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John Malone

John Malone

Interview Date: Monday October 22, 2001
Interview Location: Centennial, CO
Interviewer: Trgyve Myhren
Collection: Hauser Collection

MYHREN: I'm Tryg Myhren, Trygve Myhren to those Norwegians out there, and I'm here with John Malone in his offices at Liberty Media and it is Monday, October 22nd at 2:00 in the afternoon and we're doing John's oral history. This is a program of The Cable Center. It is generously underwritten by Gus Hauser. John, good to see you again.

MALONE: Nice seeing you, Tryg. I thought you were Danish! What's this Norwegian stuff?

MYHREN: Oh, this Norski stuff is important.

MALONE: Well, you know, my wife's Norwegian.

MYHREN: Leslie's Norwegian?

MALONE: Oh, yeah. Erickson.

MYHREN: I'll be darned. Well, that says even more good things about you. That's great. I think, John, in starting this we might set the stage by talking about when you entered the industry and how that came to be. Could you tell us a little bit about that?

MALONE: Sure. My initial experience with the cable industry was with General Instruments. They had acquired a company called Jerrold about 1969, I believe, and I, at the time, was a consultant at McKinsey and Company in New York and we got the assignment of working for General Instruments to try and figure out what they should do with, or to, this company, Jerrold Electronics, that they had just bought, which had looked so pretty the year before and now looked incredible ugly in the first year of ownership.

MYHREN: Sort of like many acquisitions.

MALONE: Like many acquisitions.

MYHREN: Okay, before you came to McKinsey, then, which proceeded all this, can you give us some background on where you went to school, where you grew up, maybe even some of the major influences in your life during that period?

MALONE: Yeah, I was born and raised in Milford, Connecticut. My mom and dad were products of the depression, so they were very conservative, worried about the world coming to an end. My dad was ultimately a vice-president at GE and then left and started his own small electronics company that ultimately did reasonably well and went public in the '60s. He was probably the major influence on me, very academic, Calvinist, but very strong influence. He was an electrical engineer. So I grew up with engineering at the dinner table and he had a shop out back where he was constantly playing with stuff. He was in radar development during the war and then after the war he was in charge of television set receiver development for General Electric, and I can remember my earliest days in the old barn behind our house he would have all his engineering crew out there working on TV set development because GE was under a strike and they couldn't get into the major plant in Bridgeport. So they were all over in our backyard working on these early TV sets, and so I grew up with television, working on some of the old projection TV sets when I was 6 and 7 years old. You know, changing tubes and doing that kind of stuff. Milford was a little bit of a tough blue-collar town and my folks got afraid I was falling in with the wrong sorts, so they packed me off to a day school in New Haven, Connecticut, Hopkins Grammar School, which actually is, I think, the second oldest school in the country. It was founded in 1660 and that was pretty much an English day school type of education, very good, very strong prep school. Still to this day an excellent school, and from there I went to Yale and thought I wanted to be pre-med and then decided engineering was easier and so I went through Yale and got degrees in electrical engineering and economics. I was in love all through that period, Tryg, so the last thing I wanted to do was go to work so I looked around as to where I could continue my education and be paid for it, and in those days there were really only three organizations that did that sort of thing. One of the three was Bell Laboratories, so I actually went to work for Bell Labs, which was an AT&T enterprise at the time, and they sent me off to get my master's in operations research, all expenses paid, plus a salary, which is very nice. So I did that for a year, came back to Bell Labs, did various projects there, studied the foreign language requirements for the Ph.D., took some time and picked up some additional coursework and then ultimately went back, once again at Bell Labs expense, and got my doctorate at Johns Hopkins in operations research and computer science, which was just starting to be dimly a subject area at the time. So that was sort of the educational background and then I went back to Bell Labs and was essentially somewhat, you would say, in the science of computer science for a couple of years. I worked on a few things that were of interest; one of them was video telephony, which was quite early and of course concluded, like everybody else, we didn't have enough bandwidth. That was in the late '60s, mid to late '60s. I also worked on a project in economics for the Bell System, which was sort of a theoretical study of the behavior of a corporation subject to the kind of regulation that they were subject to. It was a mathematical treatise and ended up submitting that to the FCC. At the time, AT&T was fighting off the theory that they were over capitalizing because they were rate regulated.

MYHREN: What was the time period?

MALONE: This would have been, probably, 1967?

MYHREN: Okay.

MALONE: Maybe '68. And the title of it was kind of interesting. It was called Profit Maximization in a Regulated Firm. So it was kind of a fun project and I presented it to the AT&T board and I can always remember the chairman then, Fred Kappel, walking me out of the boardroom, arm on the shoulder, "Son, that was great. It gives you a lot to think about, but let me give you one word of advice. If there's anything that you do in your career that changes the course of the Bell System, you will have really done something." So I went down and got on the subway back to New Jersey and wrote out my resume and decided AT&T may be a little slow moving for me. So from there...

MYHREN: I was just thinking about your AT&T experience because you obviously learned a lot from them during that period, through the Bell Labs experience and the education and so on.

MALONE: Umm hmm.

MYHREN: And then recently they've learned a lot from you.

MALONE: And I've learned a lot from them, again. But yeah, everything goes full circle in this life, if you live long enough. So, I ended up leaving the Bell System, where incidentally, I was the highest paid guy in the Bell System at my age, which they pointed out to me frequently.

MYHREN: What age did you leave at?

MALONE: Gosh, I must have been 25? Maybe 25. And that was a big enterprise then. I think they had well over a million employees and decided to go into general business and join McKinsey and Co., the management consulting firm and of course, that was once again a bait and switch deal because they thought they were hiring a guy who wanted to do engineering and computer work, and I thought I was escaping that and I think I won in the end. But I had a delightful couple of years with McKinsey working on some very heady stuff. Probably the biggest project we worked on there was the restructuring of General Electric. Actually, I personally invented this concept of the "strategic business unit" as the theory of organization for a conglomerate like GE and we got to meet a lot of extremely talented executives: Bob Wright, Jack Welsh.

MYHREN: So, you knew Bob Wright at that point, well before he came into the cable business?

MALONE: Oh yeah. So it was kind of an interesting experience and they actually did adopt that study as their theory of reorganization, so that was very, very interesting.

MYHREN: Have you read Welsh's book?

MALONE: Not yet.

MYHREN: I bet you will, though.

MALONE: Oh, absolutely. Well, they're the best run company in the country of any size and I love his headquarters – 111 people.

MYHREN: I see, and maybe I'm wrong in this, but I see a little bit of that in Liberty.

MALONE: Absolutely. Well, that's the theory. You always try and get back to that theory of decentralized, delegated authority and responsibility. So that shaped a lot of my concepts about the right way to run things and of course it was very meaningful to me to work on GE, since my dad had his whole career there. So it was a very interesting experience. Along the way at McKinsey, we ended up doing a study for General Instruments, as I mentioned earlier.

MYHREN: Yes.

MALONE: Which essentially ended up with me going to work for General Instruments from McKinsey and shortly thereafter running the Jerrold Electronics unit along with several other businesses in GI. SO that was my first real, full experience with the cable industry was GI, was Jerrold. And of course in those days, Tryg, you may remember, although you came in a little bit later...

MYHREN: I came in '75.

MALONE: There was a point when I said that the accounts receivable at Jerrold had exceeded the whole net worth of the cable industry and I think I was telling the truth. And it was, I think, by a factor of two to one, because at that time Jerrold had huge market share in supplying the electronics, but also in financing cable systems, doing turnkeys and when I first got there we actually were the number three operator in the business. Jerrold owned a whole bunch of cable systems.

