A Curious Discovery: An Entrepreneur's Story

by John S. Hendricks

informative but entertaining shows about science, nature, history, and medicine?”

The great postwar changes of the 1950s eventually reached even a little hamlet like Hatfield Bottom. As a kid who had never left West Virginia, I found my mind opened as wide as the skies by news of the Soviet Union’s launch of Sputnik. The idea of a satellite orbiting the planet was so exciting to me; it was like a doorway to a huge new world beyond earth. I was stunned to learn that the satellite was traveling an amazing 18,000 miles per hour—I couldn’t imagine anything moving so fast. And lots of people—including our little Hendricks family in West Virginia—listened to Sputnik’s “beep, beep, beep” on the radio as it circled our side of the world. We sensed, even if we didn’t know how, that Sputnik would change our lives. Even in my earliest West Virginia years I loved thinking about space travel. My favorite book was a little Wonder Book titled Tom Corbett: A Trip to the Moon. It told the story of a space explorer who journeyed with a boy and girl named Johnnie and Janie in the spaceship Polaris. This was an era when space travel seemed almost within our reach—Tom Corbett: A Trip to the Moon allowed me to dream about my impending life far beyond the hills of West Virginia. The space race was on, and almost every kid my age dreamed of somehow being a part of it. I felt privileged and lucky to have been born into one of the great Ages of Discovery.

Looking back, I figure that Uncle Ralph must have rigged some type of an amplifier to boost the signal down the hill. But what I did know, even at age five, was that the antenna had to be pointed in just the right direction, toward Charleston or Huntington, or we would get nothing but static. And the first day, that’s all we got. My dad or my brother would run up the hill and turn the antenna in one direction and then run down to see if there was a signal. I went up a couple times too, without luck. Uncle Ralph eventually provided clunky two-way radios, which saved a lot of time and energy. The antenna was turned slightly this way or slightly that way—fuzzy, fuzzy, fuzzy, and then finally we got a signal . . . a clear signal. It was a variety show, and at that moment the distant world of New York City miraculously appeared in my living room. For days thereafter I sat in front of the TV set, mesmerized.

Without knowing it, Uncle Ralph had just created a tiny, makeshift cable TV operation. And, indeed, that is exactly how cable TV actually started around the United States, beginning in the late 1940s. It was called community antenna television, and it was typically used in places that couldn’t get reception because of significant distance from transmitters or because of hilly terrain. Cable wouldn’t have its own programming for decades; it was simply a way to bring broadcast television to outlying small towns and communities far from the larger cities where the signals originated.

I didn’t know it at the time my uncle was setting up our antenna, but cable television had been born nine years earlier just north of Matewan, in Mahanoy City, Pennsylvania. Mahanoy City is also a place surrounded by mountains and hills that effectively blocked the new broadcast signals coming from Philadelphia and Pittsburgh. John Walson owned an appliance store in Mahanoy City and was anxious to sell television sets to local residents. But no one could get a clear signal. So, in 1948, Walson erected a mountaintop antenna and strung “twin lead” or “ladder” cable to the valley community below, like my uncle Ralph would do for us almost a decade later. John Walson charged $100 per hookup and $2 per month for his community antenna television (CATV) service. That was a considerable sum in those days, but the locals, anxious to participate in this new media phenomenon sweeping the country, quickly signed up by the score.

In nearby Lansford, Pennsylvania, Robert Tarlton organized a group of fellow TV set retailers in 1950 and together financed a community antenna system that offered Philadelphia broadcast signals for a fee. This particular CATV system was featured in Newsweek, the New York Times, and the Wall Street Journal—and the resulting publicity sparked an explosion of cable system construction across the country. Robert Tarlton soon became a valuable consultant to many of these systems—and his equipment supplier, a new company called Jerrold Electronics, emerged as a leading provider of amplifiers, converter boxes, and “head-end” (the master facility for receiving and distributing signals) equipment for the new industry.

