TCI

"Gibbs’ primary contribution came in mid-1991, a year after Sky was launched. As Coopers & Lybrand had predicted, the fledgling business was taking longer to get established than initially estimated; the New Zealand economy was in deep recession and subscribers were signing on in a trickle rather than the steady flow that Heatley had confidently anticipated. The business was losing $1 million a week, which gained everyone’s attention. Heatley hadn’t lost confidence but admitted that he’d underestimated the startup costs. He remembers Gibbs calling him up at home one evening and saying, ‘Craig, you promised me that if I put a little bit of money in Sky I’d have lots of fun; I’ve now got more than a little bit of money in it, and it’s no fun at all.’ Their solution was to bring in more investors to contribute around $100 million in fresh capital. They started talking to Gibbs’ partners at Telecom, Bell Atlantic and Ameritech, sowing the idea that this could be a useful experiment for them. In the United States telecommunications companies were barred from investing in cable television, so New Zealand would provide an opportunity for them to explore potentially interesting synergies between the two industries. Soon a consortium was drawn together comprising Bell Atlantic, Ameritech and two cable companies, Time Warner and TCI, and they began negotiating an appropriate price for 50 per cent of Sky."

"Once TCI had finished writing down the value of its assets to shelter cash flow from taxes, it would have to begin payingincome taxes and keep on paying interest, and there would be nothing left to fund growth. It needed to keep expanding, no matter what, buying up new cable companies to start the write-off process anew and build cash flow."

""If you're going to ask about quarterly earnings, you're at the wrong meeting, and you probably own the wrong stock," he told one group of TCI investors. "What we care about is value. We want to create value for our shareholders. And I think the best way to create value is to have a very long view, so that's what we do. So when we have the opportunity to expand into an area we think is going to have long-term value, we do it. We don't have to worry about the impact on earnings. So it makes a different kind of organization."9"

"TCI doubled as an investment vehicle, investing in an ever-expanding portfolio of cable channels. Malone viewed himself as an investor and shareholder in each of these enterprises. It"

"In a cable television system, the largest category of cost (40 percent of total operating expenses) is the fees paid to programmers (HBO, MTV, ESPN, etc.). Larger cable operators are able to negotiate lower programming costs per subscriber, and the more subscribers a cable company has, the lower its programming cost (and the higher its cash flow) per subscriber. These discounts continue to grow with size, providing powerful scale advantages for the largest players. Thus, the largest player with the lowest programming costs would have a sustainable advantage in making new acquisitions versus smaller players—they would be able to pay more for a cable company and still earn the same or better returns, thereby creating a virtuous cycle of scale that went something like this: if you buy more systems, you lower your programming costs and increase your cash flow, which allows more financial leverage, which can then be used to buy more systems, which further improves your programming costs, and so on ad infinitum. The logic and power of this feedback loop now seems obvious, but no one else at the time pursued scale remotely as aggressively as Malone and TCI."

"When he sold assets, he almost always sold for stock (the reason that, to this day, Liberty has large holdings of News Corp., Time Warner, Sprint, and Motorola stock) or sheltered gains through accumulated NOLs, and he made constant use of the latest tax strategies. As Dennis Leibowitz said, “TCI hardly ever disposed of an asset unless there was a tax angle to it.”10 No other cable company devoted remotely as much time and attention to this area as TCI."

"Malone was a pioneer in the use of spin-offs and tracking stocks, which he believed accomplished two important objectives: (1) increased transparency, allowing investors to value parts of the company that had previously been obscured by TCI’s byzantine structure, and (2) increased separation between TCI’s core cable business and other related interests (particularly programming) that might attract regulatory scrutiny."

"Malone targeted a ratio of five times debt to EBITDA and maintained it throughout most of the 1980s and 1990s. Scale allowed TCI to minimize its cost of debt, and Malone, having survived the harrowing experience of the mid-1970s, structured his debt with great care to lower costs and avoid cross-collateralization so that if one system defaulted on its debt, it would not affect the credit of the entire company."

"Malone pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI’s cash flow from taxes through the deductibility of interest payments."

"As Malone sought to achieve scale by growing his subscriber base, three primary sources of capital were available to him in addition to TCI’s robust operating cash flow: debt, equity, and asset sales."

"Because of these polyglot joint ventures, TCI was notoriously hard to analyze and often sold at a discount to its cable peers. (As David Wargo said, “To understand the company you had to read all of their footnotes and very few did.”"

"His management of TCI had a quality of asceticism about it. Every element of the company’s strategy—from the pursuit of scale to tax minimization to the active use of financial leverage—was designed to optimize shareholder returns. As Malone said in summing up his analytically driven approach to building TCI, “They haven’t repealed the laws of arithmetic . . . yet anyway.” A fact for which his shareholders are eternally grateful."

