Denver is still cable's ground zero, which gave The
Denver Post reporter Stephen Keating a good spot from which to observe the machinations
of then-Tele-Communications Inc. chairman John Malone, EchoStar Communications Corp.
chairman Charles Ergen and occasional visitor News Corp. chairman Rupert Murdoch. Their
intersection -- around the failed partnership of News and EchoStar -- forms the fulcrum of
Keating's new book. From the opening scene, at TCI chairman Bob Magness' funeral, to
Ergen's closing soliloquy, Cutthroat: High Stakes and Killer Moves on the Electronic
Frontier is a fast-paced and meaty read, whether you were there or not. This excerpt
recounts the fun and games in 1997, when TCI made sweeping programming changes designed to
help the bottom line, later reversing many of them. It ends with a foreshadowing of big
events to come: Leo J. Hindery Jr. joins the company, and Murdoch approaches Malone to
tell him about his coming partnership with Ergen. Cutthroat was published by
Johnson Books in Boulder, Colo. The related Web site iswww.cutthroat.org.
On Nov. 15, 1996, Malone spoke to a Denver meeting of The
Cato Institute, the libertarian think tank of which he is a board member. Malone lauded
free enterprise and gossiped about the feud between [News Corp. chairman] Rupert Murdoch
and Ted Turner over Fox News [Channel] in New York. Malone harped on a favored theme: how
government regulation and tax policy distorted the free market, the cable industry and TCI
in particular. It was an unwitting epitaph for the battles he and Magness fought in order
to build their empire over the years.
The next day, Magness died of cancer at age 72. He had been
treated for fast-moving lymphoma at the University of Virginia Hospital in
Charlottesville, a facility recommended to Malone by Michael Milken, who had survived
prostate cancer and funded cancer research.
At Magness' bedside when he died were his two sons; his
wife, Sharon; and Malone.
His 22-page will had handwritten notes and charitable
bequests to the Boy Scouts [of America] and the University of Denver scrawled in the
margins. The will was signed and witnessed nine months before his death, with most of the
assets left to his two sons, Gary and Kim. However, the will failed to shelter the vast
family fortune, mostly in TCI and Liberty stock, from a 55 percent federal-tax bite. Hard
to believe, but true. The company that did everything in its power to keep from paying
corporate income taxes faced the prospect that its founder's estate would pour one-half of
its wealth into the sinkhole of the U.S. Treasury. Over the years, Magness declined to
consider his own mortality and delayed his estate planning. When Sharon had raised the
subject, he said, "Girl, you'll figure it out."
Before he died, paperwork was drawn up to create a
foundation with at least $100 million -- an idea Sharon said they had discussed. But
Magness lost consciousness in the hospital before he could consider it.
After the funeral, when she went up to her husband's 11th-floor
corner office to clean it out, Malone wandered in and said, "Nobody's watching my
back anymore."
The Magness family and Malone faced a dicey situation.
Settling estate taxes within nine months of death, as required by law, meant that much of
Magness' 32 million shares of TCI stockholdings, mainly in supervoting B shares, would
have to be sold. Malone had the first right to buy them, but it was by no means clear what
would unfold.
TCI, meanwhile, was in trouble. Malone cut 2,500 jobs,
sliced executive salaries 20 percent and put TCI's four jets up for sale. He told Sparkman
that he feared losing the company if dramatic action was not taken. The stock ticked up.
TCI spun off its ownership in PrimeStar into a new company, TCI Satellite Entertainment
Inc. (TSAT), with Malone as chairman and major stockholder.
Malone attended the Western Show in Anaheim, Calif., in
December, appearing on a panel with Turner, Craig Mundie of Microsoft, cyberspace guru
Howard Rheingold and Kim Polese of Marimba [Inc.], a software firm. It was four years
after Malone had touted the 500-channel future, but his focus this time was on a
50-channel present that could keep TCI paying its bills. He said cable's long era of
ever-increasing debt without showing profits was over.
"The story gets a little old," he said.
"We've been playing that game in this industry for 30 years." Malone described a
new, fiscally conservative TCI, split into programming, international, core cable and
telephone companies to clarify its debt structure. "The curse of the cable industry
is that every year, debt goes up, and all of the money gets reinvested," he said.
"That's a paradigm that has to change. The industry has to generate earnings at some
point if we want to continue to be able to raise capital."
Earnings? Did he say earnings? Some of the attendees
couldn't believe their ears. It was as if Fidel Castro had abandoned communism in Cuba --
a country that, it turned out, had a gross domestic product in 1995 roughly equal to TCI's
debt. Yet, there it was. The chess machine had a new view of the board, and even a clever
story to illustrate the shift.
