed the co-operation of at least two governmental agencies--City Councils, School Boards, etc. in order to establish a joint powers agency to do so. There would have been no city investment required. The bonds would be sold in the public municipal market generating tax free interest, and and the bonds would have been "guaranteed" by an insurance company so that no person--buyer or seller--would have been at risk. It was an elegant plan. However, it required the acceptance of a cornerstone entity, such as the City of Palo Alto. However, our Palo Alto City Staff and Council were not even interested enough to listen to the plan or in helping Cable Co-Op and our 28,000 plus members. They wouldn't even discuss our proposal. I have never before seen our council and staff so unwilling to at least talk about our concerns--as citizens--and listen to some public discussion about this issue. Their actions effectively put an end to any idea of a "public/private" partnership for telecommunications in Palo Alto--then, now, and probably in the future, as well.

A third alternative considered was to raise money from our Co-op members themselves. California law for co-operatives limits membership investments of this type to $300 per member. But $300 x 28,000 subscribers would have raised about $8M plus--a start, but not nearly enough.

The last option was some sort of "sale" where outside investors would take an "equity" position in return for effective "control" over decisions. However, it could be expected that their strategy would be to cut expenses, increase cash flow, and sell the system--when the market was right--to recover their original investment plus a return of some unknown percent, usually very high. Cable Co-Op would be left with nothing beyond paying off its debts. If we were going to be forced to sell the system, then I concluded it would be best to sell to someone who has both the technical and financial resources to bring us the kind of new services we wanted, and who would be motivated to "stay around" for the long term.

We didn't solicit offers, but several firms approached us with tentative offers that looked good enough for us to consider. AT&T proved to be the better one for our community, in my judgment. Thus, my change of position on supporting a sale now, when previously I had opposed the "deal" just a few years ago.


When we first started out in the 1980's, we effectively had a monopoly, so we could build a good customer base. In theory, someone else could apply for a cable franchise and overbuild us; but as a practical matter, it almost never happens to an established cable system with reasonable service levels and a minimum of customer complaints to the franchising authority.

But it is quite apparent now that the Federal Communications Commission is interested in promoting competition in this whole telecommunications area--Cable TV, Internet access, Telephone, etc. Competition means that "big" companies are joining together to get even "bigger" to pool resources and fight for dominance. The AT&T/TCI combination, MCI and Sprint getting together, the local telephone companies like Pacific Bell being bought up by SBC. We are seeing just the beginnings of a major restructuring of the worldwide telecommunications business.

What do you think would happen to a small "fish" like Cable Co-Op swimming in an "ocean" of big, hungry telecommunication "sharks"? We would be eaten up without a second thought. I predict that even a City sponsored Telecommunications Utility would fail unless--somehow--it was able to keep out the competition. This is increasingly unlikely, even impossible, with the present attitude of the Federal Government and new laws.

So what could we have expected in Palo Alto if, due to some miracle, we were able to refinance our existing debt and continue in operation with our present plant? I can see a company called RCN, which has announced its business plan to overbuild TCI from San Francisco to San Jose, coming into Palo Alto in just a few years. They are already starting construction in South San Francisco and Daly City and appear to be working southward. Cable Co-Op couldn't stay in business for very long with this kind of competition. If we lost as little as 10% of our customers, we would be forced to drop people from our staff, eliminate expensive programming services, and cut back on our financial commitments to MPAC and to our own local origination. We would lose customers by the thousands in the competition for more channels, lower prices, and better, more reliable services from others. I might even "jump ship" myself.

If we were going to sell--and there is now no question in my mind that we would be forced to sell eventually--then now is the time to act. Now seems to be the "peak" of the market; once RCN or anyone else starts taking a significant number of customers away from us, the value of our conventional cable system will drop like a rock.

Now is the time! The selling price is very generous--more than I ever expected--and the industry experts we hired have told us that it IS a good price. AT&T is contractually committed to upgrade the system and provide the new services that we all desire; and they will "be around" for a long time and will be "good corporate citizens" in our community.

And we will have enough money left over after paying off our lenders to provide for our loyal employees, to offer patronage dividends to our subscribers and to set up a non-profit foundation to continue and expand upon the good work of MPAC and Cable Co-op in community programming.

Thank you for hearing me out. I thought I had an obligation to explain to you the reasons for my change in position. I hope you share my conclusion that now is the time to sell to AT&T!!