"The first large bet was made in conjunction with TCI, a London-based asset manager led by Chris Hohn and known for a number of activist incursions, namely ABN Amro Bank and the Deutsche Borse. 3G and TCI both acquired a large stake in CSX, an American railroad company, and pressed for aggressive changes in the company’s management. They were partially backed by Behring’s experience in ALL, Brazil’s largest railroad operator. After CSX, 3G raised a new fund enabling it to announce the take-private of Burger King in 2010. The fast-food chain was then held by private equity funds run by the Texas Pacific Group, Bain Capital, and Goldman Sachs, who’d purchased the company from Diageo in 2002. The group was having trouble running it, especially after the 2008 recession. The buyout valued BK at $3.3 billion (plus $700 million in debts), or nine times earnings. The disbursement was levered roughly one-to-one, which added around $1.7 billion of takeover debt on top of the existing $700 million. Bernardo Hees,"

"By one tally, we had spent $3 billion by 1987 for more than 150 cable companies, giving TCI reach into nearly 20 percent of U.S. homes. We had a sufficient lead—nearly twice as large as the number two player, Time Inc.’s ATC. A year later, we had no earnings but posted cash flow of $850 million—more than the cash flow of ABC, CBS, and NBC combined."

"TCI had a new worry: we’d be held hostage to ever-increasing fees from networks that attracted the biggest audiences. This changed the economic model in my mind, and in an instant I saw our big distribution company differently. We would have to become owners of content. Quality programming was critical for the industry, and I understood most content providers were price constrained, which is why we stepped up for Ted Turner and why we invested in BET, Discovery, and the Family Channel."

"• ⁠ To accomplish these goals, I sketched out a second list: • Retire from TCI. • Reduce outside public board memberships from 11 to 4. • Remain chairman and controlling shareholder in Liberty. • Remain chairman of CableLabs. • Stay on the Turner board. • Get the government off TCI’s back. • Generate predictable income by deferring TCI compensation payments with stock dividends, which should produce sufficient cash to maintain our lifestyle. • Say nothing publicly about the contemplated change until Bob Magness is comfortable."

"After a thirty-minute meeting, I promised to give him half a million dollars for his idea. TCI agreed to give Bob $180,000 for a 20 percent stake in Black Entertainment Television (BET) and loan the remaining $320,000."

"Sometimes in business, a strategy doesn’t appear to work at first, but the knowledge you gain is more valuable because it informs decisions down the road. In late 1988, Rupert called with a very particular request. “John, you know about computers and networks and so on, and there’s a company called Prodigy…” We had been closely watching the “computer information services,” as they were called back then. Rupert wanted to explore joint acquisitions using TCI’s networking and News Corp.’s programming. “There must be something here for us,” he said."

"But in my constitution, if the financial numbers fail to support the big bet, it is time to make a smaller one instead. This cautious, but calculated mindset would define my dealmaking for the next thirty years or more. We started building out TCI when I went there in 1973 and vastly accelerated our expansion efforts in 1979. We grew mainly through acquisitions, and by 1982, nearly ten years after I arrived, TCI was the largest cable provider in the U.S., with 2.5 million subscriber homes. And that was just the start, though I am unsure we knew this at the time. By one count, we acquired 482 companies from 1973 to 1989: a rate of one new deal every two weeks."

"In this and all other issues, my aging cowboy boss, Bob Magness, was glad to hand the reins over to me. He had borrowed big-time to buy or build more than two hundred cable systems in twenty-one states, with all the headaches of running them. Those headaches were all mine now—meeting with seven banks to get credit for TCI, five banks for a subsidiary called NTA, and two banks for a cable company called Athena, which Magness had bought from Gulf+Western a few years earlier."

"Some companies went bankrupt during this period. TCI was damn close—our stock had gone from around $16 at the IPO to a high of $37, but bottomed out at around 75 cents in 1974. The market capitalization—the value of all the shares at the time—was $3.9 million. We had halted hiring, cut back hours to meet payroll, and I was personally approving any expense in the company over $500. It wasn’t much different at home."

"TCI was decentralized to the point that decisions were delegated to six different regions, each with their own accounting, engineering, and maintenance teams. Layered on the owned systems, we were operating systems through more than fifty partnerships, most of which were with the original operators we trusted to keep running more systems. If you buy a property and find a manager motivated by ownership in the company, keep them in power and trust them."

"JC and his lieutenants—Larry Carleton, Art Lee, and Marion Nowack—were nice but could have easily passed as modern Vikings when taking over a cable system in those years, cutting cost and enforcing the TCI way. Once, JC drove from the Newport Beach, California, system to Denver in a fairly new Oldsmobile Ninety-Eight, previously driven by the head of the cable company we had just acquired. To the victor go the spoils."

"Our skill sets were strategically complementary. Over time, for me, the acquisition strategy became one of mine. For JC Sparkman, TCI’s chief of operations, the integration of the acquired cable systems became the specialty. And for Gary and Donne, managing the financials became their expertise. So we were all learning together, in a company that was struggling, in an industry that was changing."

"I almost hung a poster that said, “We listen to all ideas for networks.” Our rationale at TCI was that if your network comes to us to be carried, we’ll pay you like everyone else, but we will expect a meaningful volume discount as in any other business. So then if someone had a good idea, and they were looking for an equity holder, why not strike a deal for TCI to own 20 percent of that company instead? We reached roughly 20 percent of the industry’s subscribers. Over time, that became a model for several such deals."

"The term “junk bonds” is a misnomer because they can be a company’s treasure, too—as they were for TCI. Typically issued by a company with a lower credit rating, a junk bond has a bigger risk of defaulting compared with bonds issued by a blue-chip company. To reward the investor for taking on this higher risk of default, a junk bond pays a higher interest rate."

