Malone no pretender to throne
01-01-01
CHUCK ROSS
Electronic Media
CRN40104
Crain Communications
With the precipitous decline of AT&T stock, The New York Times has declared the king is dead. ``Amid this year's stock market carnage, [John] Malone finds himself in the
company of many other investors. But Dr. Malone has never been just any investor,' the paper of record wrote last month.
``Back when he was king of cable, he had enormous clout, controlling cable systems and cable programming through his control of TCI,' the article continued. ``Now Dr. Malone has lost not only his clout but his financial mystique.' No longer, the paper said, was Dr. Malone watched ``with a mix of fear and awe.'
Ouch! A stinging blow that could be felt from New York to Denver and back
again.
However, reports of the death of Dr. Malone's almost mythical status may be premature.
Electronic Media recently conducted an extensive interview with the erstwhile king, and he seemed as clearheaded, thoughtful and sagacious as ever, with pronouncements on everything from the doldrums on Wall Street to the state of the economy to the election of George W. Bush to retransmission consent.
The edited transcript that follows begins with a discussion of the future of Liberty Media, of which Dr. Malone is chairman.
EM: One of the more interesting comments that's been made to us recently is by
an analyst who said that right now, with Liberty Media part of AT&T, you've had
one hand tied behind your back. And once Liberty is spun off you'll again have
two hands with which to make deals. Is that true?
John Malone: I don't know that it's as drastic a difference as people
have said. It just makes life a little easier--certainly with the regulators--in that
we can't do much because of regulatory restrictions. For instance, we have a
divestiture order on our stock in wireless and PCS because of our relationship
with AT&T. If we get spun, that goes away, so we can do anything we want in that
wireless space. And right now, we have no active participation with Time Warner
because of AT&T. So once we're spun, we can have a myriad of more intimate relationships with AT&T, with Time Warner and with AOL--and being an active shareholder rather than a passive shareholder. So those kind of things. News Corp.--obviously, we're interested in becoming more active in the satellite space globally. And
being free from AT&T makes that easier.
EM: We've heard the DirecTV sale to News Corp. is close.
Dr. Malone: You'll have to ask News Corp.
EM: As this thing unfolds, is AT&T's stake in Time Warner Entertainment one of
the things you'd like to take?
Dr. Malone: Well, it's been discussed. But I don't think it's highly likely because of the structure and the tax situation. It's more likely that [AT&T] will just work out their relationship with Time Warner and somehow or other dissolve their partnership.
EM: Speaking of tax situations, you're not going to do the Liberty spinoff unless it can be done as a tax-free deal, right?
Dr. Malone: Well, first of all, it's not my call. It's AT&T's call. It
really cannot be done unless it's tax-free. (Dr. Malone is a member of the AT&T Board
of Directors.)
EM: And that requires a favorable ruling from the Internal Revenue
Service. What is the argument you think should be made to the government about why it
should be a tax-free deal?
Dr. Malone: Well, all of the issues that we've been talking about—that there's a good business purpose for separating, because, over time, these regulatory issues have turned out to be much more restrictive on both companies than were anticipated going in, particularly once the [Federal Communications Commission] changed the rules on how they count subscribers. The MediaOne deal really put a lot of restrictions on Liberty.
EM: One of the properties you've had an interest in over the years is the Rainbow programming services, which are co-owned by Cablevision and General Electric. Are you still interested in them?
Dr. Malone: They're nice assets, and we, of course, used to be partners in AMC.
Chuck [Dolan, chairman of Cablevision Systems, which owns 74 percent of Rainbow
Media Holdings] bought us out and did very well with it. I'm sure Chuck, if he does part with them on [terms] other than the spinoff, will be wanting a very high price. And we'll see if we're the best buyer, I guess.
EM: Is that the kind of thing you'd like to somehow steer Barry Diller's
way?
Dr. Malone: It's been no secret that Barry has always had the hots for
Bravo. And I think he still does. So that's clearly something that Barry would be very
interested in, and the question is can he find a price that makes sense for him
and for Chuck? And also, is there a role for Liberty in it other than just indirectly through Barry? I don't know.