"It was this way for the pharaohs in Egypt, you know.
The pharaohs were able to build those pyramids because people were willing to set aside
some of the grain and not eat it all. The pharaohs understood the idea that you don't take
all of the grain and feed it to the workers or replant it as seed. You have to hold some
back for new investment on which there is high return. In their case, it was immortality.
All that Ted and I ask for is a rising stock price."
When Turner spoke, he once again mentioned Adolf Hitler and
Rupert Murdoch in the same sentence and opined that Murdoch "doesn't have a friend in
the world" and "doesn't treat anybody well, not even in his own company."
Turner said he was mystified by the historic lows of cable stocks and thought they would
bounce back from the perception that small-dish satellite TV was a cable killer.
"We've felt the worst of it, kind of like France did during the opening months of
World War I," Turner said. "And then the trench warfare begins."
Malone later added an ominous warning that programmers
would have to check price hikes or suffer the consequences. "We want all programmers
to consider what they would do without 18 million subscribers," Malone said,
referring to TCI's reach through its own cable systems and partnerships. "That should
center their thinking."
Six weeks later, singers Don Henley, John Mellencamp, Jewel
and Tony Rich trooped into the atrium at the Denver Center for the Performing Arts. They
took their seats at a long table on a riser, facing a cadre of the press, curious fans and
handlers for the VH1 cable network. "Things have changed a little bit in the past
couple of hours," Henley said into a microphone, sounding as if he were just back
from the front to announce a long-awaited treaty.
In the context of home-entertainment battles, that's
exactly what he was doing. On Jan. 1, 1997, VH1 was pulled from 2 million TCI homes. It
sister network, MTV [MTV: Music Television], was off in another 700,000 homes. TCI dropped
networks all across the country that day, replacing them with ones that made more money to
bolster the company's finances. They reaped a New Year's whirlwind.
"Help, we're trapped by the corporate fascists from
the planet TCI," wrote a viewer in Lexington, Ky., griping about the loss of Bravo,
WGN, VH1 and Comedy Central. There were thousands more angry brushfires across the cabled
plain, heating up phone lines, newspaper columns and TV broadcasts.
Vitriol poured off Internet sites like "TCI = Totally
Cheap and Indifferent" and "Iowa Held Hostage: We Want Our MTV." It boiled
down the angry difference between network television and a networked computer. With a
one-way TV tube, viewers silently fumed or griped on the phone. The Internet was a
bulletin board for cyberbile. "These SOBs have decided to remove MTV from their
lineup in Altamonte Springs," wrote a resident of that Florida town. "Excuse me?
MTV? Isn't that one of the channels that MADE CABLE TV IN THE FIRST PLACE?"
In the broadcast-, cable- and satellite-TV industries,
viewers were known as "eyeballs" for rating points, advertising dollars and
subscription fees. But the eyeballs were getting angry.
In the Colorado mountain town of Salida, TCI took off
C-SPAN, The Weather Channel and one of two PBS stations in order to make room for FNC,
MSNBC and Cartoon Network. So furious were the townsfolk that a Rotary Club member led a
petition drive that drew 1,700 signatures. Ed Quillen, a resident of the town and
columnist for The Denver Post, lambasted Malone on the editorial page of the
newspaper. "We are not treated like paying customers; we are treated like livestock
to be delivered to a slaughterhouse," he wrote. "If they really want to show me
what I'm looking for, show me chairman John Malone in rags holding a tin cup and a 'Will
work for food' sign, standing outside the headquarters, which the sheriff has padlocked in
preparation for the auction."
TCI's chief spokesman, Robert Thomson, wrote back to the
newspaper, explained some of the network shifts and asked, "Do you really think
financial ruin for John Malone and [TCI employees] is the answer?"
Another reader weighed in: "Supply-and-demand laws
will eventually lower prices as all of the unhappy people cancel, and then you all can
sign up again for cheap cable and watch all the garbage you want. Better yet, cancel your
subscription and get off the couch."
Malone had inadvertently triggered an economics debate. He
was wielding the cable pipe like a truncheon, pushing aside lesser-viewed networks for
ones that would pay upfront subscriber fees. Murdoch had paid to get FNC on, and others
were going to do it, too. Payment for access goes on in many walks of life. Cereal makers
pay grocers for eye-level shelf space. Computer manufacturers pay resellers to promote
their hardware. Donors give money to politicians. The practice goes by many names --
marketing funds, pay to play. The cable gang called it "key money."
Cynics called it a bribe.
