Get Big Fast

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Tele-Communication, Inc
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TELE-COMMUNICATIONS, INC.

• ACCELERATING DIGITAL DEPLOYMENT

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Overview

• Introduction
• Company History
• Goals and Strategies
• GBF??
• 20-20 Hindsight

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Introduction

• Describes how the top management team at
  Tele-Communications, Inc. (TCI), the largest U.S.
  cable company, conceived and implemented a
  dramatic operational turnaround and a radical new
  technology strategy over an18-month period
  beginning in late 1996.
• The problem is whether to move to digital
  converters (first or second generation) to
  response to market pressures and move into the
  ISP market

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TCIs History Facts

• TCI was founded in 1956 by Bob Magness, an
  Oklahoma cottonseed salesman and part-time
  rancher.
• In 1970 the company was taken public.
• In 1978 TCI played an important role in HBOs
  early success. TCI started providing HBO to
  700,000 of its subscribers.
• In early 1980s TCI expanded by acquiring suburban
  and small town cable systems.
• In 1990s the company expanded to the UK and other
  international markets.

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TCIs History Facts

• TCIs managers had long been prolific deal
  makers between 1973 and 1994 the company had
  completed 650 acquisitions, divestitures, and
  joint ventures.
• IN 1993 TCI collaborated with Microsoft. Also in
  1994, the company and three other large MSOs
  joined Sprint in a joint venture called Spectrum.

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TCIs History Facts

• By year end of 1996 they wanted to expedite the
  deployment of first-generation digital
  converters.
• In 1996 the largest US cable system operator.
  With 14 million subscribers.
• TCI diversified beyond its core US cable system
  business by investing in programming,
  telecommunications services, direct to home
  satellite broadcasting, and international cable
  television businesses.
• TCI also invested in joint ventures that employed
  digital technologies to deliver new
  telecommunications services

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UBIQUITOUS DEPLOYMENT OF ADVANCED DIGITAL
CONVERTERS

• Cost of advanced digital converter in 1999 300
• Less cost of advanced analog converter in 1999
  150
• Less value of gi warrants/converter 40
• Equals incremental cost/converter of accelerated
  deployment in 1999 110
• 1999 advanced digital converter penetration of
  basic subscriber base with accelerated
  deployment 80 of 14 million basic subs 11.2
  million advanced digital subs
• 1999 advanced digital converter penetration of
  basic subscriber base under business as usual
  scenario, i.e., Deploying converters only for
  customers that respond to solicitations 20, or
  2.8 million subs
• So, incremental capital cost is 110/converter x
  8.4 million subs 924 million
• Can TCI create that much value?

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Key Stakeholders

• Customers
• 94 Million households had access to cable in 1996
  (97 of all households in US)
• 68 market penetration
• Regulatory
• FCC, PUCs, Municipal Governments
• 1996 1998 Telecommunications Acts
• Judicial (Anti-trust)

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Key Stakeholders

• Management
• John Malone, CEO
• Leo Hindery, COO
• Donne Fisher, CFO
• Investors

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Managing Strategy at TCI

• TCI had evolved into a large global company. The
  companys top management had to attend to
  multiple markets, including cable systems, cable
  programming, telephony, DHT satellite
  broadcasting, and Internet services.
• It was critical for the company to establish and
  revise strategic priorities.

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Managing Strategy at TCI

• TCIs CEO Malone had an exceptionally strong and
  flexible intellect. In meetings he verbalized his
  thought processes not just conclusions.
• Compared with many CEOs, Malone was more secure
  in his position and therefore more willing to act
  decisively in the face of uncertainty. He owned a
  large block of TCI stock and controlled 40 of
  shareholder votes in late 1997.

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Trouble in Late 1996

• In late 1996 TCI reported an unexpected loss of
  70,000 subscribers, due largely to competition
  from DHT services.
• TCI also had deterioration in the spread between
  their pricing and programming costs. The company
  became dysfunctional.
• Changes
• After analyzing TCIs margins, Malone set a goal
  of cutting SGA costs by 100 million through a
  workforce reduction.
• Malone formulated a plan to reduce TCIs
  programming expenses by about 200 million by
  dropping certain programming services.

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Trouble in Late 1996

• Malone froze capital expenditures, pending a
  review of the companys technology strategy.
• By early 1997, Malone had concluded that TCI
  needed to accelerate the deployment of digital
  converters to respond to competition from
  satellite broadcasters.
• TCI planned simultaneously to launch digital
  video, telephone, and high-speed Internet access
  services.
• Malone believed that the new technology strategy
  would conserve capital, allowing TCI to boost
  free cash flow and reduce its debt.

