Cable Cowboy: John Malone and the Rise of the Modern Cable Business

by Mark Robichaux

Although he had answered questions effortlessly in the press conference earlier that afternoon, even Malone, the cerebral cable billionaire, hadn't yet fully grasped the implications of what he had just done-a $48 billion deal, one of the largest media mergers in history, that promised to blanket millions of homes with a panoply of interactive digital services that Malone had dreamed of for years. TCI's coaxial cable wires could deliver data and Internet traffic at speeds unmatched by the nation's telephone companies, making them crucial to the expansion of the Internet. The deal would accelerate the changes already silently roiling American culture: how we get our news, entertain ourselves, teach our children, buy our stocks, and plan our vacations.

Two years down the road, the TCI merger would spark another landmark accord: America Online's $165 billion deal to buy media powerhouse Time Warner, the richest transaction ever. Each suitor sought the same thing: a new nervous system for the digital age, with miles and miles of copper coaxial TV cable reaching into millions of homes. A parade of companies would follow the template set in the AT&T deal, merging, investing, and chasing the grand vision of offering consumers a nonstop stream of information and entertainment-and many would fall short. Just weeks after AOL and Time Warner merged, the Internet bubble burst, sending values of online firms tumbling. The terrorist attacks of September 11, 2001, further accelerated a recession that battered media stocks in nearly every sector. Synergies and savings were elusive. By 2002, AOL-Time Warner would lose more than $100 billion in shareholder value since the merger announcement, amid rumors the behemouth might be dismantled. Vivendi, a French water utility that remade itself into a global media giant with the purchase of Seagram Company's Universal Studios and other properties, nearly choked in the process, losing half its stock value. Walt Disney stock would deflate, first because of its ill-fated Internet plunge, then by weak ratings at its ABC network. Hardly anyone was immune to the weak economy and morose ad market. And unthinkable as it was that evening for the TCI clan flying across the heartland, AT&T itself would ...

TCI's story was a classic American entrepreneurial tale, and it reflected the slapdash, bootstrap history of the cable industry itself. TCI was born in the scrubland of western Texas in 1952 when Bob Magness, a part-time rancher with a weakness for whisky and gambling, gleaned from a couple of hitchhikers a nifty investment idea that almost bankrupted him. He sought help from Malone, and by 1990, Malone had expanded TCI's reach and assets more than 10-fold, making nearly 500 acquisitions in that time, an average of one deal every two weeks. The structures of his deals were exotic, and his financial alchemy often befuddled Wall Street and investors. The flurry of complex mergers, acquisitions, stock dividends, and spin-offs clouded the picture of the company's true performance, which was phenomenal by the one measure that counts in almost all business: shareholder value. Despite its reputation as a risky play, through 1997, TCI outperformed every other stock in the market. A single share of TCI, purchased at the 1974 low of 75 cents, was worth $4,184 by the end of 1997-a 5,578-fold increase.' And in each of these deals, one outcome was certain: No one benefited more than Magness and Malone. Still, he saw no need to apologize for the creation of wealth. His shareholders got rich along with him. For Malone it was a noble, if not moral, achievement, the fruit of his enormous capacity to deduce and strategize. As Malone ascended to power, the cable television industry, too, had...

The reason why there was so many acquisitions was that all the deals were smaller and regional ones. The internet was set to be a non-regional platform which raised upfront money.

Weeks earlier Malone, who had run the cable TV division of a big company called General Instrument Corporation, had spurned a far more lucrative job offer in New York, the world's business capital from Steve Ross, the legendary chairman of Warner Communications, to head up Warner's budding cable TV operations. Ross saw cable as a direct pipeline for delivering Warner Bros. movies to home viewers. Ross had promised the 29-year-old Malone a limo and a $150,000 salary, even pledging to relocate the new cable headquarters to Connecticut, where Malone lived, to shorten the young executive's commute.