Walter Cronkite also played a featured role in our living room. My parents seldom missed the CBS Evening News, which Cronkite began anchoring in 1962. But I had known his resonant voice and presence since the fifties, as he had hosted one of my favorite series, You Are There, in which he treated key historical events as if they were breaking news. You Are There transported kids like me to historical events such as the Salem Witch Trials, the signing of the Magna Carta, the Boston Tea Party, the capture of John Wilkes Booth, the Hindenburg explosion, the assassination of Julius Caesar, and the fall of the Alamo. Cronkite ended each You Are There episode with words I can still recite: “What sort of day was it? A day like all days, filled with those events that alter and illuminate our times . . . and you were there.” From 1957 through 1966, Walter Cronkite also narrated the great CBS documentary series The Twentieth Century. I tried not to miss a single one of its 222 episodes. “The Doolittle Raid,” “The Times of Teddy Roosevelt,” and “Paris in the Twenties” . . . it was my full immersion program in modern history. Even better were the science episodes: “Vertijets,” “Reaching for the Moon,” “The Satellite That Talks,” and “Mach Busters.” In 1967, when I was fifteen, CBS changed the series’ name to The 21st Century, with topics focused on the future. I was off to college in 1970 when the series ended its run. As such, it had been part of my entire childhood, its impact on my ...

Through my father, I learned early on that a well-rounded education of history, literature, geography, mathematics, and science often resulted, counterintuitively, in a more humble approach to life. Like generations of wise men before him, my father had realized early that, as Aristotle said, “The more you know, the more you know you don’t know.” Sadly, I was living in a place and time when there were far too many adults who were comfortably certain in their ignorance and prejudices. And they were so comfortable in that misplaced certainty of their own superiority that they were willing to accept all sorts of injustice and misery in its name. And there I was, a boy growing up in Alabama in the early 1960s, bearing witness to this widespread self-delusion, cruelty, and stupidity of adults I was raised to respect.

As I well knew, Cronkite had throughout his career used television as a teacher of history and technology. Now, in his half-hour daily news broadcast, Cronkite began to more fully use television’s ability to illuminate significant issues confronting American society.

Less than three months after the integration of the schools in Huntsville, my childhood hero was shot in Dallas, Texas. That Friday, November 22, 1963, Mrs. Collier’s voice came over the school speaker system right after my class returned from lunch. The president, she announced, had been shot in Texas, and she was dismissing all of us from school. As I raced home, I focused on the word shot. Perhaps he had just been wounded. I cut through a yard on Barbara Drive to get home quicker. I had to get to our television set. I was home in less than five minutes. No one was there. My father and mother both worked and generally did not come home until about 5 p.m. But my adult cousin John Howell lived next door with his wife, Darlene, and their three children. Darlene kept an eye on me each afternoon after school until my parents arrived. Her boys, David and Rodney, were arriving home from school as well and she asked if I wanted to watch the news with them. I said no. For some reason, I wanted to watch it alone. When I turned the TV set on, it was already tuned to CBS. Walter Cronkite was hurriedly sorting through real-time reports from Dallas. He recapped what facts he knew about the shooting. Then, as I watched in growing horror, rumors that the president was dead began to appear in reports from the field. Cronkite was careful to say that these reports had not been confirmed. But then Cronkite reported that a priest had given the president the last rites. Next, correspondent Da...

Putting those few hundred words on paper forced me to really think about what motivates people to accomplish something in life, to invent or adapt new products, and to create experiences that did not exist before.

It struck me then that humans were somehow genetically wired to be most satisfied, most pleased, when they were working freely to create something new or better for themselves and their fellow humans. And, underlying that motivation to create, there seemed to be a wellspring of curiosity within humans to identify new problems and an endless itch to solve them. And it was all there in my dad’s happy whistle while he worked.

There are many forks in the road of life. Most often a person is in full control of those critical choices. But sometimes just dumb, inexplicable luck determines our path. Joel Hankins, like many in my generation, was dead. Four decades later, I’m still here to write this book. I have no easy answer to why this is so.

When discussion swings to the positive contributions of the mass media it generally focuses on the topic of education. Critics stress the enormous gap between the potential of the media and the actual performance. They point to the fact that three quarters of the television schedule is entertainment and that cultural programs are sparse. Certainly the educational impact of television has been minor compared to its use as a “selling machine.”

Davis went on to explain that recent research had found a “widespread positive and receptive attitude” toward science and other factual content that was not being addressed by mass media, and certainly not by television. From his review of available research Davis had concluded: “The ‘hard core’ of science enthusiasts is estimated to be about one fourth of the adult population.”

