Lessons From Cable Cowboy John Malone

Many investors regard John Malone as having one of the best track records of capital allocation in the 20th century. Below are my curated excerpts from the book, “Cable Cowboy: John Malone And The Rise of The Modern Cable Business” by Mark Robichaux.

Mental Math:

“Guess at the answers,” he said. John gave him a perplexed look. “Guess before you figure the problems out,” Dan repeated. Uncertain at first, Malone quickly developed an intuition for engineering questions that called for empirical data. Malone was amazed at how quickly he could derive a number, how he could guess what waveforms would look like at the end of a circuit even before doing the underlying mathematics. This ability to make split-second calculations served him well throughout his school days, and it became the one weapon in his arsenal-to see the answers before others did-that gave him an edge over future rivals.”

Lessons From Consulting:

“Over time, Malone found that if he interviewed 30 people or so and listened intently, themes would emerge. The best ideas were sometimes hidden, or they were lost on senior executives.”

It was not rocket science, Malone quickly realized. You simply take the best ideas from anyone who has them, polish them, and serve them up to the chairperson.”

Always ask the question, `If not?'”

Crafting A Cable Strategy:

“Despite the explosion of new content, most operators of cable systems paid little attention to programming; it was merely a commodity that brought in new viewers, not a value chain all its own. But John Malone quickly saw a more important role for all the new channels popping up-they had a dual-revenue stream: from advertising and from payments made by cable systems based on how many subscribers each system had.”

“Turning it over in his mind, he suddenly realized the answer: Rather than just owning the cable that delivered the new programming fare, TCI needed to own a piece of the cable channels themselves, thereby sharing in a whole extra upside. A big operator like TO could give a new network a big head start, and as valuable as its laid wires were, if the cable industry kept growing, the new networks now launching could be even more valuable. By buying into networks, Malone thought, TCI could own both the pipe and the water flowing through it. The cable wire and the cable programming, if owned under one roof, could be leveraged off of each other to create innumerable efficiencies. Vertical integration of companies would become an awesomely powerful and controversial tool for Malone to use in building TCI. Malone arrived at a simple conclusion: He wanted to own as much of the programming as he did of the wire. TCI, which would eventually reach 20 percent of the households, would seek to own 20 percent of every programmer that came calling. “I want to be hedged all the way,” Malone told himself.”

Malone envisioned owning an entire portfolio of networks to supply his growing cable TV empire. And this was just the beginning.”

TCI launched Encore, a pay-movie channel, with a marketing gimmick that put a new spin on “The Godfather” and the offer that couldn’t be refused. To attract as wide an audience as possible, TCI gave away the service free to its subscribers for the first month. If subscribers did not want to receive the service, the burden was on them to inform TCI; otherwise, they would be billed for it from then on. The tactic, pioneered by book and record clubs, came to be known as negative-option billing.”

Telephone companies weren’t the only reason cable operators had for alarm. Another technology that had the danger of growing quickly was satellite-dish TV. Malone took precautions like any good monopolist “

Capital Allocation:

“media titans in the East tried frantically to outbid each other to wire the big urban markets, John Malone avoided the fray and waited for them to tire themselves out. TCI steadily expanded by buying suburban and rural systems at cheap prices, waiting until the mid-1980s to venture into urban areas.”

Malone was simply reaping the remains of a system someone else had already paid for and could not operate profitably. ”

Malone’s strategy was simple: Get bigger. After more than a decade at TCI, Malone could tally a cable system’s budget with precision and predict costs and returns with uncanny accuracy. Because of that insight and because of the company’s sheer size, TCI could now buy a cable company and begin to improve the performance dramatically within a few months. TCI could buy programming and equipment on the cheap, and it could get cheaper financing rates. Malone focused on long-term growth, eschewed dividends, and handsomely rewarded management. He enjoyed an extensive network of industry contacts, but when trolling for information with investment bankers and colleagues, he often found that he knew more than they did. ”

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. “Forget about earnings. That’s a priesthood of the accounting profession,” he would preach, unrelentingly. “What you’re really after is appreciating assets. You want to own as much of that asset as you can; then you want to finance it as efficiently as possible.”

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.”

Malone viewed himself as an investor and shareholder in each of these enterprises. It was not unusual for TCI to make straight financial investments in operators he deemed shrewd. ”

Despite the company’s healthy stock price, Malone didn’t put much faith in it. He always believed that disaster and ruin hung over his head, dangling by a single hair like the sword of Damocles. ”

It was classic Malone: Take a tiny, near worthless stock, fill it with small stakes in several companies, watch them grow, then trade them for stakes in even bigger, more secure companies. “

Management Style:

Malone did not believe in memos. No paper passed from his desk to underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that causes ulcers in so many midlevel executives. Communication was direct, effective, and efficient. Every Monday morning, Malone sat with his closest executives at a broad round table, much as Magness had done, to figure a way to squeeze more out of TCI’s growing cable kingdom.”

It was, of course, much more complicated than that; what drove John Malone, always, was getting the best deal, and part of his motivation in these disputes was power-which side had it, and how it was used. ”

Malone seemed to relish the fight; he found comfort in a world of efficacy. He would never sacrifice his convictions to the whims of others, no matter what the price.”

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.”

Malone accomplished this consolidation of power largely by doing what he always did: picking up the phone and reaching out to the other side to look for the common ground where he could put together a mutually agreeable deal. ”

“A guy who rises to the top of a big corporation and owns none of it is much more interested in control than he is in economics. It is just the nature of humanity. A guy who owns his business is used to control. He never has to fight for control. What he has to fight for is economics. But a bunch of entrepreneurs find it much easier to collaborate and create economic value.

Bob Magness, Malone’s Partner & Mentor:

“Magness learned to listen instead of talk, and within a short time he could read a customer like a poker player, anticipating what that person wanted from the deal moments into negotiation.”

“a quiet determination, free of the need for praise or encouragement, that seemed to give him the advantage over others.”

About Miguel Barbosa

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23. May 2014 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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