EM: There was a report that you oppose AT&T selling some cable systems in Iowa and Montana.
Dr. Malone: I don't know where you got that I oppose things. To the degree that I have any input at all is as a director of the company and as a shareholder. If they're gonna sell something, I like to see them get the best price they can-- and do it in as efficient a tax way as they can.
EM: Would you like to see AT&T Broadband divest itself of more systems--or even all their systems at some point?
Dr. Malone: No. I'd like to see them grow their broadband business by acquiring more systems or merging with other people to get as much scale as they possibly can in the cable business. So I think that you have to say that the sale of some of their systems here is tactical.
EM: Yes, clustering has become a very popular MSO strategy.
Dr. Malone: It's a clustering kind of thing, and it's a focus thing. And I think they feel like they can focus better on their big clusters and drive their agenda better and not be distracted by a lot of smaller systems that still require a fair amount of rebuild.
They haven't sold [those cable systems in Iowa and Montana] yet, and if they don't get a good deal, they probably won't.
EM: There seems to be a disconnect between the rhetoric we heard at the Western
Cable Show, which said, ``Let's finally get these digital services rolled out,' and the fact that most MSOs don't seem that enthusiastic to do so.
Dr. Malone: There are a lot of cable guys that don't want to do telephony, for instance, until it is fully developed, 'cause they think it'll be less capital- intensive. The AT&T guys have a different view of the world. They think that if you wait too long you'll cede too much market share to the [regional telephone companies] in both data and all-distance telephony, and it'll be hard to crack back into that. So they have a more urgent sense of market share division than the traditional cable people do, and I think that's the difference you're seeing.
EM: You've said that cable does have an opportunity to become the leader in
services, but that window may indeed shut.
Dr. Malone: It's a window that's wide open right now. Cable has the lead in data over DSL. And cable has certainly the penetration lead over satellite and video. And cable can easily take market share in long-distance telephony. It's capital-intensive; it takes a lot of focus and energy, but it's there to be done. What the ultimate economic rewards of doing it are remain to be seen. That's the problem with being a pioneer. But clearly, as AT&T Broadband has already demonstrated, you can generate rapid growth in data and telephony over cable, and it does work, and people do use it, and they do pay for it. The thing that hasn't been demonstrated yet is what the long-term economics of that strategy are. [When I ran TCI] I drove the digital set-top hard and took a lot of risk doing
it. That's now become an accepted incremental service on cable. There's no cable
operator that isn't offering digital set-tops and bragging about how many customers they're adding. So there are no cable operators that aren't on that particular curve. And there are no major operators that aren't on the data curve. And that's a very good
incremental business for cable. The one that is still somewhat conjectural is telephony. Cox has been on the telephony page for a long while--and, of course, AT&T, certainly.
[But] it's going to take awhile for the cable industry broadly to have enthusiasm for rolling out local telephony and to have a consensus technology that everybody feels is good for the long run. The Time Warner guys are very reluctant to throw any money at local telephony at this point.
EM: Do you think that's because of the AOL deal, or do you think it's
because of their sensitivities to Wall Street?
Dr. Malone: Timing is everything in life. It's legitimate to say it's an opportunity that's not going away, and therefore I'm gonna wait until the capital is cheaper and it's better understood. That's a logical allocation-of- resources issue.
EM: What's your view of the cable marketplace and the economy?
Dr. Malone: Look, this is a big cycle. A year ago there was so much money around--overbuilders could raise tons of capital on projections that were, in my mind anyway, pretty problematic. And they're now running out of money. So on the one hand, the guys who were conservative are gonna do fine because they didn't leverage their balance sheets and they're rolling out these new businesses on a more orderly basis. And right now the market's rewarding them for that, because the market right now wants conservatism.
On the other hand, six months ago the market was rewarding aggressiveness. So they're all a big cycle. But it'll come back again, yes, but there'll be a lot of washouts and consolidations. It won't necessarily be the same players or the same survivors.
EM: Do you need to convince Wall Street to stop just thinking of the
current quarter and perhaps the next one?
