Cable Cowboy

They hardly ever ate out. No new furniture complemented their new home,

Indeed, the geosynchronous satellite, a.k.a. the bird, would forever change the economics of cable TV.

But once those contracts ran out, Malone knew it would be tough to resist the price demands of an established, popular brand. Turning it over in his mind, he suddenly realized the answer: Rather than just owning the cable that delivered the new programming fare, TCI needed to own a piece of the cable channels themselves, thereby sharing in a whole extra upside. A big operator like TO could give a new network a big head start, and as valuable as its laid wires were, if the cable industry kept growing, the new networks now launching could be even more valuable. By buying into networks, Malone thought, TCI could own both the pipe and the water flowing through it.

TCI needed to own a piece of the cable channels themselves, thereby sharing in a whole extra upside. A big operator like TO could give a new network a big head start, and as valuable as its laid wires were, if the cable industry kept growing, the new networks now launching could be even more valuable. By buying into networks, Malone thought, TCI could own both the pipe and the water flowing through it.

John Malone built an industry-wide reputation as a lethal force in franchise battles, willing to take on any foe and use almost any tactic to prevail.

"We promised more than we should have, and charged less than we should have, and the bottom line is that we have a serious problem,"

Like Magness before him, Malone did not believe in memos. No paper passed from his desk to underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that causes ulcers in so many midlevel executives. Communication was direct, effective, and efficient. Every Monday morning, Malone sat with his closest executives at a broad round table, much as Magness had done, to figure a way to squeeze more out of TCI's growing cable kingdom.

Malone never hesitated to use access to TCI's homes to extract the rates and conditions he wanted.

For bailing out Turner, a truth that the swashbuckling entrepreneur came to resent-Malone demanded a big presence for the cable backers on the Turner board, who…

Almost immediately after lightening up on cable with the 1984 Cable Act, politicians began mulling new ways to rein in the industry. Cable had been regulated, then it had been deregulated, and now the…

Yet subscribers didn't get much of a break. Many systems created new packaging schemes to avoid regulation.

So, the cable operators reduced charges for the costlier packages and recouped the money by raising basic cable rates to the cap now set by law. That shift defied a major goal of the new law: to safeguard the affordability of basic TV service for low-income people.

Malone knew that telephone companies posed the bigger threat because of their enormous wealth, but the new minidish competitors were far more dangerous at the moment.

In the end, the play by Microsoft and Comcast for TCI had strengthened Malone's hand in two critical ways: First, he had been forced to find creative ways to tighten his grip on TCI, and second, he had put a lot more money into his own pockets. Malone had bested the potential hijackers, and in lighter moods he referred to the Microsoft-Comcast overture as a "Polish takeover." "I got what I wanted-voting control. Sharon got what she wanted (a doubling of what the initial will called for). And the boys got what they wanted. Everybody pretty much got what they wanted," Malone told people later.Some weeks after the Magness

Malone's home life was shockingly middle-class for a man of such enormous wealth. He filed his own taxes, washed his own clothes, cleared the table, and until the mid-1990s, mowed his own yard.The moorings of diligence and self-denial came from his father.

"Always ask the question, `If not?' " he often said. "If the deal doesn't go as planned, what are you left with?"

But as they chewed on it, it became very real. "Two classes of stock," Malone began. "I've seen it done before." TCI could split the stock and issue a class B share for every share that existed. But the class B shares would have 10 votes per share, giving holders of that stock 10-to-1 voting power over regular class A shares; they just had to be careful to ensure somehow that they got most of the new supervoting shares.

Think about it, he'd tell a young analyst: Because TCI had high interest payments and big write-offs on cable equipment, it produced losses, and because it produced losses it paid hardly any taxes to the government. As long as cable operators collected predictable, monopoly rent from customers, met interest payments, and grew from acquisitions, why worry? Malone liked the mathematics of it: Tax-sheltered cash flow could be leveraged to land more loans to create more tax-sheltered cash flow. A standing jokearound TCI was that if TCI ever did report a large profit, Malone would fire the accountants.

