Tuesday 2014-03-25

Cable Cowboy by Mark Robichaux

Robichaux writes for the Wall Street Journal, which makes financial lacunae even more annoying. E.g.

As Magness later discovered, the horse, a beautiful Arabian with apple cheeks and chiseled features, could consistently beat a big-boned thor- oughbred in races over a mile, the smaller Arabian’s stamina win- ning over speed. When he returned home, his pockets were bulging; he had made more money wagering than he had earned in army pay.
-- License to Steal

At the end of WW2 the US military capped the amount of cash soldiers could return with; according to TheGoodWar privates could only return with $500. So how did Magness get his cash out? Did he use the Red Cross and pay 20 points?

And unfortunately for everyone who wants to know more about how Liberty Media earned 8.991 gigadollars and paid only -75.00 megadollars in taxes for 2013 (you read that right, they got a tax refund), the details are "too excruciating to reiterate".

A year earlier, they had traveled together to Japan to tour the Consumer Electronics Show, and one of the most memorable moments for Roberts came when he boarded the plane before the 14-hour flight. Malone slapped the seat next to his own and looked at Roberts. “Brian, have a seat,” he said. From the time they took off, neither man took a nap, watched a movie, or had a drink of anything stronger than coffee. Malone gave Roberts an earful, sometimes in excruciating detail: the tax logic of Liberty, where cable stocks were headed, and a strategic analy- sis of the DBS industry.
-- Trojan Horse?

That said, he does grok Malone's view of an income statement as a leaky bucket, where the goal is to minimize the use of cash for non-growth purposes, so that it can compound. I.e. minimize overhead, negotiate for cheap loans, and ramp up depreciation so that income before taxes is always zero. This works great for recession-proof revenues like TV for the American public, not so much for car or house sales.

Because TCI had high interest payments and big write-offs on cable equipment, it pro- duced losses, and because it produced losses it paid hardly any taxes to the government. As long as cable operators collected pre- dictable, monopoly rent from customers, met interest payments, and grew from acquisitions, why worry? Malone liked the mathe- matics of it: Tax-sheltered cash flow could be leveraged to land more loans to create more tax-sheltered cash flow. ...
“There is a big dif- ference between creating wealth and reporting income,” Malone liked to say.
-- Cash Flow