During a panel discussion at a trade show in New Orleans,
ABC economics reporter Robert Krulwich confronted Discovery Networks [U.S.] president
Johnathan Rodgers about Animal Planet's fortuitous arrival into millions of cable homes in
1997.
"How did you get John Malone to give you such a
wonderful ride?" Krulwich asked.
"The game is distribution," Rodgers said.
"You bribed him," Krulwich said.
"No, we didn't bribe him," Rodgers said. "We
offered him quality programming."
"And then," Krulwich said, cackling, "you
laid a little cash in his hand."
Since TCI owned 49 percent of Discovery Networks, the
$5-per-subscriber key money paid by Animal Planet was to some degree an internal transfer.
The key money from independent programmers like Murdoch was gravy.
The losers, as [Viacom Inc. chairman] Sumner Redstone found
out, were Viacom channels like MTV and VH1 that were bumped off to make room. Redstone had
not endeared himself to Malone when he filed the antitrust lawsuit against TCI in 1993 --
the one that accused Malone of "bully-boy tactics and strong-arming of
competitors." The one that got the Justice Department poking around in the
relationship between General Instrument [Corp.] and cable.
Malone and Redstone appeared to bury the hatchet, or at
least leave it on the table between them, when TCI bought Viacom's cable systems in 1995
for $2.3 billion in cities including Seattle, San Francisco and Nashville [Tenn.]. As part
of the deal, the lawsuit was conveniently withdrawn. That Malone would put money in
Redstone's pocket at all surprised some people. Malone was not among them. "I'm a
businessman," he said.
Having shed its cable distribution, Viacom was one of the
largest programmers not affiliated with either a broadcast network or a cable company. Its
leverage was its brand names with MTV, VH1 and Nickelodeon. Redstone thought he had
Malone's word to keep Viacom programming flowing through TCI's cable pipes. But with VH1
and MTV banished from a combined 2.7 million TCI homes in early 1997, that was clearly not
the case. "I had an absolute, positive commitment from him," Redstone told two
Viacom executives during a lunch meeting at the company's Manhattan headquarters. "He
promised it would not happen, but it did happen. I do not believe John Malone would cross
Viacom. I just don't believe it."
VH1 began a national campaign against TCI, recruiting radio
stations and rock stars. Full-page newspaper ads urged fans to flood TCI with phone calls.
Redstone himself put in a call to Malone. On the morning of the VH1 press conference in
Denver, EchoStar [Communications Corp.] employees set up a booth outside of the event and
pressed yellow Dish Network flyers into the hands of everyone who walked by. Inside, Don
Henley and his cohorts prepared to bury TCI as a shameless example of corporate control of
the media. This even though Viacom -- the rock stars' benefactor -- was no less corporate
than TCI and exceeded the cable company in revenues by several billion dollars. Sensing a
public-relations meltdown in the making, TCI backed down before the press conference and
agreed to put VH1 and MTV back where they were taken off.
"Clearly, the voice of the people matters,"
Henley told the crowd, mission accomplished. "It matters to VH1. It matters to MTV.
It matters to TCI." His reverie was interrupted by the trill of a cell phone.
"And it matters to whoever that is calling on the telephone. I think this is a
testament to the power of music, to the power of democracy," Henley continued,
searching for a third power, which was, "the power of consumers."
One of the consumers was Mellencamp, looking in dire need
of a shave and a cigarette. He said he was a TCI customer in Indiana, and "VH1 was
taken off in Bloomington." A VH1 flack stepped up to a microphone to discuss VH1's
ratings, its upset viewers and TCI's callous replacement of the music-video channel with
networks like Animal Planet. Mellencamp brought her comments, and the press conference, to
an end. "At this point, it doesn't matter, because the problem's solved," he
said. "Whatever they were replacing it with, who gives a s___?"
But that was the point: A lot of people did. They were
either loyal to networks already on the air, or eager to get something on that wasn't,
like Sci Fi Channel. Angry eyeballs from Alabama to Washington state objected to a slew of
network switches, sometimes using the language of junkies. "TCI is like a powerful
drug dealer," wrote one viewer to an Internet site. "They've got what you want,
and they know that you will pay for it. Let's face it: TV is a drug, a necessity for
most."
It was video crack, smoked through the eyeballs, with a
gangland struggle to control distribution and prices. It was satellite versus cable, and
cable versus programmers who raised rates. Yet Malone's leverage against programmers and
his threats to pull them off the air had the ring of a supermarket railing against
wholesale prices for cereal, even when it got the biggest discounts and owned some of the
major brands. TCI's Liberty Media held stakes in many popular networks and was worth
billions of dollars, with Malone as its chairman and a major shareholder.