Instead of accepting those cushy terms, Malone had chosen hardship-to take a pay cut and join TCI, an obscure cable company that had lurched from crisis to crisis for the preceding 20 years. Instead of hustling in the bustle of the Big Apple for the charismatic Steve Ross, Malone had elected to work in a western cow town for Bob Magness, a former cottonseed salesman and cattle rancher. Magness had used a wobbly foundation of brinkmanship, bald-faced gambles, and abundant debt to build TCI into the fourth largest cable provider in the United States-although it still reached fewer than 1 million homes. Malone had picked TCI because Magness, fatigued and running out of luck, was ready to relinquish power and let a new man run the entire show-and because, if Malone could make it work, he might become extremely wealthy. TCI, which had become a publicly owned company in 1970, might be a diamond in the rough.

Malone believed in him and had staked everything on this job-and then some. Upon shaking hands, Magness had agreed to a salary of just $60,000. Malone also had seen fit to buy 7,500 shares of TCI stock, which he helped to pay for with a $60,000 personal loan from a local bank.'

For two decades he had relentlessly driven himself and his wife, Betsy. They had started out with a single cable system in Memphis, Texas, that they had built themselves, and they had ultimately assembled a company with more than 200 cable systems in the top 100 markets.' Magness had done it by constantly doubling up on his bets and accumulating a mountain of debt, always gambling that Americans' hunger for this new thing called television would permit his company to grow fast enough to stay ahead of the bill collectors. For most of the previous two decades, this upstart approach had worked-but now Magness was in trouble. Debt threatened to cripple, or worse, destroy the company. It was 1972, and in just a year Magness had nearly doubled the size of TCI, which now had $19.2 million in annual revenue. Its debt load was at an obscene level for a borrower of its size: $132 million, or about six and a half times total revenue, when it should have been a fraction of that. In one year, TCI's stock had fallen more than 50 percent because of its ailing finances. If Magness didn't do something dramatic-like land John Malone to lead him out of this mess-he was in danger of losing TCI to a hostile takeover, or worse, to those bastards at the banks.

On that afternoon in 1952 when he unwittingly started on his cable career, Magness had walked into a cotton gin near Memphis, Texas, to do a little business. He knew most of the men there but couldn't place the two men talking to the ginner. He surmised from the conversation that their pickup truck had thrown a rod as they were driving back to Paducah, Texas, and that they were stranded at the gin. Magness offered the pair a ride. They visited for the next couple of hours, stopping to grab a burger, and the two men told him they had just built a big "community antenna system" that helped folks in tiny Paducah get broadcast TV signals from bigger markets far away. Community antenna television-they called it CATV Magness thought his riders were intriguing, but once in Paducah, he dropped them off and thought nothing more of it. Days later a business partner mentioned to Magness that "if you knew how to get into something called the CATV business, I understand that's a license to steal." To which Magness replied, "Hell, I know how to get in."' The next morning, Magness drove out and talked with the two men he had picked up, who introduced him to the owners of the Paducah cable system. They gladly showed Magness how the operation was financed and gave him key contacts.

Bob Magness had a plan: to build a new cable system in the isolated town of Memphis, Texas. It would have a tall antenna tower that would pull down the broadcast signals of three TV stations' in two nearby towns-Amarillo, about 80 miles away, and Lubbock, about 140 miles away. If he could raise the money to pull it off, Magness would be able to charge his neighbors a monthly fee for the television service-which he would get free of charge, basically pirating the programming from the TV stations themselves without paying them a cent. In cotton, business looked bleak because nylon and rayon were becoming the preferred material; cable TV looked like an industry with a future.

Subscribers paid a onetime hookup charge of $33, plus a $6.60 monthly fee. Bob and Betsy soon had their first 700 customers; the following year, they added another 3,000 in nearby Plainview.

As the economy boomed after the Second World War, America hungered for entertainment. Some 78 companies were selling nearly 200 different models by 1948, and nearly 600,000 TV sets flew off appliance store shelves. Each day, an estimated 1,000 new sets were being installed." An avalanche of applications for broadcast licenses hit the Federal Communications Commission (FCC), which became so overwhelmed with technical and policy issues to create a national broadcast system, it simply stopped granting new licenses altogether. The freeze lasted for four years, and in the meantime, the 108 operating stations weren't plentiful enough to reach everyone. In the same period, however, the number of homes with TV sets increased to more than 15 million homes.