MYHREN: Would you liken the situation they had sort of gotten themselves into at that point to the one that Lucent got itself into with these vendor loans of recent... Are there great similarities here or not?

MALONE: Not really, because capital was so hard to come by in those days, for Jerrold and for the cable industry, that Jerrold was merely factoring taking paper from the cable operators and factoring it to various financial discount houses with various partial guarantees. But in fact, Jerrold had gotten a number of its cable systems by the defaulting of some of those loans by various people that they built systems for. So really when Sammons, if you remember Sammons came into the cable industry, it was largely through the acquisition of the Jerrold cable systems, which took place just right after I got there and GI at that point had a liquidity crisis and they had borrowed a bunch of deutschmarks and had to pay them back in deutschmarks and there had been a revaluation and so the urgency of raising cash and the only liquid asset that they had right at that time was their cable systems. Sounds like another big company we know.

MYHREN: (Laughter) Exactly. But fortunately Sammons was there to help out.

MALONE: Charlie Sammons was there. And that was, I remember, the first time I met Bob Magness. I met a number of the cable guys for the first time then, because I had only been at Jerrold a couple of months and I remember Bob desperately wanted to buy those cable systems but he didn't have any cash and GI, and Moses Shapiro, who was the chairman of General Instruments at the time, I'll never forget the comment: I said, "We can get a higher price out of this guy Magness." And he said, "Yeah, but I don't want any Portuguese escudos. I want coin of the realm: cash." And at that particular point in time, Charlie Sammons was the only guys around that had real cash and was willing to part with it.

MYHREN: Yep.

MALONE: So that's how Sammons got started.

MYHREN: But Bob ended up skinning the cat differently.

MALONE: He did. He did find other people who would take Portuguese escudos. (Laughter) Unfortunately, a lot of those assets came with a lot of other liabilities though.

MYHREN: So I want you to take us through some of that, but you've had an enormous influence on the business, both on the operating side and on the programming side, obviously, so I'd like to at some point here get into both of those, but this development as you met Bob Magness and then you worked forward from that, to those rough early days until you saw some light out there. It would be great to hear about that.

MALONE: Sure. Let me take you a couple minutes through my experience at Jerrold because it was a terrific experience. A bunch of guys, we pretty much reinvented the equipment business over those couple years that I was there. Two-way came in, if you remember the FCC mandated two-way?

MYHREN: Absolutely.

MALONE: And Jerrold was the only outfit that could supply any of that kind of equipment during that timeframe. So our market share just exploded and our profitability exploded and at one point there, Jerrold was making about twice as much as General Instruments was reporting in earnings. So really, there was that burst of enthusiasm in the industry, you know, when the FCC had loosened the restrictions and a lot of entrepreneurs believed that now was the time to start building the cable industry. It was a short lived spurt, but it was quite dramatic when I was there at Jerrold. Anyway, there was a succession problem at General Instruments. Moses Shapiro was going to retire because of age and I didn't particularly care for the succession that was going to take place and thought it better for me to look around. And so it was kind of interesting because I had really three opportunities there to leave Jerrold. One was – and I was actually voted for a short period of time to be the CEO of TelePrompTer, believe it or not.

MYHREN: Interesting. Tell me a little more about that one, about your being voted to be the CEO of TelePrompTer.

MALONE: Well, of course I had gotten to know the TelePrompTer guys, most of the major players in the industry, as running Jerrold and selling them stuff and financing stuff for them and so on. Irving Kahn, at the time, knew that he was in legal trouble coming out of the Johnstown bribery case and knew that he was not... that there was a high probability that he wasn't going to be able to stay as CEO of TelePrompTer. So he offered me the job, and I accepted subject to thinking about it and I called him up – and they actually went and I interviewed with the Hughes guys, who were a major shareholder then of TelePrompTer and everything was copasetic and I was going to take the job and then at the last minute, I thought, well you know, the one guy I haven't met is Jack Kent Cooke, and isn't he a major shareholder and shouldn't I meet him? And Irving said, "No, that probably wouldn't be appropriate." At which point I discovered that there was a war about to explode on the scene for control of TelePrompTer between Cooke and Irving, and so I passed on the opportunity and Hub Schlafly ended up getting stuffed into that job for a while. Then I got an inquiry from Steve Ross at Warner and did I want to go do that? And unfortunately, the first thing I would have had to have done is have a difficult posture with the fellow that they had just bought a big company from and I didn't really like that too much. Plus, the other issue there was New York headquarters. And while Steve said, "Well, you can live in Connecticut and have a limo" and all that kind of stuff, I didn't think that was the life I was looking forward to. And then the third guy was Bob Magness, who was out here in Denver and Bob was just an intriguing kind of a guy and TCI was my kind of a company. They were so broke at the time that Bob used to say, "We're so broke we've go to look up to see bottom. Lower than whale shit." Very colorful expressions, but it was the opportunity I thought, in my mind, to get the family out of the New York metro and into clear and clean and beautiful Colorado, and so that's the direction that... Oh, I took a 50% pay cut and agreed to buy a bunch of stock, which turned out to be underwater, very quickly, before I even got on the scene, but that brought me out to Denver. But they were guys that I had gotten to know over the prior couple of years – Sparkman and Bill Brazile and Carter Paige and Larry Romrell, Donne Fisher and I kind of liked them. I liked the attitude, it was a laid back kind of group.

MYHREN: And you knew them from the Jerrold relationship.

MALONE: Absolutely. I knew them intimately. I'd been selling to them and then trying to collect from them for several years. So I sort of knew, to some degree, what I was getting in to and never looked back. So Bob hired me. The issue was how to talk my wife, Leslie, into it. So he said, "Well, we can't be seen together in Denver or people will figure it out, so why don't you guys come down to my place in Scottsdale." So we went down there in the middle of the winter and of course he says, "Denver's kind of like this in the winter." And other assorted minor stretching of the truth. But at any rate, I took the job with Bob and I came on as the president and CEO in... actually I joined the company on April Fool's Day in 1973 and never got a promotion for all those many years.

MYHREN: It's interesting because your making that decision obviously changed the course of the industry over time.

MALONE: Well, to some degree.

MYHREN: Had you gone to Warner it probably would have done the same thing. I would have been a different path.

MALONE: Because Steve had the... he was the only guy wanting to come into the industry with resources and had they spent their money in an acquisition strategy, rather than a franchising strategy, they could have owned the whole industry because for a fraction of what they spent trying to build the cities they could have owned the equities in the industry, as things turned out.

MYHREN: What about, John, those early years with TCI when you really didn't have any financing and you were getting loans from banks and things were a little tough. Tell us about that.

MALONE: Well, I love to think about the industry in stages and the first stage that I experienced was the "stay alive" stage. From the day I joined, the phone started ringing at home from the banks and the creditors and you'd go to these bank meetings and they'd say, "Well, how are you going to pay us back." And you'd say, "Well, I thought you guys might have something in your file to give me a clue." (Laughter) It was a tough period because the industry had over-expanded up until '72, '73, had built a lot of markets where the programming was not sufficient to drive the consumers, and the companies had largely borrowed the money in order to do their capital expenditures. So, the cable industry was awash in debt, inadequate cash flow and commitments to cities that were far beyond their financial ability to perform. And so, I used to joke about it, the first couple of years here, I spent half my time going to New York and getting beat up by the banks and the other half of my time going to the cities and reneging on commitments. You know, we got very close. I think there were a few months there where we were very, very close. We cut the work hours back to 30 hour work weeks so we could save on payroll. We really skinnied it down as tight as we could and we just floated the boat over the reef, just barely. So there were about four years there, from say about '73 'til '77 when we really were borrowing from Peter to pay Paul and it was very, very tight. That was true for a lot in the industry. I remember I had an opportunity to buy Gene Schneider's company, United Video is what it was called at the time, for 1.4 million and we couldn't find the 1.4 million dollars. But I tried. Because of our relations with General Instruments we had the opportunity to buy it and sell them back some equipment that Gene had in inventory and I almost pulled it off where I could buy their equity with the money I got back from selling back equipment to a vendor. But things were very tight and the industry really didn't have a lot of programming to promote. The broadcasters, to a large degree, controlled the regulatory process and had the cable industry bottled up. We had very little flexibility in terms of programming and so that was kind of where the industry was. For TCI, and to some degree the industry, things started to get a little bit better when HBO came on the scene, and really the thing that turned the industry was the combination of HBO and the geo-stationary satellite and the FCC being willing to allow smaller satellite receivers. All of those hit almost simultaneously and then Ted was able to put TBS up on the satellite and so for the first time, the industry had programming beyond broadcast retransmission that was meaningful.