Liberty's day-to-day chief from 1991 through 1997 was Peter
Barton, who ruled with mercenary humor. He once chided a reporter who had written a
profile of him, "You didn't go for the jugular." Liberty was TCI's biggest
supplier of programming, but it also sold to other cable and satellite companies.
"We're a little bit like the French," Barton said. "We're willing to sell
arms to all people in the war." Liberty owned two-thirds of MacNeil/Lehrer
Productions, which produced the famed nightly [The] NewsHour [with Jim
Lehrer] on PBS. "A welcome infusion of capital into NewsHour," PBS
president Ervin Duggan called it. When the Republican-led Congress proposed cutting
government support and privatizing PBS -- a proposal later abandoned -- Barton made
overtures to Duggan about Liberty buying PBS outright.
Duggan declined the help and alluded to a cautionary fable:
"When the fox said to the gingerbread boy, 'I'll help you get across the river,' what
did the fox really want?"
Peter Barton was the fox. He worked in a building separate
from TCI's headquarters, although it was still among the corporate mirror boxes of the
Denver Tech Center. Married with three children, Barton remained a rambunctious kid
himself well into his 40s. At work, he dressed in mountain casual attire: slacks, a pastel
blue work shirt and a sleeveless black fleece vest. His wiry black hair was askance. His
office looked like a tree house. There were bottles of Blenheim spicy ginger ale, a
present from magician Penn Gillette; boxes of ibuprofen stacked against a wall, a gag gift
meant to ease Barton's joint pain from downhill skiing; and a yellow banana costume from
the Allen & Co. Sun Valley media-mogul conference, signifying Barton's role as second
banana to Malone.
On the cluttered desk was a framed picture of Barton with
Robert Redford and a book of little-known writings by Benjamin Franklin, titled Fart
Proudly. At hand was a small paintball gun, from which Barton occasionally shot red
and yellow pellets onto a sliding glass door that opened onto a deck. Sitting outside,
wearing dark sunglasses and staring off into the Rocky Mountain foothills, he took calls
from the likes of Barry Diller and [The Walt Disney Co. chairman] Michael Eisner.
Barton was a made-for-cable mogul. After graduating with an
economics degree from Columbia University in 1971, Barton knocked around the West and
skied competitively. He returned to the East Coast and landed a job as a top aide to Gov.
Hugh Carey of New York. He then attended Harvard Business School and, before graduating in
1982, sent letters to several-hundred CEOs seeking a job. Malone answered, and they hit it
off. Barton was one of the few TCI executives -- or anyone else, for that matter -- who
had been to Malone's home. Malone and Barton once took a week-long sailing trip from Maine
to Florida. Malone, so guarded and calculating, seemed to open up around Barton. They were
cable's Butch Cassidy and the Sundance Kid.
As the programming battles blazed away in February 1997,
Barton was in the thick of it, using the phone as a tool of seduction and pressure. The
joke was that Barton's version of digital compression involved thumbscrews. When he hung
up the phone, he spun around in the chair and began his discourse to a reporter:
"Viewers equal eyeballs. Eyeballs equal revenues. Do
you know what Q ratings are? It's sentimental value, brand recognition. The Globetrotters
have a higher Q rating worldwide than the Denver Nuggets. Probably also true in Denver.
But when you start looking at Q ratings and say, 'Well, the brand recognition of a channel
like WGN isn't so high,' shame on them. Frankly, shame on me if one of my services ends up
being disposable. That's my f___ing problem, not TCI's. My job is to maintain my franchise
with consumers so that whenever surveys go out, they say, 'I gotta have that one.' The
untouchables are Fox Sports, CNN [Cable News Network], ESPN and MTV to a certain
enthusiastic group. You cull from the bottom of the herd and breed up."
So what's the point of key money?
"There was kind of an auction," Barton explained.
"But if you have a really lousy service, something that really sucks, and you want to
pay the cable operator a lot of money, you're not going to get on. Your most important
relationship is with your customer."
It was critical, Barton once said, to give the dog the dog
food it wants. "When John Malone or anybody else stands up and says, 'Programmers
aren't going to be able to raise their prices much anymore' and 'I'm also going to charge
key money to get access to the shelf,' there's nothing mysterious about that. He's just
looking at it from the distributor's point of view and saying, 'Gee, this shelf is so
valuable, I might as well charge rent.'"