Dr. Malone: Like everything, it cycles between fear and greed. And right now
we're in a fear cycle. And everybody wants to run for safety, which is very near- term results, very near-term cash flow. No blue sky at all. You can't lecture Wall Street that they're wrong. When everything's going bad, everybody runs for cover. When everything looks like it's gonna go great, everybody's willing to take more risk. It's just the nature of things. It's not that people are doing things right or wrong.
EM: You've said you're concerned about the shortfall of advertising dollars on
TV in the fourth quarter. Do you think we're heading for a recession?
Dr. Malone: I'm worried we are already well into recessionary behavior-- certainly in the advertising world. We're generating a huge trade imbalance, so you've gotta keep the foreign money in here. Otherwise we're gonna see interest rates run up no matter what the Fed does. They can only affect short-term rates, and then only on the margin. So the Fed has limited ability. They're like the in the middle of the teeter-totter. They can only have effect as long as [the economy] stays pretty close to neutral. If it gets out of balance one way or the other, then their power is insignificant. The biggest issue right at the moment is oil. If oil prices stay high and continue to rise, and our trade deficit continues to broaden, and all of this capital is sucked out of Europe and the U.S. and Japan, then I think we're headed for a recession.
EM: How do you think it would affect the media business, which is your
business?
Dr. Malone: Well, I think it's already had its effect. We're already seeing cutbacks, and certainly the stock market prices have come down. The [recession] that I remember that I liken this to--though I hate to use this analogy, 'cause it's scary--but this is like '73-'74.
Richard Nixon [was president]. In the spring things were going great. Stocks were high, everybody was feeling bullish. By the fall there was controversy about Watergate. Nixon was in trouble. Oil prices started to run up. And the country, by the middle of '74, was in a pretty deep recession. It was really not until Reagan that the country got back into a systematic growth pattern again. So, these things can last a long while. On the other hand, they could just be a blip on the radar screen if the right moves are taken.
EM: Do you think [President-elect] Bush and his team have the smarts to
make those moves? Bush hasn't really gotten high points for being the smartest guy in
the class. Dr. Malone: Well ... ha ha ha. He happens to be a hell of a lot smarter
than Gore. This continual put-down of Bush is kind of silly. Idiots don't go to
Yale, and idiots don't go to Harvard Business School. I don't know where they get this
stuff. Jimmy Carter was maybe the brainiest guy in the White House in my life.
But he was an awful president, 'cause he didn't pick good people.
EM: So you think the real key is picking the right people and letting them do
their jobs?
Dr. Malone: Yeah. And I think Bush is probably pretty good at that. ... Look,
it all comes down to, do you have horse sense? Do you have people skills? Do you
surround yourself with good people? And, frankly, the one thing that was missing
with Clinton, do you have strong core moral values? If Clinton had just not
diddled, he would've gone down as one of the best presidents. Intelligence is
overrated for that job. You have to compromise a lot of your core beliefs. Moderate them and make them flexible if you're going to lead effectively. That's why Clinton was good. He wasn't dogmatic.
EM: Going back to the economy, you think oil is key. So you think Bush has a better chance of making the right moves to keep us out of recession than Gore would have?
Dr. Malone: The only reason I [think so]--forgetting about my political hat--
[is that] Bush may have better traction with the Arabs than Gore.
EM: Why?
Dr. Malone: Pure and simple, because of the Gulf War, his father, the history change, all of that. Basically, to get oil prices under some kind of stability is gonna take a political deal with OPEC. Bush is in much better shape to do that. It's a little bit like Reagan was in better shape to end the Iran crisis than Carter was.
EM: And you're convinced that oil is really the key to the world economy right now?
Dr. Malone: It's huge. It's huge. Just do the arithmetic. Figure how many gazillions of dollars are being sucked out of the economies of the West by oil right now that weren't a year ago.
EM: Let's turn back to Liberty. Liberty Digital has been hammered on the stock
market. Where do you see Liberty Digital going?
Dr. Malone: Liberty Digital is a long-term interactive television play. And long-term plays, long-term stories, are out of favor right now. So the
stock gets hammered because people want to see here-and-now performance in this
kind of a market. So Liberty Digital will just keep plugging away, and some day it'll come back into vogue again, probably.