Kranzberg replied, “Well, about twenty-five percent of people do seem to have an interest in learning more about the world and about science. But advertisers want to reach the broadest audience, so I am not sure I can be too optimistic about more science on TV. But perhaps there will be more coverage in magazines and newspapers.”

As I grow older, I’m convinced more and more that anyone looking back on his or her life will see comparable streams of experience converging, establishing a possible destiny. But I’m also convinced that only a fraction of the population has this inner checklist that tracks these events, both internal and in the outside world—and that then drives their choices and tells them when the moment is right to act.

That was my next lesson in entrepreneurship: offer your customers what they need, set a price based on perceived value, then work your butt off to match, then exceed, what you are offering. Too many start-ups die because they fail at one or more of these three variables: they either don’t understand their customers’ needs, they price too low to grow and thrive, or, worst of all, take the money from the customers and then don’t do whatever it takes to deliver on their promise.

To my great satisfaction, Bronowski’s foreword to the book described the unique strengths of television as a teaching tool: Television is an admirable medium for exposition in several ways: powerful and immediate to the eye, able to take the spectator bodily into the places and processes that are described, and conversational enough to make him conscious that what he witnesses are not events but the actions of people.

That moment when you jettison your career and go all in on a new venture has been called the scariest part of being an entrepreneur.

During my meetings with Walter that April, he had explained that the ratings for Universe had been good but hadn’t always met the expectations of CBS management. The three broadcasting networks at that time were still dividing up an astounding 90 percent share of the total television viewing audience. So, a third of that amount, or a 30 percent share, was expected for CBS prime-time shows. Universe, a science and technology series, typically garnered a 25 percent share—a number that, once again, was consistent with the early research I had first encountered back in college. It seemed that it really was a world that was 25 percent full of curious people. Unfortunately, CBS had viewed that glass of human curiosity as being 75 percent empty while I was seeing it 25 percent full. Walter went on to say that CBS canceled his Universe series largely for “audience flow” reasons. “John,” he explained, “the audience that shows up for an informative show like Universe will just not stay on for the sitcom that follows. We had a nice audience for Universe, but they just abandoned the network when our show was over at eight-thirty. They probably turned the TV off to read a good book. “However,” Walter added, “if you can get a cable channel up and running with back-to-back shows on science and other educational topics, these viewers will finally have a TV channel that they can stay with all day.” He smiled like a co-conspirator and said, “This really is an idea whose time has come.”

We managed to accomplish a lot of things in the first year after the launch, but one of our highest-priority items was to secure educational rights to many of our shows. That would enable teachers to legally tape these “rights-cleared” shows for use in the classroom without further compensation to the program producers. In order for this content to be easily identified by teachers, we created a one-hour program block that aired at the start of each weekday called Assignment Discovery, in which rights-cleared content in science, history, and other subjects was free for teachers to tape and show in their classrooms.

From the beginning Discovery was a “basic” cable service—that is, it was included in the lowest-priced service package sold by cable operators to their customers. If you got basic cable service from these operators, you typically received the Discovery Channel along with CNN, ESPN, MTV, WTBS, and a host of other advertising-supported networks. Other cable networks, like HBO, were “premium” services and therefore carried no advertising to support their programming. These “premium” networks (sometimes called “pay” services) had to rely solely on subscription revenue generated by an extra purchase decision, beyond basic-level cable service, made deliberately by cable customers.

It is important to understand this characteristic of cable because, in 1985, we were setting out at Discovery to distribute television through cable systems—and we had two choices, “basic” and “premium.” Now, let’s say a network owner—like we were—decided to launch its channel as a basic cable service and it was available in all 100 million U.S. households. And imagine that this network needed revenues totaling $1 billion annually to pay for its programming and operations. Then that network would only have to charge a wholesale subscription fee of just $.42 per subscriber per month to generate half of its break-even revenue, $500 million per year, from those 100 million subscribers. Due to the universal reach of its programming, the basic network could easily generate the other half of its revenue, $500 million, from advertisers. This also means that a cable operator could carry 100 of these channels and pay wholesale subscription fees of just $42 on behalf of each of its subscribers. Now, obviously, the cable operator would have other costs than just for programming, and so the basic retail fee might be realistically set at $60 to $80 for each customer. That would be attractive and a low cost to the customer: 100 or more channels, each transmitting twenty-four hours a day. Remember: a price for just one movie or documentary on a DVD costs about $14.99. So, for the price of just four or five DVDs, a cable subscriber can enjoy an entire month of programming from 100 or more...