"We raised money from everywhere—banks, insurance companies, publishers, Wall Street, anyone with capital—to fuel TCI’s growth, because I knew the advantage would go to the biggest company. Scale economics drove every decision."

"By the late 1970s, we knew instinctively that the key to victory at TCI was in our ability to gain scale and grow ever larger through acquisition. We had three key goals in the 1980s: accumulate cable systems as fast as possible, aggregate them into contiguous clusters, and refinance the debt terms based on our bigger size and bigger cash flow."

"TCI, by contrast, posted *cash flow* of $1.86 billion, had grown annual revenue to more than $4 billion, and never had posted after-tax net income in twenty-five years of business, much less paid dividends to shareholders. And TCI was managing nearly $15 billion in debt. We were solely focused on long-term growth in the value of our stock."

"percent of its equity to TCI for our digital Headend in the Sky (HITS) distribution network, making Liberty Media, through TCI, GI’s largest shareholder. The stock walked steadily from $12 to $50, and Liberty later raised its stake to 18 percent by buying 10 million shares from Forstmann Little & Co."

"On December 17, 1997, GI announced $4.5 billion in orders from nine cable operators including TCI, Time Warner, Comcast, Cox, and others. In addition to the 15 million set-top boxes, the cable operators would also receive warrants for a 16 percent stake in GI. This single order—three times GI’s $1.8 billion in revenue—would guarantee the company’s profitable future, especially since the same operators would look to GI for maintenance parts and upgrades. As part of the deal, in 1998, GI traded 10 ⁠"

"On December 17, 1997, GI announced $4.5 billion in orders from nine cable operators including TCI, Time Warner, Comcast, Cox, and others. In addition to the 15 million set-top boxes, the cable operators would also receive warrants for a 16 percent stake in GI. This single order—three times GI’s $1.8 billion in revenue—would guarantee the company’s profitable future, especially since the same operators would look to GI for maintenance parts and upgrades."

"For me the creation of Liberty was capital allocation, but more simply, creative problem-solving. Sometimes a complex problem deserves a complex answer. In many ways, Liberty represented a clean canvas to draw on and freedom from regulators poring over TCI. Liberty would become a vehicle to build personal wealth and the progenitor of everything we run today."

"Eventually, the ordering system was replaced, and sales grew. But we were still not up to par with the Home Shopping Network. And over in Philadelphia, a fellow by the name of Joseph Segel was doing a much more elegant job of selling merchandise on a network call QVC. Joe was a polished businessperson who had founded the Franklin Mint, which ran sophisticated ads in magazines to sell commemorative coins, medallions, figurines, and other collectibles. He, too, had seen HSN and launched QVC as the Saks Fifth Avenue to HSN’s Walmart. QVC’s hosts were smoother, and its merchandise comprised of more high-margin products. So TCI took an equity stake in QVC, along with Comcast and others. Literally dozens of companies announced new shopping networks, far too many for the market to support. And the market quickly thinned out. The Fashion Channel, in which TCI owned a stake, would go bankrupt and be folded into CVN. Many retailers saw the vision, but few could make it work in time. Still, there was opportunity for the right player."

"Government tax laws gave cable companies a big advantage over phone companies: they could “depreciate” their systems quickly over a shorter life, treating the gradual loss of value in their equipment as an expense, even though it wasn’t an actual cash cost, with greater tax advantages. This accounting method reduced their reported earnings and, in turn, their taxes. On top of that, they could also deduct real cash expenses like interest payments before calculating taxable income, cutting their tax bills even more. So, when investors pointed out that TCI had high interest payments, big cable equipment budgets, and no earnings, I would point out that these accounting-based losses resulted in TCI hardly paying any taxes to the government. And as long as cable operators collected predictable “rent” in the form of monthly fees from customers, and they met interest payments and grew from acquisitions, the value of the company’s stock would increase."

"TCI and Microsoft were already conducting small interactive tests in the Redmond area, and there were some discussions to develop a cable-TV network covering computing. *What is there to think over?* TCI would be a 20 percent owner of a new internet portal that would piggyback on the most successful operating software in the industry."

"When we returned to Denver from the CableLabs trip to the West Coast, while Bill was in talks to invest $1 billion with Brian, I called an old friend at GI, Ed Breen, who had worked on digital technology at the GI VideoCipher division. Ed got his start at GI selling converter boxes and rose fast to be SVP of worldwide sales; less than ten years later, he would be running the company as CEO. “Gates can make these boxes for three hundred dollars,” I blurted out to Ed almost as soon as he answered the phone. Of course, he raised the specter that Gates would simply subsidize the cost until the industry was in his stranglehold. I knew that GI needed a hit as badly as we did. Even though GI discovered the breakthrough for digital compression, business was hurting because cable operators, TCI among them, had put off costly upgrades in the rounds of rate cuts following the 1992 Cable Act, which had crimped cash flow. GI had about 60 percent market share in TV set-top boxes but wanted the new digital business. Ed said that the best price on the box at the time was $400, more than double the cost of a typical analog box. “Okay, let’s get serious about it,” I said. “How many do you have to be buying for and by when, to get your price down to a three-hundred-dollar price?” Ed knew the specs and pricing of the box better than anyone, and I trusted him. “You know, if you ordered ten million of these things, we could get the ball rolling, because that would be a three-billion-dollar purchase order.”"

