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They haven't repealed the laws of arithmetic... yet, anyway. — John Malone

Luck is the residue of design. — Branch Rickey

John Malone is an American billionaire businessman, landowner, and philanthropist. He was CEO of Tele-Communications Inc. (TCI), a cable and media giant, for 24 years from 1973 to 1996. Malone is now chairman and largest voting shareholder of Liberty Media, Liberty Global, and Qurate Retail Group, and also owns 7% of Lionsgate and Starz Inc. Malone is ranked as the second-largest private landowner in the United States, possessing 2.2 million acres (3,437 square miles), which is more than twice the size of Rhode Island. According to The Land Report's annual rankings, Malone ranked as the largest landowner in America from 2011 to 2021.This profile contains a collection of my favorite John Malone quotes, ideas, frameworks, books, and articles. This page is an attempt to collect all of John Malone's best ideas, strategies, and wisdom in one place.

On this page:

• 13 Lessons from John Malone’s Approach to Building TCI
• Who is John Malone?
• Why John Malone was attracted to the cable industry.
• How John Malone built TCI (Tele-Communications Inc).
• How John Malone grew TCI through acquisitions.
• How John Malone sold TCI to AT&T for an extraordinary $2,600 per subscriber.
• John Malone’s Strategy: Breaking Down How He Built TCI
• How John Malone used Joint Ventures to build value.
• The culture that John Malone instilled at TCI.
• John Malone’s obsession with maximizing shareholder returns.
• Books Written on John Malone
• See Also

13 Lessons from John Malone’s Approach to Building TCI

• Acquired 482 companies with a focus on avoiding direct competition by acquiring less expensive rural and suburban subscribers.
• Pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI’s cash flow from taxes through the deduction of interest payments.
• Targeted a 5x Debt-to-EBITDA ratio.
• Emphasized cash flow and invented EBITDA to go “further up the income statement” and arrive at the most pure definition of cash-generating ability.
• Ruthless adherence to maximum acquisition price of 5x cash flow.
• Focus on cutting costs to boost cash flow after acquisitions were made—typically cutting payroll by half or more, giving up fancy headquarters, and moving to low cost industrial buildings (including an old tire warehouse.
• Extreme focus on minimizing taxes, building up tax loss carry forwards, and ensuring every transaction had a tax angle to it.
• Embrace of joint ventures as a way to invest in new cable companies run by exceptional CEOs—building up a portfolio of 41 by the time TCI was acquired by AT&T.
• Opportunistically repurchased shares during market downturns—purchasing 40% all of outstanding shares during his tenure.
• Disdain for being a technology pioneer and willingness to move last and adopt technology only if it grew revenue. As he famously said, “We lost no major ground by waiting to invest. Unfortunately, pioneers in cable technology often have arrows in their back.”
• Very small corporate headquarters staff with the only indulgence being a team of expensive tax experts. As Malone said, “We don’t believe in staff. Staff are people who second-guess people.”
• Never paid dividends, or even considered them, and rarely paid down debt.
• Pioneered the use of spin-offs and tracking stocks which he believed increased transparency into these businesses and separated TCI’s core cable business from their related interests that might attract regulatory scrutiny.

Who is John Malone?

Malone was born in 1941 in Milford, Connecticut. His father was a research engineer and his mother a former teacher. Malone idolized his father, who traveled five days a week visiting plants for General Electric. As a teenager, he exhibited early mechanical ability and made pocket money buying, refurbishing, and selling used radios. He was athletic and competed in fencing, soccer, and track in high school. He graduated from Yale with a combined degree in economics and electrical engineering and almost immediately married his high school sweetheart, Leslie.

After Yale, Malone earned master's and PhD degrees in operations research at Johns Hopkins. His two academic fields, engineering and operations, were highly quantitative and shared a focus on optimization, on minimizing "noise" and maximizing "output." Indeed, Malone's entire future career can be thought of as an extended exercise in hyper-efficient value engineering, in maximizing output in the form of shareholder value and minimizing noise from other sources, including taxes, overhead, and regulations.

After earning his PhD, Malone took a job at Bell Labs, the highly prestigious research arm of AT&T. There, he focused on studying optimal strategies in monopoly markets. After extensive financial modeling, he concluded that AT&T should increase its debt level and aggressively reduce its equity base through share repurchases. This unorthodox advice was graciously received by AT&T's board (and promptly ignored).

