Cable-TV customers irritated for years with Tele- Communications Inc., take heart: The largest cable-TV operator in the US has been feeling its own pain lately. Its stock price is down. Its troops are demoralized. Its business plan is changing weekly. Quite frankly, TCI is in financial turmoil.
To some analysts who've been shaking their heads for years over TCI's byzantine corporate structure, this could perhaps be best described as the chickens coming home to roost. To understand why, you have to understand TCI. Its philosophy has always been to rake in cash from the core cable business and use it to build and expand more cable systems - all while investing vigorously in everything under the sun that relates to telecommunications.
So TCI helped start the Primestar Partners satellite with a bunch of other cable-TV operators, taking a 21 percent share for itself. It also grabbed a 30 percent stake in the Sprint Spectrum partnership for next-generation digital wireless telephony.
But the more TCI has poured cash into start-up businesses, the more it's gone into debt. According to the most recent data, TCI is carrying more than US$15 billion in debt on its books. Add to that some other accrued expenses and about $5.5 billion in deferred income taxes, and TCI is carrying more than $21 billion in total liabilities. In fact, TCI's liabilities just about equal the total annual income of all the cable-TV companies in the United States combined. Now that's some hole.
At the Western Cable Show in Anaheim, California, three weeks ago, TCI CEO John Malone said the "curse" of TCI and the cable industry in general is its debt load. "Every year the debt goes up," he said. "That's a paradigm that has to change as the industry gets larger."
But despite its investments and liabilities, TCI managed to squeeze out $7 million in positive cashflow in the third quarter - suggesting that its core cable business is strong. But that's little consolation against the $1.5 billion in capital expenditures so far this year - $574 million of which came in the third quarter alone.
All this has hammered TCI's stock price to a five-year low of around $13 per share - down from the low 30s only three years ago, before the 1992 Cable Act prompted the decline of many cable stocks. But even though the 1996 Telecommunications Act enacted a three-year death sentence for cable rate regulation, TCI's stock has continued to fall.
Malone had been taking a hands-off management approach for the last year or so. With costs exploding and the stock price down, he reportedly reentered the day-to-day picture with a vengeance about three months ago.
In early November, the company froze all equipment shipments indefinitely. Then it re-categorized its cable systems into three groups - one in which digital services are in place and being tested, one in which digital services are likely to be deployed next (such as dense markets), and one in which digital technology can be "opportunistically deployed" - meaning whenever TCI gets around to it. And only a few weeks after TCI shuffled a number of executives around to oversee each group, Malone froze their salaries and fired 2,500 low- and mid-level employees to cut costs.
All this internal turmoil has created a volatile environment at the once stable company. One TCI official - whose duties are being shifted from the corporate office to the newly spun-off TCI Satellite Entertainment unit - acknowledged that the layoffs and other restructuring have indeed affected morale. "How do you think they feel?" she asked. "This has been a very difficult change and period for all of our employees. But as painful as it is, it's necessary." A TCI spokeswoman wouldn't rule out future layoffs.
Of course, the main problem for TCI has been its confusing business structure. And so, recognizing that all these ancillary ventures have been diluting TCI's core stock, the company spun off its satellite unit in November. And just two weeks ago, it proposed putting all its burgeoning telephony ventures into "tracking stock" to get it off the parent's books. (Tracking stocks allow part of a company's assets to be traded separately while remaining under the corporate umbrella).
The TCI spokeswoman, acknowledging that TCI's complex structure has confused many analysts, hinted that more changes could be coming, and figuring out TCI's structure "will get tougher no doubt as we continue." Although "it's really hard to say" whether more major restructuring is inevitable, she said "we're always looking at opportunities in those areas." Key is maintaining TCI's strength and flexibility, she said.
The bottom line is that TCI is here to stay, even if it means turning itself inside out. At the Western Show, Malone warned that more cable rate-hikes could be on the way so the company can realize "legitimate returns." And he warned of dropping programmers that don't cooperate with TCI's new ways, glibly telling those that demand increasing carriage fees to ask themselves whether their business plan would work with 18 million fewer cable subscribers. "That tends to center their thinking," he said.
