THE NO. 1 IN CABLE TV HAS BIG PLANS John Malone's Tele-Communications Inc. is the world's largest owner of cable TV systems. Already a demi-billionaire, he now wants to rule the information highway.
By Andrew Kupfer REPORTER ASSOCIATE Andrew Erdman

(FORTUNE Magazine) – MOST PEOPLE who cross paths with John Malone form a pretty strong opinion about him. He doesn't give a damn. He runs the biggest cable TV company in the world, and he's made longtime shareholders -- himself included -- fabulously wealthy. He's been called the Bill Gates of cable TV, for building Tele- Communications Inc. of Englewood, Colorado, into the largest player in a fragmented industry, and the Sam Walton of the business, for doing much of it in small markets in the boondocks. Many say he's a masterly strategist and dealmaker. Yet Vice President Al Gore once called him the equivalent of a Mafia don, and others have accused him of self-dealing. With his metal-edged drawl and laid-back manner, Malone, 52, looks like the Marlboro man in a button-down shirt. In fact, he's a Yalie, with a master's in electrical engineering from New York University and a doctorate in operations research from Johns Hopkins. (Company publications call him Dr. Malone.) He mocks such cable luminaries as Ted Turner, who he says wants the industry to do something for society, ''like provide free cable TV for the homeless.'' His ego and arrogance put some in mind of Genghis Khan. Says media analyst Kenneth Berents of Wheat First Securities: ''He's in the genius category, with thorns. He knows his stuff, but he can run over people.'' Malone replies with a shrug, ''When you're driving plate tectonics, you're going to squeeze people's tails.'' Until recently, few outside the industry had even heard of Malone. That's how he likes it. You've been reading more about him lately because he aims to be king of the mountain as television, telecommunications, and computers converge to transform the way people receive and respond to information in their homes. In recent months Malone has abandoned his usual reticence in order to capitalize on media interest in him and his company. Says Robert Thomson, TCI's senior vice president for communications and policy: ''As agents of change we draw fire from established industries, so we decided to be more aggressive in putting our vision across. John still wants not to be a public person.'' His critics in the industry put a different spin on his new visibility, calling it part of a massive public relations campaign tied to TCI's fight against reregulation of cable. In this view, Malone wants to project himself as the visionary who will bring communications into the 21st century -- if only Washington will stay out of the way. With a market share approaching 20% (higher, if you count customers in cable systems that TCI owns only a piece of), Malone already has the power of gatekeeper in this highly competitive industry. No cable channel can thrive without access to his customers. TCI also has formidable programming interests, with stakes in Turner's TBS and CNN (of which he owns 25%) as well as the Discovery Channel (49%). Malone wants more. He is moving his company into the telephone business at home and abroad. He is investing $2 billion in fiber-optic cable and other new technologies that will add hundreds of channels to his cable systems and let viewers watch movies whenever they wish, using $300 set-top converter boxes that are really fabulously powerful computers. He is angling to involve TCI in moviemaking too. To take TCI where he wants it to go, Malone needs bigtime allies. He recently did a cable channel deal with News Corp. chief Rupert Murdoch. He hobnobs with Barry Diller, former head of the Fox film studio and a major investor in the QVC shopping network, in which a TCI spinoff has a big stake. He has hooked up with CEO Robert Allen of AT&T for a collaboration among TCI, AT&T, and US West on a market test of movies on demand that could lead to a more ambitious partnership. The mighty Bill Gates of Microsoft is developing software for that fancy set-top converter. Malone has even linked TCI with arch-rival Time Warner, the No. 2 cable company (and the parent of FORTUNE's publisher), forming a joint venture to define hardware and software standards for two-way interactive TV. Standards would enable customers across the country to communicate with one another regardless of which cable or phone company ran the neighborhood network. Malone must push into new businesses because the cable industry has changed more in the past three years than in the previous four decades. Cable companies used to be basically construction outfits that grew by buying up franchises and laying lots of wire. With coaxial cable now running by the property lines of over 90% of U.S. households, that phase is over. A fusillade of recent announcements from Time Warner, TCI, Cablevision Systems, and others have proclaimed ever more exotic technologies, new business partnerships, and incursions into new markets. The tea leaves don't all favor TCI. Sure, it was the first to promise a large-scale megachannel cable system. But TCI has been known more for financial and dealmaking acumen than technological leadership. Now the 1992 Cable Regulation Act threatens Malone's chokehold over programming. Moreover, the regional Bell company that is his biggest telecommunications ally, US West, just signed a $2.5 billion deal with Time Warner. After a run-up that saw TCI stock increase in value more than 300-fold from the early 1970s through 1989, the shares have stagnated over the past few years. How far can Malone keep the juggernaut rolling? Twenty years ago, at 32, Malone came from General Instrument's Jerrold division, a maker of cable TV converter boxes, to be TCI's chief executive. The company had barely survived a capital squeeze, so for the first five years Malone ran a bootstrap operation. Growth was his goal, but all of it had