John Malone never fails to surprise. The cable pioneer whose tough tactics earned him the nickname Darth Vader shocked Wall Street seven years ago when he sold TCI to AT&T for more than $50 billion. Last week, without warning, he spun off Discovery to shareholders. He even alarmed Rupert Murdoch, scooping up voting shares in News Corp., becoming its largest outside shareholder and setting off speculation that he might make a run on his old pal’s $58 billion family business. His Liberty Media owns stakes in an enviable portfolio of U.S. programming (QVC, Starz, Court TV) while his Liberty International, which was spun off last summer, is now the largest cable operator outside the U.S. B&C Executive Editor Mark Robichaux caught up with the reclusive 64-year-old last week. An updated version of Robichaux’s book, Cable Cowboy: John Malone and the rise of the modern cable industry, will be available in paperback later this month.
Comcast Corp. Chairman/CEO Brian Roberts is now the King of Cable. How would you rate his performance?
Comcast has done a terrific job of taking over the management of the AT&T properties and fixing it. Brian’s team is fabulous. I think they’ve done everything pretty much right, and I can’t criticize them. I only wish that I had held onto the AT&T stock just so I could continue to own a lot of Comcast stock. Fortunately, I got out of AT&T when I saw the train wreck coming and didn’t get back in. I do own some Comcast stock, which I have actually bought subsequent to all of this. I think Steve Burke is fabulous. And I think that their vision and their ability to execute is tops.
You’re now negotiating on the other side of the table. You own networks that you want Comcast to carry.
They kicked the shit out of us!. So we know from the purchasing side they’re very tough. With Starz in particular but, sure, with all of their programming purchases, they are very tough.
But you’re Darth Vader.
I used to be. I used to have the market power to be Darth Vader. I don’t anymore.
Do you miss being Darth Vader?
I miss the market power, absolutely. When you’ve got market power, it’s a lot easier to be right. When you don’t have market power, it’s much harder. So, sure. But I also think Brian Roberts’ politics are much better than mine ever were. On the other hand, I think he’s being probably more brutal to his vendors than I ever was.
At this very second, Liberty Media stock is trading at $10.26. Is that low?
Well, keep in mind we spun off some assets so you gotta add back what International is selling for. But that said, we still think it’s selling cheap for what it is. It’s undervalued. But we’re working on that. I think, in the aftermath of the AT&T sale of TCI and the bubble bursting, we feel pretty good about where we are relative to where we might be.
I have to say on behalf of the shareholders of TCI, I feel very disappointed in what happened at AT&T post their acquisition of TCI. We feel like it was a great opportunity, the strategy was correct, the execution was very faulty and they got blindsided by a more rapid deterioration of the long-distance business than anybody had anticipated. The sale of TCI was a great exit point; it provided a lot of liquidity. But to those people that we put into the AT&T stock who didn’t sell it, I can only apologize for not having seen it coming, but we didn’t see it coming.
If you look at Liberty’s price at the time we did the merger, that we agreed to the merger with AT&T, and you look at Liberty’s price today, it has actually doubled. So it all depends on what your vantage point is whether you’re doing well or poorly. After all, Liberty today is still a $30 billion-market-cap company, plus it spun off International, which is close to a $10 billion company. So it’s a $40 billion enterprise. And the remnants of AT&T are sitting there, as what? an $11 billion enterprise? So you gotta look at things as the glass is half full. Liberty still has some very excellent growth potential and some great assets.
Personally, I gave away quite a bit to charity. Some of it I converted into Liberty International and some bonds and so on. But I would say I probably lost a couple billion dollars from the peak. I didn’t really sell out until I got off the board, and, by the time I got off the board, much of the damage had been done.
Your deal to sell TCI to AT&T was seven years ago. Why does it still stick in your craw?
The execution by AT&T after the merger was not what it should have been, so that kind of makes me feel a little bad about it. And clearly, I would’ve been better off had I not done the AT&T deal at all in retrospect. But we don’t get a chance to go back in life.
