Cablevision's New Frontier TV maverick Chuck Dolan and his son, Jim, don't get much respect. To prove their skeptics wrong, they are parting ways.
By Marc Gunther Reporter Associate Helen Kim

(FORTUNE Magazine) – Aside from biotechnology, no big business in America depends more on genes than cable television. Sire a suitable heir, as did Ralph Roberts, the founder of Comcast, and you end up with the estimable CEO of the nation's biggest cable operator, Brian Roberts. Raise a pair of ne'er-do-wells, as did John Rigas, the patriarch of Adelphia Cable, and you get trouble--Rigas and his sons, Timothy and Michael, are on trial for securities and bank fraud, and their company is bankrupt.

And then there are the Dolans. Charles F. Dolan and James P. Dolan are the father-and-son team who run Cablevision Systems Corp., the $4.1-billion-a-year company that is the dominant cable operator in New York City and its suburbs. Their family-controlled firm owns several national cable networks, including American Movie Classics and the Independent Film Channel; a brand-new satellite television company; regional sports networks in San Francisco, Chicago, Boston, Cleveland, and Florida (in partnership with Fox); regional news networks; a chain of movie theaters; Madison Square Garden; Radio City Music Hall; the New York Knicks; and the New York Rangers.

The Dolans make an odd pair. Chuck Dolan, who is 77, is one of the cable industry's pioneers. Defying skeptics, he built the first urban cable system in Manhattan in the 1960s. (Cable began as a way to bring distant TV signals to rural areas.) He dreamed up the idea for HBO, the first network designed for cable. He created the first regional sports network and the first regional news network and, more recently, the first suite of programs made for video-on-demand. A soft-spoken, gracious man who shuns the limelight, Chuck Dolan does not get near the credit he deserves for shaping the modern cable industry.

Jim Dolan, who is 49, does not get credit for much of anything. Partly that's because he inherited the job of Cablevision CEO, and partly because he displays all the charm of a New York cabbie during rush hour. A recovering alcoholic, Jim is as loud as Chuck is quiet. He plays guitar and sings in a rock & roll band called JD and the Straight Shot. He makes tabloid headlines by skating with the Rangers, dissing former Knick Latrell Sprewell, and fighting over rates with a pay-TV network owned by the New York Yankees and Goldman Sachs. He owns up to being a demanding and emotional boss. "I'm very passionate," he says. "As soon as I stop being passionate, it's time for me to go."

Father and son are close. They live near each other on Long Island's North Shore. Chuck and his wife of 53 years, Helen, have three sons--all of whom work for Cablevision--three daughters, and 14 grandchildren, including a new set of triplets. But when it comes to business, Chuck and Jim are going their own way. Not only that, they will be competitors.

Here's the plan: This fall, Cablevision will divide in two. The new Cablevision, which will be run by Jim Dolan as chairman and CEO, will include the New York--area cable systems, the local arenas and sports teams, and the regional news and sports networks. A spinoff company called Rainbow Media Enterprises, which will be run by Chuck Dolan as chairman and his 51-year-old middle son, Tom Dolan, as CEO, will consist of the satellite TV venture, movie theaters, and the national cable networks.

For Chuck Dolan, the spinoff is an opportunity to chase one more dream. He has wanted a satellite TV company ever since the early 1990s, when Cablevision was a partner with Hughes Electronics, NBC, and Rupert Murdoch's News Corp. in a startup that never got started called Sky Cable. Sky Cable became Hughes's DirecTV after NBC, Murdoch, and Cablevision couldn't agree on financing and strategy. But like many entrepreneurs, Dolan has a stubborn streak. "We never really quit," he says. Cablevision obtained its own satellite licenses and launched a bird last year. (Murdoch didn't quit either--he now owns a controlling stake in DirecTV.) Dolan's new satellite service, which is called VOOM, is late to the pay-television game, but it has set itself apart by offering more high-definition TV networks--39 right now, as many as 54 next year--than any other cable or satellite provider. If high-definition TV takes off, VOOM will be poised to capitalize.

