#268 John Malone (Cable Cowboy)

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In the American cable industry, one man has over the last several years seized monopoly power. Using bully boy tactics and strong arming competitors, suppliers and customers, that man has inflicted antitrust injury on my company and virtually every American consumer of cable services and technologies. That man is John C. Malone. Malone seeks to exert monopoly power over key stages of the delivery of cable programming to the American consumer. Control over the creation of programming in studios, control over cable programming services, control over the mechanics of transmitting programming by satellite and control over the delivery of programming to the home. At every stage in this process, the consumer has paid and will continue to pay a monopoly tax to John Malone.
That was an excerpt from a lawsuit that Malone's one-time rival, Summer Redstone, filed and it is found in the book that I'm going to talk to you about today, which is Cable Cowboy, John Malone and the Rise of the Modern Cable Business and it was written by Marc Robichaux. So before I go to the actual book, I want to read some highlights from this fantastic Twitter thread written by this anonymous account called Loadline Finance. It was written a few years ago and I think it gives a fantastic overview of John Malone's philosophy on company building and I think knowing this before we go into some of the highlights, it actually enhances your understanding of the highlights as we go through. So the first idea, Malone believed in building long-term value through leveraged cash flow. Earnings didn't count. He was not constrained by quarterly expectations. The entire time that he runs TCI, it's a public company. And so he would tell his stockholders, if you're going to ask about quarterly earnings, you're at the wrong meeting and you probably own the wrong stock. I'll go into a lot more detail about his philosophy once we get to the book. Malone built the pipes, then bought the water that flows through them. So he wanted to own the cable lines going directly into the house and the parts of the programming that flowed through those lines. This is why, by becoming the gatekeeper with access to subscribers, he could negotiate equity stakes in the channels, gaining huge financial upside. Third idea, Malone took Spartan operations to another level. Absolutely no bureaucracy, no waste. And this is a quote from Malone, We don't believe in staff. Staff are people who second-guess people. Fourth idea, always protect the mothership. He used a web of subsidiaries to spread risk. So if one went down, it didn't sink the whole ship. Here's idea number five. This one actually made me laugh. And it gives insight into how Malone viewed himself. He was not really interested in operating a company. He thought of himself as a dealmaker. Malone averaged one merger and acquisition deal every two weeks for over 15 years. That's insane. These guys were slinging billion-dollar deals like bowls of breakfast cereal. Oh, and TCI shares rose 55,000%.
And then the sixth idea is exactly what I read at the very beginning, which was Redstone's description of Malone. And it says one of the best parts of this book is the exploration of Malone's complex personality. It is not a fawning glow piece. Malone is cast as a monster as much as Maven, an isolated sociopath as much as a loving family man. And the final idea that I want to include from this thread is if you give managers equity ownership, they can focus on fighting for economics rather than wasting energy fighting for control. And I'll go into more detail about that specific highlight later on. At the time Malone was critiquing the difference between like a professional manager with no skin in the game and the way they think and the way entrepreneurs think. So I want to jump to the introduction of the book where the author is telling us why he is writing the book. This is one of my favorite things to study, which is the beginning of industries. And the reason it's one of my favorite things to study is because the beginning, the very beginning of industries are always filled with cowboys, pirates and misfits. And so the author says, I had studied the bumpy odyssey of the industry for six of my twelve years at the Wall Street Journal. I was fascinated by the cast of underfunded cowboys who had wanted merely to make a buck by building a rural antenna service. So that is how the cable, the modern cable industry in its infancy was essentially just a bunch of young entrepreneurs with no money in the middle of nowhere trying to build an antenna service, which I'll get to in more detail. Their vision always seemed just beyond their grass, and they often stumbled in running to reach it. Now the same spider's web of copper lines across the country was suddenly the single fastest route to the internet. So the difference between what he's describing there, a rural antenna network morphs into the way Americans get high-speed internet for the first time. That process that he's describing took over 50 years to happen. The tapestry