MYHREN: Well, you know, when you referred to HBO and then to Turner getting up on satellite, to go back to an earlier comment you made about inadequate programming, now all of a sudden you've got things that might cause people to buy this in larger markets where they've already got a reasonable amount of television. Maybe you could talk about the programming side of it and how that built up and what it then did for the industry.

MALONE: Right. Well, I give Jerry Levin and the guys at Time Inc. a lot of credit because they drove and took the risk of capital investment to put HBO up on the satellite. Up until then it had been a regional thing and in fact, we had owned the regional pay TV operation, which we sold to HBO and then a little later than that, ShowTime came along and got founded. But for once cable had reached critical mass to have enough potential customers that those kinds of programming investments made sense and HBO was a real driver in those days, as was WTBS, so that by '78, '79, the industry was starting to gain a little momentum. TCI itself was able to get refinanced. We were able to take our bank credit out that had strangled us for four years and replace it with a group of insurance companies and for the first time we had some financial flexibility. To give you some example, Tryg, of how tough it was in those late '70s, we had a covenant in our bank loan agreement that said we could spend no more money on pay television than we could generate from pay television, which is kind of an interesting...

MYHREN: Makes it a little tough to invest in programming.

MALONE: It made it a little tough to invest in programming. And so finally, once we were able to break out of that, for instance the satellite receivers you needed in those days were quite expensive and we had no room in our capital budget or our bank agreements to put satellite receivers in.

MYHREN: It's interesting when I think about that because of course when HBO started, it was UA Columbia and ourselves at ATC and then TelePrompTer came along closely after that, so the thing that was really constraining you at that time was your covenants wouldn't allow you to get out and get going until you could sort of prove.

MALONE: Yeah, risk capital was just not available up until probably '78, '79. Finally, about '78 or '79 everything started to work. We started to get refinanced, we got a little bit of elbow room in terms of our ability to spend capital. We had a relaxation of our corporate structure so that the portion of it that was financed and highly leveraged became restricted and we developed things called unrestricted subsidiaries and off-balance sheet transactions and we started to do that quite heavily. So, at that point, I think the industry... two things started to happen. One was that the metropolitan markets started to look, especially the suburbs of the metropolitan markets, started to look like better economic propositions and they started to develop and that spurred the development of the technology so that we had more channels. The set top box, the converter, started to come down in cost and improve in reliability and quality and that fed back to the programming world and said if you can develop programming we have more channels available. So it all sort of started to feed itself to build a video business and the improving capital base of major cable operators put them in a position to start consolidating the smaller operators so that increasingly scale economics started to play a role for the cable industry, for the operators as well as for the programmers and the two went hand in hand. A good friend of ours, Nick Nicholas, I can remember when he was asked by the Time Inc. board to study whether or not an all news channel on cable would be economically viable and after studying it pretty hard, he reported to the board that it was a good idea but it would not be economically viable. Almost simultaneously, Ted Turner launched CNN and the thing that was missing...

MYHREN: Possibly a difference in length of vision there?

MALONE: I don't think it was so much that as it was that Nick just assumed that you couldn't charge for it. For some reason, his pro forma had no subscription revenue and of course Ted's did. Just as simple a difference as that led Ted to have the successful launch of CNN. I can remember at one NCTA meeting, I was on a panel and it was in the, I think, in the very early '80s and I had changed my mind. I had really fought tooth and nail with Drew Lewis to prevent MTV from charging us for MTV and the reason was I didn't think they needed the money. They were doing quite well without a subscription fee. But I basically said our company was willing to entertain subscription fees for basic cable channels if the channels fit a unique niche because what we could see was the positive economics of driving subscriber penetration by filling niches and so after that, not only were we willing to talk to people about that, but we were willing to invest our capital in programming ideas that had this dual stream of income.

MYHREN: And that really fueled a lot of entrepreneurs and others taking the risk to try to start these channels.

MALONE: Right. John Hendricks was a good example. The Discovery Channel idea was his and initially some venture capital money from Allen & Co. and Westinghouse funded it, but they told him that they couldn't put any more money in and so they had withdrawn and he was about to shut down and John Sie, for us, ran around to see if he could put together an investor group, which he was successful in doing and it was basically us, and United, Gene Schneider, and Newhouse, and Cox and we're still partners in it today. It's been a great business. Bob Johnson, from Black Entertainment Television, who was on the staff at NCTA, came up to me after an NCTA meeting and said, "Do you think there would be any hope for a black channel aimed at the black demographic." And I was very enthusiastic about it because we were trying to build in some markets of heavy black neighborhoods and we didn't have anything to talk to them about. And so we put up what we could afford, a small amount of seed capital. We eventually talked the Time Inc. guys into coming in with us, then they got back out, we got the Taft people in and they got back out. We've had a number of partners over the years, including Mario Gabelli, but at the end of the day, Bob was very successful and he retained majority ownership all the way through, which was quite a testimony to his doggedness, his willingness to keep his budget down and grow the business. So there were a long list of programming ideas that blossomed during that period and some of them have been wonderful successes and some of them have been dismal failures. Remember the Christian Science Monitor channel?

MYHREN: I remember it well.

MALONE: Didn't quite make it. But that was part of that era of we're seeing a rapid expansion in the number of subscribers and the number of subscribers with the equipment to receive multiple channels and that just was a wonderful bed for the creation of these new service offerings, whether it was ESPN or CNN and its variants, TBS, TNT, and so on. So the whole industry, I think, was gaining momentum and strength from this programming.

MYHREN: And of course it was gaining it because the consumer liked it.

MALONE: The consumer liked it.

MYHREN: And it was very different from what was available on commercial television.

MALONE: But politically, the industry was still pretty well bottled up by the broadcasters, who held a lot more political sway and really that situation in my mind didn't start to change until the publishers, the newspaper publishers, started to invest heavily in the cable industry and suddenly there was this split in terms of political power with the publishers, even those who owned broadcast stations, having to make that decision as to did they want to push their cable fortunes or did they want to push their broadcast fortunes and fortunately for us, enough of them switched, whether it was Times Mirror or...

MYHREN: Tribune.

MALONE: Or Scripps Howard or the Tribune.

MYHREN: The Providence Journal.

MALONE: The Providence Journal, yes.

MYHREN: And Cox.

MALONE: And Cox and Taft, and that we actually ended up, I think, winning the deregulation battle largely on the backs of the publishers who were invested in the cable industry.

MYHREN: Because they had clout in Washington, and that deregulation battle was so much...

MALONE: Well, we had three things going for us. We had Tim Wirth. To this day I'll remember thinking all was lost and then at the end he pulled it out in the Congressional session.

MYHREN: He did a fabulous job.