As he braced for college, Malone continued to seek counsel from his father, who one day gave his son puzzling advice about taking tests: “Guess at the answers,” he said. John gave him a perplexed look. “Guess before you figure the problems out,” Dan repeated. Uncertain at first, Malone quickly developed an intuition for engi- neering questions that called for empirical data. Malone was amazed at how quickly he could derive a number, how he could guess what waveforms would look like at the end of a circuit even before doing the underlying mathematics.
-- Running the Show
In Vail, Colorado, a ski town wedged in the Rockies about 100 miles west of Denver, the city council voted to end TCI’s fran- chise to operate in the city. The council had declined TCI’s offer to rewire the system, which it had only recently bought, and refused to renew TCI’s contract. Malone’s response was silent but devastating. At 6:35 P.M. on November 1, 1973, the TV screen of every TCI customer in Vail went dark. TCI had pulled all programming, substituting it with the names and home phone numbers of top city officials, including the mayor. The blackout lasted through a Sunday Denver Broncos game against the St. Louis Cardinals, and the phone lines lit up. By Tuesday, the crisis was settled. After setting new terms, Malone wanted to send a message to any city thinking of squeezing TCI at this delicate stage, and it set a precedent for the scores of franchise renewals it faced down in other cities.
-- Cash Flow
Johnson knew Malone from industry meetings, and he flew out to Denver one day to present his plans for a cable channel devoted to minority issues. “How much do you need?” Malone asked him. Johnson replied that he thought it would take $500,000 to get it started. Malone had already made his decision before Johnson walked through the door. Black viewers had tremendous buying power and no TV outlet to call their own. More important, such a network would bring in more paying customers for TCI. “I’ll buy twenty percent of your company for one hundred eighty thousand dollars, and I’ll loan you the rest,” Malone offered. Johnson said yes. Malone immediately called in TCI’s lawyer, who had drawn up a one-page agreement. Moments later, the TCI treasurer handed Johnson a check for $500,000 dollars. The entire transaction took about 45 minutes.
-- Thrilla in Manila
“Ten years ago, you could have had a cable franchise for the asking,” one cable wag told Business Week in 1980. Not anymore.11 Everyone was in the race—everyone, that is, but John Malone. At such frenzied prices, there was little he could do but sit on the side- lines and watch the bidding. Malone knew the game was too expen- sive for cash-poor TCI—but he also knew to be patient. Many of the investors who had suddenly fallen in love with cable were paying way too much and were backed by way too little experience: One day they would be begging TCI to buy them out. So while he waited for the buying frenzy to collapse, he aimed to improve TCI’s cash flow by building through much smaller bites. A typical purchase during those years at TCI was a $1 million cable system, in need of an upgrade, contiguous to another TCI system, whose sellers were the first and only owners. TCI would typically offer 20 percent in cash and a 10-year note.
-- Thrilla in Manila
Continental Cablevision, which beat out seven other companies for Newton, Massachusetts, offered to build an annex to the town library for a media center. Of all the tactics used, though, the most popular and effective was rent-a- citizen. Cable operators offered local politicians lucrative invest- ment opportunities in the cable franchise. In return, cable operators got favorable votes when the franchise issue came before the town council. In many cases, the bidding cable operators loaned the pols the initial investment money. When the cable com- pany received approval, it either bought out the local partners or passed on the higher costs to customers.
-- Thrilla in Manila
On March 1, 1981, TCI fired the first salvo, suing the city in federal court. “I want to make one thing perfectly clear,” a TCI lawyer told the city official responsible for the transfer of TCI’s franchise. “And I am authorized to say this—nothing is for sale. We’re not going to sell one bolt, nothing. We would rather have it rot on the pole.” 23
Each day, TCI created a new tactic to turn up the pressure. TCI started running ads in the local newspaper, saying that cable ser- vice would end unless TCI was allowed to serve the city. The com- pany withheld franchise fees of more than $60,000. Then, in the summer of 1981, at the cable industry’s big convention in Los Angles, Paul Alden, TCI’s national director of franchising, spotted Elmer Smalling, the consultant to the city of Jefferson City. TCI’s Alden walked over, according to Smalling, and said: “Go ahead and keep your seat. You are not going to like what I have to say, anyway.”