of events that led to Cable's dominance was connected by a single thread. John Malone. And before I read this description of Malone and where he's going to be compared and contrasted with a bunch of robber barons that you and I have talked about, the way to think about Malone is he's one of these dominant personalities that you and I have seen over and over and over again. And what's interesting to me is he's still living. This book is written about 20 years ago. He's still living and he's got this like cult-like following. This book by far has been the most requested book for me to cover on Founders for years. I was finally pushed over the edge by my friend Sam Hinkue, who's actually sponsoring this episode. And he told me a few weeks ago, he's like, you got to read Cable Cowboys, Malone was a monster. And to me, that was an unintended double entendre. Because Malone's competitors definitely saw him as a monster, but he was also a monster and a formidable individual at company building. And so this is a little bit about that. Malone symbolized a much more ominous side of business to critics, consumers and competitors. They saw a monopoly run by a Machiavellian bully who lived up to his many nicknames, including Darth Vader, Genghis Khan and the Godfather. He had skated very close to security law violations and like industrial powers, Andrew Carnegie or JP Morgan before him, he had extracted a price for the progress that he offered. As his power grew, he decided which cable network survived and he crushed competitors and all of this he did openly and brazenly. So on the next page is an overview of what he did. Malone did not found TCI. He is actually hired and recruited by the founder named Bob Magnus. And I'll get into Bob's story in a little bit because that's fascinating. I was actually disappointed I could not find a biography on Bob. It makes sense when you get to know him because he very much believed that bad boys move in silence and so he didn't seem like the personality type that would cooperate with an author actually. So it says TCI was born in Western Texas in 1952 when Bob Magnus, a part-time rancher with a weakness for whiskey and gambling, gleaned from a couple of hitchhikers a nifty investment idea that almost bankrupted him. That's that rural antenna service that morphs into Cable. He sought help from Malone and by 1990 Malone had expanded TCI's reach and assets more than tenfold, making nearly 500 acquisitions in that time. That is bananas. At an average of one deal every two weeks, the structures of his deals were exotic and his financial alchemy often befuddled Wall Street and investors and befuddled the hell out of me. I had to read several sections of this book over and over again and I still have no idea what the hell is going on. And that was intentional, by the way, because the author points out at one point they had like a 350 page prospectus of some investment deal that Malone was pushing through. And it's extremely unlikely that anybody other than Malone actually understood the deal completely. So in addition to reading the book, I also watched this lecture that took place about ten years ago and it's John Malone and he's actually speaking to a strategic finance class and I'll leave the link down below because it's very fascinating. It's like just under two hours long. But strategic finance, I feel, was Malone's superpower. So back to the book. It says the structures of the deals were exotic and his financial alchemy often befuddled Wall Street and investors. The flurry of complex mergers, acquisitions, stock dividends and spinoffs clouded the picture of the company's true performance. That too, I also think was intentional. This is really about his belief. It reminded me, remember a couple podcasts ago, I can't remember if it was, I did two Rockefeller podcasts recently, one 248 on Titan and another one on 254 on this very obscure 40-year-old biography of Rockefeller. But what was interesting is I talked about probably in both those podcasts is the fact that to understand Rockefeller, you had to understand that he literally believed, literally believed this as if like as clear as day to him that he was sent here by God to make as much money as possible so then he could give it away. And I thought the reason that was important to emphasize is because when you when if you're operating with that belief like you and I may think that okay that's a little ridiculous John but to him it wasn't it was actually real and then you understand what is most like what's his motivation behind what he's doing and it stems from that belief Malone had almost like a to me it was like he repeated several times the book he thought it was like a moral like achievement to build wealth and the part where his philosophy conflicts with mine is the fact that he would build wealth he put the achievement of building wealth over service to customers so says his shareholders got rich along with him for Malone it was a noble if not moral achievement the fruit of his enormous capacity to deduce and strategize that is repeated variations of that idea that is a moral building