group 5_tele communications inc- final report section c

8/9/2019 Group 5_Tele Communications Inc- Final Report Section C

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Organizational Structure and Desig

Tele Communications Inc: Accelera

Tele Co

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Case study

ting Digital Deployment

munications I

lerating Digital

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Submitted By:

Abhijoy Dasgupta (

Anuj Das (U109107)

Dipanwita Mahapat

Rakesh Das (U1091

Sushma M Rao (U10

Zarine Ali (U109151

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c:

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Organizational Structure and Design Case study

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Tele Communications Inc: Accelerating Digital Deployment

Tele communications Inc: A Brief Background

Principally, TCI is a cable company. More specifically, TCI is a diversified corporation that holds a variety

of interests through its subsidiaries, TCI Communications ("TCI-C"), Liberty Media Group("Liberty

Media"), and TCI Ventures Group. TCI-C is one of the largest providers of cable television service in the

United States. Through its subsidiaries, TCI-C delivers a wide range of video programming, includinglocal broadcast stations; national, regional, and local cable programming services; premium movie and

pay-per-view channels; and sports programming services to homes and businesses nationwide. TCI-C

controls a number of subsidiaries that together provide cable television service to approximately 12.7

million customers, passing approximately 20.9 million homes. TCI-C also holds minority interests in, or

has joint ventures with, other cable television operators. These operators collectively provide cable

television service to approximately 7.5 million additional customers, and pass approximately 13.2 million

additional homes. In 1997, revenues from TCI-C's cable services operations totaled approximately $5.8

billion, which constituted 76% of TCI's total annual revenue.

TCI's Liberty Media Group subsidiary is an investor in, and manager of, entities engaged in the

production, acquisition, and distribution of entertainment and informational programming and

software, including multimedia products. The various business interests fall into four categories: movie

services; general entertainment and information services; electronic retailing (which includes direct

marketing, advertising sales relating to programming services, infomercials, and transaction processing);

and sports programming services.

TCI's third subsidiary is TCI Ventures Group, a wholly owned subsidiary that is composed of an array of

telecommunications investments. Through this business unit, TCI holds its non-cable, non-programming

and international assets, including, of particular relevance to this proceeding, its investments in @Home

and Sprint Corporation ("Sprint"). TCI Ventures Group holds a 39% equity interest and a 71% voting

interest in @Home, which provides content-enriched, high-speed Internet services over cable television

infrastructure. @Home began its commercial operation in September of 1996. Its primary offering

allows residential subscribers to connect their personal computers via cable modems to their cableoperator's hybrid fiber-coaxial cable ("HFC") network and receive data at higher speeds than are

available with typical dial-up access services offered over standard analog lines of local exchange

carriers. @Home transmits data between the cable plant and the public Internet using a proprietary

backbone network that enhances the speed of transmission. @Home has reached affiliate agreements

with 18 cable companies worldwide to deliver its high-speed Internet services. Considering other

current and pending affiliations, @Home has potential access to more than 50 million homes, or

approximately 50% of all homes passed by cable television plant in North America. As of December 31,

1998, @Home served more than 330,000 cable modem subscribers across North America.

Through TCI Ventures Group, TCI currently holds approximately 23.8% of the equity and approximately

2.38% of the voting interest in a class of Sprint stock that tracks the value of Sprint's personal

communications service operating group ("Sprint PCS tracking stock"). On August 31, 1998, after a

public notice period, the Commission approved Sprint's unopposed application for re-organization,

whereby Sprint issued shares of this newly-created Sprint PCS tracking stock to TCI in exchange for TCI's

partnership interest. This re-organization includes an initial public offering of additional shares of the

Sprint PCS tracking stock.


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Tele Communications Inc: A Chronology

1956 Cattle-rancher Bob Magness builds cable television system in Memphis, Texas

1957Expands system to Plainview, Texas

1957AT&T sells Canadian Northern Electric (later Nortel)

1958Magness sells Texas holdings

1958Magness, Jack Gallivan, George Hatch and Brian Glasmann establish Western Microwave network

in Montana

1962 Magness buys Collier Electric cable group

1968Western Microwave merges with Community Television cable system and becomes American Tele-

Communications, with Western Tele-Communications (WTCI) and Community Tele-Communications

(CTCI) subsidiaries

1968Parent company's name changed to Tele-Communications Inc. (TCI). Headquarters moved to

Denver, Colorado

1968FCC allows non-Bell equipment to be conected to AT&T network

1969 Microwave Communications International (MCI) establishes private long distance network

1970TCI listed on stock exchange and is 10th largest US cable network operator

1972 John Malone joins TCI from electronics manufacturer General Instrument

1973 TCI buys Foote Cone & Belding cable operations

1974 WTCI becomes second-largest US microwave common carrier

1975 CTCI becomes second-largest US cable operator, with 149 systems

1976 Time lends TCI money for terrestrial stations to receive HBO satellite transmissions

1982 TCI becomes largest US cable operator with 2 million subscribers

1982 AT&T has one million employees


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1983 Bell Canada becomes Bell Canada Enterprises (BCE)

1983 AT&T buys 25% of Olivetti for US$260m

1984 AT&T local operations spun off as seven Regional Bell Operating Companies (RBOCs), aka 'Baby

Bells'

1985 Forms Rogers Cantel with Rogers

1987TCI takes major stake in Turner Broadcasting System

1987Buys much of Westinghouse's Group W cable operations

1988Buys part of Storer cable group from KKR

1990McCaw Cellular Communications acquires 52% interest in LIN Broadcasting

1990Liberty Media formed as TCI's programming arm

1991 TCI buys Cooke Cablevision

1991 AT&T buys NCR for US$7.4bn

1991 Liberty Media floated, with Malone having 22% of equity (41% of votes)

1991 Liberty becomes partner in SportsChannel Chicago and SportsChannel Pacific

1992 Malone forecasts 500 channel universe in speech as Anaheim

1993 TCI subsidiary QVC makes unsuccessful bid for Paramount, subsequently acquired by Viacom

1993 TCI US$35 billion merger with Bell Atlantic abandoned

1994 TCI and Guinness Peat Group (GPG) pay $117m for Australian satellite tv licence and $216m for

microwave tv licences across Australia

1994 McCaw acquired by AT&T for US$11.5bn

1994 LIN broadcasting stations spun off as LIN TV

1995 TCI swaps stake in Turner for 7.5% of Time Warner


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1996 Death of Magness, succeeded by John Malone