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Accelerating TCIs Turnaround

• Leo Hindery, former CEO of InterMedia Partners
  which controlled 1.4 million cable subscribers,
  accepted Malones offer to join TCI.
• His first step was to rebuild the top management
  team. Within a few weeks of Hinderys arrival, 25
  senior executives left the company.
• TCI reduced costs of marketing by clustering its
  geographically scattered systems into a few
  regions.

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Accelerating TCIs Turnaround

• Through the partnerships, and by trading some
  systems with other MSOs, TCI was able to
  concentrate its system portfolio into six major
  markets where it was the dominant MSO (Chicago,
  Dallas, Denver, Pittsburgh, San Francisco, and
  Seattle) and ten other big cities where it
  controlled a large share of cable customers.

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Accelerating Digital Deployment

• Early in the year of 1997, Malone had focused the
  company on a defensive technology strategy that
  would accelerate the deployment of
  first-generation digital converters. By year-end,
  however, TCI was planning the rapid and
  widespread rollout of second-generation digital
  converters. These converters would deliver more
  video channels, also provide high-speed Internet
  access, integrate Web content with traditional
  television signals, and enable cable systems to
  provide telephone service.

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The Case for Ubiquitous Digital Deployment

• By early 1998, the specifications for TCIs
  second-generation digital converter were set.
• The rapid, ubiquitous deployment of
  second-generation digital converters offered 2
  other potential benefits.
• First, it could tap the unmet demand for
  interactive services in households that had not
  yet acquired a personal computer.
• Second, ubiquitous deployment would preempt
  competition from telephone companies seeking to
  deliver digital services.

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GBF?

• Tci followed a get big fast strategy
• Payoff
• Scale economies in programming procurement,
  system operations
• Leverage to acquire equity stakes in programming
  and technology ventures
• Risks
• Overextend balance sheet
• Chaotic post-merger integration
• Strain management capabilities (especially given
  reliance on ceo as architect of strategy)

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GBF?

• Network Effects were Low for cable providers
• Scale economies are great
• Customer retention rates for Cable customers are
  high but not so for digital services (many
  competitors)

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GBF?

• Risks and rewards of pursuing scale for access
  providers
• Payoff from vertical integration and walled
  gardens
• Causes of organizational inertia in large,
  established companies advantages and limitations
  of top down management approach for addressing
  inertia

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TCI LESSONS

• Traditional bottom up resource allocation
  processes are not ideal in risky, turbulent
  environments
• Division managers understand substance of
  strategy corporate managers typically do not, so
  they base their decisions on the reputations of
  division managers
• Division managers must protect their reputations
  they propose projects that are consistent with
  the accepted concept of corporate strategy, and
  with the companys reward system
• Bottom up process is slow, political, and
  inherently conservative

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TCI LESSONS

• Top down process is faster, and shifts
  responsibility for bet the company risks to the
  ceo, who is better able to bear them
  (particularly true for owner-managers).
• However, top down processes suffer from two
  limitations
• Bounded rationality. In large, complex
  organizations, CEOs have too many competing
  demands for their attention to personally play
  the lead role in developing division level
  strategies.
• Groupthink. Faced with a threat, management
  team often rallies around a strong leader,
  offering uncritical support of the leaders
  policies. They ignore alternative strategies,
  edit out disconfirming data, and stifle criticism.

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MALONES MANAGEMENT STYLE

• Overcoming Bounded Rationality
• Wide bandwidth network for collecting real time
  data from inside and outside TCI (e.g., from
  myriad joint venture partners)
• 25 years of cable industry experience yields
  pattern recognition
• Best Processor Of Information Among Fortune 500
  CEOs
• Avoiding Groupthink
• Constantly testing ideas thinks out loud
  looks for devils advocates
• TCI culture encourages open flow of information,
  honest autopsy
• Continuity of management team serves to buffer
  and translate malones ideas
• Found coo with complementary skills and attitudes

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• I think its going to be very big and for me,
  what I really love is strategy. I like financial
  strategy. I like technical strategy. I hate
  running things, I hate getting subpoenas, I hate
  giving depositions, I hate getting called before
  a city council I hate all that. And I hate
  having 35,000 employees who need to be patted on
  the back. Thats great for Leo I hate that
  stuff. Just give me a corner somewhere where I
  can sit and scheme.
• JOHN MALONE BROADCASTING CABLE
• JULY 1998

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ECONOMICS OF HFC APPLICATIONS
Source DLJ Research
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Conclusion

• TCIs operational turnaround program showed quick
  and impressive results. The company reported a
  31 increase in operating cash flow in fiscal
  1997, compared to 1996.

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20-20 Hindsight

• On March 9, 2002, ATT acquires
  Tele-Communications, Inc. (TCI), the second
  largest cable company in the United States. TCI
  is renamed ATT Broadband Internet Services.