Not everyone in the TCI organization was so purely
pragmatic. There was Roy Bliss Jr., the son of the Roy Bliss who built the cable system in
Worland, Wyo., in the 1950s. Roy Bliss Jr. worked at the Worland cable system as a kid,
burning his fingers changing blown amplifier tubes on the fly. He followed his father into
the cable business, worked with Gene Schneider in Wyoming and ended up heading a company
in Tulsa, Okla., named United Video Satellite Group [Inc.], or UVSG. It supplied
programming to owners of big satellite dishes, created an on-screen programming guide and
distributed the WGN superstation to markets outside WGN's home base of Chicago.
TCI threatened to pull WGN out of 5 million homes in early
1997. This seemed counterproductive, since TCI owned 40 percent of UVSG's stock and
controlled 85 percent of its voting power. TCI's technology chief, Larry Romrell, sat on
the board. Yet, with key money for new channels being offered, TCI's cable division would
do better unloading WGN and its steep copyright fees.
Roy Bliss Jr. went on the attack. "This is obviously a
decision made by corporate executives out of touch with local markets," Bliss said.
"Once TCI's corporate decision-makers hear from their local managers and viewers,
this decision will likely be reconsidered in many markets."
Although TCI was often a target of criticism and
investigation -- "the favorite subject of all proctological exams," Barton said
-- criticism from insiders made public was rare. It violated "omerta," the code
of keeping quiet and rebuffing outsiders. The cable industry was inbred. You never knew
who was listening or whom you might be working for -- or against -- down the road. Taking
on Malone publicly was professional suicide. But Bliss was fed up. He said later that he
already had one foot out the door. He expressed the feelings of any number of subscribers
angry at their cable company for taking them for granted.
"TCI is a big company, with lots of tentacles,"
Bliss said. "And nobody is quite as cavalier with its customers as TCI." One
week after sounding off, Bliss resigned, his departure a symbolic beheading for violating
omerta.
"He got sacked," Barton said with a shrug.
"If you're the kind of guy that if they hand you the ball, you turn around and run in
the opposite direction and put it in the other guy's goal, people aren't going to want you
around."
During the conversation in Barton's office, a CNBC
interview came on TV, showing a San Francisco-based cable executive named Leo J. Hindery
Jr. being interviewed. He had recently been named TCI's president by Malone. Barton
watched silently, impassive.
Butch and Sundance weren't going to be together much
longer. There was a new gun in town.
"The big story is Leo," Barton said finally.
"What's he going to do? How's he going to do it? Why's he doing it? You're going to
find that he's an intelligent life form with a good sense of humor. It will be good
news."
Across town, a TCI subscriber named Kenneth Gibson had
never heard of Hindery, Roy Bliss Jr. or Sr., Barton, Malone, [EchoStar chairman] Charlie
Ergen, key money or Q ratings. But he did know that WGN was off the air, meaning that he
would not be enjoying his springtime ritual of watching Chicago Cubs games.
"Without WGN this spring, I'm going to get mad,"
said Gibson, a former postman. He lived alone, spending $50 per month on cable, more than
for either his phone or utility bills. A bowling bag in the corner collected dust. He
flicked the remote control to channel 51, where WGN and the Chicago Cubs games used to be,
but it showed a different type of cub on Animal Planet. He looked out to his tiny patio
and wondered about buying a satellite-TV dish. "Do you think the cable industry has
gotten a little bit too big for its britches?" he asked. "Once they get these
franchises, is it a license to steal?"
"The only way you can run a company like ours and do
well is to be tough," Malone said in January 1997. "You can't be a social
experiment. The message is: I don't give a s___. Toughness is back."
Around this time, Malone and Murdoch met in Denver to
discuss their mutual business interests around the world. Also in the meeting were Barton
and Chase Carey, chief operating officer of News Corp. Topics included satellite TV in
Latin America, Pat Robertson's [The] Family Channel -- which Liberty part-owned and
Murdoch had his eye on -- and Fox Sports, the multibillion-dollar partnership between
Liberty and Fox that was challenging Disney's ESPN.
Murdoch mentioned that he was going to announce a
partnership with Ergen to launch a satellite-TV service in the United States. Murdoch and
Malone had been unable to strike their own deal because of the tangled PrimeStar
ownership.
Murdoch's heads-up to Malone was part of the courtesy of
cutthroat: telling your partner about the size and shape of the blade headed his way.
Murdoch's alliance with Ergen was coming at the worst possible time. Malone and the cable
gang were clawing out of a deep pit, while Murdoch was swinging a sword at their fingers.
"Rupert told us he was going to do the deal with
Charlie," Barton recalled. "I remember looking at him and telling him he was
nuts. John said, 'Let's move on.' But John was quite pissed about this. It colored the
meeting."