1996 Liberty Satellite established to sell satellite dishes

1996 TCI, Packer and Lenfest (later Comcast subsidiary) participate in unsuccessful rescue of Australis

pay TV in Australia

1996 AT&T spins off Bell Laboratories as basis of Lucent Technologies

1996 Sells NCR

1996 Sells AT&T Capital Corporation (leasing unit) for US$1.8bn

1997TCI buys newspaper and cable group Kearns-Tribune (which had 7% stake in TCI)

1997AT&T sells Submarine Systems unit to Tyco for US$850m

1997Liberty sells Southern Satellite Systems to Time Warner for US$213m

1999 Buys 31% stake in Astrolink (promoted as the "first global wireless broadband venture") for

US$425m

1999 Liberty Media takes stake in News Corporation

1999 AT&T buys cable group MediaOne (which had absorbed the Providence Journal Co's cable

operations) for US$62bn

1999 TCI bought by AT&T for US$54 billion, with Liberty Media combined with TCI Ventures Group

(technology investment unit) under effective control by Malone

1999 Liberty Media gains control of TCI Music (renamed Liberty Digital) through share swap of minor

internet businesses

2000Liberty takes stake in Cendant

2000Liberty sells stake in BET to Viacom for US2 billion

2000Liberty sells 21% stake in Gemstar-TV Guide International to News, increasing News' holding to

43%

2000Liberty and Paul Allen's Vulcan Ventures take US$190m stake in priceline.com


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2000Liberty buys Video Services Corporation for US$125m

2000Buys 9% stake in IDT

2000Pays US$200m for 5% of Primedia

2000Buys Ascent Entertainment Group

2000Sells Ascent's Denver Nuggets NBA team, Colorado Avalanche team and Denver Pepsi Center for

US$450m

2000Liberty takes direct stake in United Pan-Europe Communications NV, subsidiary of Amsterdam-

based UnitedGlobalCom

2000Liberty buys film processor Todd-AO, renamed Liberty Livewire

2001 Liberty Media spun off by AT&T

2001 Liberty takes US$1.4bn stake in UnitedGlobalCom/United Pan-Europe Communications cable

group

2001 Liberty buys nine German regional cable networks from Deutsche Telekom for US$5bn

2001 Buys Deutsche Bank's Tele Columbus and SMATcom AG cable subsidiaries for US$1bn

2001 Agrees to sell its 20% of USA Networks and 27% stake in EU-based Multithematiques tv group for

3.6% of Vivendi

2001 AT&T spins off AT&T Wireless

2002 AT&T sells AT&T Broadband (ie cable tv assets) to Comcast for value US$47.5bn

2002 Liberty takes controlling stake in OpenTV, buys interest from Naspers' MIH

2002 Sells stake in Telemundo to NBC

2003 Buys 8% of Japanese cable company Jupiter Telecommunications (J-Com) from Sumitomo for

$142m, taking stake to 44%

2003 Sells Corus Entertainment shares for US$100m

2003 Buys outstanding shares of Ascent Media Group


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2003 Buys remaining 57% of QVC from Comcast for US$7.9bn

2004 AT&T Wireless acquired by Cingular (joint venture of RBOCs SBC and BellSouth) for US$41bn

2004 Liberty completes acquisition of controlling interest in UnitedGlobalCom

2004 Increases voting stake in News to 9%, economic interest to 17%, becomes the largest shareholder

in News

2004 AT&T announces that it is no longer seeking residential customers

2004 Liberty sells stake in UK cable network TeleWest for 119m

2004 Increases voting stake in News to 17%

2005 AT&T agrees to US$16bn takeover by SBC Communications

2005 Liberty Media spins off 50% in cable channel group Discovery Communications to shareholders

2005 agrees to acquisition of SBS by KKR and Permira


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John Malone: An overview

John C. Malone (born March 7, 1941) is the current chairman of Liberty Media and CEO of Discovery

Holding Company. He was the interim CEO of Liberty Media until succeeded by former Oracle CFO Greg

Maffei.

Malone was born in Milford, Connecticut. He graduated with the class of 1959 from Hopkins School in

New Haven, Connecticut. He was a Phi Beta Kappa and merit scholar at Yale University where he

obtained a B.A. in Electrical Engineering and Economics in 1963. He also received a Master of Science in

Industrial Management from Johns Hopkins University in 1964 and a Ph.D. in Operations Research from

Johns Hopkins in 1967. Malone was also Chairman and Chief Executive Officer of TCI. Previous to that,

from 1973 to 1996, Dr. Malone served as President and CEO of Tele-Communications Inc. He currently

serves on the Board of Directors for the Bank of New York, the Cato Institute, Expedia and the Colorado

Chapter of The Nature Conservancy. Additionally, Dr. Malone is Chairman Emeritus of the Board for

Cable Television Laboratories, Inc. and Chairman of Liberty Global, Inc., and the DirecTV Group.

Malone began his career in 1963 at Bell Telephone Laboratories/AT&T in economic planning and

research and development. In 1968, he joined McKinsey & Company and in 1970 he became Group Vice

President at General Instrument Corporation (GI). He was later named President of Jerrold Electronics, a

GI subsidiary.

He served as Director of the National Cable & Telecommunications Association (NCTA) from 1974 to

1977 and again from 1980 to 1993. During the 1977-1978term, Dr. Malone was the NCTA's Treasurer.

Malone has overseen TCI's phenomenal growth from the time of his arrival at the company in 1972, and

in the process has come to be regarded as among the most powerful people in the television industry.

He has been praised by many for his outstanding business acumen and his technological foresight, but atthe same time, he has also acquired a less flattering reputation for his hardball style of business

practice. Among those who have been openly critical of Malone in this latter vein was then Tennessee

Senator Albert Gore, who dubbed Malone the "Darth Vader" of the cable industry.

