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A Look Back at the Cutthroat TCI

12/12/1999 7:00 PM Eastern

Denver is still cable's ground zero, which gave The
Denver Post reporter Stephen Keating a good spot from which to observe the machinations
of then-Tele-Communications Inc. chairman John Malone, EchoStar Communications Corp.
chairman Charles Ergen and occasional visitor News Corp. chairman Rupert Murdoch. Their
intersection -- around the failed partnership of News and EchoStar -- forms the fulcrum of
Keating's new book. From the opening scene, at TCI chairman Bob Magness' funeral, to
Ergen's closing soliloquy,
Cutthroat: High Stakes and Killer Moves on the Electronic
Frontier is a fast-paced and meaty read, whether you were there or not.

Included in this excerpt are an account of the birth of
@Home, Malone's circuitous dealings with Microsoft Corp.'s Bill Gates, the start of TCI's
parlous financial woes and Malone's fears about the Unabomber.

Cutthroat was published by Johnson Books in Boulder,
Colo. The related Web site is
www.cutthroat.org.

In January 1996, at Tele-Communications Inc. headquarters,
[chairman and CEO] John Malone addressed a group of employees and guests of
Tele-Communications International Inc. (TINTA), the arm of TCI that managed investments in
England, Japan, Latin America and elsewhere outside of the United States.

As was his habit, Malone spoke fluently, without notes.

"One of the issues that we've had to confront over the
last six or seven years is: What does a company do when the technology upon which it is
based starts to change radically? When the tectonic plates that you've built your empire
on start to shift, how do you handle that? What's the attitude? Do you become defensive?
Do you try to use regulatory or technical barriers to prevent unpreventable change, or do
you try to go with the flow?

"I think we decided to go with the flow at TCI. We
decided we couldn't predict whether terrestrial or satellite or wireless was going to
dominate distribution of communications -- both one and two-way -- so we decided to
participate in them all."

Malone was like a roulette player who bet all over the
table. TCI was the largest cable company in the nation, and it owned part of the largest
one in England, Telewest [Communications plc]. It owned part of PrimeStar [Partners Inc.]
and 30 percent of Sprint PCS, a wireless phone alliance with Sprint [Corp.], Comcast
[Corp.] and Cox [Communications Inc.]. TCI's Liberty Media [Group] held stakes in dozens
of networks, including 9 percent of Time Warner [Inc.] and its programmers. Malone was
also a founder and chairman of CableLabs [Cable Television Laboratories Inc.] in 1988, a
research-and-development arm for the industry, based near Boulder [Colo.].

TCI was at the intersection of all of the action.

"Can we develop a business in which millions of users
will pay a monthly service charge for access to our services?" Malone asked
rhetorically. "That is the entire focus of everything we do, be it in programming, be
it in technology, domestic or international. We believe that in the future, that is the
way to best create wealth for shareholders. Which is, after all, as a capitalistic
enterprise, what our fundamental goal is."

As long as the cash flow serviced its debt, TCI could grow
in every direction at once, seeking the killer applications -- the new services that would
convince people to spend their money. But by the mid-1990s, the promise of 500 channels
and interactive television was trumped by the reality of interconnected computers -- the
Internet.

It seemed logical that Malone, head of the world's dominant
cable company, and Bill Gates, head of the world's dominant software company, Microsoft
[Corp.], would find a way to dominate this new communications technology, either together
or separately. Both men had the savvy to generate their own ideas and to co-opt others.
Gates and his team created the Microsoft disk-operating system (MS-DOS) for IBM's
fledgling personal computer division in the early 1980s. It became the standard from which
Microsoft launched a suite of programs and -- parallel to the rise of the user-friendly
Apple [Computer Inc.] Macintosh -- created the Windows software that ended up running in
90 percent of the world's computers, regardless of manufacturer. Malone, to a large
degree, controlled the cable's industry's operating system -- that is, the pipes and the
programming that flowed through it.

Like John D. Rockefeller in the oil business and Henry Ford
with mass-produced automobiles, Malone and Gates shared a hyper-rational industrial view
of the world and a lust for scale economics. Physically, Malone was more commanding than
Gates, like a broad-shouldered drill sergeant compared to a scrawny buck private. In their
meetings, Malone could sit stone still, while Gates nervously rocked his upper body back
and forth. Yet Gates was 14 years younger, many times richer and a cultural icon.

Where Malone was once celebrated as the visionary, the
bellwether for communications technology, his star in the public sphere dimmed
considerably when the Bell Atlantic [Corp.] deal fell apart in 1994 and TCI's
digital-cable service was indefinitely delayed.