After a couple of years, Malone concluded that AT&T's bureaucratic culture was not for him, and he took a job with McKinsey Consulting. Having promised his wife that he would not duplicate his father's travel schedule, he soon found himself on the road four days a week working for a variety of Fortune 500 companies. In 1970, when one of those clients, General Instrument, offered him the opportunity to run Jerrold, its rapidly growing cable television equipment division, he leapt at the opportunity. He was 29 years old.

At Jerrold, Malone actively cultivated relationships with the major cable companies, and after two years he was simultaneously courted by two of the largest operators: Steve Ross of Warner Communications and Bob Magness of Tele-Communications Inc. (TCI). Despite a salary that was 60 percent lower than Ross's offer, he chose TCI because Magness offered him a larger equity opportunity and because his wife preferred the relative calm of Denver to the frenetic pace of Manhattan.

The company Malone decided to join had a long history of aggressive growth and would soon be flirting with bankruptcy. Bob Magness had founded TCI in 1956, mortgaging his home to pay for his first cable system in Memphis, Texas. Magness, a peripatetic cottonseed salesman and rancher, had learned about the cable television business while hitchhiking, and like Malone fifteen years later, had immediately recognized its compelling economic characteristics. Magness was particularly quick to grasp the industry's favorable tax characteristics.

Prudent cable operators could successfully shelter their cash flow from taxes by using debt to build new systems and by aggressively depreciating the costs of construction. These substantial depreciation charges reduced taxable income as did the interest expense on the debt, with the result that well-run cable companies rarely showed net income, and as a result, rarely paid taxes, despite very healthy cash flows. If an operator then used debt to buy or build additional systems and depreciated the newly acquired assets, he could continue to shelter his cash flow indefinitely. Magness was among the first to fully recognize these attributes and made aggressive use of leverage to build his company, famously saying that it was "better to pay interest than taxes."

TCI went public in 1970 and, by 1973 when Malone joined, had become the fourth-largest cable company in the country, with six hundred thousand subscribers. Its debt at that time was equal to an astonishing seventeen times revenues. Magness had realized that he needed additional management talent to shepherd the company through the next phase of its growth, and after an extended courtship, had landed the McKinsey wunderkind. Malone brought an unusual combination of talents to TCI, including exceptional analytical ability, financial sophistication, technical savvy, and boldness. His tenure, however, got off to a rocky start.

In late 1972, the market for cable stocks was hot, and TCI planned an additional public offering to pay down a portion of its extraordinary debt load. Within months of Malone's arrival, however, the industry was blindsided by new regulations, and the market for cable stocks cooled, forcing the company to pull its offering and leaving it with an unsustainable debt position.

The sudden evaporation of liquidity that resulted from the 1973-1974 Arab oil embargo left the entire industry in a precarious position. TCI, however, with its new, 32 year old CEO, was burdened with significantly more debt than any of its peers and teetered on the edge of bankruptcy. "Lower than whale dung," is Malone's typically blunt assessment of his starting point at TCI.

Malone had been dealt a tough hand, and he and Magness spent the next several years keeping the lenders at bay and the company out of bankruptcy. They met constantly with bank-ers. At one point in a particularly tense lender meeting. Malone threw his keys on the conference room table and walked out of the room, saying "If you want the systems, they're yours." The panicked bankers eventually relented and agreed to amend the terms on TCI's loans.

During this period, Malone introduced a new financial and operating discipline to the company, telling his managers that if they could grow subscribers by 10% per year while maintaining margins, he would ensure that they stayed independent. A frugal, entrepreneurial culture emerged from these years and pervaded the company, extending from corporate headquarters down into field operations.

TCI's headquarters did not look like the headquarters of the largest company in an industry that was redefining the American media landscape. The company's offices were spartan, with few executives at corporate, fewer secretaries, and peeling metal desks on Formica floors. The company had a single receptionist, and an automated service answered the phone. TCI executives stayed together on the road, usually in motels—COOJ. C. Sparkman recalls, "Holiday Inns were a rare luxury for us in those days."

Malone saw himself as an investor and capital allocator, delegating responsibility for day-to-day operations to Sparkman, his longtime lieutenant, who managed the company's far-flung operations through a rigorous budgeting process. Managers were expected to hit their cash flow budget, and these targets were enforced with an almost military discipline by Sparkman, a for mer air force officer. Managers in the field had a high degree of autonomy, as long as they hit their numbers. System managers who missed monthly budgets were frequently visited by the itinerant COO, and under-performers were quickly weeded out.As a result of this frugality, TCI, for a long time, had the highest margins in the industry and gained a reputation with its investors and lenders as a company that consistently underpromised and overdelivered. In paging through analyst reports from early in the company's history, one can see a consistent recurring pattern of slightly higher-than-projected cash flow and subscriber numbers quarter after quarter.