Malone began his career at AT&T Bell Labs in the mid-1960s, before moving on to become a

management consultant for McKinsey & Company in 1968. He received his Ph.D. in Industrial

Engineering from Johns Hopkins in 1969, and soon joined the General Instrument Corporation, where he

became president of its Jerrold cable equipment division. It was here that he first established ties to

many of the cable industry's pioneers. In 1972, he turned down an offer from Steve Ross of Warner

Communications to head its fledgling cable division, opting instead to leave the East Coast to accept anoffer from TCI founder Bob Magness to run the small cable company from its Denver headquarters.

Malone joined TCI just before it fell into very difficult times. Malone's first major success at TCI was in

negotiating a restructuring of the company's heavy debt load. Once freed from the burden of this debt,

Malone embarked on a conservative growth strategy for TCI. Rather than attempting to expand its

holdings by building large urban cable systems at great expense, as many other cable companies did in

the late 1970s, Malone focused TCI's growth efforts on gaining franchise rights in smaller communities,


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where the costs to build the systems would be far less onerous. The wisdom of Malone's strategy soon

became evident. TCI was able to grow without encountering the exceedingly high costs associated with

building capital intensive urban cable systems, and in the early 1980s, it was able to purchase several

existing large market systems, such as those in Pittsburgh and St. Louis, at bargain prices from

companies that had financially overextended themselves in the construction process.

As TCI grew throughout the 1980s, so did its power within the television industry. The company invested

heavily in programming services, and currently holds stakes in more than 25 different cable networks.

But TCI's success has been sometimes overshadowed by the public's perception of it as a heavy-handed

company that occasionally resorts to bullying tactics to achieve its desired ends. For instance, in TCI's

earlier days, some of its systems were known to replace entire channels of programming for days at a

time, leaving these channels blank except for the names and home phone numbers of local franchising

officials. The strategy aimed to gain leverage in franchise negotiations. Fairly or not, Malone came to

personify TCI and its negative public image.

But despite its poor public relations record, few would deny that Malone and TCI are among the most

powerful forces shaping the television industry as it moves into the next century. Like Paley and Sarnoff

of an earlier era, Malone exercises great control over what America's television viewers will or will not

see. Nearly one in four cable subscribers in the United States is served by a TCI system, and these

viewers are directly affected by the decisions Malone makes. Even those who are not TCI subscribers

feel Malone's influence, because access to the critical mass of viewers represented by TCI's cable

systems is crucial to any programmer's success. Programmers often must seek to gain positions on TCI

systems in order to gather the audience numbers that provide solid financial status. John Malone is

therefore in the position of a gatekeeper who wields enormous influence over the entire television

marketplace, which helps to explain another nickname sometimes applied to him--"The Godfather" of

cable television.

Malone's most ambitious undertaking was an attempted merger between TCI and regional telephone

company Bell Atlantic. Announced in October 1993, the deal was scuttled four months later after

financial and philosophical concerns left the two companies unable to reach a final accord. Despite the

merger's failure, the venture is indicative of Malone's vision and resolve to secure TCI's place in the

future television marketplace. TCI continues to expand its empire by purchasing more cable systems,

forging alliances with other cable companies and telephone service providers, and strengthening its

non-U.S. holdings in cable and telecommunications. These connections position the company for a

central role in an emerging full-service communications marketplace. But whatever the future holds for

TCI, John Malone already has cemented his place as one of the key shapers of the American television

landscape over the last quarter of the 20th century.


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Queries to be answered:

How did TCI create value for its shareholders through 1995?

Through the strategy of diversification TCI tried to create value for its shareholders through 1995.

Decentralized in 1986 to facilitate restructuring, if and when it becomes necessary, TCI is currentlyorganized into six divisions, each with its own marketing, accounting, and engineering departments. Ten

senior executives run the day-to-day business, sharing the responsibility of supervising a total of only

250 corporate employees. TCI had diversified beyond its core US cable systems business by investing in

programming, telecommunications services , and direct to home satellite broadcasting along with

international cable television business.For John C. Malone, to whom a day without a deal is like a day without sunshine, creating value through

diversification was the key. Slicing and dicing his way through the assets of Tele-Communications Inc.,

the giant cable company that he controls as chairman, Mr. Malone spinned off a clutch of noncore

businesses into a separate company.

The new company, TCI Ventures, was an oddball, if high-profile collection of investments that Tele-

Communications Inc. had made over the years in cable-related businesses. They had no obvious

strategic fit, including as they do 85 percent of the stock of Tele-Communications International; 30

percent of the Teleport Communications Group; 39 percent of the At Home Corporation, an Internet

access provider, and 30 percent of Sprint PCS, a privately held wireless communications company.

But for Mr. Malone, the spinoff was a way to get more value from assets that he believes have been

neglected by investors and overshadowed by Tele-Communications' prime business, the ownership of

cable systems with 14 million customers. That was the goal of his spinoff of Liberty Media in 1995.

Shareholders in Tele-Communications were able to swap up to one-third of their shares for an equal

number of shares of TCI Ventures. Both Mr. Malone and the company's president, Leo J. Hindery Jr., hadindicated that they intend to swap the maximum number of shares. If the exchange was fully

subscribed, Mr. Malone would end up with 25 percent of the voting shares of TCI Ventures, comparable

to his voting stake in Tele-Communications.

But the deal was complex. The company is making the offer attractive by pricing TCI Ventures at

somewhat of a discount to its value, much of which can be easily calculated because it has stakes in

public companies. Dennis Leibowitz, a media industry analyst at Donaldson, Lufkin & Jenrette, estimates

that an investor who exchanges three shares of Tele-Comunications for three TCI Ventures shares is

essentially getting an interest in TCI Ventures that is really worth four shares of Tele-Communications

stock.

Some analysts expected Tele-Communications stock to decline in value partly because the company is

spinning off assets. Indeed, Tele-Communications' stock closed at $17.50 on Friday, down from

$18.9375 on Aug. 13 when the TCI Ventures plan was disclosed.

