Malone: Im Through Biting Tongue (Full Text)

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At the National Show, Tele-Communications Inc. chairman and CEO John Malone held an
impromptu discussion with reporters, including
Multichannel News' Ted Hearn, over
the high-definition TV and digital issue. An excerpted version appeared in the May 11
weekly edition of
Multichannel News. The full text of the discussion follows:

Q: Is the set-top box issue settled?

Malone: What you're really talking about is high-definition digital. I think we are
evolving to a consensus that probably [ABC Television Network president] Preston Padden
has stated the best, which is progressive-scan 720p [format] will become, in my opinion,
the transmission standard for cable and whether broadcasters put that over the air or want
to broadcast 1080i [interlace format], I don't know. But I think what goes down the cable
is going to be 720p.

Q: Do think the cable industry and the broadcasters can come to an agreement on digital
must-carry?

Malone: We will fight must-carry to the death on digital high-def, because who's
going to tell use what channels to take away from 100 percent of the people so that 1
percent of the people can have something else?

So, you know, if [broadcasters] are going to cram it, I think they've got serious,
serious political issues. That's just my personal opinion.

If, on the other hand, they cooperate with the formats, then we should be able to
accommodate the carriage of anybody who can afford high definition within the normal
parameters and bandwidths that we have available to us.

Q: Do you think there is room for local cable systems and local broadcasters to work
out voluntary carriage agreements?

Malone: Sure, absolutely. But they've got to pick a standard that's spectrum
efficient. If they pick a standard that spectrum inefficient and we can't afford to
process, then they've hung themselves in my opinion.

They can transmit anything they want. I'm not telling what to transmit over the air.
I'm just telling them that what has to go up the cable system, if they are going to be
efficient about it, needs to be a progressive-scan standard that doesn't require an extra
100 bucks of capital in everybody's set-top."

Q: So does that cut out 1080i?

Malone: It cuts out 1080i because 1080i has a memory requirement and a processor
requirement that makes it prohibitively expensive to put in every set-top box.

So you'd end up with a set-top box that was specialized only for the high-definition
set customer and it would be a considerably more expensive box.

And, furthermore, the spectrum that 1080i would take up on the cable system or the
satellite system -- same issue for the satellite guys -- would be highly wasteful.

And so we'll fight that pretty hard, because we think that the government would be
making a huge mistake to drive toward an inefficient standard with respect to the use of
spectrum, period -- and particularly our spectrum on our cable systems.

Q: Where does that leave things then with HBO [which has announced support for 1080i]?

Malone: They're not going 1080i. They're going to go whatever it turns out that
they ought to go.

Everybody sort of grabbed for 1080i because, you know, there were proponents of it that
said, "1080i's great -- Sony [Corp.] makes their studio equipment in 1080i," and
so everybody sort of gravitated to 1080i.

They're are going to end up doing I think what is the most efficient, practical and
quality-wise ... Go look at the Microsoft exhibit.

720p is a better format today for any kind of sports -- anything where you have moving
pictures -- than a 1080i, and it will evolve to be far superior and far more affordable
for the set manufacturers.

So it's just a question of, you know, let's not get for the next fifty years locked
into an arcane technology because certain people are nervous about Microsoft.

Q: I'm puzzled about one point. Why are broadcasters saying to you that they'll run
into trouble with the government if you cut them in on digital revenues?

Malone: The only ones who are saying that haven't heard the story. You want me to
give you the story?

Q: Sure.

Malone: The story is as follows. Broadcasters transmit over the air high definition
in whatever format that they think is appropriate for free.

They put up the cable system at 720p a multiplexed, compressed version which we deliver
to our customers along with an HBO [Home Box Office] high-definition, a Madison Square
Garden [high]-definition -- we probably offer the public 12 channels of high-definition
signals, which at 720 progressive takes three analog channels. So it's spectrum efficient
-- and, for that we charge the customer, a reasonable fee.

Now these are customers that are paying 8,000 bucks for a TV set. The government
shouldn't be crying a lot about that. The broadcasters get a piece of that. That helps
them defray the cost of doing it. And anybody who wants it for free can get it off the
air."

