Cover Story
How is it that John Malone has such immense sway over what you see on your television screen and your computer screen? Because this entertainment dealmaker thinks more about deals than about entertainment.
Taking Liberty
By Neil Weinberg
IN HIS SPARE TIME JOHN MALONE PILOTS AN 80-FOOT-LONG YACHT named Liberty, outfitted with comforts and technology to let him do whatever he wants. Onboard is a round, spoked hatch cover that inspired the logo of Liberty Media, the corporate vessel now ostensibly owned by AT&T Corp. It's a fitting link, for Malone can do just about whatever he wants with Liberty Media, too.
Liberty is endowed with arguably the world's richest trove of media assets. That it sails so firmly under Malone's command owes largely to AT&T Chairman C. Michael Armstrong, who in March paid $54 billion in stock, cash and assumed debt for Malone's cable company, Tele-Communications, Inc., and its sibling, Liberty. But while AT&T seemed to acquire Liberty, in reality something else happened. Malone took control and set his sights on shaping the future.
In Liberty, formed in 1991, Malone has programming, access to millions of AT&T cable homes, new wireless uplinks, Web sites and more. It owns significant chunks of 22 of the top 50 cable channels and 7 of the 10 fastest-growing. Liberty is the largest stockholder in Time Warner and the second-largest in News Corp. (after Rupert Murdoch). It owns all of Encore pay TV and pieces of USA Networks, Discovery Networks and TV Guide.
Malone built up this portfolio by taking small stakes in new channels that needed carriage on TCI cable systems, masterfully rolling them into larger stakes or direct control. Example: In 1980 TCI put up $180,000 for 19% of a new channel aimed at black viewers; it's now worth $192 million and part of an even larger stake in the parent of Black Entertainment Television. Liberty's 21% stake in General Instrument, set to be acquired by Motorola, could morph into a 3% or 4% piece of Motorola if that deal goes through--more than the founding Galvin family holds. Its 24% piece of Sprint PCS, should MCI WorldCom buy Sprint Corp., could make Malone a big owner there, too.
"We are in the sweet spot of the media industry," Malone says. "The growth rates of the businesses we're in are attractive by any stretch. We're sitting on lots of cash and little debt and can use financial leverage to fatten up things we think are attractive. It's a world I'm quite comfortable with."
But for Liberty to take off, digital TV will have to do so first--something Malone began hyping as imminent almost a decade ago. This time the signs are better: 12 million homes now receive digital programming, the total could double in three years, and the Web has arrived as a ready-made, interactive sales channel.
Malone, whose visions have created huge fortunes in the past, is intent on delivering. Investors believe in him. With revenue of $900 million likely this year and no earnings, Liberty commands a $43 billion market cap based on the price of AT&T's Liberty tracking stock. That's almost as much as AT&T paid for TCI and Liberty both. AT&T itself owns no Liberty stock. Malone holds 4% of the equity and 33% of the vote and controls the board.
"I think John sees himself putting money into creating a revolution in the structure of media or high-tech companies," says Robert Johnson, a Malone partner since 1980 and chairman of BET Holdings, which owns Black Entertainment Television. "It could be combining America Online and Time Warner, or AOL and General Electric, something of that magnitude. He's waiting for that sort of opportunity to fall into place."
Since AT&T closed the TCI acquisition in March, Malone has engineered six media deals worth a total $6 billion. Liberty has invested in a few "infrastructure" firms and merged regional sports channels into News Corp.'s Fox. He seems hungry for more. "We always say the store is open every day. Every one of our assets is dealable."
It might have appeared otherwise when Malone agreed to sell to AT&T in June 1998. After 26 years at TCI and a decade of being vilified as cable's Darth Vader, Malone seemed to be cashing out. But in truth, he sculpted the deal of a lifetime. He left it to AT&T to deal with pesky regulators riding herd over hundreds of cable systems. He walked away with an extraordinary degree of autonomy at Liberty, a nice boost in his net worth and a nifty tax deferral.
Liberty has its own board, and Malone controls six of the nine seats. AT&T can't replace his picks for seven years. Liberty can even issue its own debt. If it turns a profit, AT&T must foot the tax bill. When Liberty loses money, AT&T can use the red ink to reduce its own taxes--but it must pass on the savings to Liberty itself. Liberty also has the right to fill a dozen or more channels on AT&T's upgraded cable systems--access potentially worth billions.
