EXCLUSIVE: Interview with TCI's John Malone

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TCI chief weighs news alliance with Murdoch and assesses Net opportunities

As president-CEO of Tele-Communications Inc., the world's largest cable operator, John Malone has long been one of the most powerful players in TV. In this exclusive interview with Advertising Age Media Editor Chuck Ross, Mr. Malone discusses TCI's interest in allying with Rupert Murdoch on news, as well as plans for the Internet, local advertising and CBS' future.

Advertising Age: You've now got a business relationship with Rupert Murdoch through a joint venture with sports programming. He's said he wants to eventually start a news channel. Would you like to partner with him on that venture?

John Malone: Sure I would.

On the other hand, I've got this position with Ted [Turner] and CNN and I don't want to undercut that. And I don't want to get accused of playing favorites.

You'd have to be an ostrich not to know that my politics are conservative, and I really do think there's a bias to the left [in the news media], so when Rupert says "Hey, don't you want to do something about that," my instincts say that would be a good thing to do. Whether it's economically viable or not, I don't know.

And we'd have to treat a news service with Rupert, whether we owned any of it or not, the same way we treat anybody else, which is that it is a la carte and if enough people show a demand for it we might consider putting it on an expanded basic tier of some kind.

Ad Age: Why do you think we've seen the spate of recent announcements of networks starting cable news channels?

Mr. Malone: Each of these enterprises has a different perspective on it. I think Murdoch looks at it more from the point of view that he's got Sky News, he's got newspapers all over the world, and he's got Fox, but Fox doesn't have a meaningful news play. And if he was going to have a meaningful news play for Fox, he needs to lay off the costs on more than just Fox or fX.

From NBC's point of view, they've got CNBC and they see Turner poaching on their turf with [CNNfn]. Second of all, NBC's got this deal with [Microsoft Corp. Chairman-CEO] Bill Gates on interactivity.

Gates was very interested in investing in Turner when Turner was thinking about buying a network, and essentially taking over the interactive side of it. And it was something I was encouraging.

The Time Warner deal [acquiring Turner] put an end to that. Gerry [Levin, chairman-CEO of Time Warner] was not interested in a deal with Microsoft. As a result Bill was left loose and he ended up just intensifying his deal with NBC.

Ad Age: Is there consumer interest in more news?

Mr. Malone: Well, we went out and had a company do a survey for us and asked what new networks does the public really want to see. The results were very heavily skewed toward science and technology, culture and education.

News is down around 8%. It was 60% for the Discovery Channel-type stuff [TCI co-owns the Discovery Channel.]

Ad Age: How about the traditional broadcast networks? How did they fare in your research?

Mr. Malone: In this survey we did rating the news, CNN is No. 1, ABC is No. 2, NBC is No. 3, all fairly clustered together. CBS is down with Fox, and Fox doesn't have news. That's how bad it is. The public's perception of CBS is that CBS is really in the doghouse.

Ad Age: But isn't the success of broadcast networks cyclical?

Mr. Malone: I think CBS' problems are more than cyclical. I think they have taken severe damage in their affiliation structure.

Ad Age: CBS gave cable a free pass on retransmission consent the first time around. Now that Westinghouse Co. owns the company, do you know if they're going to try to work out a better deal for themselves?

Mr. Malone: No, but if they play hardball they're going to Siberia. They're weak. Without the NFL, if they play hardball on retransmission, we will play hardball.

Ad Age: Everyone's trying to find the right business model for the Internet. Do you see much of future Internet content development being subsidized by advertising?

Mr. Malone: Advertising will tend, as in most other media, to help support the cost of the programming. But I really wonder how much of the cost of the transport it will carry.

I can see a local newspaper existing, say on a local Internet server, and having a basic service that was advertiser supported with no charge to the user and then a subscription service which allows a user much greater detail.

But it's hard to say how this evolves. Right at the moment, so many people want to play that I don't think anybody is going to be successful charging the consumer for content.

Everybody is willing to roll the dice, take the start-up losses, get what advertising revenues they can get to offset that, and see where that goes.

In the long run, my guess is that it will evolve to where you'll have some broadly distributed services that will be advertising subsidized, and others that will have to be subscription because they're pretty narrow.