Why John Malone was attracted to the cable industry.

By 1970, John Malone had been at McKinsey long enough to know an attractive industry when he saw one, and the more Malone learned about the cable television business, the more he liked it. Three things in particular caught his attention: the highly predictable, utility-like revenues; the favorable tax characteristics; and the fact that it was growing like a weed. In his years at McKinsey, Malone had never before seen these characteristics in combination, and he quickly concluded that he wanted to build his career in cable.

The combination of high growth and predictability, in particular, was very attractive. During the 1960s and into the early 1970s, the cable industry exhibited very rapid growth, with subscriber counts growing over twentyfold, as rural communities across the country sought better reception of television signals for their favorite channels and programs. Cable television customers paid monthly and rarely disconnected, making the business highly quantifiable and allowing experienced executives to forecast customer growth and profitability with remarkable precision. This was a near-perfect fit with Malone's background, which was unusually quantitative. To paraphrase Norman Mailer it was a case of Superman coming to Supermarket.

How John Malone built TCI (Tele-Communications Inc).

By 1977, TCI had finally grown to the point that it was able to entice a consortium of insurance companies to replace the banks with lower-cost debt. With his balance sheet stabilizedMalone was finally able to go on the offensive and implement his strategy for TCI, which was highly unconventional and stemmed from a central strategic insight that had been germinating since he joined the company.

Malone, the engineer and optimizer, realized early on that the key to creating value in the cable television business was to maximize both financial leverage and leverage with suppliers, particularly programmers, and that the key to both kinds of leverage was size. This was a simple and deceptively powerful insight, and Malone pursued it with single-minded tenacity. As he told longtime TCI investor David Wargo in 1982, "The key to future profitability and success in the cable business will be the ability to control programming costs through the leverage of size."

In a cable television system, the largest category of cost (40% of total operating expenses) is the fees paid to programmers (HBO, MTV, ESPN, etc.). Larger cable operators are able to negotiate lower programming costs per subscriber, and the more subscribers a cable company has, the lower its programming cost (and the higher its cash flow) per subscriber. These discounts continue to grow with size, providing powerful scale advantages for the largest players.

Thus, the largest player with the lowest programming costs would have a sustainable advantage in making new acquisitions versus smaller players—they would be able to pay more for a cable company and still earn the same or better returns, thereby creating a virtuous cycle of scale that went something like this: if you buy more systems, you lower your programming costs and increase your cash flow, which allows more financial leverage, which can then be used to buy more systems, which further improves your programming costs, and so on ad infinitum. The logic and power of this feedback loop now seems obvious, but no one else at the time pursued scale remotely as aggressively as Malone and TCI.

Related to this central idea was Malone's realization that maximizing earnings per share (EPS), the holy grail for most public companies at that time, was inconsistent with the pursuit of scale in the nascent cable television industry. To Malone, higher net income meant higher taxes, and he believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flow.

It's hard to overstate the unconventionality of this approach. At the time, Wall Street evaluated companies on EPS. Period. For a long time, Malone was alone in this approach within the cable industry; other large cable companies initially ran their companies for EPS, only later switching over to a cash flow focus (Comcast finally switched in the mid-1980s) once they realized the difficulty of showing EPS while growing a cable business. As longtime cable analyst Dennis Leibowitz told me, "Ignoring EPS gave TCI an important early competitive advantage versus other public companies."

While this strategy now seems obvious and was eventually copied by Malone's public peers, at the time, Wall Street did not know what to make of it. In lieu of EPS, Malone emphasized cash flow to lenders and investors, and in the process, invented a new vocabulary, one that today's managers and investors take for granted. Terms and concepts such as EBITDA (earnings before interest, taxes, depreciation, and amortization) were first introduced into the business lexicon by Malone. EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash-generating ability of a business before interest payments, taxes, and depreciation or amortization charges. Today EBITDA is used throughout the business world, particularly in the private equity and investment banking industries.

How John Malone grew TCI through acquisitions.

The market for cable stocks remained volatile throughout the 1970s and into the early 1980s. Malone and Magness, concerned about the potential for a hostile takeover, took advantage of occasional market downturns to opportunistically repurchase stock, thereby increasing their combined stake. In 1978, they created a supervoting class of B shares, and through a complex series of repurchases and trades, were able to secure what longtime executive John Sie refers to as "hard control" of TCI by 1979, when their combined ownership of B shares reached 56%.

