Cable Cowboy

Cable Cowboy is the biography of John Malone, an American business man, who became a billionaire in the cable TV business. He is also the largest individual private landowner in the USA.

I found Cable Cowboy an interesting biography, and it tells the history of the cable TV industry in the USA well. While the business aspects are well covered, I would have liked to learn a bit more about the private side of John Malone. With the book written more than ten years ago, and John Malone still active in many businesses, I hope there will be an update someday...

My notes

Introduction

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License to Steal

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.

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.

Running the Show

Malone knew that if just a few more things went wrong – a sudden spike in floating interest rates, a default on some old loans – TCI could become vulnerable to a takeover by corporate raiders or its own lenders, and Malone would fail utterly the first time he had a chance to run the show.

Cash Flow

[...] two bankers from Bank of Boston flew to Denver to meet with TCI, and they had lunch with Magness and Malone at a restaurant in downtown Denver. Magness didn't speak when Malone introduced the bankers, nor did he shake any hands. Magness ordered a second martini by pointing at the empty first one and grunting, and he remained silent as he drank it. Malone talked, embarrassed and worried that soon, the bankers would start wondering what the hell was going on. Carefully choosing his answers, Malone gave them something to chew on, but he could see that Magness, on the other side of the tiny table, was growing restless. His second martini drained, Magness pushed his chair back from the table and without looking at anyone directly, said matter-of-factly, "Banks are whores, and bankers are pimps".

"We've considered TCI's proposal", the lead lender finally told him, "but because of the deteriorated credit conditions, we think it appropriate to raise the interest rates of the company". Malone was stupefied. "Raise the interest rates?" he blurted, standing up. Did they know, he asked, how hard he had pressed his people in recent months? [...] "If you can run the company better than I can, here's the keys", he declared, tossing them onto the table. "You may as well start running the company yourself. If you raise the interest rates it'll break the spirit of the company. We can't do it." After a pause, the bankers walked out, murmuring. They left the keys on the table. [...] Malone didn't know whether the next day would bring bankruptcy; that night, he could barely sleep. The next morning, the bankers told him they would hold off raising the interest rates, and give TCI some breathing room.

While he could still see an upside in TCI, the bigger motivator that pulled Malone out of bed in the morning was the fear of failure. If TCI failed, Malone felt, he would lose much more than the company – he would lose the respect of his colleagues, the trust of his family, and perhaps the approval of his father.

Malone was fighting for TCI's life, and he intended neither to give up nor to take prisoners. Not long after he arrived, Malone had his first showdown with a city, and TCI's new president for the first time displayed how brutal his tactics could be in protecting his company. In Vail, Colorado, [...] the city council voted to end TCI's franchise 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.

When Malone had agreed to join, TCI's stock price was around $7. By the fall of his first year, it had fallen below the $1 mark, rendering Malone bankrupt – on paper, anyway. Thankfully, he had spoken with the loan officer at the Bank of Denver, as many TCI executives had, and there was a gentlemen's agreement not to call the loan taken to pay for shares in TCI.

The stock price lingered near $1 in 1974 and 1975, attractive to any raider. Malone and Magness couldn't buy any more shares, and bank covenants forbade the company from using borrowed money to buy and redeem shares back into the treasury. One idea was that TCI could loan money to an unrestricted, off-balance sheet subsidiary to buy the shares. But who was trustworthy? Banking covenants forbade family members from buying the stock. [...] An old ranch dog, an overweight mixed beagle named Tiger, slept by the hearth. "Can we trust Tiger?" Magness asked. Malone grinned. "By God, I think we can trust Tiger!" he replied. It started as a joke, but the two men created a holding company called Tiger Incorporated, a company that would become one of TCI's largest shareholders over the next few years, owning at one point more than one-third of the company [...]. Magness and Malone never told a soul that TCI's largest block of stock was parked with a dog – avoiding a technical violation of the debt covenants.

Thrilla in Manila

Malone knew the game was too expensive for cash-poor TCI – but he also knew to be patient. Many of the investors who had suddenly fallen in love with cable were paying way too much and were backed by way too little experience: One day they would be begging TCI to buy them out.

Malone cared little for anyone's opinion of him. But if ruthlessness was what it took to make this company succeed, he thought to himself, so be it.

Overgrown Monster

Malone's attitude was: You don't like the way we reward management? Don't buy the stock.

For employees and shareholders alike, 1,000 TCI shares bought for just $875 in 1976 were worth $450,000 by the end of the 1980s, thanks to two spin-offs, 12 stock splits, and an ever-rising stock price. TCI made millionaires of many middle managers, and even a few secretaries, and the payoff built loyalty among employees. [...] All the while, TCI had consistently failed to report any earnings. As the stock continued to climb, Malone pointed out that it was the accumulation of valuable assets over time, not the flow of reported after-tax earnings, that was making TCI shareholders so wealthy.

Soon, the scale of Malone deals was 10, 20, 30 times larger than the acquisitions he was putting together only a few years earlier. Bigger scale, higher risk. But risk was a function of skill and knowledge. If you know you can exert control on the outcome, Malone reasoned, the risk is far less than those who jump into a deal with no expertise or facts.