Each day, TCI created a new tactic to turn up the pressure. TCI started running ads in the local newspaper, saying that cable ser- vice would end unless TCI was allowed to serve the city. The com- pany withheld franchise fees of more than $60,000. Then, in the summer of 1981, at the cable industry’s big convention in Los Angles, Paul Alden, TCI’s national director of franchising, spotted Elmer Smalling, the consultant to the city of Jefferson City. TCI’s Alden walked over, according to Smalling, and said: “Go ahead and keep your seat. You are not going to like what I have to say, anyway.” The bully continued: “We are going to discredit you every chance we get. We had you checked out by a Dallas agency all the way back to CBS. We know where you live, where your office is, and who you owe money to. We are having your house watched and we are going to use this information to destroy you. You made a big mistake messing with TCI . . . We are the largest cable company around. We are going to see that you are ruined professionally.”24 Alden also threatened Teltran, the other company, with trouble in Columbia, Missouri, where it operated a cable system. Teltran dropped out of the contest for the Jefferson City franchise in the fall of 1981, citing the “distasteful environment” in the city. When word of Alden’s threats got out, Malone fired him. TCI publicly stated that it had neither authorized nor condoned the man’s behav- ior, and Malone labeled Alden a “loose cannon” and “amoral.” “He could tell you a lie and believe it was true himself,” Malone said later. Malone wouldn’t admit the truth: Even if he hadn’t personally authorized Alden’s moblike tactics, they were in line with his own two-fisted, must-prevail ethos. ...
In rendering a decision, a federal judge had called TCI’s threats “nothing short of commercial blackmail.” The appeals court had condemned TCI’s excessive and intimidating conduct, and found in favor of Jefferson City. Essentially, the court found that the First Amendment did not offer immunity from antitrust liability to members of the communications industry. The Supreme Court turned down TCI’s final appeal and, in 1987, ordered it to pay $48 million in damages, which it did. Fortunately for TCI, the original trial and appeals process wore on for nearly six years, by which time the company’s finances had improved consider- ably—and its wires in Jefferson City had expanded their reach.
Stephen J. Long, a Denver lawyer who opposed TCI in Jefferson City, believed TCI executives had shown their true colors in the fight: that they felt they could do anything they wanted to do, and that local politicians were a bunch of buffoons. “So they run over them,” he told a reporter.
-- Thrilla in Manila
And while the battle cost TCI an estimated $2 million in legal fees and more than $300,000 in campaign costs, Malone had, in some ways, bested the enemy. During the six years the case was in litiga- tion, TCI’s revenue in Morganton approached $2 million a year.27 Meanwhile, Morganton was bloodied because of the fight, spend- ing close to $1 million in legal fees. “We never thought we would lose the case in court,” Morganton City Attorney Steve Settlemeyer told the Rocky Mountain News. “But the time and money almost forced the city to fold.” That was precisely the message Malone had intended to send.
-- Thrilla in Manila
Trygve Myrhen, CEO of ATC, the cable subsidiary of Time Inc., told reporters in 1983, “We looked at the crazy demands of the cities, the political opportunism, and the eagerness of cable operators to win at almost any price, and decided there was no way to make the risks pay off.” 2 Winning bidders choked on the costs of new systems or tried to renegotiate.
-- Overgrown Monster
The headquarters of TCI was a square, flat, one-story brown building on the outskirts of Den- ver. Faux-wood paneling lined the offices, which were furnished with brown-plaid chairs and couches that looked as if they had been lifted from the lobby of a Motel 6. A lone receptionist greeted visi- tors in a carpeted area, and a door opened to a wide linoleum-tiled hallway that ran just inside the outer rim of offices. This way, the heads of engineering, operations, and accounting were mere steps from one another, and they were all close to Malone’s office. It was from here that Malone commanded his fleet of cable systems. Like Magness before him, Malone did not believe in memos. No paper passed from his desk to underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that causes ulcers in so many midlevel executives. Communication was direct, effective, and efficient. Every Monday morning, Malone sat with his closest executives at a broad round table, much as Magness had done, to figure a way to squeeze more out of TCI’s growing cable kingdom.
They shared secretaries, and an automated service answered the phone. “We don’t believe in staff. Staff are people who second-guess people,” Malone told an interviewer.4 At negotiations to buy a cable system, when a team of lawyers and bankers showed up to represent the seller, Malone brought only a lawyer or two. Malone refused the conventional thinking that TCI needed to have a brand name or a Madison Avenue image. The company had no human resources department, and it wouldn’t hire its first public relations person until the end of the 1980s
-- Overgrown Monster