MALONE: We had the broadcasters against us, but most of all we had the public starting to like this thing called cable, so even though we got beat up all the time about we charged for something that people thought they should get for free, none the less, it was becoming addictive in the average American household.

MYHREN: You were saying we had the broadcasters, you meant the publishers with us?

MALONE: We had the publishers with us, the broadcasters against us.

MYHREN: Right.

MALONE: And frankly the telephone industry was still asleep, which was a great thing for us.

MYHREN: Although in the '84 battle they put up an enormous fight at the end.

MALONE: At the end.

MYHREN: Yeah, just at the very end, but it was too late for them.

MALONE: So, you know, it was the industry... that I would call the youthful period of the industry, a period of great energy, great creativity. People were finding the capital to pursue their opportunities and even though there were oscillations in the capital markets, still the cable vector was pretty much straight up all through that period and both the technology was coming along and the scale was coming up and everything was working and so for the companies who were in it, they were receiving adequate capital returns, able to raise capital, able to reinvest. And of course it's been the history of our industry that nobody ever takes any money out of operating the cable business. They plow everything back plus whatever they can borrow and whatever they can raise and people only take money out of the cable industry when they actually sell out and go away and most of those guys aren't smart enough to stay out. They generally want to turn around and put their money back in because they haven't found another industry that's as much fun as the cable industry's been. So the industry has had a wonderful history of people enjoying it, enjoying the relationships and wanting to stay associated with it.

MYHREN: Well, maybe when you're talking about that, you'd talked about this stay alive phase...

MALONE: Right.

MYHREN: Okay, and we've talked some about programming, but then there was a consolidation phase that you might take us through because you had, once again, an enormous influence on that phase of the industry.

MALONE: Yeah, we became very aggressive in consolidating the cable industry because I saw from the beginning that scale economics was going to determine who was going to survive and who wasn't. We had the advantage of even though we were a public company, we were controlled. Bob Magness, as the principle shareholder, the controlling shareholder, wasn't particularly interested in near term earnings and was willing to really pursue a long-term strategy, which certainly I was, and so we were able to do things that most public companies can't do. We really didn't care about the impact of an acquisition on our earnings, so we would go out and do fairly highly leveraged acquisitions.

MYHREN: As you know, I know the difference in that case.

MALONE: But I think we were kind of doing, you know, at one point there we were probably doing a deal a day. Some of them were quite small and we were doing some fairly large ones and we became, I think, pretty good at understanding tax law, corporate law, structural law, and estate taxes, because a lot of these people were principally interested in planning their estates and the liquidity for their estates and so on. So we got going that way and ultimately then we found that we could do acquisitions later on. There was this phase, Tryg, that we went though, if you remember, as an industry where some of the urban markets proved to be very, very tough.

MYHREN: Near intractable at times.

MALONE: For two reasons. One was that they were thought to be wonderful opportunities and therefore the franchising and the commitments that were made to win the right to build them went far beyond reason and then when they didn't turn out to be nearly the opportunities that people thought they were, the cities were still expecting much greater benefits than the economics of the situation could produce. So it was that double whammy of the business wasn't as good as people thought and the commitments and the attitude of the cities went far beyond that. So from TCI's point of view, having sort of gorged ourselves, if you want to call it that, in a consolidation sense on rural and suburban markets, where the operational issues were very simple, we could acquire cable systems at market prices but our scale economics gave us an immediate benefit in terms of costs, programming costs, equipment costs, operational costs, and...

MYHREN: So you're saying that really helped to drive your ability when you got larger scale you were able to buy programming for less, for example, than somebody else, which made it easier, obviously, to be profitable more quickly but it also made it easier to make the next acquisition...

MALONE: Well, I'll give you an example.

MYHREN: ...because the same rules apply.

MALONE: Right. Probably the peak of this was when we bought the Pittsburgh cable system from Warner AMEX. Drew Lewis, who was running it at the time, had hired, believe it or not, McKinsey to study his cable properties and had concluded that Pittsburgh was the most intractable of the Warner AMEX cable systems because...

MYHREN: I might say here that Drew Lewis became, well, actually had been Secretary of Transportation.

MALONE: Correct. Under Reagan.

MYHREN: Under Reagan, and who was the fellow who actually took on the air traffic controller union.

MALONE: That was later on.

MYHREN: He was a very interesting character in our business.

MALONE: Yes, and a very sound businessman. But he hadn't been in the cable industry very long when I met with him and what I saw was that they had tried this Qube system, this hi-tech... it was really the first shot at addressability, at interactive addressability, and the technology was forced. It didn't work very well and this was really what was crippling the system in Pittsburgh. We had all the suburban towns around Pittsburgh, so we knew what a great cable market it was and we were actually able to buy Pittsburgh from Drew – we said we'd give him his money back, everything they had invested we'd give them back, which was music to his ears and we borrowed 100% of the money from a consortium of banks, we didn't have to put up a nickel and within two years we had the leverage down to six times cash flow and it was self-financing. So we actually bought the cable property with its own cash flow, which was the peak of the ability to do those kinds of things. In those days, before they changed the tax laws, it was quite favorable, you could step up the basis of the assets acquired and write them off over a reasonable life, and so you were sheltered, your cash flow was sheltered, and you could take leverage up very high because of all the cash flow after tax and you could use that to pay off the debt.

MYHREN: It was a wonderful time.

MALONE: It was a wonderful time. And so we did a lot of consolidating, as did some other operators at that time and did it in many ways cooperatively with other MSOs, other large cable operators. We bought Westinghouse, Group W, jointly with principally Time, Inc. and Comcast. We bought Storer Communications jointly with Comcast. So a lot of our transactions with larger acquisitions were done in partnerships with other cable operators. So, it was a time of camaraderie, I'd say, in the industry. The franchising wars were largely over, so cable operators weren't really competitive with each other except when it came to acquisitions, and so if you could figure out a way to do acquisitions collectively, it really allowed the industry to be cooperative with each other and work together on industry issues rather than internally competitive. It made it for a much more fun industry to be in because unlike some industries where everybody is at each other's throat, in the cable industry people really weren't at each other's throat. In fact, they were spending a lot of time at NCTA working on regulatory and political issues or later on at Cable Labs working on technological issues.

MYHREN: I put my hand up for both of those.

MALONE: Absolutely. Which really are hallmarks of our great industry.

MYHREN: Well, let me ask you then, you get to this large size, okay, and you've sort of won the Monopoly game here, and now what do you do? That had to cause you a lot of sleepless nights, or at least a few, as to where do I go from here.

MALONE: Well, yeah, we had gotten pretty substantial in size. We were reasonably leveraged but not massively over-leveraged. We did find the wherewithal to invest in some venture capital things. We actually created the first Liberty. We had gotten to the point where there were bits and pieces of the things that we had accumulated that the market didn't seem to give us any value for, so we decided to create the first Liberty, which was Liberty Media, and we couldn't spin it off because we couldn't meet any of the IRS rules for a spin-off, so we created a new structure that was a simultaneous incorporation where we basically allowed our shareholders to invest in this new company along with TCI and that became Liberty. It did quite well and became sort of the focus for our new programming efforts and we just kind of looked for the synergies of being a big cable operator, being a programmer with a bunch of different investments. So we were able to build that up, but prior to that – I sort of go back a notch because prior to that there was a period... For instance, when Ted Turner kind of got himself a little over his head with Mr. Kekorian buying MGM and I'll never forget the morning the phone rang and it was Ted. It was about 6 in the morning and I was just barely coming awake and he's screaming in the phone, "You've got to do something!" He says, "You've got to do something! If you don't do something it's going to be the KNN." And I said, "What the hell's the KNN, Ted?" And he says, "The Kekorian News Network." So, once again, I think it's testimony to how this industry works together that we were able to put together a refinancing plan for Ted to take Kekorian out, leave Ted in hard control of his company, and do well by everybody who invested in the enterprise. Eventually, of course, Ted was able to develop additional channels within CNN or Turner Broadcasting systems. He developed TNT and some other channels, The Cartoon Channel eventually.