Jim Dolan, meanwhile, will get to run Cablevision on his own. His timing looks good. Until now Cablevision has never made a dime. It has plowed all of its earnings, and more, into rebuilding its systems, as well as into acquisitions, new programming ventures and, lately, VOOM. That is about to change. Its cable systems are doing very well. The company says it will generate free cash flow by the fourth quarter of this year, and net income not too long after that. "We're finally going to deliver on the promises we've made for 25 years," says Jim Dolan. And he'll finally have the chance to prove that he's more than the owner's son. "There are always those question marks about 'Do you deserve to be here?'" he concedes.

Cablevision's stock has taken a wild ride. The share price topped $90 in early 2001, when cable stocks got swept up by the technology boom, and then it fell to below $5 after Adelphia went bust and investors fled family-held cable firms. It has since climbed back to about $21 as the Dolans cut spending, sold assets, and trimmed debt. Over the past five or ten years, though, Cablevision's stock performance has lagged industry leaders Comcast and Cox Communications, as well as the S&P 500. By spinning off VOOM, the Dolans hope to unlock the value of the cable company shares.

Investors in the new Rainbow, meanwhile, will be taking a flier on Chuck Dolan's vision. They could do worse. The son of an inventor, Dolan got an early start in media--he sold a column about the Boy Scouts for $2 a week to the Cleveland Press, his hometown paper. After college he ran his own sports television company; he hired cameramen to take game films, which were shipped by plane to Cleveland, edited in the Dolans' kitchen into a highlights reel, voiced over by an announcer, and then sent to TV stations for broadcast. Yes, this was ESPN, about 30 years ahead of its time. TV sports was so primitive then that "you didn't have to buy rights," Dolan recalls. "Every team was glad to have you."

When Dolan requested permission to wire New York City for cable in 1964, no one knew what he was talking about. "The bureau of franchises did not even know they had a franchise to give," he says. "We had to explain it to them." To get subscribers, he needed fresh programming. It was then that he devised the plan for what he called the Green Channel, which he described as the "Macy's of television," offering an array of movies, TV shows, and sports for "some public, large or small." He took the idea to Time Inc. (FORTUNE's publisher), where he teamed up with an ambitious young lawyer named Jerry Levin to start HBO. Soon after, he sold his stake to Time. He has hated selling assets ever since.

Under the Dolans, Cablevision has been a fertile seedbed for programming. The company started a regional sports network, called SportsChannel, in 1976. News 12 Long Island launched just after Ted Turner invented CNN, paving the way for local all-news channels in most big cities. (No one thought local news channels would work.) MagRack, a more recent creation, offers dozens of niche magazine shows, available on demand. Among them: Guitar Xpress, Wine World, Yoga Retreat, and Motorcycle Freedom.

"Chuck may be the smartest visionary in the media space," says Tom Rogers, the former Primedia CEO, who has done business with the Dolans for years. "He's just way ahead of the crowd."

Certainly that's the case with VOOM. But will the crowd follow? Chuck Dolan says that as the price of high-definition TV sets falls, viewers will hunger for HD programming and VOOM will be ready. His Rainbow programming unit has created 21 original HD VOOM channels, devoted to movies, sports, and art. VOOM also distributes HD versions of HBO, Discovery, Showtime, and Bravo, another channel developed by the Dolans.

That's just the beginning, Chuck says. VOOM has enough satellite capacity to eventually offer a virtually infinite number of programs. Think of VOOM as the of television, he says, with thousands of choices available at the push of a button. By unbundling shows from networks, and networks from one another, VOOM will appeal to viewers who are tired of paying ever-increasing monthly rates for pay television.

"Let the customer decide what they want to pay, what their menu should be, what they want and what they don't want, and all of that aggravation will disappear," Dolan says. If this makes him sound like an apostate in the close-knit cable industry he helped invent, well, that's what happens to independent thinkers. "Cable's not a religion," he has said. "It's a delivery system."

