Cable Cowboy John Malone

In a quiet room high above the graveyard of Trinity Church in lower Manhattan, where naval hero Captain James Lawrence and the first Secretary of the Treasury, Alexander Hamilton, are laid to rest, 65-year-old Liberty Media Chairman John Malone ruminates over his own legacy as head of the largest video distributor in the world.

After months of laying low, Malone last month struck one of the biggest asset swaps in media history: an $11 billion trade that makes Liberty the controlling shareholder in DirecTV, the largest satellite-TV provider in the world and the archrival of cable operators everywhere. In exchange for the 16.3% stake in News Corp. that Liberty had accumulated over the years, News Corp. agreed to give Malone its 38.5% stake in DirecTV Group, three regional sports networks and $550 million in cash. The swap saved millions of dollars in taxes, a signature preference of Malone.

What intrigued many wasn't so much that cable-TV pioneer Malone, the former chief of cable giant TCI who held the faithful spellbound at conventions, bought the enemy he swore to fight. What competitors and comrades alike are wondering is: What's next?

Malone, a tall, trim, white-haired executive who looks like a Marine Corps general and speaks like a Yale professor, keeps his cards notoriously close to his vest. But one thing is clear: He's ready to deal. On a recent cold winter day, Malone took time between meetings at the Bank of New York Building to discuss what lies ahead for Liberty, his new executive team and his changing role at the helm, and the big swap that thrust him into his position as Cable Enemy No. 1.

More than anything, DirecTV's 16 million subscribers give Malone something he's missed ever since he sold TCI to AT&T in 1999 for $50 billion and left with Liberty Media: distribution clout. DirecTV can now boost the value of Liberty's current—and future—portfolio of content assets, which includes Discovery Communications' suite of cable networks and Websites, the QVC TV shopping empire and Starz, a multiplatform pay-movie service.

The swap is the biggest deal so far in Malone's effort to remake Liberty into more of an operating company and less of an investment company, and caps a year of converting passive investments in companies into cash and operating businesses. In May, for example, Liberty sold its 50% stake in Court TV for $735 million to Time Warner. So far, Wall Street has rewarded Liberty Media Capital, driving the stock up around 20% over the past six months.

"Rationalizing" investments

Given this strategy, Malone believes Liberty's full potential can't be unlocked unless other investments in Liberty's portfolio can be sold, converted or, in Malone's words, "rationalized."

"You knew sooner or later we had to work something out with [News Corp. Chairman] Rupert [Murdoch]," Malone said. "We also have to work something out with CBS, Sprint, Time Warner and Viacom"—all of which are unconsolidated investments in Liberty's extensive holdings—as well as "rationalize our relationship" with InterActiveCorp, of which Liberty owns 22%.

"This is one more asset, one more piece of the puzzle," said Malone, peering out the window. "And as [Cablevision Chairman] Chuck Dolan told me the other day, he says he figures this makes us a 30-plus million subscriber company if we do this, you know? And that's the biggest ever, including the international and domestic, with a lot of upside still. It puts us back in the video-distribution game in a very meaningful way. And so it's an interesting shift of fate here."

Besides the satellite subscribers in the U.S., Liberty Global operates cable broadband systems reaching 13 million subscribers in 17 countries in Europe, Japan, Chile and Australia, as well as media and programming businesses, such as Jupiter TV in Japan and Chellomedia in Europe. (Liberty tracks its U.S. holdings with two stocks, Liberty Media Capital and Liberty Interactive.)

For News Corp., the swap allows a corporate stock buyback and removes any potential takeover threat from Liberty. But Malone said his intent was never to wrest control of News Corp. from the Murdoch family, only to "focus" its chairman: "For Rupert, it gets rid of a block of stock that could potentially give him heartburn down the road, which is good because I never wanted to put the company into a hostile posture. I'm glad that we're getting this resolved while Rupert and I are still young men."

Murdoch, 75, invested in DirecTV three years ago to complete his global satellite-TV empire, but retreated in the face of cable operators' aggressive "triple-play" offerings of TV, telephone and Internet services. But Malone sees growth and opportunity for his own assets, despite Wall Street analysts' contention that satellite-TV business growth has slowed.

"I continue to say what I've always said, which is I think cable television is a great business," he said. "But I think satellite TV is also a great business. And they will compete with each other, and they have different attributes. And you play the cards you're dealt, right? Would I rather have a 15 million-subscriber cable base in good shape and with no debt? Sure.

"DirecTV has 15.5 million subscribers with no debt, a wonderful cash flow, is sharing any growth in the video market with Echo Star. Cable guys, net, aren't growing in video. And DirecTV specifically is about to be able to offer an explosion of high-definition services that cable is going to have a hard time matching."