From this point forward, with control and a healthier balance sheet, Malone focused on achieving scale with a unique combination of relentlessness and creativity. Using the debt available from the company's new lenders, internal cash flow, and the occasional equity offering, Malone began an extraordinarily active acquisition program. Between 1973 and 1989, the company closed 482 acquisitions, an average of one every other week. To Malone, a subscriber was a subscriber was a subscriber. As longtime investor Rick Reiss said, "In the pursuit of scale, he was willing to look at beachfront property even if it was near a toxic waste dump," and over the years, he bought systems from sellers as diverse as the Teamsters and Lady Bird Johnson.

He did not however buy indiscriminately. In the late 1970s and early 1980s, the industry entered a new phase with the advent of satellite-delivered channels, such as HBO and MTV. Cable television suddenly went from a service primarily targeting rural customers with poor reception to one delivering highly desirable new channels to content-starved urban markets. As the industry entered this new stage, many of the larger cable companies began to focus on competing for large metropolitan franchises, and the bidding for these franchises quickly became heated and expensive.

Malone, however, unlike his peers, was uncomfortable with the extraordinary economic terms that municipalities were extracting from pliant cable operators, and alone among the larger cable companies, he refrained from these franchise wars, focusing instead on acquiring less expensive rural and suburban subscribers. By 1982, TCI was the largest company in the industry, with 2.5 million subscribers.

When many of the early urban franchises collapsed under a combination of too much debt and uneconomic terms, Malone stepped forward and acquired control at a fraction of the original cost. In this manner, the company gained control of the cable franchises for Pittsburgh, Chicago, Washington, St. Louis, and Buffalo.

Throughout the 1980s, aided by a very favorable mid-decade relaxation of FCC regulations, TCI continued to buy systems at an aggressive clip, mixing in occasional larger deals (Westinghouse and Storer Communications) with a steady stream of small transactions. In addition, the company continued to actively grow its portfolio of joint ventures, partnering legendary cable entrepreneurs such as Bill Bresnan, Bob Rosenkranz, and Leo Hindery to create cable companies in which TCL owned minority stakes. By 1987, the company was twice the size of its next-largest competitor, Time Inc.'s ATC.

Malone's creativity further evidenced itself in a wave of joint aventures in the late 1970s and early 1980s in which he partnered D with promising young programmers and cable entrepreneurs. A partial list of these partners reads like a cable hall of fame roster, including such names as Ted Turner John Sie, John Hendricks, and Bob Johnson. In putting these partnerships together, Malone was in effect an extremely creative venture capitalist who actively sought young, talented entrepreneurs and provided them with access to TCI's scale advantages (its subscribers and programming discounts) in return for minority stakes in their businesses. In this way, he generated enormous returns for his shareholders. When he saw an entrepreneur or an idea that he liked, he was prepared to act quickly.

Beginning in 1979, when he famously wrote Bob Johnson, the founder of Black Entertainment Television (BET), a $500,000 check at the end of their first meeting, Malone began to actively pursue ownership stakes in programming entities, offering in return a potent combination of start-up capital and access to TCI's millions of households. Malone led a consortium of cable companies in the bailout of Ted Turner's Turner Broadcasting System (whose channels included CNN and The Cartoon Network) when it flirted with bankruptcy in 1987; and by the end of the 1980s, TCI's programming portfolio would include Discovery, Encore, QVC, and BET in addition to the Turner channels. He was now a significant owner of both cable systems and cable programming.

The early 1990s produced an almost perfect storm of bad news for the cable industry, with the combined impact of new highly leveraged transaction (HLT) legislation in 1990 limiting the industry's access to debt capital and, more significantly, the FCC's tightening of cable regulations in 1993, which rolled back cable rates. Despite these negative developments, Malone continued to selectively acquire large cable systems (Viacom and United Artists Cable) and launch new programming networks, including Starz/Encore and a series of regional sports networks in partnership with Rupert Murdoch and Fox.

In 1993, in a stunning development, Malone reached an agreement to sell TCI to phone giant Bell Atlantic for $34 billion in stock. The deal was called off, however, as reregulation hit and TCI's cash flow and stock price fell. As the decade progressed, Malone spent more time on projects outside of the core cable business. He led a consortium of cable companies in the creation of two sizable new entities: Teleport, a competitive telephone service, and Sprint/PCS, a joint venture with Sprint to bid on cellular franchises.

