Malone circa '94: A Man Ahead of His Time
Here is an old, old interview with John Malone from 1994:
wired.com
The interview is still very useful today as it explains why cable will win the broadband race against the RBOCs (italics indicates the interviewer's question):
Some analysts say that the RBOCs are in the best position to really get this information highway built.
[Malone just laughs and shakes his head.]
I take it you don't agree.
It's all posturing . . . more smoke than fire. And I'll tell you why. First, I don't think their culture makes them very competitive, and that's their big vulnerability. Sure, any one RBOC has got as much revenue as the whole cable industry put together. And sure, they're very powerful politically. But they've lived as protected monopolies in a regulated environment all these years and never had to face competition of any kind. Every time the RBOCs have tried to diversify out of their core business, it's been a disaster.
So, yeah, the RBOCs have a lot of money, but in order to use it they have to change their whole way of doing business. They have to be able to financially walk away from their dividend.
All the tests show that the one interactive service that the public has a lot of interest in right now is movies-on-demand. Replacing the video store business with electronics is something that would generate maybe, from our tests, four or five bucks a month of cash flow per cable subscriber. Now, how much capital can you deploy for that little? If you're already basically there -- if you've already got a network in place capable of delivering video, and it's just incremental -- you can do it. But if you've only got copper in the home, and you have to build out a video network from dollar one, then it's going to be real tough. So how do these guys get the money to do it? They've either got to cross-subsidize it very heavily out of their existing telephone customers and raise rates -- which is going to give their regulators problems -- or they've got to raise their debt. But if they do that, their debt rating goes down and that's, like, completely verboten for these people. The only other way is to take it out of the shareholders -- in other words, cut the dividend -- but these guys would rather die than cut the dividend. So when you take a look at all the constraints that an RBOC's balance sheet is really under, you see they've actually got only a limited amount of discretionary capital to work with. They're just not going to be able to do much in the interactive TV business.
Pacific Bell says they're going to spend $16 billion to build the highway in California.
Yeah, we can do California for a small fraction of that and provide the same services, so who's gonna have the low-cost service?
And what is the chief advantage for you of an alliance with a long-distance network -- say AT&T?
Well, skill in telephony, financial strength, and especially branded services. If it's AT&T cellular or MCI long distance or Sprint video telephony, then it's a branded name that we can promote on our network; people will feel like there's real value in the bundle because they recognize the value of each one of the branded components. If I can do a deal with an MCI or an AT&T or a Sprint, then I have stronger brands to play with than the RBOCs do. And I got all the brands in entertainment, too.
So that's my strategy. If I can go in with a package bundled with MCI or AT&T or Sprint, and then match that up with, say, an HBO in movies, and a PG&E in home energy management -- I can save the homeowner probably enough money on his electric bill to pay for his cable service -- if I can do that, then I've got a very powerful package.
That's the race, for bundled services to the home -- branded bundled services. And if I can buy it wholesale and sell it retail -- bundle it, package it, discount it -- then I think I've got an enormous edge.
That doing a deal with Gates means he'll gain control. Lock you out or else lock everyone else out. That sort of thing.
[Laughs.] I see. The big concern is, Is Bill Gates a bigger monopolist than I am? And if I get together with him, is that going to be the worst thing that ever happened in history? Yeah, that is the concern that has been expressed to me by a lot of people in the software industry. Everybody in the business is warning us about how not to get suckered. To me, it really comes down to, if you decide to use Bill's stuff, what kind of a deal do you get?
Our deal with Bill, the details of which we haven't disclosed publicly, is essentially that if we pick him we have a preset maximum price. It's nonexclusive, and he's free to market it to anybody else he wants. And we have a "most-favored nations" deal, which just basically says if he sells it to anybody else for less, then we get the lower price, too. Basically we spec it, he builds it, and then we use it if it's the best deal. If he doesn't give us the best deal we don't have to use it, and we get price protection and most favored rates, so it's very open. It's purely a vendor-customer relationship.
Weeelll, let's just say that the good Dr. was a bit off the mark with the following prediction of a '96 completion:
...But now you can have an expansion of channels and movies-on-demand. You can have video telephony and multimedia services. You can have load control. You can play Sega games. You can have digital music. You can have high-definition TV. You can have wireless telephony in your home. So we're really not talking about back-breaking economics here. And when you pay that extra amount you're gonna get certain services free as part of that. You'll probably get a navigator for free. And I think we can easily finance it against the growth in the revenues. The servers -- if Bill is right in his projections of capital costs -- are not gonna be that burdensome. So I don't see any big impediments for us rolling this thing out and having a true, full-service network out there by the end of '96, available to most homes.
Once it's built, where will the big entrepreneurial opportunities be in the network?
In programming, a special kind of programming. It's got to really add value to all the content that'll be out there. It'll need strong branding. If you're talking about news, I as the subscriber have to ask, "Whose editorial services do I want?" I can't possibly stay informed of everything that I'm interested in, so why don't I subscribe to the Kline Editorial Service, and he'll ask me one time what I'm really interested in, and from that point on I'll have a customized information and news service that takes a half an hour a day, that hits and focuses on the things that I'm interested in, right?
To me we're gonna go very much into a customized world. It's not one-size-fits-all. These technologies are gonna allow us to make TV very personal. That's the really tremendous area.
Individuality will be emphasized. That's what I mean by an electronic community. Your own perspectives, your own individuality, will be amplified by your ability to reach sources that are of interest to you.
And the whole interactive home shopping business is also going to be tremendous, explosive. That's why [General Magic's] "agent" thing is exactly right. You send your smart agent out to look for a stereo, and it'll research Consumer Reports, give you feedback, find the best deal. |