MYHREN: I remember those board meetings, the Turner board meetings as being some of the more rollicking board meetings.

MALONE: Well, they were very interesting. They were very interesting. But look, Ted doesn't fool anybody with his country boy... He's a very sharp guy and he does keep his eye on the ball long-term. He may not be able to keep his hands off the ladies but he can keep his eye on the ball from a business point of view. So that all worked out great and it's just one of those multiple industry efforts that we've undertaken over the years that I think makes you feel really good about the cable industry. Everybody rallied around and helped Ted keep control of his company.

MYHREN: And I think more than that... It's interesting, as I reflect on what we did at that period, it wasn't just to help Ted keep control, which was very important, I think, to all of us, but we actually saved an institution that is extraordinarily important to U.S. news and information and didn't let it get into irresponsible hands.

MALONE: Yeah, one or two things could have happened. It could have gotten into irresponsible hands or it could have gotten so buried in debt that it couldn't have done its job.

MYHREN: Absolutely.

MALONE: Couldn't have provided a quality product, and either one of those would have been very harmful to the industry so it really all worked out very nicely. That was a period, I think, when we went beyond the narrow – this would have been probably the mid-80s – the companies were feeling their power a little bit and people started to look at what else can we do. We've got this multi-channel set top thing figured out, we've got these dual stream of income channels figured out. We've picked all the big potatoes out of the field, we can go back and look for the little ones kind of situation with respect to the programming opportunities and people started to reach around for other opportunities. By the late '80s we were investing in things like Sprint PCS. In fact, we started a partnership with Cox and Comcast and Sprint to try and take the cable industry into telephony in a meaningful way and that was where they called the thing the triple-play, I believe. We were going to offer high-speed data, telephony, and of course video with Sprint as a partner and that took on various forms as time went on and ended up being principally the Sprint PCS Wireless business today, which we still have a very major stake in. But it started to become interesting to think about how the cable plant technologically can start doing other things and while this had been a recurring theme in the industry, in fact, I remember Irving Kahn in Orlando in 1971, I think, in order to convince the FCC to loosen up the rules had put on a dog and pony show of all this hi-tech stuff. It had never really gotten to the point where it was economically viable and I can remember – it must have been the late '80s to early '90s – when I started discussing digital compression with the vendors, in the vendor community and actually John Sie - of Starz Encore fame now, but had been with me since the early Jerrold days - John who is actually a very qualified technologist – his master's is in physics, despite the fact he's a marketing guy...

MYHREN: And not a bad one at that.

MALONE: And I kid John about this, because I think that he remembers this, and this really came out of his early childhood, but he was on the last boat leaving Shanghai when the communists came in, but when he was a little boy growing up in Shanghai the Japanese were bombing Shanghai and committing all kinds of atrocities. So when he saw that the Japanese were about to define high definition television for the world, as a Japanese standard, I think he could hardly stand it and he scratched around and came up with this digital compression theory for high definition. He was really the guy who did that and he was pooh-poohed by a lot of technologists who later had to eat their words, but he was convinced and he did a white paper, which he supplied to the FCC.

MYHREN: I can remember, John, when the Japanese standard for HDTV really had a head of steam, and you're saying John Sie essentially helped to head that off.

MALONE: Well, not only did that analog standard have a head of steam, but the Commerce Department was even talking about subsidizing the manufacturing of the high definition - the Japanese high definition standard.

MYHREN: And they were saying something about it on the basis of military needs.

MALONE: Correct.

MYHREN: I can remember, it was amazing – the Defense Department, the Justice Department...

MALONE: An amazing manipulation.

MYREHN: Yes, exactly.

MALONE: At any rate, John, with the kind of messing around we were doing in digital compression and doing a little bit of technological forecasting, he'd come to the conclusion that this would be a huge waste of technology, also a big give-up by the U.S. digital industry, making television an analog standard, because the U.S. was just then starting to really gain steam on the digital side against the rest of the world and that if the U.S. could drive television to digital that this would be a huge edge for the U.S. manufacturers versus their international counterparts. And keep in mind then, I mean, Japan was laughing at America as being old generation technology. So, John saw this as a way to leapfrog the Japanese and he saw it, as I did, as a huge edge for the cable industry if we could move television to digital because it would suddenly explode our channel capacity, so we really, at that point, started working hard to see if we could develop a digital television implementation and we worked with Microsoft, with a lot of different people on this theoretically and ultimately of course, we ended up placing this early purchase order with GI for a digital set-top box, which hit headlines as "Malone says 500 channel..." and all of that. But the arithmetic is pretty easy – if cable systems have got 50 analog channels, and you can do 10 to 1 compression, that wasn't a huge leap of mathematics to get you there.

MYHREN: Some of the questions were about, once people sort of finally gathered that, were about "okay, so how do you fill them up?"

MALONE: Right. Well, they're getting there. It takes awhile.

MYHREN: There's no question.

MALONE: No question. But, at any rate, that was the history of that particular element and in and around that, with Dick Leghorn's kind of prodding, it seemed to us that the cable industry needed something more than John Sie and me ad hoc, kind of thinking about technology, and we created Cable Labs, which I think is now at 11 years old.

MYHREN: Yeah, I was also tired of depressing our performance at ATC by spending all the money on Chiddix and Ciciora and all those guys and not finding anybody else in the industry, except you guys, pitching in.

MALONE: And of course, this kind of leaps ahead, but Cable Labs has been a wonderful thing for the industry because it's led to the MPEG standard for digital compression, led to the DOXIS standard for high-speed data, it's going to lead to packet cable as a standard for telephony over cable, which gives us essentially global scale economics amongst the whole cable industry and takes all of the power away from the vendors, who want to go to proprietary systems and drive us into little niches that will never be cost effective. So it's been, I think, a very, very beneficial development for the cable industry.

MYHREN: And I think for the consumer.

MALONE: Right, and keep in mind, and a little kudo to Congress here, because we could have only done that because Congress woke up and passed this R&D act, which allows corporations to cooperate with each other for common technological development, which up until then would have been an anti-trust violation.

MYHREN: Let me... while we're on that subject, let me ask you something, and before we get to issues on how you took this colossus and began to figure out how to rationalize it in the future, there's this issue when you're talking about regulation, talking about the relationship with Congress, of sort of the John Malone that a lot of people will talk about, which is a fellow who's got enormous vision, financial and structuring capabilities, better technology understanding than any of the other chief executives across the media businesses in the telecommunications business, and I think that it's generally agreed that you have all of those things, plus you've created great relationships with a lot of critical people. You've got really good entrepreneurial drive, really outstanding. You put all of that together, from the vision to all the skills and the drive, they're all the positives, but there are those who have said, "Gee, John has a blind spot and the blind spot might have something to do with public policy, regulation, and public process."

MALONE: I hate those guys!

(LAUGHTER)

MYHREN: There's a certain impatience that people have noticed.

MALONE: Well, they're irrational. The problem is that I'm a planner and I like predictable processes and when you get into the law and you get into politics, you can't predict it. It becomes just a wild card and it's been very hard over the years to deal with that. I mean, as you know, because you ran a cable company, the local franchising process was brain damaging alone.

MYHREN: Maddening.