Meanwhile, Gates was hailed as a geek god, with bouquets --
and some brickbats -- tossed at his feet after the phenomenally successful launch of the
Windows 95 operating system. His every action and utterance was scrutinized for signs of
the future. He wrote a best-selling book, The Road Ahead, and he was the subject of
10 others. Gates' image was used as a hook for TV-news shows, magazine stories, newspaper
articles, cartoons and Internet sites, one of which featured a wealth clock documenting
the ballooning bankroll of the world's richest human.

Microsoft posted revenues no greater than TCI in 1996 --
about $8 billion. But Microsoft actually reported net income, and it was billed as an
essential cog in the information economy. The jury was still out on TCI, with a stock
market value one-eighth that of Microsoft's.

Gates also succeeded Malone as the technomonopolist that
official Washington loves to hate, the subject of ongoing antitrust probes. Their styles
were different in response. Malone was a provocateur who spoke his mind, whereas Gates
tried, with varying degrees of success, to soften the edges and play the game. When
Microsoft first faced government antitrust scrutiny in 1994, Gates went golfing with
President Clinton and others at the Farm Neck Golf Club on Martha's Vineyard. When photos
appeared of Clinton driving Gates around in a golf cart, some wags observed, "The
most powerful man in the world -- and his driver."

Gates reportedly told Vice President Al Gore that if the
government pushed too hard in its antitrust case, Microsoft could relocate out of the
country and export its goods to the United States under the North American Free Trade
Agreement.

"They've got to treat him a little bit carefully -- he
might bite," Malone said, referring to Gates. "Our problem is that all of our
assets are here. They're hard to move. I can't threaten to move to Canada. Bill can."

With all of the motivations for Malone and Gates to work
together -- that is, to expand their separate empires -- their early partnerships were
spectacularly unproductive. In 1994, TCI and Microsoft proposed a cable-TV network about
personal computers that included a home shopping element. It never happened, and the idea
was later pursued by Ziff-Davis [Inc.] with ZDTV.

Then came America Online [Inc.], the corner store in
cyberspace. Founder Steve Case had a 1993 run-in with Gates, who told him, "I can buy
20 percent of you, or I can buy all of you. Or I can go into this business myself and bury
you."

Case was a huge fan of Malone, and he tried to get TCI
interested in investing. Finally, in late 1994, they came to terms, and Case faxed Malone
a draft press release. Soon after, Malone announced that TCI was going to invest $125
million in TCI stock for 20 percent of [The] Microsoft Network [MSN], Gates' fledgling
Internet service. Case suspected that he got used. "I had this vision of him sending
off the rough draft of the press release to Gates the minute it came off the fax from
me," he said.

AOL boomed and MSN floundered. By late1996, Malone
recovered TCI's stock investment. "It was a mistake" not investing in AOL,
Malone said later. "But you don't know that at the time. We thought Microsoft would
be more powerful in the Internet-access service space, but Bill was kind of slow out of
the blocks."

From its mainframe genesis in defense labs and university
research links, the Internet had evolved into a new way to communicate -- for those who
were interested and could afford a PC, modem, software and phone line. Electronic bulletin
boards sprang up, generating hopes that cyberspace could become a place for
"community" and revitalization of democracy -- a new utopia. On the commercial
side, smut peddlers moved in to sell every imaginable fantasy and degradation. The
undeniable hit was the most personal -- e-mail. It had the immediacy of a phone call and
the informality of a Post-It note, and it eventually surpassed the U.S. Postal Service in
number of messages sent.

Both Malone and Gates were slow to embrace the Internet. It
was not until Dec. 7, 1995 -- Pearl Harbor Day -- that Gates announced a coherent
Microsoft strategy for the Internet. Malone's attitude toward the Internet was
"cultural discomfort," according to John Perry Barlow, an early Internet
advocate who appeared with Malone on a panel in late 1994. Barlow -- a Wyoming rancher,
cofounder of the Electronic Frontier Foundation and sometimes lyricist for the Grateful
Dead -- said he "laboriously built" for Malone "a credible business model
selling Internet connections through the wasted bandwidth of his cable network."
According to Barlow, Malone replied, "'OK, you've convinced me that there's probably
a business to be made there, but it's not a business I want to be in.'"

Whether Malone was blowing Barlow off or really had his
doubts, his interest in cable lines carrying Internet traffic intensified after a visit by
John Doerr, the Silicon Valley venture capitalist, in December 1994. Doerr was part of an
anti-Microsoft coalition that included Sun Microsystems [Inc.], developer of the Java
software, which could run with or without Microsoft's operating system. Sun's motto was,
"The network is the computer," implying that Microsoft's dominance was an
unnecessary choke point. Some in the anti-Gates contingent supplied the U.S. Justice
Department with evidence to make its antitrust case against Gates.