"If you're going to ask about quarterly earnings, you're at the wrong meeting, and you probably own the wrong stock," he told one group of TCI investors. "What we care about is value. We want to create value for our shareholders. And I think the best way to create value is to have a very long view, so that's what we do. So when we have the opportunity to expand into an area we think is going to have long-term value, we do it. We don't have to worry about the impact on earnings. So it makes a different kind of organization."9 Malone wanted to change how investors defined profit-and he would, opening doors to capital for cellular telephone business and, later, hundreds of dot-com companies.

The operators were unable to afford to build the futuristic systems they had so elaborately outlined to local governments. Only a few years earlier, city dwellers had seemed to be ideal customers because of their income, choice, and sophistication.

"Forget about earnings. That's a priesthood of the accounting profession," he would preach, unrelentingly. "What you're really after is appreciating assets. You want to own as much of that asset as you can; then you want to finance it as efficiently as possible." 6 And above all else, make sure that the deals you do avoid as much in taxes as is legally possible. And then some.

But risk was a function of skill and knowledge. If you know you can exert control on the outcome, Malone reasoned, the risk is far less than those who jump into a deal with no expertise or facts.

By the end of the decade, Malone's exhaustive deal-making romp gave TCI a wide margin in its position as the largest cable TV operator in the country. Malone had boosted revenue 24-fold, increased subscribers to 8.5 million from 1.1 million, and given shareholders a 386 percent return for the 10-year period.' More than anyone else, John Malone was responsible for transforming TCI from a tiny firm that was teetering on bankruptcy into a media colossus, and he had done so not by focusing myopically on the next quarter's earnings and kowtowing to Wall Street; instead, he had done it by focusing on the long term and building asset value. TCI…

Malone did, indeed, have everything figured out, business-wise at least. Only a decade earlier, TCI was a tiny company with a rural base of subscribers, shackled with costly, floating-rate debt and a liquidity problem. Between 1973 and 1989, Malone closed 482 deals, an average of one every two weeks." TCI had become a national titan and the biggest cable operator in the United States. From the low point that TCI stock had hit in late 1974, a year after Malone joined the company, up to the summer of 1989, TCI shares had posted a stunning rise of 55,000 percent. Hell, the payoff actually ran to 91,000 percent, from a low of $1 to $913, if investors held on to every stock that TCI had spun off, then tracked Malone's own buy-and-sell decisions.27

Malone's view of his job was "to work on behalf of the public investors within reasonable constraints to maximize their wealth, period." If investors wanted to have social motives, that was up to them individually-butMalone saw his work as a directive to succeed. "In our society frequently that leads you in the direction of trying to become as »s monopolistic as you can.

Malone may have been ruthless in the sense that he sought to dominate markets, but a determination to succeed wasn't dishonesty. If anything, Malone saw wealth creation beyond the realm of capitalism and more as a moral achievement. He railed on about it in frustration, bluntly telling a trade magazine in the summer of 1989: "I have a passion for this country. But I think this country is blowing it. I think we have an atrociously shortsighted political system that prevents us from dealing with our real long-term problems. And we are going to end up as a second-class country within my lifetime because of it."8

Malone paid $25.6 million to exercise the options he was given in lieu of salary, but to the chagrin of critics, he had put up only $100,000 in cash, which he got by selling 6,250 QVC shares back to Liberty. Malone gave the company a $25.5 million note for the rest of the stock.

Over the next two years he did more financial engineering, splitting Liberty's stock multiple times-first, 20 for 1, then 4 for 1, and then 2 for 1. His aim: to increase the number of shares available for use as currency in acquisitions and to lower the stock price he had initially, intentionally kept high so more individual investors could afford to buy in.

shares that initially sold for $256 apiece were worth $3,700unadjusted for splits, sending Malone's investment of $42.1 million, most of it borrowed from Liberty on a personal note, climbing to more than $600 million. For John Malone, the beautiful part was that he had realized these gains without paying enormous income taxes, since it came from stock swaps, which were not taxable.

While cable had a fatter pipe, phone companies could offer cable firms badly needed capital and world-class expertise in switched, two-way communications.