wealth is something good something you know moral achievement is repeated different variations that is repeated over and over again in the book okay so before I go into Bob and the starting of the company which is really one of my favorite parts of the book we got to go the fact that Malone in some ways it was irrational for him to to this is so important for me and you understand maybe the greatest opportunity that's ever going to be presented to you and I like it's going to be irrational that we chose to do it and what I mean by that is Malone is an extremely gifted I think he graduated from Yale had all these credentials he's getting recruited by all these other super smart rich people right and he's I think he's in his late 20s I think he's like 29 at this point in the story right and he turns it down like this let me just read this and it's crazy says his weeks earlier Malone had spurned a far more lucrative job offer in New York from Steve Ross who was the chairman of Warner Communications Ross had promised the 29 year old Malone a limo and $150,000 salary this is probably in the 19 this is I think this is 19 so early 1970s I think we're right right around 1972 so this is a lot of money Ross had promised the 29 year old Malone a limo and $150,000 salary even pledging to relocate the new cable headquarters to Connecticut where Malone lived so it would shorten his commute so I want to pause there before I go into him turning down his offer and going into the details of an offer what is that less than half of the salary he's gonna accept from Bob but I think I need to point something out to you is like every single person in the book whether it's a young version of John Malone or an older version of John Malone makes the same point Malone is just smarter than everybody else and I think you're seeing shades of that here where Ross is already a formidable individual in his own right it's like hey I need to get this guy this young kid on my team and I'm willing to go to great lengths to do so as I says instead Malone had chosen a hardship this is what I mean about it's almost like an this is going to wind up being the best opportunity he ever has the foundation in which he's going to build his multi-billion dollar wealth on and it didn't look like that at the time instead Malone had chosen hardship to take a pay cut and join TCI which is an obscure cable company that had lurched from crisis to crisis for the preceding 20 years and this is a little bit why Malone made this decision Malone had picked TCI because Bob Magnus was fatigued and running out of luck and was ready to relinquish power and let a new man run the entire show and because if Malone could make it work he might become extremely wealthy I can't pay you very much Bob told him one day but you've got a great future here if you can create it such a great line Malone found the challenge irresistible so he's gonna make $60,000 okay so he turns down a limo relocating the the headquarters so I can it's a short drive from a house and $150,000 salary and all Bob can give him is $60,000 a salary and a bunch of stock options so they agree it says they agreed upon a salary of $60,000 and then Malone had seen fit to buy 7500 shares of TCI stock which he helped pay for with a $60,000 personal loan from a local bank. Oh and I forgot to mention he's got to move him and his wife from the Northeast all the way to Colorado and that might have been part of the appeals as Malone is taking a liking to the informal Western setting in Colorado. It was scenic and unhurried. Malone's top executives were rough riders. They were not the MBA types that Malone knew back on the East Coast. And so let's go into the culture that Bob built. It was very much a cowboy, rough rider, heavy drinking, extreme behavior culture and it is wild how it started. For two decades Bob had relentlessly driven himself and his wife Betsy. So this is right before he goes and recruits. I need to give you background into why up until the point where he puts he's looking at the numbers he's in such despair and pain and he realizes he's in a really shitty situation and he says there's a great line I'll get to in a little bit. He's like damn it I need to find the smartest man and recruit him to run this company for me. And so we'll get there. So his wife is also his business partner. So that's Betsy. They had started out with a single cable system in Memphis, Texas that they had built themselves. And they had ultimately assembled a company with more than 200 cable systems in the top 100 markets. So that's what Bob's been up to for the last 20 years. Okay. Bob had done it by constantly doubling. This is so crazy. He had done it. He had done it by constantly doubling down on his bets and accumulating a mountain of debt. He was always gambling that Americans' hunger for this new thing called television would permit his company to grow fast enough to stay ahead of the bill collectors. What the hell does that mean? That means at this point in the story, in 1972, TCI had $19 million in annual revenue. That's fantastic, right? It had its debt load was an obscene $132 million.