"Now the banks were balking at any more lending, yet we already had pledged TCI to pour half a billion dollars into new construction to win cable franchises from local governments in Tennessee, Washington, and elsewhere. On top of that, in return for franchise agreements to operate there, we had inherited promises made by systems TCI bought to build community centers and parks."

"Two years later, the favor was returned. We got a call from a representative at Teachers Insurance, a longtime lender to TCI that still held warrants on our stock. The representative said that Teachers, Travelers, Equitable Life, John Hancock, and the others would be willing to lend $78 million to TCI, one of the largest loans to the cable industry at the time, at a rate nearly two points cheaper than the banks were offering, with much more flexibility. The insurance companies had seen how consistent our returns were over several years and felt confident to commit to a new line of capital for us. We first flew to New York to finalize the paperwork and celebrated, then quickly called a meeting in Denver to give the news to our banks. I’m sure Bob wanted to tell them all where they could go, but I stepped to the front of the room and said politely, “I’m happy to announce TCI has arranged for alternate financing, so it’s going to be possible for any bank that wants to reduce their exposure to do so on a timely basis.” Then we let the banks know that their interest rates weren’t good enough. “From this day forward, the company is a prime-rate borrower,” I said, meaning TCI deserved lower rates than other companies were getting. Five of the seven banks wanted to stay in, and they rewrote their covenants with more flexible terms and lower borrowing rates."

"At TCI, we would host newspaper executives for a daylong catered seminar, painting a future with newspaper subscribers reading on screens. Out of these meetings, we engineered joint ventures with the newspaper publishing giant Knight Ridder, where we would match every dollar of equity they put in with a dollar of equity of our own, and they would receive shares of preferred stock, which paid them a quarterly dividend. And then we would leverage that equity structure and acquire another cable system. We applied our Knight Ridder template to similar partners—E.W. Scripps Company and Taft Broadcasting—to buy jointly owned cable systems, which we would put into separate operating entities, and use them to buy still more franchises. Eventually, we would buy them all out."

"His issues with Uncle Sam notwithstanding, what I know is that Mike Milken proved his thesis that non-investment-grade bonds were undervalued relative to investment-grade bonds. And he helped TCI raise a lot of money perfectly legally, just as he had done with Ted Turner and many other U.S. companies. After we started dealing with Milken, we didn’t have to do as many road shows anymore."

"I could see what was coming: once Warner got everyone hooked on free content with MTV, it was going to increase the price down the road. So I needed to throw a monkey wrench into their IPO plans for MTV. So I wrote a letter to Warner that stipulated that, absent a mutually acceptable agreement, we were dropping MTV from all of our systems. I knew this would interrupt the MTV prospectus (the offering document for the IPO), because it would be considered a material change if the largest distributor planned to discontinue carriage. Drew, whom I liked, was on the plane and sitting in my office the next day, and Warner and TCI struck a long-term deal that protected us against the increase in rates. Quality content would become much more valuable. Already cable was outgrowing its amateur-hour status compared with the broadcast networks. CNN was now in 26 million homes, with a George Peabody Award in journalism. HBO would win its first Emmy in 1988 with a documentary."

"This was especially important for TCI, which was starved for cash at the time and was trailing our rivals in upgrading systems for fiber optics and two-way switching gear. TCI was planning to spend $2 billion to upgrade its cable systems with seven thousand miles of fiber-optic lines. This made it all the more important that we deploy digital sooner rather than later, to unlock more channels and rake in more subscription revenue to help pay the bills. TCI committed another $100 million to build the National Digital Television Center in Littleton, Colorado, with massive satellite dishes capable of receiving and sending compressed digital signals to TCI and other cable operators."

"By 1982, cable-TV was big business, and TCI had become the biggest cable operator in the U.S. With cities handing out exclusive, long-term franchises, given the high building costs, cable had become a natural monopoly: win the rights, and you owned the market. Once the dust settled on a franchise fight, operators rarely competed for customers. What started as a scrappy local business was now a strategic chessboard. We kept growing, often teaming up with former rivals on acquisitions. If you could find a way to buy together, you avoided bidding wars—and everyone came out ahead."

"Half listening to me, Ted waved his hand, swatting away the pesky regulations like a fly in the room. Ted didn’t really want to hear any objections or any questions. He wanted more than anything to leave with a handshake to carry his network to reach all of TCI’s subscribers. With my questions hanging in the air, all eyes were on Ted. Instead of calmly responding to the issues, Ted, in suit and tie, dropped down onto the floor on his hands and knees and started crawling around as if he had dropped something. Groveling on the floor, he crawled over to JC Sparkman, head of operations, and kissed JC’s shoes, telling him, “JC, I’ll kiss your feet if you carry this station! Please carry my channel!” It was quite a show, acted out in dramatic fashion, and he had the entire office hooting, howling, and laughing at the theatrics. He had won the crowd. When Ted figured out he wasn’t walking away with an agreement, though, he made his intention clear: “Well, I’m ready to do it myself if I can’t get anybody to help.” Impressive. Here’s a guy who is unafraid of walking into the cage and poking the tiger. Here was a broadcast station essentially planning to take on the broadcast industry, which had had its boot on the back of the neck of cable operators for years. *Is this guy fearless or crazy?* I thought at the time. *Probably a little bit of both.*"

"Bob and I had known Heritage chairman Jim Hoak for years, so we flew out to Des Moines, Iowa, to check his temperature. Bob and I had doubled up in a single room at the local Holiday Inn, and the night before we met Jim, we made a beeline for the hotel bar after dinner, still chewing over the issues of control. “What if we did this with two classes of stock?” I asked Bob. “TCI can split its stock, then issue a class B share for every share that exists.” Bob looked at me, his empty face begging for an explanation for this unprecedented maneuver."

