Cable operators could gradually write off the cost of their systems over a number of years, allowing them to reduce the leftover profits they reported as earnings and thereby sheltering a healthy flow of cash from taxation. And once they had written off most of the value of a cable system’s assets, they could sell it to a new owner, who could begin the tax-eluding depreciation cycle all over again. (查看原文)
Cable TV systems, to every new owner’s delight, generated bundles of cash from installation charges, $100 to $300 a customer in the 1970s, and monthly services fees of $5 to $20. Most of the money was plowed back into the companies, with hardly anything going to pay dividends to shareholders. This high cash flow could service an immense amount of debt, which was used to buy more systems. So the actual value of the acquired systems was always growing. Moreover, the companies paid hardly any taxes because of the high depreciation on the equipment. The average cable system enjoyed a profit margin of 57 percent, far fatter than most businesses. (查看原文)
When Malone walked into the office that first day, the receptionist directed him to his new desk, built for two employees. The other McKinsey executive, Louis V. Gerstner, Jr., who, 25 years later, would rescue IBM, was away, (查看原文)
How would you fix it? Over time, Malone found that if he interviewed 30 people or so and listened intently, themes would emerge. The best ideas were sometimes hidden, or they were lost on senior executives. By laying the patterns bare, studying in detail the disparate parts—not unlike disassembling a radio—he learned how big corporations don’t work.
It was not rocket science, Malone quickly realized. You simply take the best ideas from anyone who has them, polish them, and serve them up to the chairperson. While at McKinsey, he consulted for Bell New Jersey, IBM, Traveler’s Insurance, and GE, all sectors that would affect his own company years later. (查看原文)
Once TCI had finished writing down the value of its assets to shelter cash flow from taxes, it would have to begin paying income 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. (查看原文)
in corporate valuations—the true value of cash flow, defined as operating earnings before interest, depreciation, and taxes. Through a combination of logic, jawboning, and sheer force of presence, Malone persuaded Wall Street to take a second look at the cable industry, long shunned because of its nonexistent earnings and heavy debt addiction. Malone argued, successfully, that after-tax earnings simply didn’t count; what counted was cable’s prodigious cash flow, funding TCI’s continual expansion. Buying cable was like buying real estate. As the value of TCI’s franchises rose, so would the value of its stock. Net income was an invention of accountants, he declared.
Think about it, he’d tell a young analyst: Because TCI had high interest payments and big write-offs on cable equipment, it pr... (查看原文)
Despite the explosion of new content, most operators of cable systems paid little attention to programming; it was merely a commodity that brought in new viewers, not a value chain all its own. But John Malone quickly saw a more important role for all the new channels popping up—they had a dual-revenue stream: from advertising and from payments made by cable systems based on how many subscribers each system had. Someday, this dual-revenue stream might dwarf the single stream of ad revenue on which the Big Three broadcast networks relied. The new content providers promised both opportunity and risk: Their growth depended in part on getting steadily rising fee increases from cable operators like TCI. Through difficult negotiations, TCI had forced new networks into long-term, cheap contracts.... (查看原文)
Once upon a time, cable started out as a rural phenomenon. Now cities and urban areas, where cable operators weren’t needed or weren’t allowed before, were interested in cable TV. (查看原文)
A cable franchise was essentially a legal right to a local monopoly—operators had to answer to local government and win approval for rate increases; otherwise, they faced no competition in this booming business.
...
Everyone was in the race—everyone, that is, but John Malone. At such frenzied prices, there was little he could do but sit on the sidelines and watch the bidding. Malone knew the game was too expensive for cash-poor TCI—but he also knew to be patient. Many of the investors who had suddenly fallen in love with cable were paying way too much and were backed by way too little experience: One day they would be begging TCI to buy them out. So while he waited for the buying frenzy to collapse, he aimed to improve TCI’s cash flow by building through much smaller bites. A typical purch... (查看原文)
The Cable Act took effect in 1986, and while it formalized a city’s right to grant franchises and require public-access channels and other concessions from cable operators, it essentially shifted oversight from states and cities to the federal government. Cable operators won on major points. The law capped at 5 percent of revenues the so-called franchise fees that a city could charge an operator for the pleasure of doing business in a town and using public rights-of-way. It also favored incumbent cable operators heavily in franchise renewals: Unless a cable company had failed dismally to meet basic service requirements, renewal of the 10-year franchise was almost automatic. The law also kept the giant phone companies at bay, forbidding them from owning cable systems in their service areas.... (查看原文)
He demanded that cable networks either allow TCI to invest in them directly, or they had to give TCI deep discounts on price since TCI bought in bulk. In return for most-favored-nation-status on price, TCI gave any programmer immediate access to nearly one-fifth of all U.S. subscribers in a single stroke. Those who dared to test TCI’s resolve usually came around to Malone’s way of thinking. Those who crossed him often came to regret it, for Malone retaliated swiftly. (查看原文)