I could tell that Bob was heading for some kind of decision point. As he looked up from the napkin, he said: “People will want Discovery in their homes. Even if they don’t watch it, they will say they watch it. Discovery has a ‘wholesome’ quality about it.” He then told us that his wife, Diane, was a teacher and that she would love the service. Suzanne and I smiled and told him about that teacher who had called us from Kansas just moments after we had gone on air.

It was obvious that Wright was still settling into his office in Rockefeller Center. He had arrived at NBC just weeks earlier. I gave Bob a briefing on Discovery, then Jack and I together outlined the investment offer. Bob listened politely and asked a few questions. Then he explained how a Discovery investment was just not a fit for NBC. Bob simply said, “We’re in the broadcasting business, not the cable business.” Even as I walked out of his office, I knew that Bob Wright’s business definition for NBC was wrong. NBC’s real business was “the television business,” or “the content business”—and instead, he was, perhaps unconsciously, making the perilous choice to tie NBC to a particular delivery technology in an abbreviated, shorthand definition of the business. It was an understandable abbreviation in 1986, one that Wright later corrected through his aggressive development of cable networks like CNBC and MSNBC. It was a powerful lesson for me: from that day in 1986 forward, I have always tried to think of Discovery as being in “the business of satisfying curiosity.” Our charter mission is to satisfy curiosity through all forms of media distribution technologies as they evolve through time.

Viewers across America began calling their cable companies. They wanted the Discovery Channel. The Soviet programming helped propel us to become the fastest-growing cable network in history.

It was 1988 and cable was getting traction in Europe and especially in the United Kingdom. Nimrod, working for United Cable, was spearheading that American company’s move into Europe. He realized that the new cable systems would need differentiated programming to drive business—just as it had in the United States. European cable systems needed a movie channel, a sports channel, a news channel, and a documentary channel, among other specialized services. We had already proved in the States that viewers wanted a documentary channel. And we knew that if Discovery didn’t expand into Europe to fill that slot, then someone else would. Then we’d have a competitor running loose in the world.

The Discovery Channel was riding the crest of that growth—and even promoting it. Consumer research had uncovered the fact that Discovery, along with American Movie Classics (AMC), was driving cable penetration into the homes of “cable holdouts.” Cable had passed by these homes for years, but their residents had refused to subscribe. Typically they were light TV viewers and were simply not interested in any more television—until Discovery and AMC came along. Distribution of cable networks also accelerated once cable operators were liberated in January 1987 from the constraints of rate regulation. They were now free to adjust their retail rates upward to cover the wholesale costs of new networks like Discovery and AMC. We now were being quickly added to the channel lineups of America’s cable systems. Buoyed by these two trends, Discovery was adding new subscribers at the rate of 1 million per month.

Sie had a better idea: “Let’s give cable operators a piece of the advertising action,” he proposed. “If operators tear up their old free-carriage deals and sign a new affiliation agreement that gives us a nickel per month—and if they commit to an aggressive rollout of Discovery to all their subscribers—then we’ll sell more advertising. We can set aside twenty percent of our advertising revenue into a ‘rebate pool’ that we can give back to our new ‘rebate affiliates’ as an incentive to do the new deal.”

As the company’s business began its growth explosion, and as we launched our in-house production initiative, it also became evident to me that the board was dividing into two equal camps—and that I was the swing vote between them. On one side were the four cable operators: Bob Miron, representing Newhouse Cable; John Sie, representing TCI; Nimrod Kovacs, representing United Cable; and Ajit Dalvi, representing Cox Cable. On the other side were the four venture capitalists: Dick Crooks, representing Allen & Company; David Glickstein, representing New York Life Insurance Company; Dan Moore, representing Venture America; and Harlan Rosenzweig, representing Group W, a supplier that had converted receivables to venture equity. In terms of equity holdings in Discovery, the venture capital group held 53 percent, the cable operator group 40 percent. After the full $25 million of financing had been raised, I had still managed to hang on to 7 percent. While at that point there had been no formal valuation of the company, we all generally believed that Discovery was worth between $200 million and $250 million. But we were also growing fast—and if our earnings kept pace with our revenues, then we would surely be worth $300 million or more in an initial public offering (IPO) of our shares.