Viewers just outside the broadcast signal's range were trying to tune in from anywhere they could. Most viewers were doomed to hazy images and the dull roar of static over the speakers. So close, but too far for good reception. Just as with radio, hopeful viewers tried anything to catch a weak signal. Th...

Many more far-flung locales couldn't get a picture at all. Hills and mountains blocked TV signals. This new business that Magness was sizing up was the bridge for a simple but critical gap. Like others in this CATV service, he would plant a large antenna on a mountain to catch the broadcast network signals from faraway local TV stations-gigantic rabbit ears, essentially-then string wire from pole to pole into the valleys, where folks had poor reception. The terrain of West Texas was just hilly enough to need the new business. And there were nooks, crannies, a...

Folks erected massive homemade towers to catch a signal and would sit for hours watching-anything to see this marvelous, new big-city invention. Nothing in modern society compared with a TV, which in 1948 sold for $149 ($1,100 in today's dollars) in the Sears Roebuck catalog. The comedian Milton Berle, as host of Texaco Star Theatre, did more to sell TV sets in the late 1940s than any RCA salesperson, and by 1952, I Love Lucy drew 10 million of the nation's viewers. Little wonder that TV became the largest advertising medium in the world almost overnight. The m...

Parsons, a skilled engineer, located the clearest TV signal from atop the Astoria Hotel and ran a single wire across the street to his apartment. The 9-inch black-and-white set, which he initially called "wasting our money," suddenly sprang to life. People drove from more than 300 miles ...

Magness's cable systems made money from individual subscribers in each town, while the microwave business made money relaying the signals of the Big Three networks to 21 broadcast stations, serving TCI's own cable systems at the same time. Traveling to some sites on horseback, Magness built a 130-mile microwave relay from Salt Lake City-unheard of in those days-making it possible for residents of the lonely outpost of Great Falls, Montana, to see their first live World Series game in 1961.16

They compromised on Denver. It was one of the few communities out West with a direct flight back East, where the banks were. Convenient and clean, Denver would emerge soon as the capital of cable. Equipment suppliers made stops in Denver. Bill Daniels, the biggest broker in the business, was based there. So were other cable operators. Something about the Western city came to define the spirit of these pole climbers, in an era when individual men, not conglomerates, reigned sovereign over an industry. So in 1965, TCI moved to Denver to play with the big boys.

Cable TV systems, to every new owner's delight, generated bundles of cash from installation charges, $100 to $300 a customer in the 1970s, and monthly services fees of $5 to $20. Most of the money was plowed back into the companies, with hardly anything going to pay dividends to shareholders. This high cash flow could service an immense amount of debt, which was used to buy more systems. So the actual value of the acquired systems was always growing. Moreover, the companies paid hardly any taxes because of the high depreciation on the equipment. The average cable system enjoyed a profit margin of 57 percent, far fatter than most businesses."0

But cash was in short supply, and Magness was always on the hunt for more. He quickly realized big banks hadn't a clue where the flyspeck towns he served were. Bankers had to ask for chamber of commerce brochures of the cities TCI wanted to wire, and they wanted to know details like exactly where on the map the city of Ogallala, Nebraska, could be found. TCI had started out buying or building systems in the West, wary of spreading itself too thin, but soon Magness realized that to tap the money markets back in New York, he needed to start operating cable systems back East; then the bankers would know what this new cable business was all about. By 1968, TCI had tapped a healthy new vein of capital: insurance companies. In exchange for an initial loan of $10 million, Teachers Insurance and Annuity Association received a slice of TCI through warrants and convertibles. Like many cable TV operators at the time, Magness financed the construction of his systems through his equipment supplier, Jerrold, which had access to money when few cable companies did. Jerrold loaned customers like Magness what they needed, taking notes that essentially were promises to pay back the full amount.