That's my solution. Nobody gets hurt, they fulfill their public service obligation of
over the air transmission. And if they want, the signal that they deliver to us can be
time shifted, it can be modified from day and date with their standard broadcast signal,
they can put data on it, they can do all kinds of things. So they can enhance it, in other
words.

The consumer ends up with a product that can have on-screen graphics, that can have all
kinds of things integrated with it because of the technology. That's the point we keep
trying to make, which gets lost in all the noise.

But the reality is that from a cable transmission point of view, from a
computer-technology point of view, a progressive-scan technology is the right way to go.
It's at least comparable, if not superior, to 1080i, and it can evolve forward with the
passage of time, whereas an interlace technology is dead. You're going to have standard
that's dead for the next 50 years.

Q: Would this be the problem, though, if the a broadcaster put out a signal at 1080i
over the air but got paid by the cable to accept 720p? Then that would be a problem with
the government.

Malone: Why would it be? The customer would have the option.

What I am doing for the customer is just like I am doing for his existing signal. He
can get it free over the air, but if he gets it from me, he pays.

I ain't free. It's private capital, guys. This is not the Internet. This isn't a
government subsidy.

This is private enterprise and the broadcaster will have fulfilled his obligation to
make it available for free and I will have done my private enterprise job of transporting
it and defraying my costs, plus making a reasonable profit, by delivering it.

It seems to me that's exactly the model we have now on analog television and it's
exactly the model that will evolve, in my opinion, on digital television.

And I think the real answer is: Let's be efficient about this, let's give the consumer
a television set that he can afford and let's give him enough programming, enough choice
that we are not becoming a very narrow ...

If you see this thing go 1080i, you're going to have a squeezing down of voices,
because it's so inefficient on spectrum.

Instead of a proliferation of channels, you are going to see a diminution of channels,
simply because that standard is too spectrum inefficient -- and look what it does to the
satellite guys, whom I seldom cry for.

DirecTv [Inc.] has 32 transponders to work with. 1080i is one per transponder. Do you
want DirecTv to shift from 168 channels to 32 channels? Tell them they got to carry
high-def at 1080i? I mean, it's brain-dead.

The point is there has been a technological revolution which some of the people in the
broadcast industry have missed. It sort of passed them by. It's called digital, it's
called progressive scan, it's called microprocessors and digital memories and all that
kind of shit. OK?

And they missed it -- some of them. Some of them got it, some of them missed it.

I think they are all going to get here pretty quick, and I think in and around that is
peace in the valley between local cable and local broadcast.

Local cable has a big vested interest in helping local broadcast become successful in
high definition. Localism is very powerful for cable. It enhances cable. It makes it more
valuable to its customers.

So we're not at odds there at all with the local broadcasters. But they've got to get
in line on a technical standard that's affordable and that we think is spectrum efficient.

That's the message, short and sweet. That's the page I'm on." And I really think
that if the broadcasters dismiss this once-in-a-lifetime opportunity to claw their way
into subscription revenue streams, then they really are suicidal.

And then I'll have to make a statement like [vice chairman of Time Warner Inc. Ted]
Turner made to the publishers -- you know, that he's glad he came to their dinner because
they won't be able to afford it much longer.

Q: So you won't carry them unless the broadcasters [give up] the 1080i format?

Malone: In high definition? Well, I'll do whatever the government orders me to do.
But if the government orders me to do it, I'd hope they will also order me which channels
to drop. That's my only request.

And it ought to be explicit, system by system. You know, here's the channels I'm
carrying. Which ones do you want me to drop? C-Span? How about ESPN? How about CNN? Let's
just shoot one of the three news networks we carry. Tell me which one, guys. You get the
picture?

That's not to say that they couldn't come up with a must-carry theory that said as you
rebuild, as you expand capacity, you've got allocate 20 percent of your expanded capacity
to carrying this spectrum-inefficient signal that broadcasters want to burden you with.

I really this it's suicidal for them because I don't think it's the wave of the
technological future.

So that's kind of the page we are on and I'm going to start evangelizing that position
because I think it's very important.

Q: How will you do that?