Also, in the fall of 1994, Malone reached an accord with cable rivals Comcast and Cox Communications and long-distance telco Spring Corporation to offer wireless telephone service throughout the country under the Sprint name. Their joint venture agreed to pay more than $2 billion for federal licenses to offer a new generation of wireless phone service, called personal communications service, or PCS. But Malone and the rest of the cable partners would later scale back plans to roll out the wired portion because they didn't want to be locked into strict timetables to upgrade their networks. Still, the investment would pay off handsomely years later. At its peak, Spring PCS would hit a high of $65 per share in the spring of 2000, valuing TCI's position at about $12.9 billion-quite a gain for TCI's $1.4 billion total cash investment in PCS.2

Back in the saddle, Malone also called a meeting with the company's top 10 institutional investors, and he brought Clouston along. Neither accusatory nor defensive, Maloneopened the meeting with, "Tell us what we're doing wrong. How do you perceive it? I'm not here to propose anything, I'm here to listen." It was a bitch session.

His top lieutenant, Leo Hindery, built on an idea that Malone had pushed, putting clusters of cable systems (i.e., contiguous cable systems that had a large footprint and that could be operated together at lower cost) together with rival companies. If another cable operator could run a cable system more cheaply than TCI, Malone figured, then let's make a deal. Hindery quickly set about striking joint ventures with other companies, usually those that had better profit margins and leaner operations. It was a quick and effective way to improve TCI's wobbly balance sheet and anemic stock price.In what he would describe as the "Summer of Love," in 1997, Hindery struck a dozen new partnerships and nearly as many system trades with fellow cable operators.

TCI led a consortium of cable operators representing nearly half of the industry in a deal to buy some 15 million digital set-top boxes over five years from GI. The $4.5 billion order was for boxes that would cover the gamut of cable-driven video and audio services. Though the group had chosen GI, Malone and others took pains to point out that GI was simply supplying the boxes, which would comply with the industry'sOpen Cable standards so different companies could contribute software to the devices.

Malone accomplished this consolidation of power largely by doing what he always did: picking up the phone and reaching out to the other side to look for the common ground where he could put together a mutually agreeable deal.

But Malone might never have received the payment had the TCI board not learned of the takeover feelers from Bill Gates and Brian Roberts. Malone cited the hostile possibilities to make the board realize that he could sell control of the company, without so much as demanding a premium for all other shareholders, and simply notify the board he had done so the next morning-there was nothing the directors could do to stop it.

Deals are courtships in the business world. Each sale or investment is different, a reflection of the personalities involved and the strengths and weaknesses in their logic and motivation.

Once they decided to proceed on a plan largely of Malone's calculations, the entire deal took eight days to pen, a whirlwind for any merger, but especially miraculous for lethargic, deliberative AT&T.

Malone held 4 percent of its outstanding stock, 33 percent of the vote, and six of nine seats on the board; AT&T shareholders held the rest, but AT&T itself didn't own a single share. AT&T could use any losses to reduce its own taxes, but it had to pass on the savings to Liberty.

The idea was to insulate cable, valued in terms of cash flow, from the consumer long-distance business, which is valued on earnings. From his early days in cable, Malone had preached that you couldn't mix a growth-oriented, capital-intensive company valued on a cash flow basis with a traditional earnings company. Malone went along with the plan for now, but it bothered him, and he consoled himself with the knowledge he could convince Armstrong and CFO Dan Somers later of the need to issue the trackers as they had first planned.

Longtime TCI investors were richly rewarded. TCI excelled not because it was a great cable operator and friendly corporate citizen. Those were promises Malone never felt compelled to make or keep. True, it was the largest cable operator in the country, but Malone never pretended to be the best cable operator. TCI built wealth and made its shareholders wealthy by investments and complex financial engineering.

But Armstrong had unwisely eschewed a cable tracker, so it had to put up $24 billion in cash and issue 603 million more AT&T shares and take on an extra $4.5 billion in debt, pushing AT&T's total debt load to almost $60 billion. The way Malone saw it, Armstrong had done nothing more financially creative than go to the bank and borrow short-term money for a highly taxable deal, a grave sin in Malone's mind.

He traced the failure back to the lack of a tracking stock. "He [Armstrong] could then have used this new currency to consolidate anything else in the cable industry he wanted to buy. And he would have been king. But he didn't see it,"

There was a saying around the company in those days: "John shakes the trees and J.C. rakes the leaves."