Moreover, TCI Ventures was a tracking stock, an arcane security in which the shareholders do not

actually own the underlying assets, but simply have an economic interest in those assets. In this case,

the assets themselves were actually owned by Tele-Communications Inc., the parent company of the

operations.


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One reason for such a structure was that it permitted Mr. Malone to run Tele-Communications, TCI

Ventures and a third company, Liberty Media, also a tracking stock company that was created to hold

the company's cable programming interests, as a single entity for tax purposes. For example, the

combined entity could use its losses at TCI Group, the company that officially owns the cable systems

serving 14 million subscribers, to offset gains at TCI Ventures or at Liberty Media.

But despite the wheeling and dealing that a tracking stock permits, some investors are wary of buying a

stock when it is not clear just what they may end up owning. At least two analysts noted privately that

tracking stocks often trade at a discount.

For one thing, Mr. Malone has already been successful with such exchanges. In 1991, he orchestrated an

exchange offer that created Liberty Media, a company that owned cable programming services and

other businesses. At the time, Mr. Malone swapped roughly half his own shares in Tele-Communications

for shares in Liberty, a move for which he was widely criticized. But that stock went up seventeenfold

before the company bought it back three years later.

In 1991, TCI spun off much of its programming assets and 14 cable systems, due in part to antitrust

pressure from government regulators. The result was Liberty Media Corporation, with Malone aschairman and principal shareholder. During the first two years in operation, Liberty Media launched

Court TV, introduced the film channel, Encore, and acquired an interest in the Home Shopping Network.

Another home-shopping network and competitor of the Home Shopping Network, QVC, partnered with

Liberty Media and the Comcast Corporation, giving Liberty Media an 80-percent voting stake in QVC.

In 1994, Liberty Media was reacquired by TCI. The following, year it joined forces with Rupert Murdoch's

News Corporation to create FOX/Liberty Networks, a national sports network. When Turner

Broadcasting was acquired by Time Warner in 1996, control of TCI's stake in Turner Broadcasting was

passed on to Liberty Media, giving them a 9 percent holding in Time Warner. The same year John

Malone became chairman of TCI following the death of Robert Magness.

Such moves had contributed substantially to its shareholders wealth. Liberty Medias equity in

programming services was worth about 7 billion in late 1996 and TCI equity in telecommunications

ventures was worth $3.5 billion.

TCIs diversification had contributed substantially to its shareholders wealth. It had diversified beyond its

core US cable system business by investing in programming, telecommunication services, direct-to-

home satellite broadcasting and international cable television business. Through Liberty Media TCI

owned equity in a large number of programming services, including Discovery Channel, QVC and Black

Entertainment Television. Some of the major acquisitions made by TCI in this direction have been

enumerated below:

A new preferred stock issue was created by Tele-Communications Inc.'s cable subsidiary whichwas targeted for use in some small system acquisitions planned by the company. But the real

goal of the issue was to facilitate TCI's planned $2.3 billion deal to acquire Viacom Inc.'s cable

unit. (Jan 1995) Tele-Communications Inc. paid more than $1 billion to acquire TeleCable. It acquired a minority stake in Acclaim Entertainment Inc (Feb 95)


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The company had put up about $170 million in stock for superstation distributor United VideoSatellite Group and closed in on a $580 million purchase of multiple system cable operator

Western Communications.(June 1995) Tele-Communications Inc. bought the cable systems owned by The Chronicle Publishing Co. for

an estimated $580 million in stock.(Jul 1995) In fall of 1995, Time Warner agreed to exchange $8 billion in stock for 82 percent of Turner

Broadcasting. TCI traded its 21 percent interest in Turner for the third largest stake in Time

Warner of 9 percent. Tele-Communications Inc gained control of Viacom Inc.'s cable systems in a deal valued at $2.25

billion. (Nov 1995) Liberty, the programming arm of cable giant Tele-Communications Inc., swapped its 41% stake

and voting control of Home Shopping for an interest in BarryDiller's television station group,

Silver King Communications Inc. Tele-Communications, which owned an option to buy control of

the television company, transferred the option to Diller in exchange for Liberty Media's

receiving a 20% equity stake in Silver King. (Nov 95) Media moguls Rupert Murdoch and John Malone joined forces to form a new sports network

that would rival ESPN. (Dec 1995)


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Why did the companys financial performance deteriorate so rapidly during 1996?

Table 1: TCI Communications Financial Performance 1994 1996

1994 1995 1996

% change from

'94 to '95

% change from

'95 to '96

Basic Subscribers (million) 11.7 12.5 13.9 7% 11%

Revenue $4,116 $4,878 $5,954 19% 22%

Operating Cash Flow (EBITDA) 1801 2043 2230 13% 9%

Depreciation & Amortization 988 1223 1453

Interest Expense 777 962 1041 24% 8%

Capital Expenditure 1235 1665 1920 35% 15%

Cash Income Taxes 4 8 8

Free Cash Flow

(EBITDA-Interest Expense-

Capital Expenditure-Cash

Income Taxes) (215.00) (592.00) (739.00) -175% -25%

Total Assets $15,880 $20,364 $23,136

Property & Equipment (Net of

Accumulated Depreciation)5579 6988 7192

Franchise Cost (Net of

Accumulated Amortization) 9297 11563 14794 24% 28%

Debt 10712 12635 14318 18% 13%

EBITDA/Subscriber $153.93 $163.44 $160.43 6% -2%

EBITDA as % of revenue 43.70% 41.88% 37.45%

CapitalExpenditure/Subscriber $105.50 $133.20 $138.10 26% 4%

Debt/Subscriber $915.50 $1,010.80 $1,030.07 10% 2%

Table 2: US Cable Industry Financial Performance 1994 - 1996

1994 1995 1996

EBITDA/Subscriber $170 $180 $191

EBITDA as % of

revenue 43.60% 43.80% 43.00%

Capital

Expenditure/Subscriber$64 $89 $95

Debt/Subscriber $874 $903 $926


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From Table 1 & Table 2, we can observe that the EBITDA per subscriber for TCI stood at $160.43 as

compared to an industry average of $191. The EBITDA as percentage of revenue for TCI was 37.45% for

the year 1996, as compared to an industry average of 43%. The EBITDA per subscriber for TCI decreased

from $163.44 in 1995 to $160.43 in 1996, while the EBITDA as percentage of revenue decreased from

41.88% in 1995 to 37.45% in 1996. The EBITDA per subscriber decreased by 2% from 1995 to 1996 as

compared to a 6% growth from 1994 to 1995. The capital expenditure per subscriber increased from

$133.2 in 1995 to $138.1 in 1996, while the industry average stood at only $95 for the year 1996. The

debt per subscriber increased from $1010.8 in 1995 to $1030.07 in 1996, while the industry average

stood at only $926 for the year 1996.

