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Family Divide

More details on the Dolans "feud" – and what it may mean for the future
By PETER GRANT Staff Reporter of THE WALL STREET JOURNAL
January 24, 2005; Page A1
For years, James Dolan, the chief executive of Cablevision Systems Corp., worked in the shadow of his father, Charles Dolan, who built the cable and entertainment empire after wiring New York City with cable lines in 1964. But in a dramatic boardroom showdown last week, James Dolan turned on his father, joining with other directors to pull the plug on his father's cherished dream -- a satellite-television business named Voom. On Thursday, two days after the vote, the company announced it was selling Voom's satellite and other assets to EchoStar Communications Corp.

…..While James Dolan was never enthusiastic about Voom, he was willing to give his father the benefit of the doubt, according to people familiar with the situation. One year ago, he joined the board in giving Voom the green light, partly on the basis of a Morgan Stanley analysis that concluded that the business was viable, according to people familiar with the situation. Then last month, Morgan Stanley reversed its analysis, partly because of Voom's poor performance in its first year of operation, these people said. At that point, James Dolan decided that he had to oppose his father on continuing the venture.

"It was a very difficult decision for Jim," says one person close to the board. "He showed a lot of fortitude."

What Charles Dolan does now could have major repercussions for the future of Cablevision, as well as the rest of the cable industry. Cablevision's jewel of a cable system, which has about three million subscribers in the New York City area, has long been considered a takeover target, particularly by Time Warner Inc., which owns adjoining systems. Charles Dolan, the company's single largest shareholder, has in the past made it clear that he's not a seller. But Mr. Dolan is so angry now that people close to him think he might consider selling the company….

Charles Dolan's fascination with using satellites, rather than cable systems, as a more efficient way to deliver television signals goes back to 1990 when Cablevision teamed up with NBC, News Corp. and Hughes Communications to launch a service called Sky Cable. That partnership fell apart, but Hughes went on to start DirecTV, which has grown into the country's largest satellite-TV operator, with more than 12 million subscribers.

Missing that opportunity, Charles Dolan led Cablevision to invest in other satellite ventures. His determination intensified as cable subscriptions flattened. The entrepreneur in him concluded that satellite -- not cable -- was the growth business.

Cablevision's satellite plan, however, ran into huge opposition from analysts and investors who believed that with DirecTV and EchoStar leading the market, there was little room for a third competitor. Members of Cablevision's board raised similar concerns, but were unwilling to oppose Charles Dolan, an entrepreneur with a record for proving the skeptics wrong.

James Dolan also was unsure about the satellite project as its costs mounted. The company signed a contract with Lockheed Martin Corp. to build an advanced satellite, with an estimated cost of more than $250 million to get it into orbit. But in board discussions James Dolan backed his father, trying to work as a mediator between Charles Dolan and board members with reservations….

Charles Dolan also chose a programming strategy on the cutting edge of television technology so Voom would provide more high-definition programming than other satellite or cable operators.

Investor worries increased. To ease them, Cablevision announced in 2003 that it would spin off Voom together with three of its top cable networks -- AMC, the Independent Film Channel and WE:Women's Entertainment -- worth an estimated $2.5 billion. The plan, largely crafted by James Dolan, was that the networks would throw off enough cash to finance Voom's operating deficits until it became profitable.

Investors applauded the plan because the spinoff would limit Cablevision's exposure to the risky venture. But the spinoff was delayed for months by a Securities and Exchange Commission investigation into alleged accounting irregularities in Cablevision's programming unit. While the improprieties turned out to be minor, James Dolan was very frustrated by the delay, which kept the cloud of Voom hanging over his company.

Cablevision had told investors the spinoff would be done by the end of the third quarter of 2004. But the company had to postpone it as company officials and board members began to mull Voom's disappointing results. Not only had the company signed up a mere 26,000 customers at the end of the third quarter, but more than 2 out of 10 customers purchasing the service were deciding to disconnect. Making matters worse, cable and satellite-TV operators were racing to add high-definition content, eroding Voom's advantage.

By December, it became clear to many directors that the spinoff wasn't going to work, especially after Morgan Stanley weighed in with its negative report. Lawyers also warned board members of personal liability if they didn't vote in the best interest of shareholders. In a Dec. 20 meeting, the board voted 9 to 4 to bag the spinoff plan and "pursue strategic alternatives," which was widely interpreted on Wall Street to mean Voom was going to be sold or shut down. James Dolan voted against his father.

But Charles Dolan wasn't ready to give up. If the board wasn't going to approve it, he considered changing the makeup of the board. Charles Dolan controls the majority of a special class of stock that the Dolan family owns that elects 75% of the directors. He began talking to people about possibly replacing three members of the board who voted against him, Sheila Mahony, a former Cablevision executive; William Bell, a former vice chairman of the company, and investment banker Steven Rattner, according to people familiar with the matter.

But Mr. Dolan was talked out of that plan by his advisers, including lawyers at Debevoise & Plimpton, who warned that in this post-Enron age such a maneuver could cause an uproar, and even lead to delisting. Such a scenario could lead to default on bank covenants and even a possible bankruptcy filing, they warned.

By last week's meeting, all Charles Dolan could do was try to persuade the board to keep funding Voom, which had money only until the end of January. He argued that the board was being oversensitive to the post-Enron regulatory climate. But this time, the vote was close to unanimous against him.

Charles Dolan made one last attempt to save Voom by looking into buying it himself. But that didn't last long and the board quickly agreed to sell to EchoStar, which had been having on-and-off conversations with Cablevision for months.