The Man With the Bandwidth
John Malone's cable gamble could soon pay off.
In this brand-new digital economy we're supposedly inhabiting, competitive advantage can be eroded in an instant, and large companies with lots of fixed assets are doomed to being overrun by quick-moving startups who can adapt better to a world of rapid technological innovation. By that logic, the cable industry--with its overpriced services, monopolistic market control, and unwieldy operating structures--must be headed for the graveyard.
But as the recent return to center stage of cable pioneer John Malone, head of TCI, suggests, the cable industry has never been healthier, despite having committed a rather staggering array of strategic missteps in the past few years. In the end, owning billions of dollars of infrastructure--such as cable wires--certainly has its flaws as a business strategy, but it also has one huge benefit: Owning those wires allows you to make a lot of mistakes without going out of business. And in an industry dedicated to gambling on future technologies, that's a benefit that can't be overvalued.
Of course, Malone did not become famous because his company owned a lot of cable wires. On the contrary, he was as responsible as anyone for hyping the digital economy and the transformation of the home into a multimedia center of information, entertainment, and commerce. Without the Malone of the early 1990s, the whole concept of the information superhighway--with its 500 TV channels, its interactive television, its high-speed Internet access, and online banking and shopping--could scarcely have existed. For a man with a master's degree in electrical engineering and a doctorate in operations research, Malone has always had a keen sense of how important futurist rhetoric was to the new media world. Convincing people that cool things were just around the corner was essential to convincing them that they wanted those things.
Of course, Malone did temper his visionary side with a hard-boiled business side. When he talked about the information superhighway, it was always in terms of collecting tolls on it. The technologies Malone championed were designed to service meat-and-potatoes tasks--such as banking and shopping--rather than the needs of some ideal virtual community. Malone's reputation as "the Darth Vader of cable" and "a guy who knows how to run over people" spoke to his ferocious ability as a negotiator and deal-maker. When he joked in early 1994 that Federal Communications Commission chief commissioner Reed Hundt should be shot for ordering rate reductions, the idea that the dark side of the Force was shaping the digital future was hard to resist.
Afew months earlier, in October 1993, Malone had announced that TCI and Bell Atlantic planned to merge in a deal that at the time dwarfed all previous mergers. The result was going to be a massive vertically integrated company, offering 25 million customers across the country every communication and information service they could want. Had the deal gone through, today's media landscape would obviously look very different. But by February 1994, the plan had collapsed, and its failure deflated both the superhighway hype and Malone's reputation as an irresistible force.
It seems odd that one blown deal could have changed everything, but TCI had billed itself as a growth company, which meant it had to keep getting bigger in order to remain valuable in the eyes of Wall Street. And the FCC's rate rollback, which happened around the same time, put a real dent into TCI's cash flow. Since the company has always carried a huge debt load--today it's north of $10 billion--slowing cash flow was hardly a recipe for success. What's more, the truth was that the technology could not live up to the hype. In retrospect, in fact, what's most interesting about that time is how little progress we've made toward the kinds of things Malone assured us were just around the corner. Five hundred channels, on-screen banking, on-screen shopping, interactive news: None is available via cable television today. Even cable modems, which would make a qualitative difference in the experience of using the Web, have minuscule market penetration, though that's supposed to change--wink, wink, nudge, nudge--in the next year or so.
Over the following three years, the cable industry was everyone's favorite selection as the industry most likely to fail. Either the regional Bell companies were going to take away the cable companies' business, or satellite television was going to steal it, or the companies were going to collapse under the weight of their own debt. In fact, if Microsoft hadn't invested $1 billion a year ago in cable provider Comcast, that might still be the conventional wisdom. But Microsoft did invest that money--pointing once again to television as a gateway to the digital future--and almost overnight cable was hot again.
Microsoft's investment in Comcast drew attention to the obvious--that the name of the game in the new media economy is bandwidth. Amazing leaps in digital technology are largely irrelevant unless you can bring them inside the home. And no industry is better positioned to provide that bandwidth than the one that has 70 percent of U.S. residences wired with high-bandwidth coaxial cable. Malone believed that all along, which is why he never moved TCI out of the cable business and why, when the company sought to make its subscriber base more manageable, it traded subscribers for minority stakes in other cable companies.
The Street's new love affair with cable has put Malone back on the business pages nearly every day and back in visionary mode. This is more than a little ironic when you consider that TCI has become the least technologically advanced of all American cable companies, after Malone slashed capital spending in the past couple of years in order to keep the company's finances in order. But with the digital set-top box, which Malone sees as the vehicle that will finally deliver high-speed Net access, interactive television, and hundreds of channels, he's found his latest can't-lose gizmo. And everyone from Microsoft to Intel to Sun Microsystems has jumped on board.
The digital box may well be the harbinger of a truly wired future, once the struggle over which technologies will be included in it is resolved and the cable companies figure out how to get subscribers to pay for it. But even if the set-top box is not the answer, Malone will just wait until the next one appears. With 14 million subscribers and minority stakes in everything from the Learning Channel to Time Warner, he has the resources to be patient, and the experience of the last four years shows he has the will to be patient as well. The myth of John Malone was built around the image of someone able to see the value inherent in a future that no one else could grasp. The reality of John Malone is that he's someone able to see the value inherent in a mundane present--the present of cable wires and the E! Network--that everyone else was too quick to write off.
James Surowiecki writes the financial column at The New Yorker.