MALONE: But then, if you stack that up with multiple layers of regulations and then you've got anti-trust laws being administered by three different federal agencies and by the states, you get such a maze that it doesn't lend itself to – I forget which side of the brain is supposed to process this – but to that kind of processing, so you can't anticipate and predict it and so you have to develop a philosophy about it and probably most of what's a blind spot in me, I would say, is just the attitude that I've developed, which is you just go do it and when they tell you you can't, then you back up and you negotiate with them.

MYHREN: Right, or go off ten degrees and go there.

MALONE: Right, it's just like the old tank; it bumps into something, backs up and goes over here, and you keep trying until you find something that works. I mean, there are things that we've tried to do over the years that we've been stopped on. Probably the most persistent thing I've always wanted to be involved in is satellite. I've always wanted to be in the satellite business, I always thought that satellite was a great complement to cable because it would give you ubiquitous distribution and plus the satellite as a transport mechanism fulfills a need for cable and the ubiquity fulfills a need for the public. And from the earliest days, the regulatory and political processes kept cable companies out of satellite and I always thought that was a terrible public policy mistake, which I tried to overcome in all kinds of structural ways, by PrimeStar... we really started with Scientific-Atlanta and a thing called HomeSat when the small satellite receiver for C-band first became available. We started a company called HomeSat and we were going to sell a service to rural households based upon a small C-band dish. There was no scrambling at the time, so we found ourselves in a great deal of difficulty trying to sell something that people could steal. Later on, when we finally scrambled, which incidentally is really where a lot of my disagreements with Vice-President Gore originated, but we did scramble the satellite signals. We launched a channel called NetLink and we became directly or indirectly the major provider of satellite services to homeowners who owned satellite C-band dishes. We then ultimately ended up creating something called PrimeStar, which you may remember, which was a joint venture in the cable industry to offer K band, KU band, satellite services using digital compression. Most people don't realize, but PrimeStar was the first company that used digital compression on the satellite. DirectTV at the time was still strictly analog and did not use any compression. So we were earliest in that, but our efforts to grow that business were blocked by regulatory barriers.

MYHREN: I used to figure that there was an answer to this, of course, and the reason why it was all very logical, or should be, was that of course if you looked at the public policy people, the regulators and legislatures, at the various levels, of course their interest was in the consumer and in the public and so if you just thought that way, I must admit that I discovered I was wrong, and therefore it really wasn't a very logical process. Not to say that some of them didn't care, but it was not consistent.

MALONE: Well, you know, I had a private meeting with Vice-President Gore when he was still Senator Gore, actually right here in Denver. We spent a very nice evening and he's a lot smarter than he looks, let's put it that way, but I tried to convince him that a regulated satellite service by the cable industry for the rural part of the country would be much more cost effective than an effort to build a stand alone satellite system just for the rural areas. I didn't succeed in that, but I thought it was a pretty good pitch. At any rate, we persisted with PrimeStar right up to the point where our license to buy a high-speed satellite – our joint venture with Rupert Murdoch to use his license – was shot down by the government. So we persisted all the way through and ultimately sold PrimeStar to DirectTV – broke my heart. And I was the only guy that took stock; everybody else took cash and the stock did alright. We hedged it when it was higher. So, yeah, technologically I've always thought that was great. So I tend to think about, having started my career with the Bell System and thought that AT&T was actually doing a fabulous job of providing communications for America. America, in those days, had far and away the best telephone system in the world.

MYHREN: No question.

MALONE: Plus, it had this huge resource called Bell Labs, that was inventing almost everything that was new in technology: the laser, the transistor. You name it, they invented it. And when they broke the Bell System up, it created a few jobs for a few guys, mostly lawyers, and substantially degraded the quality of the American telephone system. So, I'm not entirely sure that for those kinds of services, that a deregulated, competitive model is the right model. In my own mind, I think maybe a regulated, and intelligently regulated monopoly model may actually be better for certain services and less disruptive for the public and even though it gets wasteful at times, and it's slower sometimes in implementing things, the scale economics of it is overwhelming. Anyway, mixed emotions about all that stuff and so I don't automatically buy that competition is the right answer in every situation and I certainly have never contested the duty or the right or the appropriateness of the government regulating certain aspects of the business. What has always bothered me is when they can't be clear about their regulation and so they leave a businessman in a realm of grayness, so you don't know, are they going to let you do this or aren't they going to let you do it. And you find yourself doing it knowing that the odds are that they may or may not, and in the end, generally speaking, you negotiate your way through and you get the thing done even though at the inception you didn't know that it was going to happen.

MYHREN: I think the thing you mentioned about the different layers of regulation, too, which don't end up always being duplicative, but sometimes they're at odds with each other, just make it extraordinarily difficult for a businessman.

MALONE: Absolutely. Right now, in terms of anti-trust policy, we have the FCC feeling an anti-trust orientation, plus the Justice Department, plus the Federal Trade Commission, at the federal level, and then we have many state AGs, who also feel that they have a role to play in anti-trust and none of them have well developed theories that you can study and say, okay, here's how they want a company to behave. So, as a result, it's kind of a gray area and I think it's damaging really to the way business operates, kind of like the tax code, you know.

MYHREN: Which is constantly changing.

MALONE: And very dense. You're constantly trying to figure out how to do things they don't want you to do because the benefit of that is huge to your shareholders.

MYHREN: Let me take us back to sort of as you're looking at this big company with all of this background and you're thinking about – I'm not sure what the right terms are, rationalization, exit, being able to go off and run a company like you are with Liberty right now, which is more the model that you would look for, what do you do with this big company you have? Take us through the Bell Atlantic and on up.

MALONE: Well, yeah, I'd say Bell Atlantic was quite a bit different than the ultimate AT&T transaction. Bell Atlantic... I got to know Ray Smith quite well and I really thought there was a wonderful opportunity, since I'd come out of the telephone industry, a wonderful opportunity to blend what they had with what we had and build a truly global, if not just national, dominant player in communications. What we had was growth potential and the ability to spend capital in shelter taxes and develop growth and what they had was a pretty steady but uninspiring business and I thought if you could blend the two together you could really have a supercharged cable company, a cable company with plenty of cash flow with a strong investment grade rating so it could once again gain scale economics in terms of its capital acquisition and could develop telephony over cable and cable over telephony. I really thought you could blend the two, technologically and operationally. So that was the theory and that was truly a merger of equals, and in fact, if you looked at the original deal, we were going to name six directors out of thirteen and the other seven were going to be public interest directors. So, in effect, particularly since Ray was going to be one of the seven, we would have effectively controlled the combined company and I thought that was a wonderful opportunity for me to do what I wanted to do, which was be a strategist and long-term kind of planner and for Ray to take on the operational aspects and worry about the politics and the regulations and all of that. So, to me it was both personally a move to get into a role that I enjoyed, but with a stronger balance sheet and I thought with that strong balance sheet and that bigger reach, we could have really driven the programming side of the business as well. So part of that deal was merging Liberty back and putting it all together and driving it that way. What happened after that was that we started to become very successful in some of these other businesses. The technology investment business started to take off for us. PCS started to explode in value, the programming businesses started to become very valuable. I got totally preoccupied with those businesses and I kind of lost maybe a little enthusiasm for the day to day in the cable business and I think we found that the generational change – we had a whole generation of senior managers who were retiring, and whether it was my lack of comfort with the next generation or maybe some underperformance, at any rate it was pretty clear that the spark had gone out of, maybe Sparkman retired, the spark had gone out of our operating drive and the place was swarming with consultants and it seemed like we lost our way a little bit in terms of our historical theory of how to run the cable business. And we were really having a hard time coping with the addition of the new services, sort of the infrastructure management challenge of introducing new services. At that time, the principle new service was digital set-top and our overheads were getting out of control, our marketing costs were out of control and our cash flow was really taking a beating and we were starting to be on the ragged edge of losing our credit ratings. So, at that time, I kind of had to get back into the day to day operations, some would say in a draconian sort of a way, but we had a massive swing in our operating cash flow from substantially negative to substantially positive and I kind of imposed a discipline that we were really going to shut down the bandwidth expansion capital investment program until we got control of it and replace it with a digital set-top program that could immediately take advantage of the bandwidth we had. So we launched digital set-top, I think quite successfully, got the business into strong positive cash flow. A lot of people think that that draconian move was Leo's. Actually, Leo didn't join us until after the blood had pretty well run down the gutters and we were ready to start hiring back a few people and get the company growing again, in terms of the traditional sense of growth. I think if you look at the numbers, there was about a 60% year to year cash flow growth on the running rate basis, which was pretty substantial. So we really whacked it hard and proved that the company was capable of generating real cash, got our bond ratings back in good shape and then Leo took over running the cable business for us. You know Leo, he's like 25 hours a day, he'll wear you out even if you're not around him. So, my interest then went back to the content and technology side of it and I was spending a lot of time with Microsoft and trying to figure out the digital compression stuff, Cable Labs some, and the content businesses, and Leo came in and said, "You know, I've got this inquiry from AT&T. They really believe that the plant can be used." So they bought the triple play thing hook, line, and sinker and they were willing to entertain a number of transactions and of course, when Mike Armstrong took the AT&T job – I've known him for years – and he stopped in Denver the day that he accepted the job and we sat down and he said, "What should we be doing together?" I said, "There's three things: you ought to invest in At Home, because you need a high-speed data solution. You ought to buy Teleport, because it's a local access business that you can really drive. And we ought to work something out on telephone over cable and figure out how to work together on that." And actually that's what we did. We sat down to start working on that. In the process of doing that, they decided that maybe they should have a closer relationship with us than that represented and Leo really drove it. What happened, in all honesty Tryg, they came back with a proposal which suited me in the sense that I could worry about the things I was interested in, Liberty and some technology stuff. And my shareholders could get an exit into a very liquid security at a big premium and you look at that and you say...