So far, Cablevision has spent about $600 million to launch VOOM, which has around 13,000 subscribers. According to Chuck Dolan, VOOM needs about $2 billion of investment and 1.5 million subscribers to break even. This is much less, he notes, than the $5 billion spent by Cablevision to rebuild its cable systems. The trouble is, much of Wall Street thinks VOOM is a crazy idea. (Dolan notes wryly that he has been called Chuck Full of Nuts.) Most analysts don't think Dolan can compete against satellite firms DirecTV and Echostar, which together have more than 22 million subscribers. Neither is profitable. VOOM also must compete with cable operators, including Cablevision, that offer digital services, such as high-speed Internet access, telephony, and video-on-demand, that satellite television cannot match. "We are skeptical about VOOM as currently structured," says Aryeh Bourkoff, a cable analyst for UBS.

Raising further doubts is Chuck Dolan's decision to install Tom Dolan as CEO. Tom is all but unknown outside Cablevision. He worked for IBM, ran a cable system on Long Island, and is currently the company's chief information officer. It's quite a leap from running the IT department to leading a public company.

Then again, for smart people, the Dolans do some dumb-looking things when it comes to mixing family and business. According to Cablevision's proxy statement, a production company owned by the Dolan family sold Cablevision $396,000 worth of programming in 2003. (Cablevision won't say whether the production company has other customers.) Cablevision leases a plane, as do the Dolans. The company subleases its plane to the Dolans, and they sublease their plane back, according to the proxy. The company also leases helicopters and a hangar to an entity owned by Charles Dolan. And it leases aircraft from entities owned by Charles and Patrick Dolan. Patrick is Chuck's oldest son. Formerly a CNN producer, he now runs News 12.

One might ask why Cablevision, whose New York--area cable assets are reachable via taxi, subway, and commuter rail, needs an air force. The company says that its sports teams travel widely and that its national networks do business worldwide. Jim Dolan also notes that the cable systems are spread far and wide across the tri-state area. "We're able to operate in New York like it's Indianapolis or Louisville," he says. "Those aircraft keep us connected." He also says that Cablevision discloses all of its insider dealings and that they are approved by the board of directors and "policed down to the penny."

As a family-controlled company, Cablevision does not have to meet Sarbanes-Oxley rules for board independence. The Dolans own about 26% of the equity in Cablevision--about $1.5 billion in stock. Through a separate class of shares, they elect 75% of the directors. Because the family's wealth is tied up in the company, Jim Dolan says his interests are aligned with all shareholders'. Governance advocates say he has a point; studies show that family-controlled companies, as a group, outperform those with a dispersed shareholder base. But Ric Marshall, the chief analyst for the Corporate Library, a shareholder advisory firm, says the Dolans' modus operandi raises some red flags. Marshall says: "I would argue that instead of being exempt from the commonly held standards of good corporate governance, firms like Cablevision should be held to even higher standards of board independence and conflicts of interest to ensure that the best interests of the minority public shareholders are properly represented."

The composition of the Cablevision board provides little comfort in that regard. Four of the 14 directors are Dolans. Another is a lawyer whose firm works for Cablevision. Three more are current or former employees. (One of them, John Tatta, 84, a former company president, was paid $900,000 in consulting fees and bonuses last year. He also sat on the board's compensation committee.) Pay practices at Cablevision are generous. Jim Dolan made $4.4 million in salary and bonus in 2003, and he was given another $11.6 million in restricted stock, in exchange for (under-water) options, that vests over four years. Chuck Dolan made $6.4 million in salary and bonus, and traded his options in for $5.2 million in restricted stock. Sheila Mahony, a director and executive who has worked for the firm for 24 years, was given a $5.9 million severance package and a three-year, $1.4 million consulting deal when she retired this year. Remember, Cablevision has not yet made a profit.