Ad Age: TCI's Internet venture, @Home, essentially allows people to use their local cable system to connect to the Internet. How does this fit with your long-term strategy?

Mr. Malone: The Internet is sort of an amorphous concept. People pay for their own phone lines right now to get connectivity. All that @Home will be is a high speed version of a local access provider.

But because of the strains that that will put on the existing Internet architecture, it's our guess that @Home will have to reach out and have a high speed network that's sort of national in scope, and that then ties into the AOL or Prodigy or CompuServe facilities, as well as going directly to heavy use locations, such as Washington, New York or L.A.

The ability of the Internet, or the World Wide Web, to handle that high speed is limited, and so we will find ourselves, over time, reaching deeper into the actual information providers to provide more direct high speed access.

Ad Age: Do you charge information providers for access to these high speed users?

Mr. Malone: Hard to say how that structure will evolve, as to whether the consumer carries the whole freight for the costs or whether it's split between the consumer and the information provider.

If the information provider is going to be charging a fee from the consumer, then it may be appropriate for the transport [i.e., @Home] to participate in that, rather than getting all of its costs directly out of the consumer. That way the business would penetrate much faster.

Ad Age: We hear that you're going to do an @Work to complement @Home.

Mr. Malone: It would be an @Home but dedicated more to the business customer. It would be the same transport infrastructure, but branded differently and with different content players, business-oriented content.

Ad Age: We understand that one scenario TCI is working on at the local level would be to develop a home page for a local advertiser and then get the advertiser to promote it on a TV commercial that the advertiser would buy from the local TCI cable system.

Mr. Malone: Sure. That's one way for us to enhance the value of advertising on our local spots. It's also a way for somebody with a home page to promote it.

Ad Age: How soon will we see this?

Mr. Malone: I expect that we'll experiment with it this year.

Ad Age: So you make a big differentiation between the potential of national and local advertising as far as new media ventures are concerned.

Mr. Malone: In terms of mass advertising, I just don't see much of an advertiser's budget going into these alternative things for quite a long while. So I don't think it has a big effect.

Overall, I think you'll continue to see erosion of market share of the broadcast networks as we see more and more channels taking fractional shares.

But I suspect that the big ones, and in that I will start to add networks like CNN and Discovery and ESPN and A&E--the ones that have almost universal reach--we'll see their ad rates go up to offset any dilution in market share. So I think they're going to be OK because they're the only place to go.

And the little cable networks, the ones that are carving up market share, will get some advertising support, but it won't be the big bucks.

Local advertising is a whole different ball game. If this electronic stuff really takes off, you're likely to see a real shift in the way local advertisers think about advertising. Maybe re-evaluate newspaper, maybe re-evaluate local broadcast.

Ad Age: Where do they migrate to?

Mr. Malone: Online type stuff. Local cable spots. There will be a lot of experimentation with local retail, and hopefully we can come up with some innovative things and capture a bigger share of that local advertising pie ...

That's where I'm more focused. I don't think national advertisers will be as important to us as a cable company. As a programming company, national advertisers are very important.

Ad Age: We know telephony is going to be a big play for cable operators. Where are you with Sprint and wireless telephony right now?

Mr. Malone: We're far enough along to know that it works, technologically. What we don't know are market-share issues; what kind of market-penetration we are really looking at.

Ad Age: What kind of market share is realistic?

Mr. Malone: I've never believed that we should go hell-bent for the POTS [plain old telephone service] business.

Our leading products should be this @Home kind of stuff, and we've got the Sprint joint venture for wireless personal communication services.

We should bring to the market new products, differentiated products and differentiated pricing, rather than just go into the market and try and cut prices to capture market share, and end up making the whole pie smaller.

So our strategy will be more to go in with a package of services that includes some new and neat stuff that otherwise isn't being offered.

That's going to be both with the wireless PCS and the broadband data.

Ad Age: So you want to stay out of the consumer wired phone business?

Mr. Malone: I wouldn't say we want to stay out of it.

I want to go into the business and say we've got PCS, we've got broadband data interconnect, and if you buy those from us, your POTS service is almost free.

Or part of it is. It's cheap. Or think of your @Home as a second line.

Copyright January 1996 Crain Communications Inc.

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