In pursuing these new initiatives, Malone was allocating the firm's capital and his own time to projects that he believed leveraged the company's dominant market position and offered compelling potential returns. In 1991, he spun off CI's minority interests in programming assets into a new entity, Liberty Media, in which he ended up owning a significant personal stake. This was the first in a series of tracking stocks that Malone created, including TCI Ventures (for Teleport, Sprint/PCS, and other non-cable assets) and TCI International (for TCI's ownership in miscellaneous foreign cable assets).

Malone was a pioneer in the use of spin-offs and tracking stocks, which he believed accomplished two important objectives: 1) increased transparency, allowing investors to value parts of the company that had previously been obscured by ICI's byzantine structure, and 2) increased separation between TCI's core cable business and other related interests (particularly programming) that might attract regulatory scrutiny. Malone started with the spin-off of the Western Tele-Communications microwave business in 1981, and by the time of the sale to AT&T, the company had spun off a remarkable fourteen different entities to shareholders. In utilizing these spin-offs, Malone, like Henry Singleton and Bill Stiritz, was consciously increasing the complexity of his business in pursuit of the best economic outcome for shareholders.

After Sparkman retired in 1995, Malone delegated authority for the company's cable operations to a new management team led by Brendan Clouston, a former marketing executive. Under Clouston, TCI began to centralize customer service and spend aggressively to upgrade its aging cable facilities. In the third quarter of 1996, however, TCI badly missed its forecast, losing subscribers for the first time in its history and showing a decline in quarterly cash flow. Malone, disappointed by these results, reassumed the helm and, uncharacteristically, took direct management control of operations, quickly reducing employee head count by 2,500, halting all orders for capital equip-ment, and aggressively renegotiating programming contracts. He also fired the consultants who had been hired to help with the system upgrade, and returned responsibility for customer service to the local system managers.

As operations stabilized and cash flow improved, he brought on Leo Hindery (the CEO of InterMedia Partners, a large TCI joint venture) to run operations, and returned his attention to strategic projects. Hindery continued the restructuring process: bringing back TCI veteran Marvin Jones as his COO, giving more responsibility to regional managers, and actively pursuing trades to more tightly cluster subscribers and reduce costs.

Once Hindery was on board, Malone focused his attention on developing digital set-top boxes that would allow the industry to compete effectively with the new satellite television providers, He courted Microsoft but eventually struck a deal with General Instrument, the industry's largest equipment manufacturer, for 10 million set-top boxes at $300 each. In return he asked for a significant equity stake in the company, eventually owning 16%.

In the middle of the operational crisis of 1996 and 1997, Bob Magness, Malone's mentor and longtime partner, died, throwing control of the company into question. Through a series of typically complex transactions, Malone was able, along with the company, to purchase Magness's supervoting shares, ensuring retention of "hard" control for the endgame phase at TCI.

How John Malone sold TCI to AT&T for an extraordinary $2,600 per subscriber.

In the late 1990s, several of Malone's strategic, non-cable projects began to bear significant fruit. He had been correct about their return potential—in 1997, Teleport was sold to AT&T for an astounding $11 billion, a twenty-eight-fold return on investment. In 1998, the Sprint/PCS joint venture was sold to Sprint Corporation for $9 billion in Sprint stock, and in 1999, General Instrument was sold to Motorola for $11 billion.

In the late 1990s, Malone shifted his attention to finding a home for TCI. Although Malone loved the cable business, he was a purely rational executive and, as early as 1981, had told analyst David Wargo, "I felt TCI might be worth $48 a share and would sell if someone offered us this." This target price continued to grow, and for a long, long time no one was willing to pay it. As the 1990s progressed, however, Malone saw a combination of factors clouding TCI's future: rising competition from satellite television, the enormous cost of upgrading the company's rural systems, and uncertainty about management succession. When he received an inquiry from AT&T's aggressive new CEO, Mike Armstrong, he eagerly initiated discussions. Characteristically, he handled the negotiations himself, often facing a sizable crowd of AT&T lawyers, bankers, and accountants across the table.

As talks between the two companies unfolded, Malone proved to be as adept at selling as he had been at acquiring. As Rick Beiss said,"He turned the board of AT&T upside down, shook every nickel from their pockets, and returned them to their board seats." The financial terms—twelve times EBITDA, $2,600 per subscriber—were extraordinary and, remarkably, the company received no discount for its patchwork guilt of decrepit rural systems. Not surprisingly, Malone, ever watchful of unnecessary taxes, structured the transaction as a stock deal allowing his investors to defer capital gains taxes.