"We put together hundreds of deals that made millionaires of dozens of cable-system owners, often family businesses whose owners had worked most of their lives to build what they built. The motivation to sell is different for every person. For some it’s the money. For some, it’s a family thing. Most are just retiring, sapped from juggling all the headaches of a small business. We believed our stock was undervalued, and I avoided using cheap currency to buy assets—a mistake many start-ups make by giving up too much equity early, instead of waiting to raise capital when their value is higher. And we didn’t mind cash deals because the step-up in basis gave us larger depreciation deductions, which helped offset future taxes. At TCI, we thought we were just scaling up for efficiency and cash flow—but in chasing margins, we unknowingly laid the fiber backbone for the internet itself, paving the future for broadband before we knew what it would become."

"Magness looked up at an old ranch dog, a lethargic mixed beagle named Tiger, sleeping by the fire. “About the only one we can trust in the whole world is Tiger…,” Magness said. I laughed. Then… lightning struck. TCI, too, had a sleeping asset that could save the day. By happenstance, we had an unrestricted subsidiary that was not on the balance sheet of TCI, a small cable system down in Brazoria, Texas, that for some reason was not covered by the bank agreements. If we could leverage the balance sheet of that company to purchase stock, we could buy the shares back at a bargain and redeem them into the treasury. And that is exactly what we did, buying back almost 20 percent of the company at a big discount, redeeming shares, and shrinking the equity through an entity called Tiger Inc., which included the stock held by Gulf+Western and Kaufman & Broad. The move allowed us to keep more than 40 percent of TCI shares in friendly hands. We later moved the Tiger shares over to Jerry O’Brien, publisher of *The Salt Lake Tribune,* an early TCI investor and Magness friend."

"When we started to grow and finance that growth, predictability was what gave banks the confidence to lend more money for bigger purchases. We saw patterns, which led to some simple rules at times: for example, never pay more than five times the annual cash flow generated by a cable system, figuring in the savings from synergies. This helped us decide instantly if a property was worth the asking price. It was all quite simple—a virtuous circle that would help us gain the advantages of scale economics. Buying more cable systems would bring in more paying subscribers. More paying customers meant higher cash flow and lower costs in the form of bulk discounts for networks. Increased cash flow allowed TCI to borrow more money and pay the higher total interest costs on it, which we used to buy still more cable systems."

"Only about a third of the TCI investors swapped their shares for Liberty stock. After my talk with Ted, I bought as much of Liberty Media as I could, swapping in a third of my TCI shares for what amounted to nearly 9 percent of Liberty shares in return. After borrowing $25.6 million to exercise the options I was given, I would come to control 20 percent of Liberty’s class B stock, which was allowed ten votes per share. And using rights Bob transferred to me, I would control close to 40 percent of the shareholder votes at Liberty."

"At his first cable system in Memphis, Texas, TCI caught three TV stations from nearby Amarillo, about 80 miles away, and Lubbock, about 140 miles away. Bob paid $100,000 to a Forth Worth company to erect a thirty-story tower on a sixty-foot rise near town. Subscribers paid $33 to get hooked up, plus a $6.60 monthly fee. From their kitchen table, they started off with Betsy handling billing and Bob managing construction. When they couldn’t build, they bought, merging the cable company with a large common carrier microwave company, whose big dishes could transmit TV signals to cable-TV headends far away by line of sight. By the time the company went public in 1970,TCI was already the tenth-largest cable operator in the country. But the sudden growth had left TCI bloated with debt."

"The conversation was always the same: What is your programming service worth? If the answer was, say, $20 million, we’d say, “Okay, we’ll pay you $5 million for a 20 percent stake, and we’ll pay you 5 cents per subscriber home per month—but we want to freeze that rate flat for the next fifteen years.” An implicit part of this discussion was TCI’s reach as the biggest cable operator in the country. By signing on with our cable systems, new channels instantly could reach 20 percent of the nation from the get-go. I personally wanted to encourage the programming companies and entrepreneurs to create content exclusively for cable TV. The industry had been feeding on leftovers from the broadcasters for nearly twenty years; in the early 1980s, the top-rated cable programs included ancient reruns of *The Andy Griffith Show* from the sixties. I knew if the new cable networks had access to the same scale and financing as we did, they could exceed the quality of what the broadcasters were producing."

"It was the summer of 1986, and I had flown to New York with Peter Barton, a new young recruit at TCI who had shown promise, to explore investments in a new, fast-growing genre that was making money. A lot of money. We were there to meet Irwin Jacobs, a corporate raider from Minnesota who had founded a mail-order company that dealt in closed-out merchandise. Irwin was a shrewd, motivated businessman who had found opportunity in the detritus of companies that had failed, or needed cash, or had bought too much of one product. He had been called a corporate raider in the press, accused of greenmail by public firms, and was known as “Irwin the Liquidator” in local business circles and on Wall Street."

