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In the early days of TCI, angry creditors of the cash-strapped cable-television company
often called on its chief executive, John Malone. According to L.J. Davis, author of The
Billionaire Shell Game, Mr. Malone would "slam the keys on the desk, inform the
creditors that they now owned a cable company, and ask them how they proposed to run
it." When Vail, Colo., pushed TCI to provide better cable programming without raising prices, Mr. Malone pulled off the regular schedule of shows and replaced it with a screen that showed nothing but the mayor's and city manager's names and phone numbers. Vail backed off. The tough-guy posturing followed the tradition of cable, which got started when some roustabouts realized they could make a lot of money by intercepting TV signals and running a wire into an area with lousy reception. Cable attracted an eccentric cast of characters in its early days because it spread in grass-roots fashion, with entrepreneurs sharing with prospective entrepreneurs the knowledge that they could establish lucrative cable systems without paying for TV signals and without paying taxes. The game was to buy a lot of equipment and depreciate it so rapidly that the system would run at a loss. Then, when the business matured enough so that the owners were in danger of actually registering a profit on their tens of millions of dollars of annual cash flow, they would sell the system to someone else. That person would start the depreciation game all over, Mr. Davis says, and there still wouldn't be any taxes paid. But, from the beginning, Mr. Malone and his original partner, the late Bob Magness, were playing a grander game than the others: They just kept buying. When, many years later, they finally couldn't buy any more, they needed something well beyond the standard exit strategy. And they did need to exit, or they would finally have had to start paying taxes. Mr. Magness, TCI's founder, detested even the thought of taxes. So, Mr. Malone began flirting with Big Ideas. In the early 1990s, Mr. Malone convinced the public that the world was about to move to 500-channel cable systems. TCI would lead the way. With broadcasters and telecommunications companies in a stampede over the possibility that they might miss a revolution, Mr. Malone had kicked up so much dust that he could talk Bell Atlantic into buying TCI for a staggering $33 billion. When that deal fell through, and the 500-channel idea was finally dismissed as silly, Mr. Malone lay low for a few years. But he didn't go away. He resurfaced with new tales of convergence—the idea that cable and communications technologies would merge, creating untold opportunities for merchandising through interactive television and possibly rendering traditional phone technologies obsolete. Mr. Malone used some negotiations about the configuration of television set-top boxes to again position TCI as a leader of a revolution. Shortly thereafter, he agreed to sell TCI to AT&T for an equally staggering $32 billion. The excerpt that follows, which covers the period leading up to the agreement to be acquired by Bell Atlantic, shows how Big Ideas are often driven more by greed and personality than by technological possibilities. It is a cautionary tale. John Malone had his fish on the hook. Now the time had come to set it. The setting was a suite at the Waldorf Towers, whose Regency furniture, marble fireplace, and crystal chandeliers gave it an air of quiet opulence. The suite's sole other occupant was Raymond Smith, chairman of the Bell Atlantic regional telephone company and Malone's chosen mark. If Malone was successful tonight, Ray Smith would make a final, supreme effort to pay an imperial ransom for a company that, for its part, closely resembled a phlogiston mine. But, to all appearances, the thought did not disturb Malone, and the prospect did not excite him. Few things did. Malone could sit, calm and utterly still, for hours, and he often did so, especially when he was negotiating with an adversary or a person who controlled an object of his desire. This often induced a pleasing state of babble in the other occupants of the room, sometimes accompanied by an even more pleasing state of confusion and fear. Malone was an intensely focused man, and his focus was almost invariably directed toward a single objective: money, the getting of it. In the service of this goal, he was also a man with many hidden agendas, and he had a hidden agenda now. In the Waldorf suite, it was his purpose to allow the man sitting opposite him, Ray Smith, to talk himself into paying vastly more for TCI than TCI was worth on the best day the company ever had. In their meetings, Smith and Malone disagreed about many things, but on one topic they were unanimous. Bell Atlantic was the company of the past, and TCI was the company of the future. Malone repeatedly said so, and Smith repeatedly agreed. Following his usual custom, Malone neglected to tell his adversary a number of things. TCI, within narrow limits, may have been the company of a certain kind of future. It was not, however, a company of forever. There was a limit to how long Malone could play the game he'd chosen. To reap continued benefits from accelerated depreciation and interest