You’re no longer the largest U.S. cable operator, but you do have big stakes in blue-chip cable programmers, such as Discovery. As the industry heads to its annual convention this year in San Francisco, what are the biggest issues?
Number-one thing is the launching of new services and products, which is really driving the industry. So VoIP and the continued penetration of high-speed data, introduction of new services on those platforms will be the big positive thing that they’ll be talking about.
The negative thing is what it has always been, which is the overhang of competition: What are the Bells going to really be able to do, and how much will that impact the cable business? What will the satellite guys and Rupert [Murdoch] be doing? As they regain some of their lost ground on video, they continue to press their advantage in data and telephony. Those will be the principal issues for the industry. Now the industry is down to just a few players. Maybe the whole industry meets in a phone booth.
You said the industry was turning into a handful of big operators.
I’m not sure it’s an industry anymore. I think it may be just a few big guys, a couple of big guys—and they either work together or they don’t—and a bunch of little guys the big guys don’t pay much attention to anymore.
Basically, the consolidation of the business has got to the point where I don’t believe that an independent programmer has any chance whatsoever of doing anything unless he’s heavily invested in and supported by one of the major distributors.
But you were in this very catbird seat just eight years ago. This now sounds like a different tune.
TCI was never big enough that we could stop anything. We were big enough that we could help something that was a good idea to get going, but we could never kill anybody. But there’s no way on earth that you can be successful in the U.S. distributing a channel that Brian Roberts doesn’t carry, particularly if he has one that competes with it. And probably pretty soon the same can be said of Rupert Murdoch.
I think the consolidation has gone that far. I’m not saying that’s good or bad. I’m just saying that’s true.
Do you think the government will step in at some point?
I don’t know. I mean the government stepped in and gave retransmission consent to the broadcasters, which pretty well wiped out any chance that independent programmers had anyway, right? I mean, if you look at what happened since retransmission consent was signed, virtually all programming, all the networks that are successful have evolved toward ownership by a broadcast network. So you’ve seen the consolidation both on the broadcast network side and on the distribution side to the point where small independents really don’t have a chance.
Can I believe my ears? Darth Vader taking up for the little guy now?
I’m just expressing the view that that’s the stage consolidation has reached.
I get guys in here with good programming ideas asking me how to get distribution for them, and I tell them the same thing, which is you gotta go make a deal with Comcast or with News Corp. or you probably ought to abandon your idea or wait until the Internet and then offer it as a streaming-video Web site and that will eventually succeed in providing an alternate route to the end consumer. But right now, you can’t start something with traditional cable-network economics and hope to be successful. It’s just not in the cards.
Digital video recorders (DVRs) will be the rage at the show this year. What will be the effect of cable operators’ massive deployment of TiVos and DVRs?
They’re a threat to the current financial structure of content creation by threatening the advertising-revenue stream. And I think that’s probably as serious an issue as there is overhanging the industry.
You make it sound like DVRs are a bad thing for cable operators.
They’ll sell the rope that hangs them. You’re offering them because your competitors are. You don’t have a choice so you’re going to be offering both video-on-demand and DVRs because, if you don’t, somebody else will. So you offer them because it enhances the video-viewing experience, but it undercuts the advertising-revenue model, which could ultimately undercut the quality of the content that you’re ultimately going to purvey and, therefore, ultimately reduce viewing. If nobody spends a million to make the content, who’s going to watch, right?
Think about the next Olympics from China. How many people are going to sit up in the middle of the night rather than turn their TiVo on and record, and how many of those people are going to watch commercials? So for somebody like GE [NBC] that’s made a long-term bet on the Olympics, it’s a real challenge. They’re going to have to change their exploitation model. They’re going to have to go to some kind of subscription model if they’re going to be successful in the out years, because there’s just going to be too many people watching it and not watching the commercials. And so a lot of this stuff is going to have to change; a lot of these financial models are going to have to change.