"By 1982, TCI had built itself into the nation’s largest cable company, but the biggest deals were yet to come. More scale equals more savings, which gave us more buying power to buy more systems and build more scale, which equaled more savings—a virtuous growth cycle. When I wasn’t raising money in the 1980s, I was flying from city to city, making promises to politicians where we owned cable-TV franchises, or where we were trying to buy them. Big established media companies were now elbowing in to buy or build cable systems—not in the rural towns where the industry was born but in the big cities where urbanites were eager to explore the new national networks like HBO and TBS."

"The deal grew our subscriber base by 20 percent. And we made overhead expenses disappear. Gone were the luxury offices, corporate dining rooms, and company cars. And while we inherited regional employees and managers in each acquisition, we didn’t add a single person to corporate HQ. Aside from the cable systems that were wholly owned, TCI was a minority partner in more than thirty-five cable companies, all of which got the same price breaks in programming that TCI got."

"By the end of 1974, our debt was around $150 million, and our interest payments had doubled to $12 million a year. TCI’s annual revenue was less than $35 million. The debt ate at me, sure, but it literally raised Bob’s blood pressure and his tolerance for whiskey. He took it personally when bankers pressed us, feeling umbrage at the inference that we weren’t good for the money."

"One of TCI’s largest shareholders, homebuilder Kaufman & Broad, which owned close to 20 percent, had whispered to Bob that they were ready to get out of their investment in TCI, which was understandable. Bob had given big investors in TCI his inflated stock, assumed the debt of the construction on the business, and committed to building out these underdeveloped franchises. Now, with the stock in the tank, those investors were rethinking their position."

"The public loved the novelty of cable TV, but many customers were justifiably upset about customer service: long wait times on the phone and for service calls. There was a good reason for the disconnect: Cable-TV operators were in the distribution industry, but up until that point, TCI and most other cable operators could only think of themselves as being in the"

"Even before I could find my way around the squat one-story office in Denver and settle into the financial problems at TCI, I stumbled into a political showdown in November 1973. The city council of Vail, Colorado, a tourist town built on ski resorts and condos a couple hours west of Denver, had refused to renew TCI’s contract unless we met certain demands. TCI had then failed to meet deadlines to rewire the system. So the council called a meeting, and with no public hearing or due process, canceled our franchise agreement with the city. I felt like the town was playing hardball, which many cities were willing to do when it came to the cable franchise, so we played hardball, too. Since we couldn’t legally operate a franchise, we opted to pull the plug on the system after 6 p.m. on November 2, 1973, about ten minutes into *Bullitt*, an action flick with Steve McQueen. In its place, we ran a scrolling text of the names of the mayor and the city manager, with their phone numbers. The blackout continued Friday through Monday, eclipsing a Denver Broncos game. It didn’t take long for the phone lines to spur the politicians. By Tuesday, we had hammered out an agreement with the council. We were also putting cities on notice if they were mulling franchise renewals for TCI: don’t threaten our livelihood and expect TCI to simply roll over."

"My financial gamble on him paid off handsomely. He was also the first person to introduce me to the idea of ownership in something versus just drawing a paycheck. This advice helped inspire me to form Liberty Media, the holding company for many of the channel ownership stakes TCI was accumulating. Since I now had skin in the game, my wealth grew alongside the rising value of the company, benefitting thousands of our shareholders, as well; this is the way it is supposed to work, and for us, it has worked wonderfully."

"Was I a tough negotiator? Damn right I was. The cable company down in Slippery Rock who’s got only one thousand customers will pay you 25 cents, and it will take you years to build up critical mass. How much does that help you? But you’re asking me for real money and a real commitment and this really launches you into orbit, and has real value. What is it worth to you in start-up losses, if it takes three years or so, whereas TCI can launch tomorrow? What is that worth to you?"

"We could not simply spin Liberty off into its own company—it did not meet the spin-off rules at the time, which required majority ownership of the entity for five years. So with the help of a smart accounting advisor, we came up with the idea of a “simultaneous incorporation,” in which a newly spun-out entity is legally incorporated at the time it receives the assets and stock of a qualifying business from the parent—and is tax-free under IRS rules. Liberty Media would hold the stakes in programming networks, including 50 percent of American Movie Classics, 16 percent of the Family Channel, and 30 percent of QVC, and interests in fourteen regional sports networks, as well as fourteen cable systems. TCI shareholders would get the “right” to buy one Liberty share for every two hundred shares of TCI they owned. And each right allowed an investor the option to swap in sixteen shares of TCI stock for a single share of Liberty Media. Liberty was expected to own 10 percent of TCI’s outstanding shares on a fully diluted basis."

"We did not have the skill to run channels on our own, but we could be an investor and justify our investment with vast distribution. We needed to protect TCI’s interests—and, by extension, those of our customers—by limiting the ability of networks to raise prices. We would do this by demanding a volume discount and/or long-term price guarantees on a carriage contract. We wanted a “Most Favored Nation” clause, a guarantee that we would get the lowest prices a programmer was charging to any cable operator. This simple tactic could give us a real edge."