Doerr's connection to Malone was through Bruce Ravenel, a
TCI technology executive hired away from U S West. Doerr and Ravenel worked together in
the 1970s at Intel Corp., the computer-chip maker. Doerr pitched Malone four days before
Christmas 1994, on exactly what Barlow proposed. Within five months, a company named At
Home Corp. was formed, based in Redwood City, Calif. At Home's mission was to devise the
communications backbone and service to carry Internet traffic at very high speeds back and
forth through cable lines.

Telecommunications systems have organic analogies. The
phone network is a wheel, with messages pouring down the spokes to a hub, then back out
again. Satellites are suns, beaming video and data to vast areas. Cable systems are like
trees laid underground, with the branches delivering one-way video to homes. Rebuilding
cable systems with fiber optic lines tied to coaxial cable and two-way amplifiers is
intended to transform the tree into a wheel. Particularly since the sun is so bright.

"One-way cable TV is essentially dead," wrote
deep thinker George Gilder in April 1995. "In response to [satellite], cable has no
choice but to change its business radically to two-way computer services."

With Ravenel as scout, Malone was moving TCI incrementally
toward cyberspace. It bought 2.3 percent of Netscape [Communications Corp.], Microsoft's
rival in the browser wars. When Netscape went public in August 1995, its share price
soared and helped to set off the Internet stock craze. Malone later expressed
mystification at the values of Internet start-ups with minimal revenues and track records.
"It's great if you can capitalize a business like Netscape by having an idea, raising
a s___load of money, then building a business," he said. "But it doesn't always
work."

Malone also said he got "10 opportunities a week to
invest in Internet-content providers. They all have one thing in common: They're all going
to lose $5 million this year." TCI's most promising investment was At Home, cited as
@Home, the @ symbol having made the transition to the media mainstream by way of e-mail
addresses.

Having learned his lesson from PrimeStar's convoluted
ownership structure, Malone returned to what he knew best: control. Comcast and Cox became
co-owners in @Home, but TCI retained majority ownership of the service, which would be
offered to any cable company that wanted it. Time Warner pursued its own cable Internet
service named Road Runner. MediaOne [Group Inc.], the former Continental Cablevision
[Inc.] company owned by U S West, also went its own way.

Coaxial cable has much greater bandwidth, or capacity, than
phone wires. @Home claimed that it could download a video clip to a computer screen
hundreds of times faster than possible through a traditional phone line and modem. This
cable Internet solution fit perfectly with Gates' concept of the "Web
lifestyle," by which the worldwide computer network – and, therefore, Microsoft
-- is integral to everyday life. "You're living a Web lifestyle when you just take it
for granted that any purchase you make, any new thing you want to plan, like a trip, you
turn to the Web as part of that process," Gates said. "People today live a phone
lifestyle and a car lifestyle. And they almost laugh when you say that to them, because
it's so taken for granted."

Gates wasn't laughing, however, when he found that Malone
was @Home alone and would launch cable Internet service without ties to Microsoft.
"Gates 'just exploded' at Malone as part of their scheduled one-on-one meeting,
threatening to bury this company, buy cable operators, and do whatever it took to crush
@Home, since we are obviously so anti-Microsoft that it's criminal," according to a
May 1996 e-mail from @Home executive Milo Medin to Marc Andreessen, Netscape's founder.

The e-mail came out during the government's antitrust trial
against Microsoft. It flipped a few assumptions. Malone, cable's enforcer, was in the
crosshairs of a cutthroat who just looked benign.

By mid-1996, Malone's troubles at TCI went much deeper than
Gates' threats. Malone's doctor told him in 1993 that his persistent flu symptoms were
from stress. On a business trip to Argentina in early 1996, Malone caught a nasty bug. He
spent a good deal of time at his vacation home in Maine and left TCI's day-to-day affairs
to his lieutenants. Speculation swirled that the 55-year-old cable magnate was seriously
ill, having a midlife crisis, or had yet to rebound from the failed merger with Bell
Atlantic.

Maybe he was spooked by the Unabomber, from whom Malone
later claimed to have received a threat.

Theodore John Kaczynski opposed everything that
technologists like Malone and Gates stood for, and he aimed to destroy it one human at a
time. Working from an isolated cabin in Montana, Kaczynski crafted mail bombs that killed
three people and seriously injured eight people between 1978 and April 1995. The primary
targets were university researchers and business executives.