EM: You hope.
Dr. Malone: Even if it doesn't come into quote, unquote, vogue, it will have actually developed some businesses that have real revenues and real cash flows, and then people can value it on what it really is.
EM: As we move ahead and try to get to a more robust interactive TV situation,
what kind of interactive services do you think will be big?
Dr. Malone: No. 1: interactive advertising. It's clearly No. 1 and very easy.
EM: You've mentioned that in the past. You're still a believer in that?
Dr. Malone: Oh, huge. Absolutely huge. In the only places it's ever been tried, it works great. The U.K. is doing some of it, Rupert [Murdoch, whose News Corp. owns BSkyB] is doing some over there. It's just that we don't have the platform out there yet.
EM: You have to have the high-end set-top boxes, right?
Dr. Malone: Yeah, you've got to have the equipment in place. I'm a huge believer in interactive television. That's what QVC and HSN are. It's rudimentary. You watch TV and you pick up the phone. But once it becomes real time and automatic--look, half the advertising that's done asks you to do something but doesn't give you a way to do it. So you tell me. I just think it's going to be huge. And it'll revolutionize advertising.
EM: What kinds of things do you see people doing to participate in "
interactive advertising?
Dr. Malone: They'll order. They'll ask for the test drive, they'll buy the record album. They'll just be able to respond on an impulse basis to all kinds of offers and opportunities, and that will revolutionize the way people do advertising.
EM: So you'd urge AT&T to get the Motorola DCT 5000s out there as fast as they can?
Dr. Malone: Absolutely. Absolutely. Because there's little incremental cost to
the 5000s over the [DCT] 2000s.
EM: Are you still as high on gaming on TV as you were at one time?
Dr. Malone: Sure. You'll notice we've done this game channel deal with Sony, and we hope that that can blossom into an interactive platform. I think gaming has huge potential. Hell, look at Sony. Half their business now is gaming.
EM: Let's talk about satellite. What do you see as the potential of DirecTV and
other satellite providers as we move forward?
Dr. Malone: Well, they are a superior broadcast video platform. No question. They are an inferior data platform. And they are not a player on telephony at all. And on interactive television they're an awkward player. To my mind, cable is the only player on the field that can do it all over one architecture and, therefore, ought to be able to do it the most cost- effectively. So then everything else is a question of capital, market share, scale, regulatory politics and all that. Basically, cable should be able to have the dominant distribution technology, with satellite playing a competitive and supplementary role. And the [regional phone companies] basically having an eroding scale over time if cable can effectively go against them. But they are the monopoly. They're the only remaining monopoly.
EM: When do you think we'll go to digital TV with the broadcasters?
Dr. Malone: I've never believed in any of that.
EM: Really? In what sense?
Dr. Malone: There's no economics in it. Why does a broadcaster want to spend a
lot of money to give things away free? I think [Walt Disney Co. Chairman and CEO
Michael] Eisner understands. You don't give things away. You own ESPN and you
charge for it. If you look at programming, who owns the programming on cable systems? There's not very many independents left. It's pretty much Viacom, which is also CBS; Disney, which is also ABC and ESPN; NBC, which is CNBC and
MSNBC; and Warner. Time Warner AOL is the only quote, unquote, independent. Oh,
and Rupert [Murdoch, chairman and CEO of News Corp.]. I forgot about Rupert, who has a slug of cable networks.Look, everybody wants businesses that are valuable. And the cable networks are more valuable than the broadcast networks. So why create more broadcast networks? I mean, isn't that brain damage? [Laughs]
EM: But through retransmission consent, the broadcasters have a lot of power, especially those that are vertically integrated, such as Viacom and Disney and the like.
Dr. Malone: The problem is they probably have too much power, 'cause they're crowding out the independents. And the government needs to worry about that.
It's the accumulation of market power by the broadcast networks [that's become] huge in the last 10 years. Independents have a very hard time and are very worried. Let's face it, [Ted] Turner sold out to Time Warner because he didn't think he could fight with
the networks anymore, because the government had given them too much power and
they were coming directly at him. So that's always going to be a balance-of-power issue.