From the low point that TCI stock had hit in late 1974, a year after Malone joined the company, up to the summer of 1989, TCI shares had posted a stunning rise of 55,000 percent. Hell, the payoff actually ran to 91,000 percent, from a low of $1 to $913, if investors held on to every stock that TCI had spun off, then tracked Malone’s own buy-and-sell decisions. (查看原文)
As part of the plan for Liberty, TCI created a new class of stock, called a tracking stock, which would be distributed to TCI shareholders and give them an interest in Liberty’s earnings. But again, Malone’s reputation hurt him. All that Malone’s critics seemed to recall is that Malone had made a hefty option-related profit the first time he spun off Liberty and then brought it back into TCI. “There have been too many transactions involving buying and selling Liberty, and they all seem to work in Malone’s favor,” said Rodney Linafelter, a portfolio manager wither Berger Associates, which had sold its entire million-share position in TCI in early 1995. Typical of many TCI transactions, the deal was extraordinarily complex. The idea of a tracking stock didn’t appeal to many investors, no mat... (查看原文)
Hindery’s favorite analogy for TCI’s problems was that TCI was a gas station company acting like a pipeline company. Pipelines deliver fuel in bulk. But gas stations sell it to retail customers, a far more service-oriented business. Customer service would win the day, and no one could argue that TCI didn’t need to pay more attention to its customers. “Running a pipeline business is a pretty easy business—you just turn on a pump. Running gas stations is a really hard business,” Hindery liked to say. (查看原文)
It was a rare picture for media watchers: Rupert Murdoch, one of the shrewdest, most powerful media barons at the time, had misjudged the U.S. media market in a critical way. In Britain, Murdoch had successfully challenged a complacent broadcasting establishment by introducing satellite TV. He quickly signed up millions of subscribers by locking up exclusive movie and sports rights. By contrast, the U.S. cable industry was a far more antagonistic rival, especially when cable operators were aligned against a common threat. Moreover, the DBS market in the United States, though fledgling, already had three strong entrants. On top of arriving late to the market in 1998, Sky would have had to sign up 5 million subscribers to break even by some estimates. And Murdoch had other financial obligati... (查看原文)
What the cable operators failed to realize at the moment was how truly strong their position was. Only the cable industry’s fat pipes, where the electrical signals danced along lines passing 95 percent of American homes, could launch the American PC industry into a new level of what Malone verbosely called “two-way broadband digital connectivity,” which translated to a cornucopia of online news, entertainment, and shopping. All of the hundreds of new dot-com companies starting up would not have a chance unless Internet service providers could deliver pictures and sites instantly over a broadband network. For that reason, the future of the computer industry in the United States was largely reliant on the future of the cable industry. By linking America’s computers to its high-speed or so-ca... (查看原文)
From TCI’s point of view, 10 million boxes for every customer, at $300, was $3 billion. If Malone could offset that by getting a $1 billion stake in GI, and another $2 billion from other sources, it was like an equipment pool, building a massive platform with little economic risk. As Malone would explain it to colleagues later on: “It becomes self-fulfilling. If you can get the scale economics, you can get the costs down. If you get the costs down, you get the scale economics. If you get the scale economics you can develop applications that are really important to a lot of people. If you can get applications that are important to people, you get people to buy the boxes, and you’ll get more scale economics.” (查看原文)
Malone’s children were not covetous of wealth, a fact that pleased him but did not surprise him. In fact, his son and daughter had settled into a comfortable and surprisingly middle-class life. After the frenzied battle over his best friend’s estate, he was even more convinced that not only would money not buy happiness, too much left in the wrong hands could generate immense pain. Wealth, if bestowed for no other reason than inheritance, had more power to destroy than to strengthen one’s character. (查看原文)
The conclusion was mutual, and Malone started spinning ideas for tracking stocks that would represent the disparate parts of the business.
That way, old-line investors who demanded strong earnings growth in AT&T’s old business could own one stock, and more aggressive investors could take more risk on a cable tracking stock that was judged by cash flow, despite producing annual losses. Malone drew up several financial models for Armstrong and his CFO, Dan Somers, showing how they could eliminate the damage that the deal would do to AT&T’s earnings by offloading cable’s losses onto a tracking stock. (查看原文)
Malone wanted to go along, and he stopped himself from saying what he really wanted to say: “Here’s why you should mess with it, Mike: You’ve just issued more than 400 million new shares of AT&T to buy a business that produces no earnings. It will be a huge money-loser for years, given how much you’ll spend on broadband. That’s going to sharply dilute your earnings per share, and your old shareholders like earnings. That will hurt your stock price, and then you can’t use stock to make more acquisitions, then you’re stuck. If you create a tracking stock to track the performance of cable, you separate out the losses we produce and show better earnings for your main shareholders; and you can use the tracker to buy more cable interests in tax-free deals.”
That’s what Malone had wanted to say,... (查看原文)