To be fair, the Dolans have a reputation in the media industry for square dealing. When, in partnership with NBC, they lost $75 million on an ill-fated pay-per-view venture called the Triplecast during the 1992 Olympics, Chuck Dolan paid his share right away. "He could have dragged it out for years," says NBC chairman Bob Wright. "To me, on a personal basis, it was very important." Last year, Cablevision turned up accounting problems in its Rainbow programming operation. The Dolans fired 13 people, immediately took the problems to the SEC, and hired Wilmer Cutler & Pickering, a well-regarded Washington law firm, to investigate. The company subsequently restated three years of earnings, involving about $15 million of errors. An SEC investigation remains open.

All those issues--the costs of VOOM, the governance and accounting problems, and the tabloid headlines about Jim Dolan--have obscured an important fact: Cablevision's core business is outperforming its peers. Only Cablevision, among the big cable operators, offers digital television, high-speed Internet access, telephony, and video-on-demand to all the homes it passes. (It passes 4.4 million homes and has 3.1 million customers.) The company generates more revenue per subscriber--$79.02 a month--than any other big cable operator does. About 40% of its subscribers buy its high-speed Internet access, and the company is rapidly rolling out phone service that is taking customers away from Verizon. "The Cablevision cable systems are doing much better than anyone gives it credit for right now," says UBS's Aryeh Bourkoff.

The stellar performance has come about as the Dolans have steered highly leveraged Cablevision through a storm during the past couple of years. While other operators--notably Adelphia and AT&T--flopped or were forced to sell as the market turned bearish, Cablevision stayed afloat thanks to a series of shrewd maneuvers. It sold its Bravo network to NBC for about $1.2 billion in a complex cash-and-stock deal. It sold its majority interest in a cellular venture to Verizon Wireless, generating a profit of $435 million for Cablevision. (Its partner in that deal was John Dolan, Chuck's nephew.) The company also eliminated about 5,000 jobs, shut down the Wiz, a money-losing chain of electronics stores it had bought a few years before, and refinanced its debt. The Dolans also demonstrated their smarts by using derivatives to protect the value of shares of AT&T, Adelphia, and Charter that the company had acquired when it sold them cable systems outside New York.

Whether Chuck or Jim Dolan was at the helm during this period is unclear. (Jim has been a competitive yachstman who knows a thing or two about navigating rough seas.) Those who know both men say that despite their outward appearances, Chuck is the maverick, risk-taking dealmaker with a wild streak when it comes to business. "A mad scientist" is how a fellow cable mogul describes him, admiringly. The more flamboyant Jim turns out to be a pragmatic, methodical, and detail-oriented executive. "The company was never viewed as a great operator," says Tom Rogers. "Jim is all about the operations and execution and details." Jim's pragmatism, for example, saved the company from losing lots of money when others wanted to bet big on the Internet. "I give Jim extraordinary credit for saying 'Where's the beef?'" says his colleague Josh Sapan, who runs the Rainbow networks.

Lately, Jim Dolan has been devoting lots of time to Madison Square Garden and the teams. The New York tabloids blame him for the performance of the Knicks and especially the woeful Rangers; he urges fans to be patient. Making sense of the operations of the teams, the Garden, and Radio City has been like untangling a "5-year-old kid's fishing reel," he says. He's been hiring, firing, and reorganizing, and now thinks he has the right people in the right places. "These operations are not like the cable business because they're not as predictable," he says. The teams and arenas don't have a big impact on Cablevision's bottom line because they contribute less than 5% of revenues, but the wins and losses affect Jim Dolan's reputation.

Reputation matters to him. That's why people who know him dismiss the idea that his plan is to sell the New York cable systems after the split. The most obvious buyer is Time Warner (parent of Time Inc.), which owns cable assets in New York and wants more. Analysts would like to see a deal. Whenever the Dolans are asked, they say that anything is for sale at the right price.

But Jim Dolan would like to quiet his doubters and critics first. Then again, he says, "I've gotten to know those doubters and critics pretty well, and I don't think they're going to be quiet. But this company is going to be successful."