And if Malone spots a lucrative opportunity to go into business against AT&T, he is free to pursue it. Liberty's board can take actions that may hurt AT&T. Wait--if the Liberty board isn't beholden to AT&T, to whom is it beholden? To John Malone. Armstrong had a terse response recently when the Senate Judiciary Committee asked if AT&T controls Liberty: "No."
"Liberty was always John Malone's baby, and he knew AT&T wanted a deal badly. He used his leverage to satisfy all his needs," says an ex-AT&T executive. "Every tracking stock on the planet is controlled by the parent, with the same board and debt. Except Liberty."
Whether that will benefit AT&T is questionable; that it will benefit Liberty is almost undoubtable. Malone's record thus far: A $10,000 investment in TCI when he joined in 1973 would have grown to $2.9 million by late 1999, 26 times better than the S&P 500. And since the TCI deal closed, Liberty's share price is up 29%--but AT&T's is down 26%. That rankles the board member who is the largest individual shareholder of AT&T: John Malone. He says AT&T should issue tracking stock for cellular and cable (see sidebar, "God likes pure plays").
If past is prologue, Malone will use Liberty to shake up the world of digital media and make a killing for himself and his shareholders. He runs Liberty, with a payroll of 33, within view of his 42,000-acre ranch on Denver's south fringe. His No. 2, Chief Executive Robert (Dob) Bennett, takes care of day-to-day business. Malone is free to do what he does best--deals. He lives for them. This is a guy worth $3.4 billion who recently bought a $60,000 house to fix up and rent at a profit.
Malone would probably trade plumbing pipes if they appreciated faster than cable lines. "I never heard John talk programming in a creative sense or ask if I'd seen some great film," says Peter Barton, No. 2 at Liberty from 1991 to 1997. "He talks about programming in terms of whether it reaches an audience."
Marlboro-man-handsome at 58, Malone owns homes in Colorado and Maine and ferries his wife, Leslie, and their seven pugs in a custom-built $750,000 camper. They stay overnight at truck stops, and when curious onlookers ask him who's inside, he tells them it's Garth Brooks.
Malone learned how to turn technology into money at an early age. He grew up in Milford, Conn., the son of a vice president at General Electric. As a kid he bought broken radios, fixed them up and sold them for several times his cost. In 1963 he graduated Phi Beta Kappa from Yale with degrees in engineering and economics. By 1967 he had married, earned a Ph.D. from Johns Hopkins and had worked at Bell Labs. He went to McKinsey & Co. in 1968 and joined General Instrument in 1970. At 32 he quit to partner up with Robert Magness, a GI customer and chairman of TCI.
Magness, a sly Texan in the Ross Perot mold, had started out with 700 customers in Memphis, Tex. in 1956, back when operators pulled TV signals free from the sky and pumped them into markets too puny for broadcasters or bureaucrats to bother with. When Malone arrived, TCI was a top-10 cable operator, with 400,000 subscribers. It was also nearly bankrupt. Malone spent four years staving off foreclosure. By 1977 TCI was generating plentiful cash. In the 1980s TCI bought up hundreds of cable systems, at times doing a deal a week. By 1990 TCI had 8.5 million subs and lorded it over the business.
As Malone's clout grew, he used it to bludgeon foes, defend friends and build his own equity stake. New channels needed TCI's wires--and Malone wanted TCI to have stakes in new channels. Extortion? Malone told programmers that they were better off if TCI owned a stake and was motivated to give them a good deal in paying them subscription fees. "We took the view that as long as I have an equity ride, I'm not going to be tightfisted," he says.
"Commercial blackmail" was one of the charges that cost TCI a $36 million jury award resulting from tactics it used in 1981 to try to prevent Jefferson City, Mo. from yanking a contract. A decade later TCI tried to buy the Learning Channel but was outbid by Lifetime. So TCI ordered its systems to pull Learning, prompting Lifetime to retreat. Learning got sold to TCI's 49%-owned Discovery.
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"Malone knew AT&T wanted a deal badly and used his leverage to satisfy all his needs."
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TCI's methods brought harsh criticism from regulators, rivals and foes such as Al Gore, then
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