The King Of Cable Scrambles To Shore Up His Fortress

John C. Malone is keeping an even lower profile than usual these days. Never one for the spotlight to begin with, the 51-year-old chief executive of cable TV giant Tele-Communications Inc. is spending the summer with his family in Maine. Linked by phone and fax to his office in Denver, Malone runs the $4 billion-a-year TCI from a smallish house not far from the ocean. To the outside world, he may as well be invisible.

If only he could make TCI's problems disappear so easily. These are bruising times for America's largest cable company. As with much of the industry, TCI's boom days are over. Its subscriber rolls, which grew at double-digit annual rates in the 1980s, increased an anemic 4.7% in 1991 and are growing even more slowly this year (chart). Widely viewed as a corporate bully for its hard-nosed business tactics, TCI has become a prime target for congressional leaders eager to rein in price hikes and reregulate the $20 billion cable business. At the same time, the company, which hasn't turned a profit since 1988, is cutting costs while trying to patch up battered relations with some of the cities it serves.

`BEING BIG.' With its strong cash flow, TCI never used to let things like losses bother it much. Scurrying to buy cable systems in the U.S., it doubled its debt, to $9.9 billion, in the past four years alone. In 1989, it paid $1.9 billion, including assumed debt, for the cable systems owned by United Artists Entertainment Inc., based in Denver, and $389 million for the system owned by Washington Redskins owner Jack Kent Cooke. It now serves 16% of U.S. cable subscribers. "Being big has always been crucial to TCI's strategy, and they weren't afraid to spend a lot of money to get there," says Marc B. Nathanson, chairman of rival Falcon Cable Systems Co.

But lately, TCI has switched to a different channel. It is essentially out of the market for cable systems. Instead, it has been pouring money into new technologies that it hopes will become growth engines. With thousands of miles of cable already strung throughout cities and into homes and businesses, TCI is betting that it can increase the number of services it sells to customers.

Fiber optics are key to the plan: With data-compression technology, which squeezes even more information into the fiber-optic wires, it can offer up to 400 channels and provide a wealth of information, including computer-data transmission, improved TV quality, and even CD-quality music. Already, the company has converted parts of more than a quarter of its existing systems from coaxial cable to fiber optics. Along with American Telephone & Telegraph Co. and U.S. West Inc., TCI is trying viewer-controlled TV in Denver, allowing customers to choose from up to 1,000 different shows on demand. That's just one of several fiber-optics programs TCI is testing around the country.

It even wants to get into the telephone business. The company has a fiber-optics venture with McCaw Cellular Communications Inc., and in February, it paid an estimated $75 million for 49.9% of Teleport Communications Group, which operates a private fiber-optic network that transmits data and telephone messages for large companies in seven cities. "These guys at TCI have always been entrepreneurs, and these days, that means finding new services, not wiring homes," says John Tinker, managing director at broker Furman Selz Inc.

The technology push comes on the heels of an aggressive move into cable programming. Over the past few years, Malone has spent more than $500 million buying pieces of programming companies such as Turner Broadcasting System Inc., Discovery Communications, and a handful of others. The money has helped jumpstart the production of shows TCI needed to expand its offerings, while its ownership let it recapture a piece of its $600 million annual programming costs.

But some Malone programming investments have contributed mightily to the company's bad-boy image. On June 29, the former owner of the Learning Channel sued TCI, alleging that the company unfairly drove down the purchase price in their 1991 deal. In the suit, the now bankrupt Financial News Network charges that TCI threatened to drop the Learning Channel from many of its systems so that TCI's 49%-controlled Discovery Channel could swoop in and buy it at a cut rate. The suit seeks $26.5 million in damages. TCI declines to comment, except to insist it will prevail in the suit.