MYHREN: Sounds good!

MALONE: Well, how do you turn this down? How do you say no? And so that was actually a sale. There was no question about it – there was no pretense, there was no merger of equals.

MYHREN: It wasn't a merger.

MALONE: It was not a merger; they were buying us with their liquid security and I was getting autonomy for the things like Liberty and the technology business.

MYHREN: Plus some, didn't you negotiate some fairly significant balance sheet advantages for the autonomous...

MALONE: It worked out that because of their tax posture and our tax posture, a lot of the inter-company stuff turned out to be very advantageous for Liberty. We were able, for instance, to sell them back the AT&T shares that we had gotten for Teleport for cash tax free. Similarly, we were able to sell them our stake in At Home, out of Liberty and into AT&T, for cash tax free and on a going forward basis, the fact that Liberty would be consolidating with AT&T meant that any tax savings that Liberty could generate, Liberty would be compensated for on a current basis with cash. So, from that perspective, from just a narrow operating, it was a good environment for Liberty from a balance sheet point of view. We, I guess, talked ourselves into believing that we would be able to work closely enough with them that we could create synergies across the two companies. In retrospect, that's a very hard thing to achieve between two entities that aren't under common control, but nonetheless, it worked out pretty well from a balance sheet point of view and in all honesty, our shareholders, had they gotten out of the AT&T stock that they got at the peak, they would have tripled their money from the announcement date. Few of us have that timing that's that good. But still, it provided massive liquidity to big shareholders who otherwise were illiquid in our stock and at a very good price. So, we did it. It's as simple as that. The store's always open and I think your duty, even if you're a control shareholder, if you get to the point where somebody offers you a bigger price today than you think you can make the present value of the future worth, you really have to seriously look at it. It's your duty to look at it and that's what we did.

MYHREN: Right, I think that's right. Then, you get to that point and you go onto the AT&T board and lots has ensued since then.

MALONE: Well, it's been quite a sleigh ride. Yeah, I went on the AT&T board as the largest individual shareholder of AT&T, plus I kept this Liberty entity that I had effective control of.

MYHREN: Were you and Amos about equal in shareholdings at that point?

MALONE: If you include his sister.

MYHREN: Okay. Yep.

MALONE: When he came in, yeah. Plus, he diluted me when he came in because they issued so much stock to buy Media One that percentage wise...

MYHREN: See, I was on his board going through all that.

MALONE: Plus, I had started to sell down on my AT&T holdings really right after the merger.

MYHREN: Got you. So you've been selling down and he's been buying up.

MALONE: You've got it. That's correct. I've sold down and swapped out from AT&T into Liberty over this period so yeah, he's now a substantially much larger shareholder of AT&T than I am. And that was quite an experience because what we saw was a really talented chief executive in Mike Armstrong with really, I think, a pretty good vision of what could be done, but running into all kinds of implementation problems and really, if you want a post-mortem on it, I think they didn't pay too much for TCI, particularly if they had gone ahead and created a tracking stock for the cable business when they did it, because if you look at it, at their stock performance, they took a beating after they announced the deal. Their stock got down into the upper 40s from 63 when they announced the deal, but shortly after the close, it got up well above the preannouncement price and six months thereafter, it was up into the 90s. So, they had about a 50% appreciation once the market understood TCI and how they were paying it. They absorbed that hit to their earnings okay and the market believed they were still going to do a tracking stock, which would take away the earnings hit from the AT&T core. When they did the Media One deal, it was just too big a dilution to their earnings for the traditional AT&T investor to handle. As a result, their stock took a real beating. They had agreed to a cash collar, as you may well know as a shareholder, on the Media One stock and as a result they ended up paying more cash than stock for Media One and they paid a huge price in retrospect.

MYHREN: It was a good thing. Obviously, the cash elements of the Media One deal with AT&T were salutary for a lot of us, but I guess it really put a tax on AT&T.

MALONE: Yeah, I think it kind of overstressed AT&T's balance sheet, particularly in conjunction with the unexpectedly rapid decline of the long distance cash flow streams, so that that combination kind of overstressed their equity and their balance sheet and kind of put them in a position where they can't, on their own, probably, go forward and fully execute the original vision.

MYHREN: You, then, took Liberty out from under AT&T, so you've been off doing your own thing there and then you've gotten into the European scene in cable, once again, in a huge way, so maybe you could take us through that.

MALONE: Yeah, if you remember Tryg, part of our original deal with AT&T was that Liberty would be an autonomously managed subsidiary of AT&T and as time went on, it became clear that Liberty's direction was going to run into conflict from a regulatory point of view with AT&T's direction and so it seemed to be the prudent thing to split the sheets and since the AT&T shareholders really had no financial interest in Liberty and Liberty shareholders had no financial interest in AT&T, it was pretty much a... once we ran into those problems that started to really mount, it made sense for both sides that they spin Liberty off to the Liberty tracking stock shareholders, which is what ultimately happened. So, Liberty is now autonomous. It is what it's always been, it's a collection of businesses and a portfolio of investment assets that we're trying to grow and optimize. In particular, we're very interested in the international cable television business. For one thing, it didn't put us in conflict with AT&T to get into it and it seems that some of those markets are proving very interesting in terms of this triple play, this full technological implementation.

MYHREN: Video, voice, and data.

MALONE: Video, voice, and data. And particularly right now, the equity markets and the debt markets seem to be running away from these businesses, and so these businesses are seeing their ability to raise capital dry up and their stocks trade at record lows and so it's a pretty good opportunity for Liberty to expand internationally. If we do close the transactions that we have announced, we will be at over 25 million subscribers outside the U.S., with lots of opportunity to grow. So we will have essentially become bigger outside than we ever were inside in terms of subscriber count, anyway.