Table 3: Cable System Financial Performance: TCI Vs Other Large MSOs, 1996

TCI

Media

One Comcast Cox

Basic subscribers as % of homes passed 59.10% 59% 61.20% 65%

Monthly Revenue per Basic Subscriber $36.17 $36.88 $37.38 $35.33Programming (% Revenue) 18% 20.20% 21.70% 25.50%

Plant Operations (% Revenue) 13.1 12.8 9.8 10.3

Marketing (% Revenue) 4 4 3.5 3.4

General & Administrative (% Revenue) 26.7 21.2 15.1 20.9

Operating Cash Flow (% Revenue) 37.5 41.7 49.9 39.9

Capital Expenditures per Basic Subscriber $138 $129 $103 $129

It is observed from Table 3 that the Operating Cash Flow (EBITDA as percentage of revenue) for TCI for

the year 1996 stood at $37.5, which is the lowest when compared to the industry competitors of TCI,

namely Media One, Comcast and Cox. On the other hand, the capital expenditure per basic subscriber

stood at $138, which was the highest when compared to its closest industry rivals.

The technology strategy adopted by TCI was completely out of sync with its top priority, which was to

address the threat posed by satellite channels capacity. To address that, TCI wanted to deploy digital

video as a mass market offering. But they had positioned digital rollout as a high end service. TCI also

spent heavily on fiber upgrades, to roll out data and voice communications, at the expense of protecting

its traditional video business. The company needed to upgrade the plant and set up new call centers

before rolling out new services. It needed a massive software program before setting up new call

centers. All these compelled TCI to adopt a very aggressive capital expenditure program, and this

explains the 35% growth in capital expenditure from 1994 to 1995, followed by a 15% growth from 1995

to 1996, which can be observed from the financial statements of TCIs cable systems and its Technology

Ventures unit for the years 1994, 1995 & 1996.

Decentralized in 1986 to facilitate restructuring, if and when it becomes necessary, TCI was organized

into six divisions, each with its own marketing, accounting, and engineering departments. Ten senior


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executives run the day-to-day business, sharing the responsibility of supervising a total of only 250

corporate employees.

Since 1985, Malone had spent more than $3 billion acquiring interests in more than 150 cable

companies, representing three million subscribers. As TCI led the cable television industry into the

1990s, perhaps the most serious threat facing the company was that of reregulation. TCI had reached itsnumber one position through numerous mergers, acquisitions, and partnerships; it was not anonymous.

The company also faced serious challenges from technology, especially direct satellite transmission.

However, in anticipation of growth in the television-receive-only marketplace, TCI acquired TEMPO

Enterprises, a satellite communications company. While TCI had based its growth on maintaining a

highly leveraged financial position, the size of the company's debt made it vulnerable to a rise in interest

rates or to a recession, which jeopardized pay cable revenues. The decision making was centralized at

the HQ. This was a result of the confusion created by the company that was still trying to integrate the

various cable companies that it had acquired. No one had clear profit accountability.

The following steps were taken by the company throughout the year:

1. Company diversified into sports apparel stores in October 1995, though it had around $20 billionin assets. It also acquired a minority stake in TSX Corporation. It also bought Prime Cables

system in suburban Houston for approximately $225 million. It acquired Portland, Oregon and

Nevada cable systems of Columbia International.

2. Liberty the programming arm of TCI, swapped 41% of its stake and voting control of HomeShopping for an interest in Dillers television station group, Silver King Communications in the

month of November 1995.

3. TCI bought the cable television systems of Viacom Inc. in November 1995 for around $2.25billion. This unusually structured sale (a spin-off the cable unit and selling it to TCI) was a coup

for Viacom. The deal eliminated $1.7 billion of Viacom's $10.9 billion in outstanding debt.

Moreover, because of the structure of the deal, Viacom was able to avoid a tax bill that could

have reached $650 million. In return, Malone gained 1.2 million subscribers without having to

give up control of his company to a new group of shareholders.

4. In January 1996, TCI raised its stake in DMX Corp by buying a few million shares.5. Tele-Communications acquired United Video Satellite Group in a stock-reorganization plan. UV

shareholders could receive one newly created TCI convertible preferred share for each class A or

class B share held.

6. In February, TCI declared that it would subsidize the computers as well as training programstransmitted over cable wires and satellite systems to public schools. This was because, the TCI

officials predicted that it would be years before the venture will break-even and finally turn a

profit. Hence they wanted to nurture interest in the public school students and teachers.

7. TCI filed a shelf registration statement with the Securities and Exchange Commission (SEC), tosell up to $1 billion of debt or equity securities. This filing has given TCI more financial flexibility

than before.

8. TCI bought Knight-Ridders 50% stake in TKR Cables for cash around $400 million to $420 millionin cash and common stock, and another $400 more in debt. It already owned the other 50%. TCI


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is paying roughly $2000 per subscriber. The company is also buying Knight-Ridders 15 percent

stake in cable systems in five southern states of US. In effect, the cash portion of the deal

includes paying back of $71 million in subordinated debt. In addition, the company will assume

$423 million in debt and liabilities related to the purchase.