Cable was proving to be a “first player” industry: if you were first in movies, like HBO; first in sports, like ESPN; or first in documentaries, like Discovery, then you enjoyed a perpetual carriage lead over the number-two and number-three competitors in your category. For that reason, we had no intention of being number two or number three in our category anywhere in the world.

At the Chicago meeting we agreed that the only fair way to resolve the crisis was to approach the venture investors with a buyout offer that matched their expected value of a public stock offering.

As we finalized the buyout, our plans to launch Discovery Europe were publicly announced and our rapid global expansion began. The five of us remaining on the Discovery board committed to keeping the company private as long as possible. That way we could invest all of Discovery’s revenues, in excess of expenses, back into growing the company domestically, internationally, and with new, original content. Discovery emerged from the board crisis a company transformed. What appeared at the time to be a financial dispute proved to be a debate about the soul of the company. In the end, we had chosen long-term growth over a short-term payout—and that decision put us on the path to become a global media giant.

When you are building a company, you don’t think much about how many shares you own. After all, if the enterprise fails they won’t matter anyway. Instead those shares become a kind of barometer of control—how much control of the company you give away to investors and employees, and how much you retain for yourself.

In late 1991, I presented a white paper to my board outlining a future of menu-accessed—rather than channel-accessed—television. Then, over the year that followed, I continued to refine this vision of digital television in which viewers could watch what they wanted, when they wanted. It seemed to me self-evident that consumers would migrate to such a platform, which I dubbed “Your Choice TV.” And so, even without a lot of proof, I set to work with a team designing an entire “on-demand” system, complete with handheld remotes, set-top converter menus, and digitally compressed satellite transponder feeds of individual shows from all the major cable and broadcast networks. We even demonstrated the ordering of airline tickets and seat selections from a TV set. We even made the argument, which proved prescient, that cable operators would at last be able to deliver advertising “addressed” to each consumer based on their interests and demographics. There would also be, we argued, abundant choices of movie selections and many new digital channels, like a Science Channel, paralleling the many popular special-interest magazines found at newsstands.

Not surprisingly, given that he was one of the most successful media giants of the twentieth century, Murdoch quickly saw the promise of digital compression and the value to consumers of accessing programs on demand. However, after noting digital’s potentially massive disruption of advertising-supported television delivered through affiliated broadcast stations, Murdoch began peppering us with very smart questions. How will you split up VOD revenue with the affiliates? What will happen to live viewership if consumers lose the urgency to show up to watch programs on their initial air date? (That last question had also troubled Howard Stringer at CBS—until David Poltrack, the head of research at CBS, pointed out that CBS only received a penny per viewer from advertisers on the network; in comparison, CBS would get a half share, or 50 cents, for each paying viewer of Your Choice TV.)

The test results, when they came in, stunned us. Consumers responded even more enthusiastically than we had expected. We learned to our amazement that women were coming home every day after work and paying $.79 to watch that day’s episode of All My Children. They could, of course, have taped it with their VCRs—but, as they told us in focus groups, that was “just too much trouble.” Other people ordered Saturday Night Live episodes on the following Sunday through Wednesday because they were now free to go out on Saturday night.

Looking ahead from the present, I can see that digital technologies, implemented through cable and the Internet, will likely allow consumers to access television programs on-demand with a choice between two prices: (1) a free or low price (perhaps 5 cents) if the program contains advertising; and (2) a higher price (perhaps 50 cents) if the program is commercial-free. That in turn will make consumers increasingly more aware of the value of advertising in subsidizing the cost of television.

At Discovery, we believed that consumers would continually migrate toward television platforms—such as HD—that offered an ever-closer-to-reality viewing experience; 3-D television was next. And in order to stimulate the rollout and adoption of this next technology, Discovery joined forces with Sony and IMAX to launch the world’s first full-time 3-D channel—“3net”—on February 13, 2011.

In the not-too-distant future, perhaps within a decade or two, the resolution quality of television will increase to a point where pixel density and imaging technology will match the fine resolution power of the human visual system. In other words, viewing a television monitor will be like looking out a window or through a doorway into the next room. I call this endgame for viewing resolution “Retinal-Definition, Three-Dimensional Media,” or simply RD3D Media for short. It is surely coming. It will cause a sensation. And you can count on Discovery to help pioneer it.