In addition, Malone retained effective control of the Liberty programming subsidiary with six of nine board seats and secured an at-tractive, long-term carriage deal for Liberty's channels on AT&T's cable systems. This transaction was the final resounding validation of Malone's unique strategy at TCI: producing exceptional returns for his investors. Mind-boggling returns, in fact: in the 25 years after Malone took the helm at TCI, the entire cable industry grew enormously, and all the public companies in it prospered. No cable executive, however, created remotely as much value for shareholders as Malone. From his debut in 1973 until 1998 when the company was sold to AT&T, the compound return to TCI's shareholders was a phenomenal 30.3%, compared with 20.4% for other publicly traded cable companies and 14.3% for the S&P 500 over the same period.

A dollar invested with TCI at the beginning of the Malone era was worth over $900 by mid-1998. That same dollar was worth $180 if invested in the other publicly traded cable companies and $22 if invested in the S&P 500. Thus TCI outperformed the S&P by over fortyfold and its public peers by five-fold during Malone's tenure.

John Malone’s Strategy: Breaking Down How He Built TCI

The cable television business during Malone's tenure was extremely capital intensive, with enormous amounts of cash required to build, buy, and maintain cable systems. As Malone sought to achieve scale by growing his subscriber base, three primary sources of capital were available to him in addition to TCI's robust operating cash flow: debt, equity, and asset sales. His use of each of these sources was distinctive.

Malone pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI's cash fow from taxes through the deductibility of interest payments. Malone targeted a ratio of 5x debt to EBITDA) and maintained it throughout most of the 1980s and 1990s.

Scale allowed TCI to minimize its cost of debt, and Malone, having survived the harrowing experience of the mid-1970s, structured his debt with great care to lower costs and avoid cross-collateralization so that if one system defaulted on its debt, it would not affect the credit of the entire company. This compartmentalization into "bulkheads" (the term derived from Malone's fascination with all things nautical—he also sometimes referred to TCI's "bow wave of depreciation") caused further complexity in TCI's structure, but provided the company with substantial downside protection.

When it came to issuing equity, Malone was parsimonious, with the company's occasional offerings timed to coincide with record high multiples on his stock. As Malone said in a 1980 interview, "Our recent rise in stock price provided us with a good opportunity for this offering." He was justifiably proud of his stinginess in issuing equity and believed it was another factor that distinguished him from his peers.

Malone occasionally and opportunistically sold assets. He coolly evaluated the public and private values for cable systems and traded actively in both markets when he saw discrepancies. Malone carefully managed the company's supply of net operating losses (NOLs), accumulated over years of depreciation and interest deductions, which allowed him to sell assets without paying taxes. As a result of this tax shield was comfortable selling systems if prices were attractive, to raise capital to fund future growth. As Malone told David Wargo as early as 1981, "It makes sense to maybe sell off some of our systems... at 10 times cash flow to buy back our stock at 7 times."

Another key source of capital at the company was taxes not paid. As we've seen, tax minimization was a central component of Malone's strategy at TCI, and he took Magness's historical approach to taxes to an entirely new level. Malone abhorred taxes; they offended his libertarian sensibilities, and he applied his engineering mind-set to the problem of minimizing the "leakage" from taxes as he might have minimized signal leakage on an electrical engineering exam. As the company grew its cash flow by twentyfold over Malone's tenure, it never paid significant taxes.

In fact, Malone's one extravagance in terms of corporate staff was in-house tax experts. The internal tax team met monthly to determine optimal tax strategies, with meetings chaired by Malone himself. When he sold assets, he almost always sold for stock, (the reason that, to this day, Liberty has large holdings of News Corp., Time Warner, Sprint, and Motorola stock) or sheltered gains through accumulated NOLs, and he made constant use of the latest tax strategies. As Dennis Leibowitz said, "TCI hardly ever disposed of an asset unless there was a tax angle to it." No other cable company devoted remotely as much time and attention to this area as TCI.