9. TCI reported a loss of $79 million (16 cents a share) for the quarter ending Mar 1996, ascompared to its loss in the financial year ending Mar 1995, when it reported a loss of only $1

million. This loss was mainly due to investments in its satellite and cable businesses and

equipment upgrades, as well as preparation for launching new products, and also due to the

spin-off of its Liberty Media unit. 89% of this loss came from a loss of $70.31 million at TCI

Communications Inc., its domestic cable unit. Revenue for Tele-Communication Inc. rose by

about 26 percent to $1.91 billion from $1.51 billion. 72% of the revenue came from TCI

Communications.

10.TCIs stock performance was up for criticism. In a raging bull market, when the industry averagehas seen a rise of nearly 52%, an investor of TCIs stock saw an increase of just 24%. No one

believed that TCI was capable of introducing a new product. By harnessing digital technology,

TCI promised its viewers everything from 500 channels of television, to phone service, to

lightning-fast internet access. Because it was Malone who promised it, and it did not happen,

people were disappointed.

11.TCI provided $25 million in bonuses to its employees. This amount was paid to its front-lineemployees who were involved in customer-retention programs.

12.Continental Cablevision Inc. and Tele-Communications Inc. filed for authorization to compete forlocal phone customers against entrenched regional Bell operating companies in four states. The

telephone arm of TCI, TCI Telephony Services, filed in Illinois, Connecticut, and the San Francisco

Bay in California, whereas Continental Cablevision applied for entry in Michigan.

13. In May 1996, Malone sold approximately 450,000 of his shares of TCI International for $21.75per share i.e. $9.7 million.

14.TCI won a concession by the Mexican Government to provide direct-to-home television toMexico. It paved way for Grupo Televisa SA and its partners TCI, News Corp of Australia and

Brazils Globo and Telecommunications Inc. to move ahead with plans to provide DTH across

Latin America.

15.TCI agreed to buy 300,000 (costing around $595) modems from Lancity Corp. for the cabletelevision companys allowing customers to access internet over its cable lines. The terms of the

deal were not disclosed. This deal was signed because TCI was gearing up to launch its Home

Online Service (which would provide access to the Internet thousands of times faster than over

ordinary copper telephone lines).

16.A company called SDI ad insertion systems (StarNet Development Inc.). This new deal bringsTCIs total investment in SDI to more than $10 million.

17.TCIs plan was to spin-off its satellite unit into a separate company. This move put the hiddenvalue of its direct-broadcast satellite operation into spotlight. But, it also helped the MSO to

solve the MSOs recent debt problems. This breaking off helped TCI to reduce the debt, improve

shareholder value and it made it easier to raise the capital for expanding into the high-power

digital satellite market.


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In August 1996, Tele-Communications Inc. reported that its second quarter loss had nearly doubled

compared with the previous year, because of higher costs for refinancing debt and losses from

investments in other cable companies, but that cash flow had improved. The owner of the programming

spin-off Liberty Media Corp, and TCI Communications Inc. reported a loss of $184 million compared with

a loss of $95 million in the corresponding quarter the previous year. Revenues for the largest United

States cable operator rose nearly 23 percent, to $2.02 billion from $1.65 billion. The results included a

$66 million charge for paying off debt early and for canceling bank credit lines. TCI's loss on investments

in other cable companies widened to $96 million, from $43 million in the 1995 quarter.

Tele-Communications Inc.'s cable operations posted a minuscule cash flow increase during the second

quarter of 1996 as the MSO waited for a recent round of rate hikes to kick in. On the top line, TCI

Communications boosted revenues 15 percent during the quarter, to $1.5 billion, while cash flow rose 6

percent to $549 million. However, that growth was generated primarily by acquisitions, such as the

takeover of Chronicle Publishing Inc.'s cable unit. Without those new revenues, TCI's cable sales

increased 9 percent and cash flow increased just 1 percent. Growth was held back by the timing of

aggressive rate hikes TCI had passed through to the bulk of its 11 million subscribers. From June, TCIcustomers were hit with rate increases averaging 13 percent, but reaching as high as 28 percent. Basic

subscriber growth slipped. TCI added 43,000 basic units during the second quarter, up a meager 1.3

percent annualized.

As per the third quarter results, TCI reported a 3% growth in operating cash flow (before the impact of

acquisitions), compared to an expected double-digit growth in cash flow. This major drop in growth was

attributed to the unexpected loss of 70000 subscribers, largely due to severe competition from DTH

satellite services. Margins in the core cable business were down to 38% in 1996, from a peak of 50% in

1992. Such downfall in the growth rate was attributed to the following reasons:

Deterioration in the spread between pricing and programming costs SG&A growth related to corporate projects

The SG&A growth was mostly related to the corporate projects which included setting up of new call

centers for customer service representatives, new billing system and the addition of staff to develop

digital, data & phone business.

TCI reported a fourth quarter loss of $29 million. The loss was mainly attributed to the lack of gains

posted the previous year from stock sales. The loss, compared with net earnings of $95 million for the

last three months of 1995, also resulted from higher costs at its programming subsidiary, Flextech. The

losses on revenues of $95 million were partly offset by gains at Cablevision, which was acquired in April1995. The company also reported a loss of 102,000 premium customers as quarterly financial results

reflect the cable giant's retrenchment. The cable operator's fourth quarter was marked by a 2,500-

worker layoff, a decision to scale back capital spending to cut debt and preparations for the launch of

digital services in 1997. TCI reported operating cash flow growth of $28 million, or 5.9 %, for the fourth

quarter, not accounting for acquisitions and sales. That measurement of core cable growth compares to

growth rates of 12 % to 15 %. It was reported by the company that expenses for launching digital


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service, customer service and information systems were relatively high. After the fourth quarter and

year-end results for the financial year 1996, John Malone, chairman and CEO of Tele-Communications,

Inc. was quoted saying,

The fourth quarter was a time of transition during which we implemented a number of programs to

improve TCI's operating efficiencies. During the quarter, we negotiated a number of programmingcontracts, improved the quality of our programming line-up and took steps to reduce operating

expenses. These actions and others currently underway should enable the Company to more fully use its

strengths in today's exciting environment.


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Should TCI proceed with the ubiquitous deployment of digital converters?

