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John Malone, chairman-CEO of Tele-Communications Inc., the nation's largest cable operator, has long been a major behind-the-scenes player in the TV arena. In this exclusive interview with Advertising Age Media Editor Chuck Ross, Mr. Malone, 56, discussed recent dealmaking with Rupert Murdoch, Bill Gates and Michael Eisner, as well as the future of advertising in the digital age.

AA: Later this year, TCI will market the first generation of digital boxes and digital services. What's your game plan?

Mr. Malone: It's going to be a very attractive offering. It'll be optional to the consumer. It is a flat $10, and if a guy has or wants Disney, Disney is free if he takes digital, for instance. The Disney Channel is typically an $8 charge. So digital is pretty cheap incrementally to a Disney customer, and the same thing with Starz, our movie service. If you have or want Starz, and you take digital, Starz is free. And of course if you take Starz and digital, you're getting 12 channels of movies. If you're getting HBO and take digital, you get the multiplex version of HBO and so on. You get 42 channels of video and 14 channels of digital audio for that $10, plus you get an interactive guide.

AA: You're very sanguine about the ad possibilities of the next generation of set-top boxes, some of which we could see a year from now. What kinds of applications do you envision?

Mr. Malone: You could run an ad at the beginning of a major pay-per-view event and the ad would say sign up for Sprint and watch the fight tonight on us. Then you hit the button and bingo, you're a Sprint customer and you're also watching the fight.

Or you watch an ad for Rogaine and you hit the button and you immediately see the names and addresses of your closest physicians who can prescribe it. . . .

So you can do all that in real time, and it's pretty sexy. It can evolve into a very important advertising, merchandising vehicle.

AA: How soon until we see these kinds of applications on a mass scale?

Mr. Malone: It really depends on how fast these boxes penetrate the market. You need scale economics to make it attractive for the advertising community. My guess is that they will tend to penetrate upscale households first, so they will have disproportionate attractiveness to certain classes of advertisers sooner rather than later. And the advertising community likes to be on what's new, hot and sexy, so you may see some industry initiatives with certain advertisers for exclusivity arrangements. For example, we could .*.*. go to Nike and say, "Would you like to be the sponsor of real-time sports scores on the TV screen?"

To me it's an issue of what's the expense vs. how many homes you hit. If it were traditional advertising, where you have to spend a fortune on a complex advertisement, and you're only getting a couple million homes, it might not be that attractive. But if what you've got is something that costs very little and gives you a lot of marketing data as well as a traditional advertising presence, it might be very attractive.

AA: You give the advertiser home or subscriber data?

Mr. Malone: Absolutely. [We would give advertisers data on] who responded when we asked the question and who would be interested in some consumer product. Bingo, you could give them immediate response. And of course you have the fact we'll know who's watching what. Once the platform is out there, you can experiment with a whole bunch of things.

AA: As recently as a year ago, the cable industry was touting interconnects [for one-stop shopping for cable ad buys in one area] as being the way to be advertiser friendly. Now the industry is going in a different direction.

Mr. Malone: What we did was bite the bullet and said we're going to force a big geographical reshuffle of the industry, and we're well on our way to doing that. And when that happens, you don't have interconnects anymore-what you have is ownership.

So, when the smoke clears, virtually every ADI in the country will have a dominant cable operator, from an operating point of view. For example, in all of south Texas, the whole Gulf Coast, it's a joint venture between us and Time Warner. So you have one-stop shopping if you're an advertiser. .*.*. That's where we are headed. We think it's even stronger than interconnect.

The goal here is to eliminate the balkanization in the cable industry and make it much more like the broadcast model. I think it can be quite meaningful in terms of our ability to do a better job for Madison Avenue.

AA: There have been recent talks between major cable operators and Bill Gates about the next generation of set-top boxes. Does Microsoft have interests in investing in cable beyond the $1 billion it's invested in Comcast?

Mr. Malone: Bill clearly wants to be the technology supplier to the cable industry as it evolves into this intelligent network computer era. That's why he made the investment in Comcast. I don't think it bought him a seat at the [cable] table, but it at least bought him a window so he can watch what's going on.

It's OK if Bill supplies the technology, as long as he cannot extract unreasonable profits for supplying the technology or deny access to other developers. If it's principally a Microsoft platform, as long as it's open, that's fine. In many ways, that's superior, because he's got a hell of a brand, and he's a guy who can see the whole system as it evolves.

AA: There have been reports that ultimately Mr. Gates is interested in acquiring a broadcast network.

Mr. Malone: I know he's not terribly interested in programming per se. He's willing to invest in intellectual property if it furthers his other goals. I suspect Bill will not pay a big premium to buy a network, which he perceives as a diminishing asset. It's more likely he'll do joint ventures like he did with NBC, where he gets the part he wants without paying a premium. So it's very unlikely, in my judgment, that he's an interested buyer in CBS.