Malone: I'm going to stop biting my tongue and I'm also going to approach friendly
broadcasters and suggest we do bilateral deals, you know, like right now."

And my willingness to do those will be contingent upon the technology that we can agree
on.

Does the government really want me to have my customers pay for an extra 100 bucks a
box so that a very small percentage of people can get high definition?

Do they really want to tell me which channels to take off my cable systems so that the
broadcasters can be a spectrum hog? I don't really think so." I really don't think
the broadcasters who think about this really want to do this as a cost center. I think
they want to do this as a profit center or at least as some offset to their incremental
expense, or they get buried.

HBO has to do it once per country. The broadcasters have to do it in 185 markets or
something.

You think about the cost differentials of doing that. We've got literally hundreds of
satellite channels that we can use for multiplexing all the cable networks. We do that
once per country.

If they want to play spectrum hog, I think it's almost suicidal for them. I think it
would be very foolish for them to do that.

Q: Where do things go from here? And what's the state of the negotiations with the
major broadcasters?

Malone: Well, I thought it was a huge breakthrough when the [Walt] Disney [Co.]
guys came out publicly and supported the scheme I am talking about.

They haven't gone so far as to say that maybe they can get some subscription income out
of it. But they have supported the technology.

We've got various TV set manufacturers now. And then ask [Microsoft Corp. chairman]
Bill Gates what he wants, right? And then ask Silicon Valley what they want.

There's no question out there what they want. They need a progressive scan. They know
it's more efficient.

So, you know, that's the message. We just have to keep delivering it.

Q: What kind of bilateral deals did you have in mind?

Malone: The one just described. I'll go to the four local broadcasters in a market
and say, you know, work with me on this and I'll carry you for free and if you want to
make a charge, I'll administer the charge. I'll secure it, I'll multiplex it, I'll deliver
it, you can time-shift it if you want, and if it's a subscription business, we'll collect
and pay, okay. That's the deal.

I haven't conspired with my satellite competitors. But my suspicion is that they are on
the same page -- that anything that's spectrum-efficient in high-definition they would
support.

Q: [Tele-Communications Inc. president and COO] Leo Hindery told Congress that his box
would pass though a 1080i signal.

Malone: It will. It will. It will just pass it through. We can't do anything to it.
We can't doing anything with it. We can't enhance it. We can't put graphics on it. We
can't do any interactive on it. But we can pass it through and it will use a full analog
channel, OK?. It'll be a spectrum hog. That's the whole point I am making."

A 1080i, you know, is one that is just going to be passively passed through and it will
displace a lot of other programming -- right now 14-to-one. So for every 1080i must-carry
digital signal the government would make me carry, I've got to wipe out 14 networks. Get
the leverage?

If they want to tell which 14, I guess I'm a servant of the government. But the reality
is, I don't think it makes a lot of sense. It makes a lot of sense to cooperate, to have a
standard that's spectrum efficient, that's affordable and that's the wave of the
technological future.

In terms of passing through, yeah, I'll pass it through. But tell which 14 to take off.
And the satellite guys -- tell them what 8 to take off.

Q: You just deal with the first four broadcasters. What about the next three to seven
broadcasters?

Malone: Fine. If there's a demand and they want to spend the money on it, fine.
We'll do two analog channels at four-to-one and multiplex. Look, it's in the interest of
the cable company and the community and the broadcaster to work this out."

Q: Leo [Hindery] insists that this is the networks' idea, so this isn't an agenda that
you are necessarily pushing?

Malone: Leo is welcome to his opinion. It's an agenda that I think is crucial for
the cable industry in terms of spectrum efficiency. I think the broadcasters need to come
to a consensus themselves, but I think they are getting there. And the set manufacturers
have to come to a consensus and I think they are getting there.

The problem with the set manufacturers is that they thought it was either going to be
480p or it was going to be 1080i. The idea that it could be 720p -- you know, Japan
doesn't move that fast. They are kind of still recovering from the shock that they've
engineered the wrong thing. But they'll get there.

Q: A six to 10 digital subscription tier -- what would be the programming on that tier?