payments, TCI had to buy more cable systems with yet more borrowed money, piling debt upon debt. In the 1950s and '60s, the typical small-time cable proprietor usually sold his systems after five or seven years. Selling the systems, not delivering television, was where the money was. But TCI was different, because of founder Bob Magness. "Bob never sold anything," recalled Glenn Jones, a cable pioneer. "Bob just bought." Magness liked to keep things simple. He always said that it was cheaper to pay interest than to pay taxes; it was the guiding principle of his business life. Everyone in cable knew that, of all the ranchers in bibbed overalls, ex-fighter pilots, and failed lawyers who traded cable systems as though they were portfolios of penny stocks, remarkably few of them paid any taxes to speak of. Magness took it one step further. If he kept borrowing and buying, he would eventually reach a point where he was rolling in dough, and he would still never have to pay a penny of tax. The trick was to keep expanding. But a company that grew larger and larger by acquisition rather than internal expansion had to buy larger and larger companies. It no longer made sense for TCI to buy small cable outfits and small programming services because they did not produce the desired result of larger and larger tax-extinguishing write-offs. Sooner or later, Malone and Magness would run up against the last remaining antitrust barriers of an increasingly libertarian government, or else they would simply run out of things to buy. If they continued to rely on debt, the situation could also become dangerously absurd, especially if Malone either faltered or became overconfident. Something—government action, a change in the financial marketplace, a new economic philosophy—would make his creditors nervous; his money would become expensive, and it would eventually dry up. It had happened often enough before. Financial engineering based on borrowed money was not a strategy of forever, no matter what Malone said. TCI was a short-term winner, and the financial community—Wall Street especially—always loved a short-term winner. But short-term victory was also a self-limiting phenomenon. As was the sort of monopoly Malone had fashioned for himself. It is a well-known, invariably forgotten lesson of history that would-be monopolists like Malone are usually great and vocal fans of market forces until they actually become monopolists, whereupon they begin to make the rules to suit themselves. The more rules they make, the more hides they fry, the sooner an inevitable reaction occurs, usually when a crack appears in the monopolistic facade. A crack had begun to appear. Slowly at first, and then with gathering speed, Malone began to need the TV programmers more than they needed him. [He had initially been able to charge cable programmers to deliver their fare to audiences, but, led by ESPN, the programmers were realizing that they could turn the tables and demand payments from cable franchisers like TCI.] If Malone hoped to thrive and prosper, he would have to get out of the financial engineering business and enter a whole new line of work. He would have to get into the television business. Malone had another problem, too. Although cable television had come to resemble a utility—when many people moved into a new home, they automatically called to have the gas, electricity, and cable hooked up—it was plagued by a glass ceiling. By 1989, the country was almost entirely wired; to continue its expansion, the cable industry had to expand its audience in the areas where the coaxial pipe was already laid. This was no easy task. In the systems where cable achieved its best penetration, no more than 60% to 65% of the homes subscribed to cable. Moreover, despite the fact that most systems—except some controlled by Malone—now offered dozens of channels, most people still watched only a handful of them with any regularity, and they were always the same ones. By 1993, Malone had maneuvered himself into a position where he had an excellent chance of pulling off a major coup in partnership with Barry Diller, one of the most talented entertainment executives of modern times. It would not, however, be the coup of coups. That particular triumph would be accomplished if he could sell TCI itself, lock, stock, obsolete cable systems, and dangerously mounting debt, for tens of billions of dollars. Selling TCI for vastly more than it was worth involved an act of prestidigitation unmatched since the British hid the Suez Canal from the Nazis in 1941. Fortunately, the very thing he needed to turn the trick had already been placed in his hands. It was Woo Paik's digital television. Nobody understood digital television very well. It would be Malone's agreeable task to instruct them. Then, wrapping himself in the mantle of the future, he would find his sucker. It would cost him very little—a certain amount of rhetoric from the brilliant king of cable, a few plausible actions that might cost TCI a little money. By the summer of 1993, Malone was well on his way. He had been working on his new plan for more than a year. In 1992, Malone had electrified the nation—and, most importantly, the nation's investment community, its press (the New York Times repeated his words on the front page), and its