SWOT Analysis:

Strengths

TCI operational strategy was already gaining momentum Support from many electronics vendor to create digital converter Malone heading Cablelabs had the discretion to make decisions By 1997 debt ratio would come down from 5 to 3.8 TCI stock performance had improved when it almost doubled in value

Weakness

TCI managers still undecided on the portfolio of services to be offered even after esting incertain markets

Free cash flow will suffer Major upfront investment required Some applications that were thought to be provided were already available Many applications have to be developed from scratch

Opportunities

Create a option against Microsoft WebTV Majors like At&T and Madison Avenue could be Partners in services Interactive deals from interactive marketers 1998 already called for a major rush for the presence in the internet-first mover advantage Might be able to negotiate for equity stakes in new digital services New trading stocks may not affect the credentials so much.

Threats

First generation digital converters were working beautifully Microsoft aggressive stance on creating a space in cable internet Thinking that companies will help in subsidizing the box Present high speed internet services offered much faster pace than DSL Wallstreet and media had other views on ubiquitous deployment No point in installing devices where people have not shown interest Rating agencies cutting down as they use free cash flow as a scale of measure Opinion that the public will rate newco and oldco on complete different financial theory Interactive marketers may not be interested without any sure assurance Market trials will not be of value without critical mass of applications New trading stocks may or may not attract Capital for ubiquitous deployment.


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Financial overview

1998 scenario

total homes passed (us) in 1996 94,000,000.00

Total Basic subscribers 63,732,000.00

TCI basic subscribers 14,000,000.00

TCI home passed 23,688,663.28

TCI subscribers (us) in 1998 15,000,000.00

TCI home passed in 1998 24,742,429.78

Capital costs: HFC DC Internet POTS

Fixed per home passed 1998 250.00 20 11 35

Variable per new subscriber - 350 350 678

1.50% 1.30% 0.10%

Penetration 225,000.00 195,000.00 15,000.00

Variable costs 78,750,000.00 68,250,000.00 10,170,000.00

Fixed costs 3,092,803,722.50 7,422,728.93 3,538,167.46 865,985.04

Total costs 3,092,803,722.50 86,397,728.93 71,983,167.46 11,050,985.04

Revenue/per subscriber per month 16.89 35.69 44.52

Revenues estimated per month 3,800,250.00 5,219,662.50 667,800.00

Revenues estimated in 1998 45,603,000.00 62,635,950.00 8,013,600.00

EBITDA 42% 38% 0.34

EBITDA in vaue 19,153,260.00 23,801,661.00 2,724,624.00

Breakeven year 4.510862847 3.024291769 4.055967004


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2003 Scenario

Capital costs: 27,500,000.00





0.41 0.24 0.11

Penetration 24,827,862.69 11,275,000.00 6,600,000.00 3,025,000.00

Variable costs 1,691,250,000.00 825,000,000.00 1,648,625,000.00

Fixed costs 4,791,777,498.77 225,500,000.00 72,600,000.00 96,800,000.00

Total costs 4,791,777,498.77 1,928,025,000.00 904,200,000.00 1,748,450,000.00


Revenues estimated per month 190,434,750.00 176,665,500.00 134,673,000.00

Revenues estimated in 1998 2,285,217,000.00 2,119,986,000.00 1,616,076,000.00

EBITDA 42% 38% 0.34

EBITDA in value 959,791,140.00 805,594,680.00 549,465,840.00

Breakeven year 2.008796414 1.122400659 3.182090446


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Ubiquitous digital deployment

total homes passed (us) in 1996 94,000,000.00

Total Basic subscribers 63,732,000.00

TCI basic subscribers 14,000,000.00

TCI home passed 23,688,663.28

TCI subscribers (us) in 1998 16,000,000.00





75.00% 75.00% 75.00%

Penetration 12,000,000.00 12,000,000.00 12,000,000.00

Variable costs 4,200,000,000.00 4,200,000,000.00 8,136,000,000.00

Fixed costs 6,185,607,445.01 371,136,446.70 204,125,045.69 649,488,781.73

Total costs 6,185,607,445.01 4,583,136,446.70 4,416,125,045.69 8,797,488,781.73


Revenues estimated per month 202,680,000.00 321,210,000.00 534,240,000.00

Revenues estimated in 1998 2,432,160,000.00 3,854,520,000.00 6,410,880,000.00

EBITDA 42% 38% 0.34

EBITDA in value 1,021,507,200.00 1,464,717,600.00 2,179,699,200.00

Breakeven year 0.4 0.1 0.3


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Organizational Structure and Desig

Tele Communications Inc: Accelera

Comparative study of situations

Total Cost Required

Total break even yearsDC cost

DC breakeven

Internet cost

Internet breakeven

POTS Cost

POTS breakeven

0

5E+09

1E+10

1.5E+10

2E+10

2.5E+10

3E+10

Total Cost Required

0

1

2

3

4

5

6

7

8

Total break even

years

DC br

Case study

ting Digital Deployment

1998 2003

3262235604 9372452499

7 4.04883503486397728.93 1928025000

4.510862847 2.008796414

71983167.46 904200000

3.024291769 1.122400659

11050985.04 1748450000

4.055967004 3.182090446

DC cost Internet cost POTS Cost

akeven Internet breakeven POTS breakeven

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Ubiquitous

23982357719

1.61021507200

0.4

1464717600

0.1

2179699200

0.3

1998

2003

Ubiquitous

1998

2003

Ubiquitous


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If Ubiquitous deployment is done:

Advantage:

Will gain a percentage of transaction revenues from the usage of TCIs digital services In late nineties, internet was booming, a number of start-ups and marketing companies raced

for their share on internet an opportunity for first movers

TCI can negotiate for equity stakes in these companies Ubiquitous deployment would pre-empt competition from traditional telephone companies

trying for a share in digital space

Capital cost expected to reduce in near future owing to technological advancements in thesilicon valley

1 million households would generate $10 million by the end of 1998, also the 1st-generationdigital converter penetration was 5-13% within a few months

By 2003, 2nd-generation digital converters were predicted to generate $17.44 in incrementalmonthly revenue

Video-on-demand(VoD) was a promising application, also the rapid reduction in headendservers cost further improved its economic prospects