Viacom is one of those ones that seems, at least for the moment, threatened by the new technologies. They got out of Blockbuster because of Internet and Netflix. Then XM radio and Sirius radio are representing a very real threat to their radio networks. Not to mention iPod. So Viacom is an example of a company that’s already feeling the bow wave, if you want to call it that, of these new technologies. You have to be a little cautious about how you see your assets and how are they going to play in these rapidly changing technologies.
There’s one thing for sure: The world will look completely different 10 years from now than it does today. That’s one thing you can bank on. These technologies do not slow down. The world is becoming much more adept, and the connectivity is getting better and faster. So the world will change, and some of these things will change in ways that are difficult to sit here and predict. But they definitely will change, and you can only say sort of roughly what attributes you need to have to survive it and/or to do well in it and what attributes are a killer. Trying to stay in the old space and build walls to protect it is a definite death sentence; it’s a dinosaur solution.
Are the phone companies really going to become TV companies?
It’s hard to say. I believe they’re speaking with a fair degree of integrity, but if you really listen carefully what [President/CEO of Verizon Communications] Ivan Siedenberg is saying, he’s going to do this fiber to the home where it makes sense. He’s not saying he’s going to do it everywhere. And if you listen to the other guys, SBC and Bell South, they’re basically saying that they’re going to do a DSL upgrade, which really makes a lot of sense financially, and I think that they will probably do it. So I tend to bet a little bit more on cable although both guys can win if they don’t get crazy about price cutting.
Fiber close enough to the home for all practical purposes is the game. I mean, do you have to have fiber to every TV set? Do you have to have fiber to the drop? Do you have fiber to the curb? I mean it’s really a question of economics, maintenance and what are you going to use a gazillion bits per second for? There is a point of diminishing returns. The question really, I think, is one that will only be determined in the future in boardrooms when we see what the P&L impact is of spending all this capital and not getting any return: Can they take the pain?
But the phone companies are building and buying new high-speed plant, right?
But look, this is like an arms race. Yeah, we can build a bigger hydrogen bomb than you can, but the question is, how useful is that to the consumer and does the consumer give a shit?
A lot is written about your relationship with Rupert Murdoch. You’ve been the largest outside shareholder of the company for a while. What’s your endgame with News Corp.?
We’d like to own as much of News Corp. as we can on behalf of our shareholders. It’s an economic issue; it’s not a management issue. We think they’re the best-positioned of the big, vertically integrated media companies, and we think they’re very well-run. So we want to own as much of their stock as we can because we think it will give us good returns. It was a “why not?” issue on the votes. If you have voting stock at the same price as non-voting stock, why not? Let’s be clear: It wasn’t so that we can go take the company over.
There’s also lot of speculation about you and Liberty Media. Is Malone a buyer or a seller?
When you’re running a business for the public shareholders, everything has a price, right? If somebody hits the price, we don’t have a choice. Whatever we want or feel emotionally, at the right price, everything is for sale. You gotta know that, if anybody makes me an offer, I have to take it seriously.
You’re not out there in the market inching up your skirt, so to speak?
No, no, no, because that would be a waste of energy, and I might get a cold ass. The more likely scenario is that we continue to build businesses that we believe in and positions we believe in and some of those positions are better off as separate public companies, like the international business, and some of those businesses are better off being part of somebody else’s business. Right? And some of those businesses are better off being part of us.
What is your strategy in spinning off Discovery Communications to shareholders?
Discovery is a situation where we would have loved to have owned all of it. We came to the conclusion that it was very unlikely that we would ever be able to buy out Cox and Newhouse—very, very unlikely—because they love it and they don’t want to sell it.
So our conclusion was, well, why don’t we give Discovery directly to our shareholders? And maybe we can do something with Cox and Newhouse so that we can all own a public Discovery together. I’d like to see that entity strongly capitalized, growing rapidly, fulfilling its destiny globally as an independent, public company. It should trade much more reflective of its underlying values. If not, then there may be somebody else for whom the value is apparent who would come in and want to own it.
