Co-founder marks Comcast's 50 years: 'A natural monopoly' and how it grew

Philly Startup Leaders' past head Bob Moul (Artisan Mobile), current head Rick Nucci (ex of Dell Boomi), dozens of their software-company-founder peers and scores of wanna-bes were at WXPN's World Cafe theater in U City on Thursday for Founder Factory 2013, an all-day symposium. Keynote speaker was Julian Brodsky, a South Philly native and auditor by training, who cofounded what is by some measures Philadelphia's most successful tech start-up -- Comcast Corp. -- 50 years ago. In his booming voice, Brodsky told familiar stories -- and some new ones. Highlights:

Roots: "Comcast was started by three of us in November 1963, with the purchase of a 1,200-subscriber cable system in Tupelo, Miss." -- Elvis' hometown, and at the time a center of violent Ku Klux Klan racial reaction. "Tupelo had a dozen employees and less than $100,000 of annual revenues. A classic community antenna system bringing the three TV networks from Memphis, Tenn. into this TV-starved area.

"Today Comcast revenue is over $65 billion a year, we have 130,000 employees," tens of millions of cable, Internet and phone customers, a share value north of $100 billion, and nearly $50 billion in debt. After "hating" AT&T for much of his career, now "I am the telephone company," Brodsky exulted. "We did this by being obsessed with growth," taking advantage of "an unending series of buy and build opportunities, accompanied by innovative M&A and financing techniques."

How did Comcast scale from local to national? Through "changes in management style. We started with $100,000 of capital and a highly centralized management style, because every dollar was precious. Two of us made every single decision. The company became gridlocked outside the operating guy's door and my door.

"No way we could grow... So we went to a very strong decentralized" system, giving much power "to local and regional operating guys... We had to institute a highly disciplined budgeting and financial reporting process that allowed us to control a decentralized operation."

That later cycled back: "When we got to the size we are today we came to the conclusion we could no longer take advantage of our scale by being so highly decentralized. So we went to a moderately centralized operation, taking advantage of marketing research and decisions done on a centralized basis...

"With regard to capital, the greatest way to scale is to use other people's money... Not particularly through venture capital... but principally by slicing and dicing a whole lot of entities... owning 51 percent [of each] and keeping control... When you got all the way to the subsidiary, our economic interest might have been 5 or 10 percent, but we still controlled it... We used off-balance-sheet projections, master limited partnerships...

"And we used tax benefit transfers (to) scale our capital. Start-up companies, for the most part, can't use the tax losses they generate. But in certain fields such as cable (which run up) ridiculous start-up losses, [you could sell] those benefits for (cash and turn it into) equity. With that, we were able to scale our capital" for growth.

"Human resource" needs changed over the years. At first, the community-antenna company "was dominated by engineers... Then [by] the accountants -- our golden age... Then we got dominated by the marketers.... Today the most important skill sets in our industry are the product types, the computer scientists, data scientists, and the like.

"Toward the end of the 1980s we realized we had reached a crisis. We could no longer get along with the three of us [founders still] managing mediocrity. We needed good people. We had to seriously introduce the firepower... We went on a hiring spree to hire as many bright capable people as we could get our hands on. That set the stage for what happened in the late '80s and '90s and this century.

"There was another factor that made all of this possible, that was pretty much unknown at the time [actually it was 'spelled out in Comcast's annual shareholders' proxy reports]. Class B Voting Shares, super voting rights, have always been controlled by the Roberts family. This was not some afterthought. This existed before we went public in the 1970s. No one has ever purchased a share of Comcast stock without buying into the notion that the company would be controlled by the Roberts family.

"This essentially bulletproof stitation, this control, let management take extraordinary risks, and make the tough decisions that would benefit shareholders over the long run...without worrying about short term pressures (or) shareholder activists.

"I say this to you without giving you any encouragement to try to do this in your entrepreneurial efforts. It's a tough, tough sell. Toward the end of my career I was involved in the Comcast in-house venture capital operations and I can't remember a single situation where we granted or seriously entertained the thought of an entrepreneur having super voting rights in an investment. It has happened [elsewhere] - Facebook, Google, a couple others. If you got the guts and the staying power, and the greatest business since sliced bread, you might get super voting rights.

"Did this strategy work? DId we create value?" Tracing the stock back to its low-trading-volume early valuations, Brodsky boasted that Comcast posted a 40-year-post-1972 IPO return rate of more than 19% a year, roughly double the S&P 500. Which brough gasps from the Founders crowd. Of course, as Brodsky didn't find it necessary to mention, much of that gain came in the ramp-up from the early years, when, as Brodsky has said on other occasions, a Comcast share was worth less than a glass of beer.

Brodsky also re-told the story of how he came to join investor Ralph Roberts in founding Comcast. In the early 1960s, when Roberts sold his controlling stake in the Darby-based Pioneer Belt & Suspender company, "the New York lawyers and accountants showed up, and Ralph said, uh oh," he needed an M&A accountant, and that was Brodsky's line. "Ralph had a pile of cash," and wanted financial advice investing it.