AA: There seems to be some turmoil right now as to the future of Court TV, which is owned primarily by TCI, General Electric Co./NBC and Time Warner. What would you like to see happen with it?

Mr. Malone: I'd like to see its programming have a concept that's long term and brings something of value to my customers.

The problem is that two of the three companies that invested in it, Time Warner and GE, decided to compete with it. CNBC in prime time is Court TV. And Time Warner has a major segment on CNN that's the same thing.

Court TV can stay somewhat in the genre it's in, but it's got to think about the fact that the major trials are so heavily covered that it's not the home run it used to be. So it needs to have a business strategy that's broader.

Ted [Turner, vice chairman of Time Warner] would be happy to take it over and turn it over to that, and NBC wouldn't be too happy with that.

And NBC would be happy to take it over and turn it over to general entertainment, and Ted wouldn't be too happy with that. So we have a classic . . . standoff of an asset that, if we could get aligned, could be quite valuable.

AA: So, what happens?

Mr. Malone: (Laughing.) What I'd love to have is [Disney/ABC Cable Networks President] Gerry Laybourne make an offer to acquire Court TV and convert it into a children's programming service, and then everyone would be against that except TCI.

AA: You were instrumental in the deal that saw Rupert Murdoch and Saban Entertainment take over the Family Channel. Now, the challenge is to program it successfully with kids programming.

Mr. Malone: I think the Family Channel will get better because they will spend a lot more money and energy programming it. For cable that's good. Tim [Robertson, former president of the Family Channel] did a wonderful job, but he had a limited budget. I think both Disney and Saban, through Family, will give Nickelodeon a real run for that segment of the market.

AA: But Disney hasn't come up with a plan yet to challenge Nickelodeon.

Mr. Malone: Their plan was to buy Family Channel. They tried very hard. In the end, Pat [Robertson, chairman of Family Channel parent International Family Entertainment] made the decision to go with Rupert primarily because he would get to stay on the air [with "The 700 Club"]. With Disney, the requirement would be that he phase out of his on-air presence. . . .

Now, I wouldn't count Gerry Laybourne and Disney down or out. I think she will come forth with a strong children's oriented service that will give everyone a run for their money.

AA: What was TCI's role in the Family deal?

Mr. Malone: We were really neutral in it. The only thing we said is that while Rupert was working out his difference with the cable industry, on the satellite side, we wouldn't let any deal happen. Once the satellite deal got worked out [Mr. Murdoch's News Corp. aligned with Primestar, the direct broadcast satellite company co-owned by TCI and other cable players], we simply took our foot off it and said, "It's open to the highest bidder, but it's Pat's call."

AA: Was GE ever a serious player for Family?

Mr. Malone: Early, and at a much lower price. They were very interested.

AA: So is it too late for GE to snag an analog channel for entertainment programming?

Mr. Malone: There are other vehicles and they could concoct something. The real issue is who would support it.

If GE and NBC wanted to pay top price, they could have probably bought USA Network. The problem is that they're trying to sneak in through the back door, like they did with CNBC [formerly FNN] and America's Talking [now MSNBC]. I don't believe they're going to be able to get from here to there in an analog channel that way.

AA: Another recent deal is the one that saw Discovery Communications, of which TCI owns the biggest chunk, acquiring 70% of the Travel Channel for $20 million. Why do you think Bud Paxson, who only recently bought Travel himself for $75 million, made the deal?

Mr. Malone: This was really a gesture by Bud, who said to the cable industry, "Look, we really can do things together. Here I've captured this asset for you, and let's all work together to develop it, and maybe in the course of that, with this broadcast network I have, we can all work together to figure out how to make money for both of us."

I think this is really an outreach by Bud trying to develop a bridge to the cable operators and maybe as a result get much broader distribution of his broadcast network.

AA: Since we've last spoken, Mr. Murdoch has gotten his cable news channel on in New York. When he was getting ready to launch the service, you told us you didn't think there was room for three cable news networks-Fox, MSNBC and CNN.

Mr. Malone: If what you mean is that there's not room for them all to make money, I still believe that. CNN can make money competing with two other broad-based news services that have partial but not complete distribution. But those two other services are going to lose money forever. If it's worth it for them to brand, or for other ego reasons, then it may well be worth it and they'll stay in.

For Bill and MSNBC, if it can drive his brand, maybe he can see enough in it if he can bring it close to break-even. With Rupert, the same thing. He's very much into branding Fox. And Rupert also believes that the political leverage he can get out of being a major network can be useful to him in the rest of his businesses.

AA: You've now got Leo Hindery Jr., the president of TCI, in place as your new right-hand man. Where do you personally want to focus your energy in the next few years?

Mr. Malone: Strategy. Financial strategy and technical strategy for the company.

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