Dr. Malone's RX for a New World

Cable World, April 17, 2000 by Tim Clark

Liberty Media is assembling a system that will enable the company to develop digital content and platforms that will deliver integrated broadband services around the world.

"It's part of the cosmology of what's going on today," chairman John Malone told attendees of the company's annual analyst confab in New York April 13.

The planets -- including digital, satellite, international and post-production -- can work together or separately, said Paine Webber analyst Chris Dixon.

Liberty can spin them off to create a currency for future acquisitions or keep them together as pieces of its telecommunications pie.

The overall strategy is to create shareholder value. Malone is not an emotional investor, one insider said. "He's not going to invest in something just because he likes it," he said. "He does it only if it makes strategy sense."

Malone's track record is stellar. But Liberty's CEO Dob Bennett hedged his bets by saying, "We don't know whether we'll be able to sustain growth. We do know that we are not in it for today's business. We're in it for the long-term."

Long-term means belting on digital deployment worldwide. Although he's spending billions on putting together a satellite-delivered data business, Malone remains optimistic about cable's prospects saying "cable will have a leg up" on DBS once the advanced digital set-tops are available. He also predicted that once cable deploys IP technology, it can circumvent the inconvenient access charges and other phone industry "bureaucracies."

Malone has spent much of the past year buying up obscure and smaller assets to build his digital and technological empire.

But he remains fond of his larger holdings in companies like News Corp. and Time Warner Inc. He said the AOL/Time Warner merger "will be dynamite."

"They will have economic power, content and technology to do whatever they want," Malone said.

Many analysts have expected Liberty to be spun off from Ma Bell. Even Malone admitted last week that the benefit of being a wholly-owned subsidiary of AT&T Corp. lies in tax efficiencies - something Malone feels very strongly about.

Many of Liberty's acquisitions are actually competitors to AT&Ts business units, but Bennett dismissed any conflict. Indeed, "Whoever comes up with the opportunity first, goes for it," he said. "Liberty could be considered a farm team for AT&T," Malone added.

Some of Liberty's acquisitions could cause AT&T some headaches. Witness the company's purchase of broadcaster Emmis Broadcasting Corp. last year. FCC rules prohibit a company from owning broadcast and cable assets in the same market. AT&T could be forced to divest some assets if the FCC decides there are cross-ownership problems.

Yet a spin-off of Liberty is unlikely any time soon. AT&T would have to ask the IRS for a tax-free waiver if Liberty is spun off before next spring, analysts said.

Liberty used the investors conference to unveil its new Liberty Livewire subsidiary, described as the "first true convergence company" by Liberty Media VP David Beddow. Liberty Livewire includes the independent post-production distribution companies Liberty's recently bought.

From worldwide hosting and post-production to digital distribution, Liberty Livewire will be "specifically tailored" for clients, Beddow said.

Those clients would include major music, television and theatrical studios who would use Livewire assets like Soundflux.

Malone sees other Livewire opportunities: "We want to see Madison Avenue go digital," he said. Malone said Livewire will benefit from outsourcing contracts once advertising goes digital.

Liberty Digital CEO Lee Masters said, "Interactive TV is real in the U.K." Liberty Digital aims to create "mega vertical" categories by zeroing in on a "name that's a commerce category leader across all platforms," said Masters. Using "auto" as a category, Masters cited Carsdirect.com as a mega vertical since it is a premiere automotive site on the Internet.

Liberty executives say their investment strategy is simple: Invest in companies that possess value in branded content and high customer satisfaction.

Liberty follows a so-called "value creation cycle," Bennett said, which entails satisfying the demand for broadband, searching for a consolidation premium and maximizing returns through financial engineering. Prudent debt leverage and equity also are major components in the cycle.