Once again, by identifying early the emergence of the Internet—and especially noting how it was being used to satisfy curiosity—Discovery was already well on its cyber-way by the time the Web exploded. We began as early as 1998 to add video clips to all of our network websites. And, by 2006, we were looking for ways to dramatically accelerate our presence on the Internet through the acquisition of hot new content enterprises. One of those companies was HowStuffWorks—which, by 2007, when we acquired it, had tens of millions of annual visitors. HowStuffWorks was headed by Jeff Arnold, an Internet pioneer who had previously founded WebMD. We quickly began adding video resources to its website. A Compete.com survey reported that the site attracted more than 58 million visitors in 2008. We also made a significant number of acquisitions to increase our online video presence, most recently our acquisition of Revision3. Revision3 produces and distributes Web television shows on niche topics. The company was founded in April 2005. A year later while checking out YouTube (this is where surfing the Web is valuable), I first ran across the creative and endlessly clever Philip DeFranco, who hosts his own daily Internet show. To me, DeFranco’s daily episodes about politics, pop culture, and world news stood out from others for its wit, respect for the audience, and high production values. It wasn’t long before Revision3 became the new home for programming innovators like Philip DeFranco...

Our goal is to be open to these “sparks of imagination” wherever and whenever they arise. Sometimes that is an immense undertaking.

Revolution 1: Television on Demand With the invention of the medium, its distribution via broadcast transmission in the mid-1940s, and a drop in TV prices due to growing production, the world experienced “Television on Demand.” With a flick of a switch, we could turn on a television set and enjoy what broadcasting network programmers chose for us to watch at that particular hour. The three major broadcasting networks (ABC, CBS, and NBC) controlled when we could watch the news or a movie or a documentary—and, if we missed a broadcast, we might never see it again. We had the mighty new medium of television, but only on its terms. By the mid-1970s, the world was poised to welcome the second revolution of television.

Revolution 2: Genre of Television on Demand Cable network television was a stunningly simple—but earthshaking—proposition. It began when HBO transmitted its first satellite signal to cable operators and their customers in 1975. HBO’s consumer promise was to deliver a particular category or genre of content (movies) all day long. After that, television could never go back.

Revolution 3: Television Programs on Demand One reason I still find the television industry endlessly fascinating and exciting is that Discovery, like the other “second revolution” companies, is now being challenged by a third revolution. The same, unceasing consumer demand for more choice and control over television, the demand that created the second revolution, is now greater than ever before. Ever since the introduction of TiVo, television’s third “on demand” revolution has been under way—and it has been picking up speed now that cable operators have been providing ever-more content on demand, including menus of hundreds of movies and entire television series.

Content and technology aside, the heart of our business—frankly, of any consumer business—is the ability to discern fundamental trends in consumer behavior. Shifts in these trends will either drive or retard the growth of new and existing products and services.

At Discovery, we have seven of these assessments on which we base our growth investments. I share them with the reader both to help you understand how we at Discovery operate, and in hopes that our process of establishing bedrock assessments will be useful to you in your enterprise: 1. Consumers will migrate to distribution platforms that offer more content choices. 2. Consumers will migrate to entertainment platforms that offer viewers the opportunity to control viewing choices, so that they can watch what they want to watch and at a time of their choosing. 3. Consumers will migrate to entertainment platforms that offer a closer-to-reality viewing experience. 4. When consumers secure a viewing platform that allows them to watch their favorite content at times of their choosing, the demand for alternative, poorer-quality content will always diminish. 5. Consumers will migrate toward services and platforms that offer content free of commercial interruptions. 6. In a world of overwhelming content choices on the Internet and on television, consumers will increasingly rely on quality brands as an important editorial filter. 7. Last, consumers worldwide will demonstrate these behavioral trends.

Our basic tactic in pursuing global multi-network distribution is to develop specialty channels with strong themes that create a common appeal to an enormous number of viewers with otherwise divergent interests.

When we do our job right, each of these populations of viewers will turn to one of those Discovery channels with the happy expectation that they will find either the show they love or one that is philosophically or thematically related to that show. As such, each channel presents a comfort zone—one that the viewer can trust to always fit with his or her interests.