By 1986, TCI was beginning to run the way Malone had wanted it to run—highly decentralized. He had cut the company into six sep- arate operating divisions, each nearly autonomous, with its own accounting and engineering departments. “When you’ve got it run- ning right, when you’ve got it decentralized, when you’ve got it structured properly, it’s like flying the most powerful fighter jet in the world,” he liked to say.9 TCI wasn’t as pure a cable company as Cox in Atlanta, Cablevision in New York, or Comcast in Philadel- phia. Malone had dozens of different partnerships with other cable operators to own and operate systems, and TCI doubled as an investment vehicle, investing in an ever-expanding portfolio of cable channels. Malone viewed himself as an investor and share- holder in each of these enterprises.
-- Overgrown Monster
One day in the summer of 1984, Malone received a letter from ESPN, alerting TCI that ESPN would start charging money for its service—25 cents per subscriber the first year, and 30 cents a subscriber the second year. Malone fumed. He knew what was going on—ESPN had just been acquired by ABC, which was putting the squeeze on cable operators as it searched for every return it could get to make the acquisition pay off. So Malone retaliated. ABC Chairman Fred Pierce was sitting in the stands at the 1984 Olympic Games when he received a message from Herb Granath, who oversaw ABC’s cable business. Granath had received a letter from Malone, who had written that TCI would “shut off ABC’s ESPN on every one of its systems at midnight” that night unless Malone heard from ABC “by the end of the day.”10 ABC called and bought some time, but later Malone sent ABC an omi- nous message: He announced a competing sports network called Sports Time, backed by one of the biggest names and some of the deepest pockets in sports advertising: Anheuser-Busch Company, which also owned the St. Louis Cardinals. ESPN, fearful of losing its hard grip on cable sports, backed down and signed a more favor- able long-term contract with TCI; TCI and Anheuser-Busch aban- doned the idea of a new channel.
-- Overgrown Monster
“We’re not fucking around here. We’ve got to do this. If you’re not seriously here to figure how you can put up real money, let’s all go home.” No one left, and everyone put up real money: $560 million ponied up by 14 cable companies, including Daniels & Associates, Continental Cablevision, Warner, and Time Inc.’s ATC Corp., to buy one-third of Turner Broadcasting. The new cash not only val- ued Turner at $1.5 billion and wiped away any threat from Kerko- rian, it also gave TNT enough money to bid on NFL football in 1988...
TCI would be handsomely rewarded for the Turner investment: nearly $6 billion in value at its peak 13 years later for an original investment of about $125 million.
-- Overgrown Monster
The Financial News Network (FNN) was slipping into bankruptcy and put its 51 percent stake in the Learning Channel, aimed at kids, which was up for sale. A few bid- ders emerged, including the Public Broadcasting System, the Life- time cable channel, which was jointly owned by ABC and Viacom, and the Discovery Channel, which was partly owned by TCI. Life- time ultimately offered $38.9 million and Discovery offered $30 million. The same day that Lifetime made an agreement in princi- ple to buy Learning Channel, TCI gave written notice that it would stop carrying the channel on almost all of its cable systems, citing a slip in quality, according to a lawsuit filed by FNN’s successor com- pany, Data Broadcasting Corporation.
In the programming business, the break-even mark was consid- ered to be 20 million cable subscribers, and the Learning Channel reached 21 million households. Some 3 million of those received the program through TCI-owned systems. The TCI decision to drop the channel not only prompted Lifetime to drop its $38 million offer but also put a chill on the prospects of bids from other possi- ble suitors.
After Lifetime withdrew, TCI’s 49-percent-owned Discovery Chan- nel successfully reemerged with a $30 million offer for the Learning Channel.
-- Cable Cosa Nostra
Many first-time visitors noted that the King of Cable had no TV in his office—he claimed he wouldn’t get anything done if he had one there. Two vast windows and a stone terrace opened up to the snow-peaked Rocky Mountains, a view that seemed to allow Malone the space to think. On his desk, which was a cold gray slab of granite, a computer gave real-time updates of his key investments, with TCI’s symbol at the top. No pho- tographs of his family or Polaroids of him shaking hands with Bill Gates or the president. Visitors were typically drawn to the one thing in the room that represented art: a six-foot-high 1850s replica of an America’s Cup schooner that rested majestically on a marble table behind the granite desk.
-- Nice Try, My Friend
Malone did not regret selling TCI to AT&T, despite the outcome. Looking back, he had found the best buyer, but perhaps not the best partner. What he regretted was failing to negotiate the right to sell his stock at the time of the deal—a move that would have certainly raised eyebrows among AT&T shareholders—then watching it lose close to half a billion dollars before selling most all of it.
-- Deja Vu