"I even had taken out a $60,000 loan from the Bank of Denver to buy TCI stock at $7 a share when I joined—a year later, the stock had fallen to $3, weighed down by high interest rates, wild inflation, and an unrelated industry scandal, briefly bottoming out at 78 cents. My start date at the company should have been my first clue: April Fool’s Day."

"As chairman of the new company, I needed someone fast on their feet as president because I was still running TCI. Peter Barton had proven himself by launching CVN, negotiating with cities over tough franchise renewals, and adding levity in the awkward moments of deal discussions. He was a helluva salesperson, too, but he was terrible with numbers. How he got through Harvard Business School I have no idea. Nonetheless, I named Peter the CEO of Liberty Media under one condition: Robert “Dob” Bennett would be vice president and principal financial officer, and he would handle all financial details. Dob and Peter are about as different as people can be. Peter had the risk tolerance to think big, then move aggressively on a target acquisition. Dob, who had been director of finance at TCI since 1987 after leaving the Bank of New York, assiduously weighed the probability of success against the downside risks. But Dob and Peter worked together like they were brothers, occasionally bickering but silently complementing each other’s strengths. Sometimes one person can do two jobs. Other times, you need two people to do one. We tried to explain to investors that the Liberty spin-off would simplify the balance sheet, giving investors more choice on which part of the TCI empire they thought held more promise—pure distribution with TCI or more content with Liberty."

"Many of the deals I made were built on the camaraderie of friendships within the industry. When Heritage Communications was the nation’s tenth-largest cable company, it was still run by James M. Hoak Jr., the man who had played a key role in the deal over a decade earlier that created two classes of stock for TCI. Hoak was a Midwesterner who had graduated Yale, interned at the FCC in 1968, graduated from Stanford University’s law school, and started a cable company—at twenty-six years old."

"“And the only difference after this two-for-one stock split,” I told him, “is that the class B shares would have ten votes per share, giving holders of that stock ten-to-one voting power over regular class A shares.” If we could redeem Hatch’s B shares and buy enough class B shares on the open market, we could safeguard control. So TCI split the stock, and Bob swapped all his class A shares for Hatch’s super-voting B shares, and then exchanged as many class A shares as we could on the open market. Hatch then used his shares in TCI to acquire the 25 percent stake in KSN from the Heritage company in Des Moines. To facilitate the trade, TCI bought an interest in Heritage, whose stock shot up when it sold its KSN position. Eventually we would acquire all of Heritage."

"The box delay continued to eat at me, so in the summer of 1996 I called one of the few people who could grok the box issue: Bill Gates. “Bill, I know we can build this digital set-top box for three hundred dollars in volume—cable operators can afford that if it meets our CableLabs specs. “But there are engineers at some of the vendors, namely Scientific Atlanta, saying this could be five years out now, and cost at least $600. Keep in mind, I am trying like hell to avoid a major rebuild of the entire TCI footprint with fiber—and to use digital compression to get channel expansion at an affordable price.” Vendors would point to the all-digital, interactive Full Service Network whose astronomical costs made it impractical, and they’d say the same thing: “Well, we can demonstrate it technologically, but it is far too expensive as a consumer product.” But I also knew Moore’s Law meant processing power would keep doubling every two years, so it was only a matter of time before the tech caught up. I’d run the numbers and think, “Why should these components cost so much?” “John, I am absolutely certain that that we could build such a device and deliver it at or below a three-hundred-dollar target price. Why don’t you bring ’em up here and we’ll have a discussion. And I’ll tell them myself—Microsoft will build what you want for three hundred bucks—any volume you want—and we’ll guarantee it.”"

"Strategically, I knew that Bill was blocking an easy play between AOL, the fastest-growing online service, and TCI, the largest cable operator in the country. But I also believed what he was saying about the market, so I asked him, “What are you suggesting? What’s the alternative?” “Well, why don’t you just buy twenty percent of Microsoft Network? This is going wide fast, and it’s certain to be a massive success.” “What are you going to charge me for this?” I asked. “Well, why don’t you pay me the same amount you were going to pay Paul for his block. This could be worth an enormous amount… who knows?” This was a rather rich ask. Gates was seeking, for just 20 percent of his new and untested service, the same price we were about to pay for 25 percent of the leader in the online access business. It might sound a little arrogant, yet it also sounded like the truth."

"The idea for two classes of stock was a seminal solution for TCI and one of my prouder moments. Magness was able to double his 20 percent voting control of TCI at the time to around 40 percent, Hatch got out of TCI. And TCI ended up with a profitable stake in Heritage—all tax-free because the deals were stock swaps."

"This turn to digital would end up unleashing billions of dollars in new capital spending, subscription revenue, and stock market value. This wellspring began even before the mainstream arrival of HDTV sets themselves. Only later did I realize the odd truth of this: The race was to produce a prettier picture, sharper in resolution, and able to show lifelike images. But in reaching for this goal, my industry ended up producing something of far greater value: the capability to deliver hundreds of extra channels of programming, new on-demand shows, internet access, and even phone calls to U.S. homes. Right away. Using digital technology, engineers could convert the continuous waves of video, audio, or data signals into strings of ones and zeroes, which could be compressed, transmitted, modulated, decoded, and stored for later retrieval. It also solved an urgent problem for TCI and the cable-TV industry: the ablity to offer the public dozens of new channels and movies on demand, increase revenue, and get us out of the hole the government had dug with the 1992 Cable Act."