Given the extraordinary growth in cable during the 1970s and 1980s, Malone had the luxury of high-return capital allocation options, and he structured TCI to optimize across them. As one might expect from his background, Malone had a coolly rational, almost surgical approach to capital allocation, and he was willing to look at any investment project that offered attractive returns regardless of complexity or unconventionality. Applying his engineering mind-set, Malone looked for no-brainers, focusing only on projects that had compelling returns. Interestingly, he didn't use spreadsheets, preferring instead projects where returns could be justified by simple math. As he once said, "Computers require an immense amount of detail. I'm a mathematician, not a programmer. I may be accurate, but I'm not precise."

In deciding how to deploy TCI's capital, Malone made choices that were starkly different from those of his peers. He never paid dividends (or even considered them) and rarely paid down debt. He was parsimonious with capital expenditures, aggressive in regard to acquisitions, and opportunistic with stock repurchases.

Until the advent of satellite competition in the mid-1990s, Malone saw no quantifiable benefit to improving his cable infrastructure unless it resulted in new revenues. To him, the math was undeniably clear: if capital expenditures were lower, cash flow would be higher. As a result, for years Malone steadfastly refused to upgrade his rural systems despite pleas from Wall Street.As he once said in a typically candid aside, "These [rural systems) are our dregs and we will not attempt to rebuild them."'' This attitude was very different from that of the leaders of other cable companies who regularly trumpeted their extensive investments in new technologies.

Ironically, this most technically savvy of cable CEOs was typically the last to implement new technology, preferring the role of technological "settler" to that of "pioneer." Malone appreciated how difficult and expensive it was to implement new technologies, and preferred to wait and let his peers prove the economic viability of new services, saying of an early-1980s decision to delay the introduction of a new setup box, "We lost no major ground by waiting to invest. Unfortunately, pioneers in cable technology often have arrows in their backs." TCI was the last public company to introduce pay-per-view programming (and when it did, Malone convinced the programmers to help pay for the equipment).

He was, however, prepared to invest when he needed to, and he was among the first in the industry to champion expensive new set-top boxes to help increase channel capacity and customer choice when satellite competition arose in the mid-1990s.

Far and away the largest capital allocation outlet for TCI was, of course, acquisitions. As we've seen, Malone was an aggressive, yet disciplined, buyer of cable systems, a seeming oxymoron. He bought more companies than anybody else—in fact, he bought more companies than his three or four largest competitors combined. Collectively, these acquisitions represented an enormous bet on the future of cable, an industry long characterized by regulatory uncertainty and potential competitive threats; and from 1979 through 1998, the average annual value of TI's acquisitions equaled a remarkable 17% of enterprise value (exceeding 20% in five of those years).

He was also, however, a value buyer, and he quickly developed a simple rule that became the cornerstone of the company's acquisition program: only purchase companies if the price translated into a maximum multiple of five times cash flow after the easily quantifiable benefits from programming discounts and overhead elimination had been realized. This analysis could be done on a single sheet of paper (or if necessary the back of a napkin). It did not require extensive modeling or projections.

What mattered was the quality of the assumptions and the ability to achieve the expected synergies. Malone and Sparkman trained their operations teams to be highly efficient in eliminating unnecessary costs from new acquisitions. Immediately after TCI took over the floundering Pittsburgh franchise from Warner Communications, it reduced payroll by half, closed the elaborate studios the prior owners had built for the city, and moved headquarters from a downtown skyscraper to a tire warehouse. Within months, the formerly unprofitable system was generating significant cash flow.

Malone's simple rule allowed him to act quickly when opportunity presented itself. When the Hoak family, owners of a million-subscriber cable business, decided to sell in 1987, Malone was able to strike a deal with them in an hour. He was also comfortable walking away from transactions that did not meet the rule. Paul Kagan, a longtime industry analyst, remembered Malone walking away from a sizable Hawaiian transaction that was only $1 million over his target price.

Malone, alone among the CEOs of major public cable companies, was also an opportunistic buyer of his own stock during periodic market downturns. As Dennis Leibowitz said, "None of the other public MSO's (multiple system operators) made any significant share repurchases over this period." In contrast, TCI repurchased over 40% of its shares during Malone's tenure. His timing with these purchases was excellent, producing an average compound return of over 40%.

An exchange with Dave Wargo in the early 1980s was typical of Malone's opportunistic philosophy regarding buybacks: "We are evaluating alternatives in order to buy our eguity at current prices to arbitrage the differential between its current multiple and the private market value." These buybacks provided a useful benchmark in evaluating other capital allocation options, including acquisitions. As Malone said to Wargo in 1981, "With our stock in the low twenties, purchasing it looks more attractive than buying private systems."

How John Malone used Joint Ventures to build value.