NOT MUCH SPIN. With stakes in 4 of the nation's 10 largest cable channels, Malone has taken lots of heat from people who feel TCI unfairly dominates the business. Last year, he moved to quell some of the criticism by spinning off most of its programming interests into a separate company called Liberty Media Corp., of which TCI holds 5%. Still, the companies are hardly independent of one another. Malone and TCI Chairman Bob Magness own 56% of Liberty and sit on its six-person board along with three other TCI execs. Malone is CEO. Liberty buys some $2 million in programming a year from TCI and pays an extra $4 million for accounting and other services.

For all of Malone's maneuvering, however, few of the new businesses TCI has added are likely to make much of a contribution before the end of the decade. So he has made a few recent moves to shore up TCI's finances. Early this year, he sold off its 2,406-screen United Artists theater chain, which had lower margins than cable. Malone, who declined to be interviewed, has also refinanced TCI's huge debt load by courting overseas banks and issuing long-term bonds. That cut its overall interest rate to 8% from 10% over two years and lopped off nearly $400,000 a day in interest payments.

Thanks mainly to lower interest rates, says analyst Michael Kupinski of A. G. Edwards & Sons Inc., TCI should earn $129 million this year, vs. a $102 million loss in 1991. That has helped its stock move from 17 to around 20 this year. Still, not everyone thinks it will keep going up. Greenwich (Conn.) money manager Frederick A. Moran notes that Malone has cut his own holding in TCI while adding more in Liberty. "He seems to think the upside is greater for programming than cable," says Moran, who has sold his stake in TCI.

What's going on in Washington isn't reassuring, either. The bill to regulate cable, now moving toward compromise on Capitol Hill, is filled with restrictions that could wreak havoc on TCI's income statement. The federally permitted 5% annual rate hike for basic services would be repealed, allowing stricter controls by local governments. Cable companies could also be charged for programs they now carry for free, including those offered by the Big Three networks.

TCI hasn't had an easy time of it at the congressional debates. The week the Senate began hearings in January, legislators read a front-page Wall Street Journal story accusing Malone and Magness of "internal self-dealing" through questionable stock transactions. TCI strongly denies any wrongdoing by its officers. Later, legislators were angered when the TCI-backed National Cable Television Assn. sent out pamphlets, stuffed into cable-subscriber bills, that called a piece of the bill a tax on cable users. The NCTA says legislators misinterpreted the ads.

It wasn't the first time TCI called on its customers to help block the legislation. According to city officials in Evansville, Ind., TCI pressured the city council to oppose the bill or see its rates skyrocket. A TCI spokesman says it was only explaining how the legislation might affect subscribers. Eventually, the council, angered by TCI, publicly endorsed the legislation. "For all TCI's financial brilliance, you have to wonder how they could be so bad at public relations," says Falcon Cable's Nathanson.

BROKEN STRONG-ARM. TCI's relationships with many of the cities that license it could prove as nettlesome as its image in Washington. In the next five years, 25% of TCI's franchises, representing some 2 million basic subscribers, come up for renewal. Not all of them are happy. After town officials in Morganton, N.C., complained to TCI that it charged too much and offered too few channels, the company last year tried unsuccessfully to get the council voted out of office. Finally, on July 6, the council ended the bruising battle by voting to toss TCI out--literally, by ripping out its cables--in favor of a city-run system.

Some cities have wrung concessions from TCI lately. Jefferson City, Mo., just extended the company's license to provide service for eight years but not before demanding more channels and better repair service. And TCI just settled a long-standing dispute with Gillette, Wyo., over similar problems, agreeing to refund $500,000 to customers, add channels, and freeze rates for two years.

Hoping to head off a mass exodus, TCI has been trying hard to portray itself as a good corporate citizen. It is considering a nationwide expansion of its ad campaign by Hal Riney & Partners, and it's using new and more frequent marketing studies to gauge the needs of customers. Already, officials in several of its larger cities, such as Chicago and Seattle, report some improvement in service and channel offerings. But it may be too late to mollify everyone. "People are tired of the way TCI has bullied its way across the country for years," contends Morganton Mayor Mel Cohen. If Congress agrees and pushes for reregulation, TCI had better hope its bets on new technology start to pay off quickly.

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