to come from current revenues. That meant TCI couldn't afford to bid for expensive urban franchises, nor could it spend a lot to add premium cable channels. Ever the pragmatist, Malone once got help from what today seems an unlikely source: Time Inc., the predecessor of Time Warner, which lent TCI several million dollars to build earth stations so it could pick up Time's HBO satellite feed. Piece by piece, Malone assembled an ever larger cable network in rural areas. Soon TCI was buying up suburban franchises; eventually it had systems in Chicago, Pittsburgh, Dallas, and other cities. By 1982, Malone had transformed TCI into the most powerful company in the industry. Today it owns franchises in every state but Alaska. Malone also wanted a piece of the other industry pie: programming. Cable system operators pay the owners of channels -- TBS or ESPN, for example -- a monthly fee, perhaps 25 cents per subscriber. If it owned cable channels, TCI could tap into a steady stream of income from the 80% of U.S. cable TV subscribers who aren't on TCI systems. During the Eighties, Malone rescued the science-and-nature Discovery Channel from bankruptcy. His 25% share of Turner Broadcasting got him a piece of everyone who watches CNN, TBS, or TNT. He also bought shares of American Movie Classics, Black Entertainment Television, and the QVC shopping network. Yet TCI was hardly dominant, and the business was fast becoming a free-for- all. Advances in technology meant that cable and telephone companies would all soon be able to deliver the same mix of communications services, from phone calls to movies on demand to interactive games. Satellites promised to . carry more TV channels than TCI's older rural systems could. Consumer anger at continual price rises brought the threat of new regulation and, for TCI, the menacing prospect that Congress would try to restrict companies that own both cable TV systems and programming. Revenue growth in the cable industry slowed to the 5% range. Malone had to ready TCI for a move into new businesses. Last year he began forging links with telephone companies. His most important venture so far: TeleWest, owned jointly with US West, which runs a combined cable TV and phone system that serves nearly two million Britons. Eventually, TCI may have an even bigger ally -- AT&T. The partnership would be a natural. Both companies operate throughout the U.S., and each has something the other needs. AT&T wants to be a force in video communications, which TCI's coaxial cable network can carry into the home. For TCI to get into telecommunications, it must add two-way switching to its systems so they can carry phone calls to and from customers. TCI recently finished a small-scale test of technology with McCaw Cellular. Normally, cellular companies build their own wire links between transmitters and the local and long-distance telephone networks. In this experiment, McCaw piggybacked on TCI's existing cable system to make those connections. Also, last year TCI spent $85 million in equity to buy 50% of Teleport, which provides long-distance services to businesses in seven U.S. cities, bypassing the local phone companies with its own fiber-optic cable and satellite network. MALONE is riding a wave of genuine technological breakthroughs. He announced late last year that TCI will bring digital compression to its cable TV systems, allowing ten channels to fit in the space one now requires. In the short run, that will help TCI fight off satellite TV, which will offer 150 channels. Eventually, TCI's systems may have up to 500 channels, many of them carrying movies on demand. (No sooner had Malone raised the competitive ante than Time Warner said it would have a TV-plus-telephone system capable of handling hundreds of channels up and running next year in Orlando, Florida.) TCI is about to announce a deal with Microsoft to develop software that will help viewers navigate the sea of TV programs -- perhaps by creating an ''intelligent filter'' that serves up an on-screen menu of choices tailored to each customer's taste. To transform the homely set-top converter box into a computer of amazing ! power, next year TCI will begin installing a souped-up box made by General Instrument and using an Intel 386 microprocessor. But the company is working on a box with far more might, one it says will have 200 times the processing power of a 486-based computer -- more even than Intel's new Pentium chip, making it brawnier than most mainframes. Its centerpiece will be a RISC (reduced instruction set computing) chip made by Silicon Graphics. Says TCI senior vice president Larry Romrell: ''It's what we jokingly call a Cray supercomputer in the home.'' If the box lives up to its billing, it will be able to tune in several channels simultaneously and carry telephone calls too. A viewer will be able to watch Masterpiece Theatre, record Live at Lincoln Center, and use advanced TV features like picture-in-picture, while a housemate using another set plays video golf with someone far away. With the addition of a keyboard and disk drive, the box can serve as the central processor of a computer. TCI says the boxes might cost subscribers only a couple of dollars a month extra. Revamping cable systems and rolling out new technology may cost TCI $5 billion over the next five years or so. TCI is uniquely positioned among cable companies to finance the investment, owing to assiduous courting of debt- rating agencies. It was a tough sell. With $10.1 billion in debt and only $2 billion in equity, TCI had a nosebleed debt-to-equity ratio of 5 to 1. High debt-to-equity ratios aren't unusual in the capital-intensive cable industry, but the raters prefer something lower. TCI was able to satisfy Standard & Poor's, Moody's, and others that its operating earnings could safely cover interest payments. Today it is the only independent cable company that has investment-grade commercial paper. Over the past three years, TCI