"After his performance at TCI’s home office, by the time we saw Ted again, in just a matter of months, many of the rules I had cited to him had, almost magically, changed in his favor. With concerted lobbying by the industry, the government dropped the license and size requirement for the expensive satellite receivers, for example."

"By late 1999, with GI trading above $80, Motorola bought the company for $11 billion. Thanks to our stock and warrants, TCI briefly became a controlling shareholder in Motorola, with a stake worth nearly $5 billion. GI’s ownership would shift again, but for a moment, I held the reins of the company I’d once dreamed of working for. What would Monty say now?"

"But Ted, who had joined the TCI board a year earlier in 1994, told me when I mentioned the idea of a merger, “I love you guys, but you’re too far right-wing for me. I think if CNN is going to be controlled by anybody or fit with anybody, it needs to fit with somebody who’s in the news business—and Time Inc. is probably the most logical choice.” In truth, I’m a libertarian, believing in minimal government intervention, free markets, and personal freedom—but I could not argue the nuances to Ted. Few can."

"Without saying it aloud, Bob and I knew the bankers saw us as just numbers on a balance sheet—and they would never understand what drove us. Bootstrapping the business over the past two years had forged a strong bond between us all at TCI. This was our life’s work, something built on grit, optimism, and a trust that ran deeper than any balance sheet could reflect."

"When I first accepted the offer to come work for Bob, the pitch was solid: Come out West and run one of the largest cable operators in this new industry! Long-term contracts to wire big cities were worth millions of dollars. This set off a land grab across the country, and TCI had taken on crushing debt to finance furious growth. Around this time, TCI reached more than 621,000 subscribers through 151 systems in 33 states, with annual revenue around $34 million a year—and $84.8 million in debt."

"‘I think Nate would rather have had Craig back out of the whole thing and let Nate and Time Warner, and to a lesser extent TCI, take over, really,’ Downey says. ‘Nate tended to keep Craig out of the loop and Nate saw his reporting line as back to Jeff Schwall in the US, who was the Time Warner director to whom Nate reported. That was okay to a point because Time Warner was a huge influence on the HK Partnership. But it did mean that Craig felt not consulted when he should have been and when he saw himself—because of him and Terry having founded the whole operation—as having special rights. That led to persistent misunderstandings and conflicts between Craig and Nate. Both sides were in the wrong. Craig did poke into matters that a chief executive should have handled without difficulty, and Nate did withhold information from directors, including Craig, where he should have consulted us instead of consulting Jeff Schwall.’"

"Working from a Los Angeles office, Milken had created a $125 billion pool of capital that had helped tiny companies swallow giants and permitted obscure executives to gain control of world-famous busi- nesses. So effective was his operation that a mere statement that Milken believed he could raise a financial war chest in pursuit of a particular corporate quarry—a so-called "highly confident" letter—could cause panic at the company targeted for takeover. Secretive, feared by competitors, and closely monitored by securities regulators, Milken already played an enormous role in the communications industry. During his time at Drexel, he channeled some $26 billion into MCI, McCaw, Metromedia, Viacom, TCI, Time Warner, Turner, Cablevision Systems, News Corporation, and other cable, telecom, wireless, publish- ing, and entertainment companies."

"*TCI didn’t believe in business class. Since this was its first venture outside the United States, it had no view on 12-hour flights. So I flew to New Zealand in an economy seat and arrived early after an uncomfortable flight and went straight to a breakfast with Alan Gibbs, Trevor Farmer and two of the American directors. After exchanging pleasantries someone said, ‘John, talk a bit about your background.’ Halfway through my story Alan cuts me off. ‘You bloody Americans had the chance to do everything perfectly after World War Two, but you didn’t have the guts to take on Russia.’ Then he launched into a tirade against America’s lack of courage. I was aghast. I mean, I was born in 1953. I fought back a little bit, as best I could when I could get a word in, which wasn’t easy. I think I said, ‘Well, I’ve just met the only guy in the globe who thinks Americans aren’t sufficiently tough.’ Afterwards I said to my colleagues, ‘Jeez, that didn’t go well’, but the Americans who knew him said, ‘Oh no, I think he likes you.’ Thereafter, when things were going OK, Trevor Farmer would be there, but if Gibbs turned up we knew we were in trouble.*[30](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-30)"

"So Gibbs had left Telecom by May 1999. Ironically, soon afterwards Craig Heatley and the others on the Sky board went cold on their proposed acquisition of ihug, which had been the actual trigger for Gibbs’ departure from the Telecom board. Sky, meantime, had been an excellent investment for Gibbs and Farmer. The US grouping of Ameritech, Bell Atlantic, Time Warner and TCI, which Gibbs had helped to bring in as 50 per cent shareholders in 1991, had provided the company with the additional capital it needed to get established with two excellent executives in Nate Smith and John Fellet. But the American partnership was inherently unstable because of the rivalry between its constituent companies. In August 1997 Heatley engineered the sale of the Americans’ stake in Sky to Independent Newspapers Limited (INL), a New Zealand newspaper company that was controlled by Rupert Murdoch’s News Corporation.[15](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477355-616451090-15) Then a few months later, in November 1997, Sky had its initial public offering."