Despite chatter on Wall Street to the contrary, Malone isn't likely to merge DirecTV quickly with the other dominant satellite-TV operator, EchoStar Communications, run by business maverick Charlie Ergen. Still, he hopes the two companies can forge deeper ties.

"You know, if the government wouldn't let us put the businesses together today, we can at least save a lot of cost and capital by cooperating in certain areas," Malone said. "If you think, 'What are the possibilities for DTV?' Well, we could form an alliance with EchoStar and share a high-definition platform, which would either double the capacity or cut the costs in half or some combination. We could develop content jointly with EchoStar for that high-definition platform, which would be very interesting."

To match the cable operators' "triple play" of services, DirecTV needs robust Internet service and phone service. Rumors of a quick sale or outright merger with a telephone company are unlikely given the enormous tax implications, but huge opportunity lies in the telephone companies' need for a video play. AT&T, BellSouth and Verizon are all potential candidates for joint ventures and partnerships. "We can form a warmer and fuzzier relationship with the telcos in terms of being their video answer for their platform," Malone said. A sale to AT&T would be a trip down memory lane; after he sold TCI to AT&T in 1999, Malone walked away with TCI's programming arm, known today as Liberty Media.

Liberty owns at least two companies that can alleviate his need for Internet service. Current Communications, which delivers Internet service over power lines, has "promise but not ubiquity," said Malone. He also has high hopes for WildBlue Communications, which delivers broadband to rural homes via satellite. "We've already done joint-marketing deals with both Echo and Direct and AT&T for WildBlue. So there, we're in a position to be both the retailer and a wholesaler of high-speed transport for the rural market," he said. Moreover, DirecTV already has partnerships with Verizon Communications Inc. and BellSouth.

"Between Wi-Max [broadband access], power-line broadband, even Wi-Fi network, we think that there's going to be lots of ways that the public is going to be able to get high-speed connectivity," Malone said. "But their ability to get lots of video channels is going to be somewhat limited. Cable can do it and satellite can do it, and we don't see any other way, any other technology can do it. So I think DTV is actually a great business. To continue to be a great business, it has to continue to innovate technologically. It has to come up with solutions for those people who want to bundle the communication services."

Building 'bench strength'

When asked about what his fellow cable operators thought—particularly Comcast, the largest cable operator—Malone smiled. "Maybe we can do some joint-program things together, who knows? But you know, if you put [Comcast] scale together with our scale, including international, you're looking at some big numbers, the ability to underwrite some pretty interesting projects in terms of content. So it doesn't necessarily have to be because you're competing in one aspect of the game space that you can't cooperate in other aspects.

"I really think that's the world we're in. You've got to be able to see yourself in some situations as an ally, as neutral or as an adversary, a competitive adversary. It works that way pretty universally."

As content as he appears to be with the DirecTV deal, Malone is equally satisfied with the executive team he's put in place.

Liberty Media President/CEO Greg Maffei, who joined the company in the fall of 2005, previously served as president/CFO of Oracle, CFO of Microsoft Corporation and Chairman of Expedia. Michael T. Fries, a 20-year veteran of the cable and media industry, was appointed president/CEO of Liberty Global in June 2005. Just recently, Malone greenlighted the hire of David Zaslav, president of cable and new-media distribution for NBC Universal, to become Discovery's new CEO. Finally, Chase Carey, the News Corp. veteran who serves as DirecTV president/CEO, will stay in his post.

By his own description, it is the first time in a while that Malone has a team that could very well serve as a succession plan.

"The mantra that I sing now is, 'Let's make sure we have a team with bench strength and not just a one-man band,'" Malone said. "And, finally, maybe we're getting a set of CEOs and management team of the next generation that can carry it for the next 20 years, which is great. We really have struggled with this whole concept of, 'So now who's going to run it?'"

Maffei, who has taken over more operating responsibilities, says the recent year of deals, especially DirecTV, make Liberty "relevant again," and working for Malone has been "a challenge in the best sense."

Any plans Malone has in store must wait until after the deal closes, likely in the middle of next year. But he is content to wait.

"I'm sitting in all the planning and budgeting meetings this year, but I don't know why," he said. "This may be the last year when I decide that I ought to do that. It's much easier as a director to pull back on the reins than it is to supply energy. Reins are not a good energy supplier—it's like pushing on a string. So I would much rather—I've learned in my old age here—have very energetic, aggressive guys running the businesses and being more of the brake than to have to supply the energy."