MALONE GETS INTERACTIVE Liberty Chairman Swings GI, Music Deals

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John Malone may have relinquished control over cableoperations with the sale of Tele-Communications Inc. to AT&T Corp. last month, but hisinfluence over interactive television programming and technology got stronger with twodeals that his Liberty Media Group landed last week.

Liberty Media, which owns stakes in about 100 cablechannels as well as Time Warner Inc. and USA Networks Inc., added to that portfolio whenit acquired an additional 3-percent stake in General Instrument Corp. The acquisitionbrought its total holdings in the set-top vendor to 18 percent.

Separately, Liberty -- an AT&T Corp. subsidiarycontrolled by Malone -- agreed to contribute its Internet and interactive programmingassets to TCI Music Inc. in exchange for 128.8 million newly issued shares in the company.

Liberty bought the GI shares for $280 million from New YorkCity leveraged buyout firm Forstmann Little & Co. GI separately agreed to purchase 5.3million of its own shares from Forstmann Little for $148.9 million.

The deals whittle Forstmann's stake in GI to less than1 percent, ending an eight-year relationship between the two companies. Forstmann had beenlooking to sell the shares since last August.

The deal is also expected to solidify Malone's tieswith GI. AT&T Broadband and Internet Services, AT&T's cable arm (formerlyTele-Communications Inc.), is GI's biggest customer.

"What this represents is Liberty's strong beliefin broadband communications in general and in General Instrument," said Geoff Roman,executive vice president of GI. "We view this as a strategic investment."

Roman added that while Liberty and AT&T are operatedseparately, GI expects to continue to have a strong relationship with AT&T, addingthat the investment "indicates we're an important technology."

"We've worked very closely as we'vedeveloped our products," Roman added. "I think a lot of our strategies are verymuch the same. There is some advantage from Dr. Malone's insight."

AT&T and GI also announced Friday that GI was the"first contracted development partner" working to supply technology forAT&T's Internet Protocol telephony deployments. That solidifies an earlier arrangementunder which GI would supply gear such as cable modems, the DCT-5000+ set-top with abuilt-in modem and interface terminals for IP phone service.

Leslie Ellis, senior broadband analyst at Paul KaganAssociates, speculated last week that Malone might be spinning scenarios that would see GI"aggregate" other cable-related technology companies that have historic ties toTCI. Those could include cable hardware maker Antec Corp. and CommScope Inc., the coaxialcable maker that once was part of GI.

"This kind of strategy would make sense, givenMalone's strong links to GI and his track record for aggregating companies," Ellissaid.

TCI and its Headend in the Sky (HITS) affiliates hadalready committed to buy 6.5 million to 11.9 million digital set-top boxes from thecompany between 1997 and 2002. So far, TCI has purchased about 1 million digital boxes.

Although it is rumored that the order has been stepped up,Roman said that any increases would depend on how fast AT&T Broadband deploys digitaltechnology and how many customers they can attract for the service.

No matter what happens with increased orders, by gaining alarger piece of GI, Liberty Media gets a significant share of one of the top set-top boxmakers in the world. Perhaps more importantly, Liberty gets major input in how thetechnology for interactive digital television in delivered.

"If you go back to the AT&T/TCI deal, that was abig data point for what the cable industry could be," said Gary Farber, an analystwith SG Cowen & Co. "It's all about access. The GI deal reinforces the factthat John Malone, in his mind, has a lot of thoughts about how he wants to access theconsumer. The digital box is the access point."

And while the GI investment gives Liberty an inroad on theequipment side, the TCI Music deal makes Malone an even larger player in the interactiveand Internet content arena.

Liberty Digital's Internet and interactive assetsinclude investments in priceline.com, iVillage, Sportsline USA and drugstore.com.

Crucially, Liberty also has the rights to provideinteractive video services to AT&T cable systems under an agreement that stems fromthe AT&T/TCI merger.

In return for contributing its programming assets,Liberty's Liberty Digital unit, run by Lee Masters, will get 128.8 million newly issuedshares of TCI Music Series B common stock, upping its interest in the company from 86percent to 94 percent.

Malone managed to significantly increase the publicvaluations of both TCI Music and Liberty with the announcement.

TCI Music's share price rose from $8.38 the day before theannouncement to $29.56 the next day and $41.63 at the April 8 close. Liberty's sharesalso got a big lift, with the company's A shares trading at $68.75 on April 8, up$12.87 from its April 5 close.

By shifting around assets, Malone also increased TCIMusic's market capitalization by nearly five times. Based on the number of sharesoutstanding prior to the agreement – 81.4 million – TCI Music's marketcapitalization was $3.4 billion, up from $682.1 million on April 5.

Probably the biggest piece of the deal, for investors, wasTCI Music's access to a 6-MHz channel on AT&T Broabdand's network. Thatchannel, which can be split into 12 digital programming channels, will give Liberty avenue for its other programming assets and millions of guaranteed viewers.

Some analysts value the addition of that 6-MHz channel at$1 billion.

Whatever the valuation, Janco Partners analyst TedHenderson said the inclusion of that analog channel could prove to be very important toLiberty in the future.

"It allows them an avenue to roll out services,"Henderson said. "You can create a wonderful service, but if you can't createdistribution for it, it's useless. It's an outstanding asset to have. Now theyknow they've got a home for these things [interactive and Internet programmingassets]."

The channel also provides an excellent testbed for digitalprogramming that later can be offered to other systems as they upgrade to digitaltechnology.

Liberty Digital's Masters said the company wasfocusing on six to seven interactive applications it wants to provide in the 6 MHz ofbandwidth it is allotted by AT&T, including e-commerce, interactive advertising andgaming.

But he said the company still was hashing out its businessplans and characterized the potential applications as in the formative stages.

"We are still in the stage of determining who we wantto partner with," Masters said.

Liberty wants to offer the initial two or three interactiveapplications in conjunction with AT&T's deployment of advanced digital set-topboxes, which Masters said he expects to roll out late this year or early in 2000.

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