turned about $2.5 billion of bank loans into long-term commercial debt, saving up to $50 million a year in interest and ensuring that it won't be hog-tied by huge interest payments as it builds its piece of the information highway. As he focused the company on new markets, Malone kept one eye on Washington and the other on his own bottom line. In 1991 he spun off TCI's programming interests into a new company called Liberty Media, sinking into it most of his personal wealth -- a stake now worth over $600 million. (He and his wife, Leslie, also still own about $40 million of TCI stock.) The new cable regulations will affect TCI, not Liberty; programming isn't regulated. Since the spinoff, Liberty stock has far outperformed TCI's, rising in value over tenfold. Malone is chairman of Liberty, and for all practical purposes TCI runs it. As the era of movies on demand approaches, companies that own the movies stand to profit. Compared with its rival Time Warner, TCI has a big weakness: the lack of a movie studio. ''Sure, I'd like to have one,'' says Malone. ''Maybe Barry Diller will do it for us.'' That was a joke, but Malone was dead serious when he agreed to pay Carolco, producer of the hit Cliffhanger, $90 million over the next four years to make four movies. The films -- action-adventure blockbusters, or can't-fail family-style pictures like Home Alone II -- will preview on TCI the weekend before their theatrical release. TCI may charge as much as $30 (vs. $3 or $4 for older movies) and may also sell videocassettes, T-shirts, and other tie-ins. TCI would share in theatrical revenues too. Chief operating officer Brendan Clouston expects only a small percentage of customers to pay that much, but those who did would become evangelists for the film. ''It's an extension of the advertising of a movie's launch,'' he says. ''It takes an expense and turns it into a profit center.'' NOT EVERYONE THINKS it will work. A high executive with one Hollywood production company says, ''I just don't believe you're going to get people to spend that kind of money without a hugely expensive marketing campaign.'' William Nygren of Harris Associates, a Chicago investment firm with stock in TCI and Liberty Media, counters: ''If you look at a couple with two children and what it costs to bring in a babysitter, the price doesn't sound so high. The popcorn is better at home too.'' TCI will also tap the kid market in a deal with Sega Enterprises and Time Warner to create the Sega Channel, offering subscribers unlimited play with interactive games for maybe $20 a month. Malone may not own a movie studio, but he can still try to steal a few stars. ''Yesterday I had meetings with William Morris and the Creative Artists Agency,'' he says. ''Stars don't have to make deals with the major studios. They can produce a film with an independent studio on spec and take out more money up front in guarantees from us than the whole thing would be worth to them with a studio.'' TCI will make its money from video-on-demand fees and scheduled pay-per-view service. Creativity at the bargaining table has sometimes earned Malone a black eye. / Last year the Wall Street Journal alleged that Malone and TCI founder Bob Magness, 69, engaged in self-dealing, suggesting that they sold to TCI several cable TV franchises in Utah that the company apparently already owned. Of the article, treasurer Bernard Schotters says, ''I was very hurt by the innuendo that the characters of the people in this company were flawed.'' He says TCI couldn't acquire the franchises initially because it was part owner of a local broadcast station there at the time and would have violated cross-ownership restrictions that forbid a company to have a cable television system and a broadcast channel in the same area. ''So we put them in friendly hands,'' Schotters says. ''They ((Malone and Magness)) obtained the franchises. We didn't have title to them.'' To some insiders this deal was just business as usual in the cable industry. Nygren of Harris Associates says he wasn't overly concerned by the report. ''This industry started out as a bunch of partnerships that eventually were rolled into companies,'' he says. ''Dealings between companies and individuals on the board are commonplace.'' Nygren has only admiration for Malone's single-mindedness. Less of a fan is Vice President Gore, who has been quoted as calling Malone ''a monopolist bent on dominating the television marketplace.'' Malone insists that their one meeting a few years back was cordial. He believes the two got sideways when TCI began scrambling its satellite feed in the mid- 1980s, to the consternation of satellite dish owners -- who abound in rural states. Tennessee, for instance. ''My attitude has always been that if we get too big, it's a legitimate role of government to say, 'You're too big,' '' Malone declares. ''They just don't have to be so personal about it.''

Malone warms up as he continues. ''He called me Darth Vader and the leader of the cable Cosa Nostra. You can't win a pissing contest with a skunk, so there's no point in getting involved in that kind of rhetoric.'' He often does, though. Moments earlier he had complained that Rush Limbaugh's show keeps him up too late and added, ''I'm glad someone in the media has the courage to say what a bald-faced liar the President is.'' You may not like his style, or admire the way he has accumulated his wealth, but there's no denying that he built a dirt-poor company up from nothing. In a world where massive industries are converging with astounding speed, with consequences that less adroit competitors may grasp too late, Malone - understands not only the technology but also the art of the deal. That makes him a rare double threat.


MAN OF MANY DEALS Malone has been beating the brush for partners to help him move into telecommunications and entertainment. At right are some of the big names he is investing in, talking to, and thinking about.