Cable Guy: John Malone: Wiring Europe

John Malone has been American cable's smartest operator and toughest dealmaker. But he's finding it hard to translate his success overseas

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As if that were not enough, there are entrenched telecom monopolies, local media companies and wary regulators to contend with. Malone learned that lesson the hard way earlier this year in Germany, when powerful private broadcasters like RTL and public providers such as ARD and ZDF did their best to block him. "A scheme in which one player controls the heart of TV's infrastructure is against open competition," says Didier Bellens, CEO of RTL Group, which is controlled by Bertelsmann. Given that kind of opposition, it wasn't surprising that after spending months negotiating a deal to purchase six of Deutsche Telekom's regional cable systems for $4.9 billion--which would have given him 12 million subscribers and 60% of the German cable market--Malone found himself at loggerheads with German regulators.

It's not an uncommon position for Malone, who has a deep distrust of government and counts Ronald Reagan and Dwight Eisenhower among his heroes. But Malone also has a stubborn and patient sense of the value of a deal. So when the German Cartel Office demanded that he spend an extra $1 billion to $2 billion to upgrade the country's aging cable lines and offer cable telephony immediately--instead of gradually, as he had planned--he decided to walk away, as he often has at the last minute. "A very wise man," Liberty Media CEO Robert (Dobb) Bennett said at the recent stockholders' meeting, gesturing toward his mentor, "once told me the best investments are the ones you decide not to make."

Or at least to delay. Many observers think Malone is playing his classic waiting game in Germany, using his patience to drive down the price of Deutsche Telekom's cable assets before he swoops in again. "I don't believe he's done in Germany. This is how he negotiates," says a longtime Liberty observer. But price is only one part of the parley. Germany may be Europe's largest television market, with 33 million households, but it's also one of the most antiquated. Already, two foreign players in the German cable market, NTL's Iesy and Callahan Associates' Ish, have had to scale back the pace of their digital TV and telephony roll-out as well as earnings expectations.

German basic-cable subscribers can watch as many as 30 channels that air popular game shows like Wanna Bet? or mini-series like The Count of Monte Cristo for $10 to $20 a month, which is typically included in apartment rents. To complicate matters, German cable providers don't own the "last mile"--the wire into the home. That privilege is reserved for thousands of so-called Level 4 operators, made up of everyone from real estate companies to apartment-house owners. "The oddest part of it all is that the cable operators themselves don't get the lion's share of the money. The Level 4 operators do," says Michael Lynton, head of AOL Time Warner's international ventures. "Ultimately the economics of the business have to change for cable operators to be interested in further investment."

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