HDTV has huge scope of revenue generation although the price of HDTV sets initially were highand HDTV programming was in nascent stage

Development of OpenCable standards helped reduce MSOs capital expenditures In 1997, total cable modem subscribers - 111000

TCIs share was < 4440

Penetration rate was high, TCI could leverage on this to provide High Speed Internet Access

Services

Consumer market for online services was expected to grow from $6.9 to $9.7 billion in 3 yearsfrom 1998

Establishment of industry standards for cable modems reduced their life-cycle costs and therebycapital item off MSOs balance sheet

Target market for cable telephony was huge, estimated to be in excess of $100 billion IP telephone services market was projected to grow from $49 million in 1998 t $1.9 billion in

2003

Savings on international calls through IP over switched-circuit service averaged 30%-70%


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Disadvantage:

Free cash flow would suffer Aggressive investments Sceptical of TCIs moves as they had failed to deliver on past promises Uncertainties about the deployment could not be resolved as they had to be developed from

scratch

Fear of a lack of critical mass High capital costs and regulatory uncertainty in case of POTS market


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What are the strengths and limitations of Malones management style?

Strengths

Top-down management style

This style helped Malone to establish and revise strategic priorities on critical issues. Malone had an

exceptionally strong and flexible intellect. His ability to process information was highly talked about. In

meetings, Malone verbalized his thought process and not his conclusions. He described a problem from

different perspectives and traced multiple, complex, cause-and-effect sequences to better understand

TCIs options. Through this approach, Malone constantly subjected his ideas to challenges from other

members of TCIs management team. He sometimes deliberately kept his strategies fluid as they were

being formulated, because he was concerned that managers might fixate on one opinion, then find it

difficult to adapt if circumstances changed. He believed that if you give people too much, too early,

they find it hard to move to the next strategy.

Willingness to Act Decisively:

TCIs managers confronted inevitable tradeoffs between investing in new opportunities early to capture

first-mover advantages and delaying commitment in order to gather more data and thereby reduce the

risk of pursuing a flawed strategy. Compared with many CEOs, Malone was more secure in his position

and therefore more willing to act decisively in the face of uncertainty. He controlled 40% of

shareholders votes in late 1997 by virtue of owning a large number of TCI Class B stock.

Less number of employees:

Malone believed in keeping TCI a lean company. Only a dozen senior executives ran the whole show.

The heads of engineering, operations, and accounting were mere steps from one another, and theywere all close to Malones office. Malone did not believe in memos. No paper passed from his desk to

underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that causes

ulcers in so many midlevel executives. Communication was direct, effective, and efficient. The

executives shared secretaries, and an automated service answered the phone.

We dont believe in staff. Staff are people who second-guess people,

----Malone to an interviewer.

Malone brought only a lawyer or two when he showed up at negotiations. Malone refused the

conventional thinking that TCI needed to have a brand name or a Madison Avenue image. The company

had no human resources department, and it wouldnt hire its first public relations person until the endof the 1980s.


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Effective Reward Policy:

Malone saw to it that his executives were richly rewarded, sometimes through a nifty little bit of self-

dealing that gave them sweetheart terms on cable systems they bought from TCI and sold back to the

company in a series of complex transactions. Sometimes this approach helped the company sidestep

rules restricting how many systems it could own in a particular market. When TCI was ready to re-buy

the properties, it paid the executives in company stock, at a very nice premium.

This didnt bother Malone nearly as much, as he saw nothing wrong with such deals and defended them

as perfectly legal. He explained later that he along with Bob Magness had cut several deals that allowed

executives to own cable systems privately, then eventually turn them over to TCI.

For Malone, it was a way not only to compensate his top employees as the values grew but, more

important, teach them.

Guys will understand a cable system a hell of a lot better if they have skin in the game, he said often.

If TCI, either for regulatory or for financial reasons, couldnt own the systems, Malone didnt want to

lose them to someone else. In one deal, Magness, Malone, and other TCI executives bought 21 percent

of a cable company called Liberty Cable, in exchange for cable TV properties valued at about $4 million.Two years later, TCI bought their stock for nearly $15 million worth of TCI shares; by 1987, the shares

were worth $40 milliona 900 percent profit on the original investment.

Critics may have judged the deal as enriching insiders, but Malone paid little attention. Malones

attitude was: You dont like the way we reward management? Dont buy the stock.

Malone made no effort to conceal his compensation schemes: Every deal involving TCI executives was

displayed prominently in SEC filings.

TCI also instituted an employee stock purchase plan, and it made even the secretarial staff rich. For

employees and shareholders alike, 1,000 TCI shares bought for just $875 in 1976 were worth $450,000

by the end of the 1980s, thanks to two spin-offs, 12 stock splits, and an ever-rising stock price. TCI made

millionaires of many middle managers, and even a few secretaries, and the payoff built loyalty among

employees.

Decentralization Policy:

Malone wanted TCI to run as a highly decentralized organization. He had cut the company into six

separate operating divisions, each nearly autonomous, each with its own marketing, accounting, and

engineering departments. Ten senior executives ran the day-to-day business, sharing the responsibility

of supervising a total of only 250 corporate employees.

When youve got it running right, when youve got it decentralized, when youve got it structured

properly, its like flying the most powerful fighter jet in the world, he liked to say.

TCI wasnt as pure a cable company as Cox in Atlanta, Cablevision in New York, or Comcast in

Philadelphia. Malone had dozens of different partnerships with other cable operators to own and

operate systems, and TCI doubled as an investment vehicle, investing in an ever-expanding portfolio of

cable channels. Malone viewed himself as an investor and shareholder in each of these enterprises. It

was not unusual for TCI to make straight financial investments in operators he deemed shrewd.


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Limitations

Certain aspects of Malones management style slowed down the decision making process. The managers

had difficulty decoding the action implications of his rapidly evolving situational assessments. Rarely did

he give direct orders. He had a tendency to think out loud, which was a problem for young managers.

Also he made dynamic decisions. He chalked out better plans while talking. He could hold two seeminglydisparate ideas in his minds, which sometimes was not easy to decipher.

group 5_tele communications inc- final report section c

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