Tennett, what an awesome article! It deserves to be printed out just in case the link expires:
multichannel.com
Weekly Preview for April 12, 1999
MALONE GETS
INTERACTIVE
Liberty Chairman Swings GI,
Music Deals
By M. FARRELL and B. MENEZES April 12, 1999
John Malone may have relinquished control
over cable operations with the sale of
Tele-Communications Inc. to AT&T Corp. last
month, but his influence over interactive
television programming and technology got
stronger with two deals that his Liberty Media
Group landed last week.
Liberty Media, which owns stakes in about 100
cable channels as well as Time Warner Inc.
and USA Networks Inc., added to that portfolio
when it acquired an additional 3-percent stake
in General Instrument Corp. The acquisition
brought its total holdings in the set-top vendor
to 18 percent.
Separately, Liberty -- an AT&T Corp.
subsidiary controlled by Malone -- agreed to
contribute its Internet and interactive
programming assets to TCI Music Inc. in
exchange for 128.8 million newly issued
shares in the company.
Liberty bought the GI shares for $280 million
from New York City leveraged buyout firm
Forstmann Little & Co. GI separately agreed to
purchase 5.3 million of its own shares from
Forstmann Little for $148.9 million.
The deals whittle Forstmann's stake in GI to
less than 1 percent, ending an eight-year
relationship between the two companies.
Forstmann had been looking to sell the shares
since last August.
The deal is also expected to solidify Malone's
ties with GI. AT&T Broadband and Internet
Services, AT&T's cable arm (formerly
Tele-Communications Inc.), is GI's biggest
customer.
"What this represents is Liberty's strong belief
in broadband communications in general and
in General Instrument," said Geoff Roman,
executive vice president of GI. "We view this
as a strategic investment."
Roman added that while Liberty and AT&T are
operated separately, GI expects to continue to
have a strong relationship with AT&T, adding
that the investment "indicates we're an
important technology."
"We've worked very closely as we've
developed our products," Roman added. "I
think a lot of our strategies are very much the
same. There is some advantage from Dr.
Malone's insight."
AT&T and GI also announced Friday that GI
was the "first contracted development partner"
working to supply technology for AT&T's
Internet Protocol telephony deployments. That
solidifies an earlier arrangement under which
GI would supply gear such as cable modems,
the DCT-5000+ set-top with a built-in modem
and interface terminals for IP phone service.
Leslie Ellis, senior broadband analyst at Paul
Kagan Associates, speculated last week that
Malone might be spinning scenarios that would
see GI "aggregate" other cable-related
technology companies that have historic ties
to TCI. Those could include cable hardware
maker Antec Corp. and CommScope Inc., the
coaxial cable maker that once was part of GI.
"This kind of strategy would make sense,
given Malone's strong links to GI and his track
record for aggregating companies," Ellis said.
TCI and its Headend in the Sky (HITS)
affiliates had already committed to buy 6.5
million to 11.9 million digital set-top boxes from
the company between 1997 and 2002. So far,
TCI has purchased about 1 million digital
boxes.
Although it is rumored that the order has been
stepped up, Roman said that any increases
would depend on how fast AT&T Broadband
deploys digital technology and how many
customers they can attract for the service.
No matter what happens with increased
orders, by gaining a larger piece of GI, Liberty
Media gets a significant share of one of the
top set-top box makers in the world. Perhaps
more importantly, Liberty gets major input in
how the technology for interactive digital
television in delivered.
"If you go back to the AT&T/TCI deal, that was
a big data point for what the cable industry
could be," said Gary Farber, an analyst with
SG Cowen & Co. "It's all about access. The GI
deal reinforces the fact that John Malone, in
his mind, has a lot of thoughts about how he
wants to access the consumer. The digital box
is the access point."
And while the GI investment gives Liberty an
inroad on the equipment side, the TCI Music
deal makes Malone an even larger player in
the interactive and Internet content arena.
Liberty Digital's Internet and interactive assets
include investments in priceline.com, iVillage,
Sportsline USA and drugstore.com.
Crucially, Liberty also has the rights to provide
interactive video services to AT&T cable
systems under an agreement that stems from
the AT&T/TCI merger.
In return for contributing its programming
assets, Liberty's Liberty Digital unit, run by
Lee Masters, will get 128.8 million newly
issued shares of TCI Music Series B common
stock, upping its interest in the company from
86 percent to 94 percent.
Malone managed to significantly increase the
public valuations of both TCI Music and Liberty
with the announcement.
TCI Music's share price rose from $8.38 the
day before the announcement to $29.56 the
next day and $41.63 at the April 8 close.
Liberty's shares also got a big lift, with the
company's A shares trading at $68.75 on April
8, up $12.87 from its April 5 close.
By shifting around assets, Malone also
increased TCI Music's market capitalization by
nearly five times. Based on the number of
shares outstanding prior to the agreement –
81.4 million – TCI Music's market capitalization
was $3.4 billion, up from $682.1 million on
April 5.
Probably the biggest piece of the deal, for
investors, was TCI Music's access to a 6-MHz
channel on AT&T Broabdand's network. That
channel, which can be split into 12 digital
programming channels, will give Liberty a
venue for its other programming assets and
millions of guaranteed viewers.
Some analysts value the addition of that
6-MHz channel at $1 billion.
Whatever the valuation, Janco Partners
analyst Ted Henderson said the inclusion of
that analog channel could prove to be very
important to Liberty in the future.
"It allows them an avenue to roll out services,"
Henderson said. "You can create a wonderful
service, but if you can't create distribution for
it, it's useless. It's an outstanding asset to
have. Now they know they've got a home for
these things [interactive and Internet
programming assets]."
The channel also provides an excellent
testbed for digital programming that later can
be offered to other systems as they upgrade
to digital technology.
Liberty Digital's Masters said the company was
focusing on six to seven interactive
applications it wants to provide in the 6 MHz of
bandwidth it is allotted by AT&T, including
e-commerce, interactive advertising and
gaming.
But he said the company still was hashing out
its business plans and characterized the
potential applications as in the formative
stages.
"We are still in the stage of determining who
we want to partner with," Masters said.
Liberty wants to offer the initial two or three
interactive applications in conjunction with
AT&T's deployment of advanced digital set-top
boxes, which Masters said he expects to roll
out late this year or early in 2000. |