MYHREN: Well, even in terms of percentage of European cable subscribers, wouldn't you be?

MALONE: Right, we would be a pretty major operator, probably the dominant international operator, all taken together. And so that's kind of interesting. We continue to develop our interests, our relationships, with other media companies, notably News Corp. We're participating in their efforts to acquire Hughes, which would finally get me back in the satellite business on a legal basis. So, we do believe very much in the cable business and the cable technology. We think that this hybrid fiber network still looks to me to be the most cost effective way of providing a broad range of communications services to the consumer and to small business, perhaps. We think that as the scale grows and as the technology develops better ways of performing these functions the economics will become even better for this. The rapid decline and the cost of cable modems, for instance, now that we have a global standard, is a good example of how that's going. People are talking about digital only set-top boxes for under a hundred bucks, down from $350 two years ago. I mean, the fall in the capital costs of the customer premise equipment, I think, portends well for the future of the cable business, domestically and internationally. So, I guess I'm as bullish now on the cable business as I've ever been.

MYHREN: If you just take this question that a lot of people have: is satellite going to win in the end, is cable going to win in the end, and you look over in Europe where, of course, cable got off to a later start, but on the other hand has managed to do a better job of the triple play than has happened in the U.S. where cable was much more embedded, you have two very different situations. Who do you think wins in each place, or is there really room for both to play?

MALONE: Well, there's clearly room in the U.S. The U.S. market is very large and the satellite industry for video distribution will always have an edge in the rural areas for video distribution, since in many cases it will be the only way you can get these services. Where it's cost effective for hybrid fiber cable to build and where the consumer is interested in this multiplicity of services, I think cable will have a huge advantage and I think cable will put a lot of pressure over the LEC, over the local telephone company as well, with this full set of services. As these platforms become more integrated, as people become accustomed to getting their information and entertainment across multiple platforms, the advantage of cable will come to the fore, that you can get your email on your TV set, or you can get an alarm on your TV set that you've got email, that it will work on your PC or on your wireless phone, I think these are all favoring the guy who can integrate these services technologically and from a consumer usefulness point of view. So, I'm quite bullish on that. It will vary market to market enormously, depending on the going in conditions. As you say, we've had various experiences in the UK where satellite was the incumbent multi-channel distributor and cable came on later, the satellite has still an edge in video because satellite was early enough for the satellite purveyor to control the programming more heavily than the cable side was able to. So, on video, satellite has an edge but on telephony, cable has a huge edge since satellite can't provide it. It's the driving force in the UK and now as data, as high-speed data, gains acceptance that will give cable still another edge over satellite. The two will co-exist and split the market, but I would bet that ultimately cable's return will be superior on capital. On the other hand, in the UK the programming that's dominated by Sky will provide a high return for the Sky shareholders. So, you have to say, what businesses are they in? I mean, Sky is basically in the programming business. If you interpret Sky long-term as being in the programming business and willing to sell its programming to both cable and satellite customers, that's a great programming business to be in.

MYHREN: Right, but just purely as a satellite business, that edge will start to get taken away from them a little over there?

MALONE: Right. In central Europe, I think UPC has demonstrated that they can achieve high penetrations of data and telephone and video in markets like Holland and Austria. Germany, I think, which is going to be a major test of Liberty, the jury's out. I think Deutsche Telecomm has done a better job of implementing ISDN and DSL than most incumbent phone companies have and the video programming is largely tied up by various, one in particular, company that is really struggling financially to make any sense out of it. So, it's market by market. Japan is going extremely well. Excruciatingly slow, which I think is a cultural phenomenon, but extremely well and its growth is just very, very predictable and the results are very attractive. So, each market... Latin America, cable does great; the uncertainty is the currency and the political stability. So, every market when you get outside the dear old U.S. – the nice thing about the U.S. is we have political and currency stability and this is a great place to do business and particularly for the cable industry. So, you know, when we look at it from Liberty's point of view, we are cable operators in the U.S. We're the largest shareholder of AOL, a major cable operator in the U.S., and someday I may be a major shareholder of Comcast. We are partners with Comcast in other businesses, which ultimately, I think, will become equity in Comcast and so we'll be a player there. So, I'm a believer in the business. Actually, it's a better business domestically than it is anywhere else in the world, but the market prices reflect that. You can't buy into the cable industry in the U.S. today at the same price that you can buy into international.

MYHREN: Absolutely, which is why some of the money from here is flying over there to try to find...

MALONE: Opportunities.

MYHREN: ...opportunities, figuring that the long curve works there. As you reflect on all this, a truly magnificent career and a lot of accomplishments, some ups and downs, obviously, as you've gone along, which makes it more interesting, do you have any major lessons that you've learned or things that you want to pass on to folks to think about?

MALONE: No, I'd say I just thank God that I landed in this industry, that my relationship with Bob Magness was just fabulous over the years. He was a friend, a mentor, father, whatever, just fabulous, and generally speaking, the people in the industry have been wonderful, wonderful to deal with. We've had our characters and our personalities but I don't think I could have picked an industry, I don't think there exists an industry with quite the mix of personalities and entrepreneurship, that I could have had nearly the enjoyment that I've had just being in this industry and being part of it. It's been a great industry, hopefully it will continue to be a great industry. The industry's uniqueness and its ability to support entrepreneurship, to listen to innovation and implement innovation, to take a Bob Johnson and make him a huge contributor and very successful personally, or John Hendricks with Discovery or... you go down the list of the hundreds of entrepreneurs that have flourished in this industry. I think you can't point to any other industry that's anywhere close.

MYHREN: You know, it's interesting John because as you know, I've been in books and magazines and actually film and broadcast and newspaper publishing and cable and it is absolutely clear to me that what you say is true, which is that there's no other industry that has quite the mix of characters and interesting people and had the other elements that were necessary to create just a fascinating group of people to be around, because having looked at all the others, cable really rises a full step above.

MALONE: That's my view, Tryg. And I've tried to figure out exactly why that is and you know, it's not been a great industry for major corporations, because its economic returns are too far out in the future. Those who have tried to buy in and grow have generally stepped back out and they've made money but they have not found it hospitable. It's an industry in which guys have sold out and come back in and been successful, time and time again. It's an industry where family companies that had the kids carry on, I wish that I had, I didn't, have been able to stay family enterprises, whether it's the Roberts family with Comcast, or Adelphia...

MYHREN: The Rigas's.

MALONE; The Rigas's. It's wonderful in that sense, that entrepreneurs who kept their eye on the ball were able to keep control of their companies and grow them very nicely. So, it's afforded family type enterprises, which is really... even Bobby Miron, that we're going to talk about later, the Newhouse family has been in the business forever. So that adds a dimension of it, it's not just an endless series of Harvard Business School guys trying to one-up each other. This isn't like bond trading.

MYHREN: No, it really isn't.

MALONE: People develop a real emotional attachment, I think, to the business and to the people in the business and it's nice. It adds a dimension to it that doesn't exist in other businesses.

MYHREN: I would absolutely agree with that. I want to thank you for what has been a fascinating retelling. Probably too short, because there is a lot more you could have told, but I want to thank you for it.

MALONE: Tryg, there's endless details and great personal bravo performances by a lot of individuals who've taken on individual problems and helped the industry fix them. Amos Hostetter's efforts on the pole attachment bill saved the industry's cookies. I mean, you know, that's what made the industry great.

MYHREN: There's no question about it. I think I should say here at the end, just to remind everybody what we're doing here, this is the oral history of John Malone. It's being taken at Liberty's headquarters building right outside Denver on Monday, October 22nd. I think it's now a little after 4:00. My name is Tryg Myhren and we thank you.