In September 1995, as part of a negotiation with the
Unabomber intended to halt the bloodshed, The Washington Post and The New York
Times
jointly published the Unabomber's manifesto. It included these footnotes:

"We are asserting that ALL, or even most, bullies and
ruthless competitors suffer from feelings of inferiority ... The conservatives are just
taking the average man for a sucker, exploiting his resentment of Big Government to
promote the power of Big Business ... When someone approves of the purpose for which
propaganda is being used in a given case, he generally calls it "education" or
applies to it some similar euphemism. But propaganda is propaganda, regardless of the
purpose for which it is used ... Many leftists are motivated also by hostility, but the
hostility probably results in part from a frustrated need for power."

A psychologist who examined Kaczynski later wrote that he
had "an almost total absence of interpersonal relationships" and
"delusional thinking involving being controlled by modern technology."

By the mid-1990s, many who considered themselves potential
targets had beefed up security measures. At the home of [TCI founder] Bob Magness,
packages were x-rayed before they came into the home. TCI took similar precautions at
headquarters. Malone already lived in the country, at the end of a winding driveway,
behind a security gate.

In February 1996, Kaczynski's brother, David, contacted the
FBI with his belief that his brother might be the Unabomber. The FBI began its manhunt,
which was increasingly publicized. On April 3, 1996, FBI agents arrested Kaczynski at his
Montana cabin. They found bomb-making materials and a list of 400 people who were
potential targets, but they were never named publicly. At Kaczynski's trial, he was
sentenced to life in prison without possibility of parole.

On April 2, 1996, Malone spoke at the fifth-anniversary
party for Encore Media [Group], a TCI-controlled programmer. He spoke to reporters
afterward about his reduced operating role at TCI. "Virtually all of my wealth is
tied up in the various companies," he said. "Obviously, I'm not going to lose
interest. The problem is that some of us get old and we have to let others take
over." By that time, Malone had cashed out his $10 million personal stake in TCI's
international company, which sent that stock spiraling down.

When Malone caught cold, the cable business got pneumonia.
Cable-rate hikes averaged 8.5 percent in 1996, more than three times the rate of
inflation. This boosted cash flow, but it helped to drive subscribers into the beckoning
arms of satellite-TV companies. Cable's debt pyramid was cracking, and TCI had the
farthest to fall. By mid-1996, the six members of the cable gang carried a debt load of
$41 billion, one third of which belonged to TCI. Something had to give.

The head of TCI's cable operations since 1994 was Brendan
Clouston, a native of Montreal with an MBA and a banking background. He worked for TCI in
the 1980s and rejoined the company in 1991 when it took over United Artists
Entertainment's cable and movie theater assets, where Clouston was chief financial
officer.

"Brendan is basically the president of the company,
although we don't call him that yet," Malone said in 1993.

Clouston was a strategic planner and numbers cruncher who
moved in as J.C. Sparkman retired. Clouston lacked Sparkman's experience in cable field
operations, but he spent big on consultants and pie-in-the-sky technology. He acted as if
TCI was actually going to build and operate all of the things Malone talked about.
Meanwhile, cash-flow margins shrunk.

As the TCI supertanker steamed toward a financial iceberg,
a presentation was held at company headquarters for the business press in mid-August 1996.
Leading it was Robert Thomson, TCI's gruff public-policy chief. A graduate of the
University of Washington, Thomson served as an infantry lieutenant in Panama and Vietnam
before earning a law degree at Georgetown University. He was a congressional liaison in
the Carter administration and worked as general counsel for a Connecticut transportation
company before joining TCI in 1987.

Thomson knew his way around Congress, and he was TCI's
chief flak catcher and spokesman. There were at least three views of Thomson, none of
which were contradictory: one, that he magnified Malone's hubris; two, that he was a loyal
soldier; and three, that he was given few resources to do his job.

As reporters nibbled on scrambled eggs and toast and
scribbled on pads, Thomson served up the latest spin. "This is going to be one of the
best marketing companies in the country," he said. "I know that sounds
grandiose. I know that sounds like utter bulls___. But when you look back three years from
now, Brendan Clouston will have superintended the most striking transformation of any
company in history."

Also in the room was Dr. Sadie Decker, Ph.D., a former
aerospace executive who headed SummiTrak, a $100 million TCI project to route operations
and customer transactions through a supercomputing system. "The data center is
sucking power, they're just generating data like crazy," Decker said. "I'm the
one to catch the billions and billions of transactions."

Whatever image inflation occurred at the briefing quickly
deflated when Thomson announced that no press would be allowed to attend the company's
annual meeting the next week -- an odd prohibition for a Fortune 500 company. Most public
companies welcome the chance to get a staged event publicized in the business press.