cable industry—by announcing the imminent arrival of the 500-channel world. It would be based, of course, on digital television. Cable would bring it to a waiting nation, with TCI in the van. Digital television would not merely be more television. Instead, it would be the information superhighway. There would be data services; the long-anticipated—MIT Media Lab founder Nicholas Negroponte talked about it constantly—convergence of the computer and the television set would become reality. There would be an entirely new form of cable-based telephone service. The Picturephone, for one, would finally become a ubiquitous appliance, although the Picturephone had utterly failed to take the country by storm as long ago as 1964. The home viewer could customize his programming. Negroponte would get his smart television set at last, and interactive television would become a fact. There would be other services and uses as yet undreamed of; digital cable television would be a boon to the human race. It was well-known that Malone was no ivory-towered theorist or unwashed gearhead driven to the brink of madness by the elusive wonders of the digital domain. The John Malone who took his listeners to the mountaintop and showed them powers and dominions was a notorious cheapskate and an intensely practical man. Moreover, the intensely practical Malone was speaking to a choir consisting of the financial community and the press, where true and useful knowledge about any technology more complex than a can opener was vanishingly small. Even so—or, perhaps, precisely so—in the press and the financial community, technological enthusiasm burned with a refiner's fire. Everybody read the press, and money talked. With Wall Street dramatically alerted to the imminent arrival of the 500-channel world by the impeccably pragmatic Malone, the financial community's celebrated herd instinct immediately kicked in. A cable company that did not plan an interactive, 500-channel, digital future was not looked upon with favor, and there would be no financial reward for any cable company that said the whole idea was nuts. There was little danger of that. The dyslexic former lawyers, ex-ranchers, and retired garment salesmen who ran most of the cable business were a far cry from the steely-eyed, flint-hearted, ruthless robber barons— Edison, Carnegie, and Henry Clay Frick came to mind—who had built the great industrial empires of the past. Edison, Carnegie, and Frick knew how their technologies worked, and they had skeptically examined a foundered horse or two in their time, but most of the cable guys had seldom seen a sky that was not blue, and Malone had just shown them the bluest of skies. It was Qube all over again, with a significant exception. In 1977 there really was something called Qube, and it worked. [Qube was Warner Communications' experiment with interactive television. The Qube system offered an early pay-per-view service; subscribers could select and pay for only those movies they watched. With Qube, people could push buttons and vote on City Planning Commission proposals, make reservations at restaurants, or get travel information from a travel office. But many viewers became bored with Qube's interactive features, and a lot of others didn't use them at all.] In 1992, there had been demonstrations of digital television, but they were lab work and videotapes. Many of the key components of a digital cable system were prototypes, were prohibitively expensive adaptions of other technologies, or did not exist. The reality of the situation notwithstanding, the other cable operators were more than willing to join Malone in his headlong charge into a future he described as immediate and certain. Moreover, Malone instantly suited his actions to his words. Or so it seemed. He ordered a million digital set-top boxes from General Instrument, the inventor of digital television. It had not, however, invented an inexpensive digital set-top box, and neither had anybody else. Malone then suspended his order for a device that did not exist. He began to rewire some of his systems—but by no means all, a fact that was frequently overlooked—with hybrid fiber-coax. The new digital television, he announced, would be available to his customers in 1995. He neglected to add that the new digital television would not be available to all or even most of them. With AT&T and US West, his closest ally among the regional telephone companies, he launched an experiment with video-on-demand—a simplified form of customizable television—in Littleton, Colo. He announced that the test had been an unqualified success because the viewers had purchased more video-on-demand than they did old-fashioned pay-per-view. But he neglected to point out that the viewers spent significantly less for video-on-demand than they did for rentals at the neighborhood video store. When all was said and done, Malone had created the appearance of vigorous action, effectively disguised TCI—the most technologically backward of the major cable companies—as the company of the digital future, and spent very little in the way of real money. Malone was about to find his sucker. Copyright © 1998 by L.J. Davis. From The Billionaire Shell Game, published by Doubleday, a division of Random House, Inc. All rights reserved. |