To the standard menu of five capital allocation alternatives, Malone added a sixth: investment in joint ventures. No CEO has ever used joint ventures as actively, or created as much value for his shareholders through them, as John Malone. Malone realized early on that he could leverage the company's scale into equity interests in programmers and other cable companies, and that these interests could add significant value for shareholders, with very little incremental investment. At the time of the sale to AT&T, the company had 41 separate partnership interests, and much of CI's long-term return is attributable to these cable and non-cable joint ventures.

Because of these polyglot joint ventures, TCI was notoriously hard to analyze and often sold at a discount to its cable peers. As David Wargo said, "To understand the company you had to read all of their footnotes and very few did." Malone, however, believed this complexity was a small price to pay for the enormous value created over the years by these projects.

As with many of Malone's initiatives, these joint ventures seem logical in hindsight, but at the time they were highly unconventional: no one else in the industry used joint ventures to increase system ownership, and only later did other MSOs begin to seek ownership stakes in programmers.

The culture that John Malone instilled at TCI.

Despite his cool, calculating, almost Spock-like approach, Malone was also successful in creating a very strong culture and engendering great employee loyalty. He did this by providing a powerful mix of incentive and autonomy. TCI had an aggressive employee stock purchase program in which the company matched employee contributions and invited participation from all levels in the organization. Many early employees (supposedly including Malone's longtime secretary) became millionaires, and this culture bred tremendous loyalty—in Malone's first 16 years at the helm, not a single senior executive left the company.

TCI's operations were remarkably decentralized, and as late as 1995, when Sparkman retired, the company had only 17 employees at corporate in a company with 12 million subscribers. As Malone put it with characteristic directness, "We don't believe in staff. Staff are people who second-guess people." The company did not have human resource executives and didn't hire a PR person until the late 1980s. TCI's culture was described by Dennis Leibowitz as a group of frugal, action-oriented "cowboys" who defined themselves in counterpoint to the more conservative and bureaucratic Easterners who ran the other large cable companies.

John Malone’s obsession with maximizing shareholder returns.

Malone created a model for savvy capital allocation in rapidly growing, capital-intensive businesses that has been followed by executives in industries as diverse as cellular telephony, records management, and communications towers. Among the CEOs in this book, he most resembles that other high-level mathematician (and PhD), Henry Singleton. For mathematicians, insights often come when variables are taken to extremes, and Malone was no exception. Nothing about TCI was characterized by half-measures. TCI was the largest company in the cable industry, with the lowest programming costs, least maintained facilities, most complex structure, and, oh yes, far and away the highest returns.

His management of TCI had a quality of asceticism about it. Every element of the company's strategy—from the pursuit of scale to tax minimization to the active use of financial leverage—was designed to optimize shareholder returns. As Malone said in summing up his analytically driven approach to building TCI, "They haven't repealed the laws of arithmetic... yet anyway." A fact for which his shareholders are eternally grateful.

Books Written on John Malone

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

In this refreshing, counterintuitive audiobook, author Will Thorndike brings to bear the analytical wisdom of a successful career in investing, closely evaluating the performance of companies and their leaders. You will meet eight individualistic CEOs whose firms' average returns outperformed the S&P 500 by a factor of twenty in other words, an investment of $10,000 with each of these CEOs, on average, would have been worth over $1.5 million twenty-five years later. You may not know all their names, but you will recognize their companies: General Cinema, Ralston Purina, The Washington Post Company, Berkshire Hathaway, General Dynamics, Capital Cities Broadcasting, TCI, and Teledyne.

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Cable Cowboy: John Malone And The Rise of The Modern Cable Business

For more than 25 years, Malone has dominated the cable television industry, shaping the world of entertainment and communications, first with his cable company, TCI, and later with Liberty Media. Written with Malone's unprecedented cooperation, the engaging narrative brings this controversial capitalist and businessman to life. Cable Cowboy is at once a penetrating portrait of Malone's complex persona, and a captivating history of the cable TV industry.

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See Also

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• The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
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• Interview with Warren Buffett’s Biographer Alice Schroeder
• Singleton Prize: Charlie Munger in Conversation with Todd Combs
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• Charlie Munger on "The Berkshire System" - 50th Anniversary Essay on Berkshire Hathaway
• “The Multidisciplinary Approach to Thinking“ Talk by Peter Kaufman
• Warren Buffet's Memo to Berkshire's Managers on The Importance of Reputation
• Some Thoughts On Selling Your Business from Warren Buffett

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