Do you watch a lot of Discovery programming?
I do. I wish that they would go more back to their roots and have a little less of the toys-for-boys stuff, which they may eventually decide to do. But they’re trying to cover a lot of bases with their programming.
You’re a News Corp. shareholder. Do you watch Fox’ hit American Idol?
You know, I have never watched American Idol.
Are you kidding me?
But I understand that it’s very successful.
I don’t make my decisions by watching shows and deciding whether I like them or not. If I did, I wouldn’t be worth shit as an executive. I like to look at ratings and economics and surveys.
What do you watch regularly?
I watch Fox News and or CNBC or Bloomberg. So I’m more of a news junkie. But usually I’m reading, or I’m doing something, and I’ve got the TV set on.
Why has Starz been such a big drag on Liberty?
Well, Starz is a company that made a big investment in output from Hollywood, including Internet Protocol rights—IT rights—for subscriptions. They thought they had a contract with AT&T that Comcast inherited that was binding and would’ve underwritten those contracts. That contract was disavowed by Comcast. It ultimately didn’t come to pass, and so Starz found itself with an expensive output deal from Hollywood without the compensatory revenue stream that they had anticipated coming primarily out of Comcast. Despite that, Starz’ revenues have grown every year.
Unfortunately, the revenues didn’t rise fast enough to offset the large increase in product cost that was coming to them by these output deals. That increase in product cost is only a couple-year phenomenon. So in another year, their costs will stop rising and start stabilizing. In addition, they have all these Internet Protocol rights, which we think will become very important as more and more movie viewing is done or downloaded over the Internet as opposed to over traditional broadcast channels.
For Liberty Media International, where are the biggest areas of growth?
International is going great. We had a successful IPO of our Japan business. The stock has moved up very nicely from the original pricing. We’re hoping that the merger with UGC [UnitedGlobalCom] takes place in May. It’s a great company. It’s got lots of capital. I mean, it’s almost as big today as TCI was when I sold it to AT&T, in terms of subscribers. It’s got roughly $6 billion in consolidated liquidity. And every one of its businesses is generating free cash flow after leverage. We put it together to have the muscle to do almost any acquisition it wants to do and any sort of internal development it needs to do. So we think it’s a very robust business and there’s going to be lots of acquisitions available to it.
Here in New York, Cablevision is embroiled in a two-front tabloid battle: over the purchase of a potential stadium site and the struggle in the boardroom between Cablevision Chairman Chuck Dolan and his son, President/CEO James Dolan. At issue is the direction of Cablevision’s HD satellite service called VOOM. Years ago, you were briefly on the Cablevision board; now you’ve joined it again. What’s up?
I’m an old friend of Chuck’s. TCI used to own 30% of them. So I was on the board for a while, and I think I have good relations with both Chuck and Jimmy. Chuck asked me to do it, so I said for old time’s sake, sure.
What do you think is going to happen there with respect to Voom?
Well, Voom will clearly either be continued by Chuck personally, or it will cease to exist. I have declined to do that on behalf of Liberty on a number of occasions. Does he want my advice on anything I could be useful for relative to Voom? He’s got it, you know? Chuck’s problem is, he’s a public company and he really should be a private company. To be willing to play the cards as hard as Chuck plays the cards, you almost have to be private. It’s hard to find public directors who will support the management in a transaction that they perceive to be as risky as Voom. If you’re going to be exceptionally successful, you need an exceptional leader who has got to be a risk-taker, and he needs a board of directors who will support him. A lot of people have lost money betting against Chuck.
Do you ever think of retiring?
Well, everybody asks me about retirement, but this year wasn’t the retirement year. This was a kick-it-in-the-ass-and-set-it-up-and-be-proud-of-it year for the international assets. I think we’re going to build an international cable company that’s going to rival anything in the U.S. And that’s my final message, ’cause I gotta go eat.