It was an astonishing concession to the rapidly expanding industry. Cities had granted the cable systems protected monopoly status in exchange for a presumption that elected officials would hold sway over whether the monopoly could raise its rates. Now the feds had let cable remain a monopoly-but had freed it to raise prices at will, which cable did with unabashed alacrity. The predominant thinking among those who supported the bill was that the budding cable industry would grow, and rates would be kept in check by competition from the broadcast networks as well as other new systems for delivering TV, such as videotape rentals, microwave TV systems, and satellite-dish TV. This would have been nice, but it didn't happen that way:

Malone's strategy was simple: Get bigger. After more than a decade at TCI, Malone could tally a cable system's budget with precision and predict costs and returns with uncanny accuracy. Because of that insight and because of the company's sheer size, TCI could now buy a cable company and begin to improve the performance dramatically within a few months. TCI could buy programming and equipment on the cheap, and it could get cheaper financing rates. Malone focused on long-term growth, eschewed dividends, and handsomely rewarded management.

Despite phenomenal growth, though, TCI was still a lean company. A dozen senior executives ran the whole shebang. When they flew to New York, they slept in the company's spartan two-bedroom apartment, doubling up two to a room. The headquarters of TCI was a square, flat, one-story brown building on the outskirts of Denver. Faux-wood paneling lined the offices, which were furnished with brown-plaid chairs and couches that looked as if they had been lifted from the lobby of a Motel 6. A lone receptionist greeted visitors in a carpeted area, and a door opened to a wide linoleum-tiled hallway that ran just inside the outer rim of offices. This way, the heads of engineering, operations, and accounting were mere steps from one another, and they were all close to Malone's office.

Turner's company looked wobbly. Malone decided to structure a rescue.

By 1988, in exchange for warrants, 32 cable operators owned half of the reorganized parent company, called CVN Companies, and the shopping channel was shown on 104 systems.The more horses Malone bet on, the likelier his chances of winning. Though the Fashion Channel, a fashion shopping service in which TCI owned a small stake, would file for bankruptcy protection, others would win big. Around this time, Malone bought a slice of QVC Network, Incorporated, another home shopping network started by entrepreneur Joe Segel, an energetic entrepreneur whose first success was the Franklin Mint. Two years later, QVC,…

To Malone, however, the government had it backward. TCI's size and market dominance was evidence that his strategy of mass-scale economics was working. The discounts he extracted from cablechannels, which the government now found to be troublesome even though they…

In December 1993, he led five of the country's largest cable TV companies (Tele-Communications, Time Warner, Continental Cablevision, Comcast, and Cox Cable Communications) into a joint venture that would organize local cable operators in large markets to attack one of the Bells' most lucrative offerings: service for businesses. Cable operators hoping to offer telephone services on their upgraded lines could be part of an umbrella organization called Teleport. The Teleport partnership proved to be a shrewd way around the telephone companies' broad, contiguous regional reach. For example, the Chicago market was served by only one regional telephone company, Ameritech, but 12 different cable operators. This way, local cable operators could share common marketing and advertising, research and development, regulatory advice, and branding of new offerings. "You don't want 12 different companies trying to position a business against one," Robert Thomson, a senior vice president of TCI, explained to anyone who wanted to know the rationale. "This is clearly a step that will enhance competition." AT&T would end up paying $11.3 billion to buy the company later, netting an average 10-fold gain for the top cable operators, including TCI, whose TCI Ventures received $2.9 billion for its 30 percent stake.'

"Escape is necessary," Malone later told one listener. "Getting away gives you a new perspective and makes you more human. When you're running a large corporation, you're not able to show your human side all that much. It's just not productive."'

He wanted better customer records and easier ways for TCI's far-flung offices to report information internally. He wanted to solve every problem, Malone thought, before he could solve any.

Hindery's favorite analogy for TCI's problems was that TCI was a gas station company acting like a pipeline company. Pipelines deliver fuel in bulk. But gas stations sell it to retail customers, a far more service-oriented business. Customer service would win the day, and no one could argue that TCI didn't need to pay more attention to its customers. "Running a pipeline business is a pretty easy business-you just turn on a pump. Running gas stations is a really hard business," Hindery liked to say.'