But TCI was as prickly as they came, a corporate cactus.

The reporters discussed some leverage of their own: They
could each buy a share of TCI stock at the stagnant price of $15, attend as cheapskate
shareholders and risk getting kicked out.

"I'll sell you one," Gerald Gaines, the head of
TCI's cable-telephone division, said softly.

Thomson reversed the no-press policy the next day.

After he had been diagnosed with cancer, but several weeks
before he entered a Virginia hospital, Bob Magness sat for an interview in the rolling
backyard of his home in Cherry Hills Village, the blue sky above and the craggy Rocky
Mountains in the distance.

"Are you OK?" asked the interviewer, who worked
for TCI.

"Sun's a little bright," said Magness, squinting,
the folds of flesh gathering around his eyes like bread rising in the oven. Magness wore a
robin's egg-blue, short-sleeved shirt with a wide collar. His arms were splayed at right
angles on the arms of a wicker chair, as if he were ready to draw holstered guns. He thin
white hair was parted neatly and combed to the side. A shy man, Magness was uncomfortable,
even for this, a videotaped interview as part of a tribute to his friend and cable
colleague, Carl Williams. Two months later, Williams would deliver a eulogy at Magness'
funeral, along with Malone and [Time Warner Inc. vice chairman] Ted Turner.

"I better get a little looser before I start talkin' a
little easier," said Magness, nervously rubbing his left trigger finger against his
thumb as the whoosh from a jet overhead drowned out the sound. "We did a lot of deals
on a handshake," Magness said about dealing with Williams. "I'd as soon have his
handshake as his contract. Sometimes we'd have to put it on a sheet or two of paper."

The interviewer attempted to draw Magness out, but the
cable cowboy kept his mouth shut. The secrets, both good and bad, were locked away.
"There's a lot of things I respect about Carl that they don't need to know,"
Magness said.

The interviewer suggested that Magness look into the
camera, and even tried to put words in his mouth, but Magness was on his own. "I'm
about wore out," he said.

In a raging bull market, cable stocks were dogs. Investors
had many more promising technology and media companies to pick from. Intel and Microsoft
were good bets. Internet stocks were the new gold rush.

The multiples of cash flow by which cable stocks traded
were sinking. "We do not recall in more than two decades such a disconnect between
stocks and fundamentals," wrote Dennis Leibowitz, a media analyst at Donaldson,
Lufkin & Jenrette Inc. The drop "seems to represent sudden and final surrender by
some of the industry's stalwart backers, since most of the disbelievers are
long-gone."

During TCI's annual meeting in August, Malone and Magness
were quizzed by John Gilbert, a lifelong New Yorker and shareholder gadfly in his 80s who
was also an honorary Ringling Bros. clown. He donned a red nose to greet Magness, asked
the members of the press in the room to take a bow and handed Malone an 18-inch blue
plastic shoehorn after the meeting.

"Now I won't have to bend over for the government
anymore," Malone said.

It was funny, but TCI's financial situation was scary.

Its stock fell under $12, a 52-week low. TCI froze vendor
shipments, which sent the stocks of those companies tumbling. Standard & Poor's
[Corp.] put TCI bonds on "Credit Watch," perilously close to a junk rating,
which could raise the cost of borrowing and eventually force big institutional investors
to sell off TCI stock.

An Oct. 14 Business Week cover story titled,
"Cable TV: A Crisis Looms," painted a bleak picture of a $25 billion industry
with a history of broken promises and splintered leadership that faced intense
competition. Malone needed to make a statement. With Clouston in tow, he chose a Bear
Stearns [& Co.] conference in Phoenix, capping a two-day event that also featured [USA
Networks Inc. chairman] Barry Diller and Seagram [Co.'s] Edgar Bronfman Jr.

In his dinner speech, Malone called the players in the
small-dish satellite-TV business "the seven dwarfs" and hyped TCI's
long-promised digital-cable service to provide more channels. "Rumors that I have
expired or am terminally ill or have lost interest in the cable company are substantially
inaccurate," he said. Malone liked the line so much, it was fed to reporters in New
York at The Wall Street Journal and USA Today for the next day's newspapers.

Whatever the spin, Wall Street's passion for Malone's
financial engineering had cooled considerably. "The issue is simple," cable
analyst John Tinker said. "No one believes TCI is capable of introducing a new
product."

"They haven't met any targets," Larry Haverty of
State Street Research told the Journal. "It's like the emperor has no
clothes."

More trouble lay ahead.

September