EM: An independent like Gerry Laybourne and her Oxygen are having a hell of a time on the distribution side. She's on ...
Dr. Malone: Life support from Paul Allen. He's just a nice guy and embarrassed
to see her tank, I guess.
EM: You'd think if any independent could get significant distribution, it
would be Gerry, with her experience and the big names on the content side she has
behind her.
Dr. Malone: It's just saying that you're competing with programming
that's owned by guys who have a lot of market power, who are going to make it
very hard for you to A) get distribution or get full distribution, and B) have
enough scale economics to attract advertising. People are selling advertising against multichannels. One channel is going to have a hard time. Like Bob Johnson [chairman and CEO of BET Holdings]. Why did we want to merge Bob Johnson into Viacom/CBS? The reality was it had gone as far as one entrepreneur could take it with one channel. And he had tried to start second and third channels but couldn't get any meaningful distribution.
EM: So if you're an entrepreneur today with a great idea for a channel does that mean you have to partner with a bigger company to get distribution? Or does it mean we're just not going to see some great ideas come to life?
Dr. Malone: Well, Gerry Laybourne's as good as they get.
EM: And as you've noted, she's struggling like hell.
Dr. Malone: That's right. It is tougher. The industry's more consolidated, and there's fewer Paul Allens around. The other thing is we had, over the years, the ability to work together with a bunch of other operators and form collaborative groups that supported new ideas.
EM: And big corporations don't work like that.
Dr. Malone: Big corporations are always at war with each other, at least psychologically. So there's no way that if A supports it, that B isn't going to fight it.
When the broadcast networks got retransmission consent, the government went way
overboard. And the net result of that is ultimately to squeeze out new ideas like Gerry Laybourne's. It's all going to who's got market power, not who's got good ideas. And that's not a good thing. But that's the nature of the beast.
EM: So entrepreneurs who have good programming ideas have to go to the next
technology that's sort of wide-open territory. Right now that's the Internet.
Dr. Malone: That's right. The leap-frog or the way around is gonna be streaming
video, it's gonna be Internet, it's gonna be entirely new creations. That's not
to say that something new couldn't be created in the cable space, but it's gonna
have an uphill [battle]; you can't [have] a traditional approach. It's got to be a nontraditional approach. On the other hand, take something like Discovery. Discovery has been able to get big distribution for its Health Channel, which surprised me. I thought
they would have a great deal of trouble, but the quality of their relationships
over the years and the fact that they are neutral, I think, has helped them.
And it looks like they're gonna get massive distribution of that channel over time.
EM: Of course, they were helped by switching out an existing channel, and
they have leverage because of the other channels they have that cable operators want.
Dr. Malone: Exactly. And other channels that they can advertise and promote the new channel on.
EM: And that's something that Gerry, for example, as a stand-alone, doesn't have.
Dr. Malone: Right. But if you look at the start-up losses that Discovery Health is gonna have to rack up before it has any chance to have break-even cash flow to get better earnings, you're talking about a five-, six-year program and hundreds of millions of dollars. You have got to have some kind of a business in place to be able to sustain that. To start up as a little entrepreneur--forget it. So the question is: Is Paul Allen willing to stick at it long enough that [Oxygen] can grow and get distribution and ultimately succeed? The problem with a lot of these things is they start off with programming budgets that are unsustainable. I remember when Bob Johnson started BET. All of our discussions were ``Only spend what you can afford--and grow slowly.' You can't go out and hire. It's like Planet Hollywood. You can't go out and hire 50 very expensive people in a start-up business and think it's gonna work.
EM: Isn't that part of Oxygen's problem? They initially hired a lot of people and put on lots of original programming, which can be expensive.
Dr. Malone: And that's the problem. It's always chicken and egg. You love to come out of the blocks big, but those days--where the cable industry and the satellite industry will say, ``We'll clear a channel universally,' like we did with TNT--are over. When Ted launched TNT he had pretty much universal distribution, and so he could afford expensive programming on day one. Those days are over, 'cause you'll never get [today's] cable world, these corporate owners, to all think the same way at the same time. |