Brodsky was captivated by the urbane investor. "To spend a little time with Ralph is to love Ralph," he said. "He looked at a dozen businesses. He looked at Pete Musser, from Safeguard Scientifics, going through one of his periodic liquidity issues... Pete had this rundown cable system" in Tupelo. "He hired [German refugee and former Philadelphia Evening Bulletin reporter] Dan Aaron from Jerrold [future Gov. Milton Shapp's cable antenna and finance company, later part of Motorola] to help him broker it. Ralph had looked at cable... He said to Dan, 'if you will come join me...we'll build a big cable company together'... I heard about it, and said, 'Whoa!' I loved what I saw about Cable, I loved Ralph, I shocked them and resigned [from his accounting firm], and said, 'You're not doing this without me.'"

Would he have done anything differently? asked one of the Founders. "Yeah. One, we regret every cable system we didn't buy, that we had a chance to...

"If you were a strategic thinker on Mars, looking down at Comcast through the '70s, '80s, even into the '90s, you'd say, 'These guys were obsessed with distribution, and they're not paying attention to content.'"

Much later -- in the late 2000s -- "buying NBC Universal... completed our strategic circle by getting all the content that goes along with NBC Universal."

That was a big reversal from earlier and much cheaper opportunities that Comcast insisted on ignoring: "The classic story in that regard:... Ted Turner, a really great man, bought the MGM film library. He grossly overpaid. He couldn't make the payments. It was enormously valuable for Cable TV to have access to all these movies...Kirk Kerkorian was about to foreclose on Ted... a number of cable leaders organized a rescue attempt for Ted Turner... The amount was not trivial. It was over a billion dollars. That was real money back in the '70s and '80s." The crowd laughed at that. "We got invited to the meeting... It was like an Israeli bond sale, everyone put up their hand and said, 'I commit to so and so.' Maybe $75 million. Everybody, based on your size, committed...

"We declined. For two reasons. First, we didnt have $75 million, and we didnt have any chance of getting it for that purpose. And, if we had, we would have put it on the poles or in the ground -- to get more distribution.

"That $75M would be worth billions today. Turner Broacasting built into a very successful company.

"I can also remember the day the founders of the Discovery Channel came to see us. For a very modest amount we could [have] become a shareholder in DIscovery Communications. We turned it down.

"We were just fixated with distribution, and thought content was just for other people.

"Many other cable operators made significant [investments. John Malone's] TCI, through Liberty Media, made lots through Discovery. Cox. Time Warner, obviously. Advance Communications. Oh, many of them did."

Another Founder asked why Comcast started in Philadelphia -- and stayed here. "We're all Philadelphians. Except, well, Dan, was from Germany" but settled here as a World War II refugee. "Ralph went to Germantown High School, I went to Overbrook High School, both of us went to Penn. Never thought of being anyplace else...

"Until the mid-80s we had no business at all in Philadelphia; our business was all in other cities." Comcast's office "started in Bala Cynwyd. 1963 to 1989. There was never a question that we were going to move into the city.

"We did another landmark transaction when we bought out ATT Broadband, the No. 1 cable operator, in 2002. They had 14 million subscribers, we only had about seven and a half million. AT&T was a gigantic company. They wanted us to move the headquarters from Philadelphia to New York for the combined company. They thought, because of their size, they could dictate a lot of the terms of the transactions.

"They were not used to dealing with us rabid dogs from Philadelphia. I have to hand it to Brian. That was a show-stopper. He said, 'No.'"

In Philadelphia, Comcast set up shop in the former CoreState Bank offices at Centre Square before building its own tower, the city's tallest, in the mid-2000s, with room for a second, shorter building, which might get built soon: "Rumor on the street is, there will very soon be another tower very close to the Comcast Center," Brodsky affirmed.

A Founder asked if Comcast had any "defensible" business assets when it raised that initial $100,000 to go into cable TV. Yes, said Brodsky: "Some parts of our business were a natural monopoly. I can say it now. Now that you have up to five choices from people who deliver what Comcast delivers" -- satellite, phone, online and mail-delivery video services, for example.

"As we look at it, with various venture capital investments, at least when I was involved with venture capital, you always considered what was unique about the company. What were the barriers to entry? And there were other things that were even more important. Execution.

"The most important one is the size of the potential market. Even if there's not a great barrier to entry, if you have a capable management team and the ability to execute and the market is large enough and the idea is good enough, even with the potential for competition, it still could be a sucessful business and a successful investment.

"Sure, it's great if you have a secret sauce" -- only not so great "if only 3 people are going to buy it. The size of the market is still the determining factor for a decent venture capital investment."

What about Comcast's future? "We've just scratched the surface of what you can do in a mobile environment. Compaines like Comcast will be known as mobile and broadband suppliers" of video. Though "the living room," and its home video, "will always be important."

And internationally: "Comcast in its distribution business is 100 percent domestic. Over the next 10 or 20 years, Comcast is almost bound to [acquire, via for example] satellite and wireless, significant international operations.

"We'll always find ways" to supply video to customers, he added. "Comcast and the cable guys are nimble enough to react to all these changes in technology. They will be the preferred aggregator of content and services."

Really? Brodsky insisted: Cable companies "are very good at servicing. No matter what you think," he insisted, as the crowd laughed at the suggestoin.

"And particularly adept at raising money from suppliers," Brodsky added. "How else could someone like ESPN create money from 110 million households? Call the cable company, they'll fix your browser, they'll do everything for your customer. The cable company is uniquely positioned to take care of everything that's been coming down the road."