Instead of scores of TCI cable systems taking orders from Denver, Hindery wanted to put marketing and purchasing decisions back in the hands of local operators. "You market from the bottom up, and not the top down. What works in Birmingham doesn't work in Bozeman,"' he told the troops. With haste, Hindery lopped off the heads of 25 executives at TCI, including Brendan Clouston and his team, and replaced virtually all of the positions from within. He began remaking TCI into a collection of local companies that tended to their own markets, based on the simple idea that no single manager can manage more than 2 million subscribers.

Malone believed the definition was not freedom from obligation, but freedom to choose which of those obligations to take on, which roles to play in business and life.

Tracking stocks don't represent an actual ownership interest in the underlying assets, which remain owned by the parent company; instead, a tracker is tied to a business's performance,

Soon, a long list of consumer advocates and competitors began lobbying for regulators to force AT&T to open up its cable wires to all content providers, rather than granting exclusive opening-screen access to its partly owned At Home unit. City officials in Portland, Oregon, took AT&T to federal court to require the company to open its cable lines there to any Internet company on the same terms it gave At Home. AOL and other services lobbied the FCC and Congress for action largely out of fear that they would be left out of the high-speed future.

"There is a big difference between creating wealth and reporting income," Malone liked to say, and the investors who held a long view rather than focusing on quarterly earnings would be rewarded handsomely.

When Malone waged franchise battles, he seemed less intenton arguing the merits and more focused on making a show of fighting relentlessly and maiming the opposition. He wanted local pols and rival cable companies alike to get the message: Don't mess with TCI, or suffer the consequences.

So Malone turned to his cable colleagues, calling a meeting in New York of a handful of the largest and most influential cable operators in the country, most of whom had started their own companies. He started in his trademark no-bullshit style: Given Turner's situation, it was imperative that they come together to preserve Turner as an independent programmer. "If anybody here is not on board, please leave now," Malone instructed. "We're not fucking around here. We've got to do this. If you're not seriously here to figure how you can put up real money, let's all go home."No one left, and everyone put up real money: $560 million ponied up by 14 cable companies, including Daniels & Associates, Continental Cablevision, Warner, and Time Inc.'s ATC Corp., to buy one-third of Turner Broadcasting.

Along the way, the men who ran TCI cultivated a Wild West image that set them apart from the many bankers, investors, and legislators whom they courted and contended with. In the eyes of John Malone, they were nothing like the effete East Coasters who ran bigger cable companies. The TCI men were cable cowboys. Though the term was repeated in derision by the bankers and politicians who coined it, the TCI team wore the nickname like a badge.

Lifetime ultimately offered $38.9 million and Discovery offered $30 million. The same day that Lifetime made an agreement in principle to buy Learning Channel, TCI gave written notice that it would stop carrying the channel on almost all of its cable systems, citing a slip in quality, according to a lawsuit filed by FNN's successor company, Data Broadcasting Corporation.In the programming business, the break-even mark was considered to be 20 million cable subscribers, and the Learning Channel reached 21 million households. Some 3 million of those received the program through TCI-owned systems. The TCI decision to drop the channel not only prompted Lifetime to drop its $38 million offer but also put a chill on the prospects of bids from other possible suitors.After Lifetime withdrew, TCI's 49-percent-owned Discovery Channel successfully reemerged with a $30 million offer for the Learning Channel.

"Let me just get this right-subscribers are selling for $2,000 apiece. You think you are right, she thinks she is right." What mattered was 20 bucks versus losing $2,000.

Technology would save cable, Malone decided, as it had done so many times before.

What the cable operators failed to realize at the moment was how truly strong their position was. Only the cable industry's fat pipes, where the electrical signals danced along lines passing 95 percent of American homes, could launch the American PC industry into a new level of what Malone verbosely called "two-way broadband digital connectivity," which translated to a cornucopia of online news, entertainment, and shopping. All of the hundreds of new dot-com companies starting up would not have a chance unless Internet service providers could deliver pictures and sites instantly over a broadband network. For that reason, the future of the computer industry in the United States was largely reliant on the future of the cable industry.

AT&T also agreed to funnel $5.5 billion in cash to Liberty Media, to use as the subsidiary saw fit. Prior to the formal acquisition, TCI's Ventures unit, which oversees digital and Internet-related services including At Home, would be merged with Liberty Media.