More than anyone else, John Malone was responsible for transforming TCI from a tiny firm that was teetering on bankruptcy into a media colossus, and he had done so not by focusing myopically on the next quarter's earnings and kowtowing to Wall Street; instead, he had done it by focusing on the long term and building asset value. TCI grew so big so fast that by 1988, the company generated $850 million in cash; though it had no earnings, it had more cash flow than ABC, CBS, and NBC combined.

Cable Cosa Nostra

To Malone, the outcry over lousy customer relations and price increases was merely a by-product of good business: Charge as much as you can for a product or service, and spend as little as you can get away with in providing it.

Five Hundred Channels

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Nice Try, My Friend

Malone had known something about himself all along, that he was a deal maker, a strategist, a fund manager – anything but an operator. He loathed simply running a company, and now TCI was under what he saw as occupation of the federal government, shackled by an inordinate amount of federal regulation. He could not handle the duress of running a regulated monopoly for years to come.

Chasing Too Many Rabbits?

Frustrated by the failure of his exit plan, Malone retreated. He did something he hadn't done in 20 years of running TCI: He took his eye off the ball. He let his number two, Brendan Clouston, run things day to day and came to view TCI as an anchor around his neck. Malone didn't want to be exposed financially or personally, timewise, reputationwise, to the operations side of the cable TV business. Had the company sold out to Bell Atlantic, Malone could have been done with running a government-regulated monopoly and could have focused on strategy and deals for the combined colossus. Ray Smith would have taken on the tasks Malone loathed: placating politicians, pressing flesh, and talking to the press. Now, Malone was stuck with all of it. In his mind he had already sold TCI, and when the deal unraveled, he seemed to avoid the responsibility of control. Malone dropped out of sight. He stopped coming to the office as much.

Clouston, who was technically COO, seemed to understand Malone's management style better than most. He once put it this way: "I've never had a direct instruction from him in 15 years. Instead, I have to try to understand his point of view, then make my decisions accordingly."

Dr. Kevorkian

He couldn't bring himself to fire Clouston, whom he regarded as devoted and loyal. That he allowed loyalty to come before performance was, perhaps, one of Malone's greatest weaknesses as a manager during his career at TCI.

Death of a Cowboy

Somewhere deep inside himself, John Malone struggled to quell the queasy feeling of going it alone, without Bob Magness to bounce things off and tell him everything would be okay. Malone was devastated by the diagnosis, and the laconic, hard-to-read cable cowboy became even more withdrawn than usual. On visits to the hospital, he doted on Magness and made like everything was alright, but he knew it was a lie, and the depression that had always been at the edges of his existence now overwhelmed him.

Trojan Horse?

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What Pop Would Have Wanted

Deals are courtships in the business world. Each sale or investment is different, a reflection of the personalities involved and the strengths and weaknesses in their logic and motivation.

Malone had always found a way to avoid paying taxes, and his swan dive from TCI proved no exception. Instead of cash, the currency of the deal was AT&T stock. It would be one of the largest sales in the history of telecommunications, and Malone had structured it so that the Internal Revenue Service had no choice but to treat it as a tax-free stock merger. Basically, Malone had exchanged his personal stake of $1.7 billion in TCI and Liberty for $2.4 billion in AT&T and Liberty stock.

Give Me Liberty

Liberty – Malone had always loved that word. He was as libertarian as a man could be, fiercely proud of what he had accomplished. A man who believed that wealth creation was a noble, moral achievement, he was pushing 60 with Calvinist roots and capitalist beliefs. As a boardmember and donor of the Cato Institute (the libertarian think tank that espouses limited government and individual liberty), Malone believed the definition was not freedom from obligation, but freedom to choose which of those obligations to take on, which roles to play in business and life.

[...] at 57 years old, Malone was finally beginning to enjoy the possessions and playthings that came with wealth – boats, houses, and even a tiny island in the Bahamas. Unless these material artifacts could efficiently shelter income or increase in value, he felt conflicted about owning them. It had taken his painfully shy wife, Leslie, 40 years to convince him to retreat, occasionally, from his inborn urge to analyze, tinker, and apply set theory to nearly every aspect of his life.

He focused on financial efficiency so much, he often wondered whether he wasn't simply stingy and cheap.

"They'd ask, 'Have you ever paid any taxes?' like that's a crime. I said, 'Sure I've paid taxes – as little as possible, and as late as possible.' I'm serious! Then I make them a speech. 'I regard that as my shareholders' money. It is not the government's. It is my job to save as much of that as I can for my shareholders.'" The message, which Malone proselytized, never seemed to take.

For the first time in his career, Malone was in a particularly weak position: He had huge financial exposure but no control. Virtually all of his wealth was tied up in the AT&T stock he had received for selling TCI and Liberty, yet the decisions affecting the stock's value were being made by a bunch of AT&T executives who didn't know the cable business. And it was beginning to look like the decisions they were making were the wrong ones.

If an investor had bought $100 worth of TCI stock in 1973, participated in the spin-offs and splits, mimicking Malone's trades, he would have $181,200 by late 1999. Longtime TCI investors were richly rewarded. TCI excelled not because it was a great cable operator and friendly corporate citizen. Those were promises Malone never felt compelled to make or keep. True, it was the largest cable operator in the country, but Malone never pretended to be the best cable operator. TCI built wealth and made its shareholders wealthy by investments and complex financial engineering.

Déjà Vu

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Epilogue

"I'm a collector of land, and the basic idea is to own land in pretty places that haven't been ruined yet and to not develop it."