Malone: It would be, in my view, the local broadcasters that choose to be high
definition, plus it would be the key major cable networks whose programming is readily
adaptable into that format. So anything that's movie-based or anything that's currently
produced on the sports side or Discovery [Channel], which has always been producing its
programming in a high-def format. So, you know, Discovery, HBO, and Starz! and Showtime
and pay-per-view, probably Fox Sports and ESPN would probably be the early high-def.

Q: Not duplication, you're talking about new programming?

Malone: No. It would be their existing programming in high-def format.

Q: How much do you expect the cable networks to be charging you for an HDTV feed?

Malone: I'd hope it's free and then I can charge a lot for it when I pass it on.
What do I really think? I think it will vary from supplier to supplier. Some of them will
have very low incremental costs of doing it and they'll probably bundle it with their
analog. So maybe it's a way for ESPN to give back a little of the money they just stole.
It would be to say, "OK, the bad news is the ESPN rate is going up, the good news is
you can have ESPN high-def without a charge." Wouldn't that be nice? Why don't you
guys suggest that to Disney?

Q: So you got four major networks in a 10-channel package at $10. What do you expect to
be paying the four major networks?

Malone: I don't know. Something reasonable.

Q: Forty percent of the take? Sixty percent of the take?

Malone: I think you would have to do some focus group and some sense of what the
values were. Don't forget these are available off-air for free.

I remember a phone call I got a few years ago from one of the network heads who said if
we were to pull the network off broadcast and put it on cable, would you pay $2 a month a
subscriber for it? I said no, but I'd pay $1. It never happened.

It's worth a helluva lot more if it's exclusive than if it's free. How much does a
supermarket charge for eggs if there's a truck out there with eggs for free? You don't
sell a lot of eggs in the supermarket.

So to us it would be more of a service, since you can get it for free otherwise if you
go through the technical issues of receiving it.

Q: How much of an economic incentive are they going to need?

Malone: Anything's better than nothing. My mother used to tell me that and she also
said beggars can't be choosers.

Q: Maybe universal must-carry is better than up on a tier for 50 cents a month?

Malone: You mean for them?

Q: Yeah.

Malone: They've got huge costs and no incremental revenue. So why is high-def a
good economic proposition for a broadcaster? Give me any business model that says that
it's not just a cost center, a big loser. At best, they retain parity, because cable
networks will clearly go high-def in a spectrum-efficient way. So the question is, then,
what does a broadcaster do if he's faced with HBO and Fox and so on going high-def?

I think it's better than that. It's clear to us that we can make deals with Fox and
Disney. It's sort of clear to me that I can make a deal with NBC. I don't know whether I
can make a deal with CBS. I'm sure I can make a deal with PBS [Public Broadcasting
Service].

And then the independent stations, I think, we have a fair degree of leverage over
because of our transport -- so I'm sure we can make deals with them.

So really, I think it's a question of pounding this thing. If the government wants to
say, "You got six weeks to work this out," that would probably be a help -- and
if it's not worked out in six [weeks], it's nuclear. Sometimes you need that to drive to a
consensus.

Look, a lot of this is fear of the computers, fear of Microsoft, fear that if you go to
a progressive scan, somehow or other Bill [Gates'] got some trick up his sleeve and he's
going to own the world -- which really is only a timing difference, because he is going to
own the world anyway. It's a question of whether this is his route or some other route.

Q: Could the studios derail this by charging too much money for time-shifting their
programs, like Seinfeld?

Malone: That's why it is important. If there was any must-carry, it would probably
be day and date identical signal, you can't have two bites at the apple and so on.

Whereas a private deal with cable gives the station flexibility to broadcast one thing
at analog and a different thing up the cable for high-def. So no one studio could really
hold you for ransom. If it turned out they could make a high-def with every other supplier
except Seinfeld, then they just don't put Seinfeld at high-def and they still have a
high-def signal.

Q: What if the government comes back to you and says, "We are imposing
must-carry," and also says that the digital-broadcast signal is the first purchase
the cable subscriber has to make?

Malone: I think I would short my stock and hire the best constitutional lawyer I
could find, because I think that's a taking. But I'd also start a PR [public relations]
campaign with the public about here's what you are going to lose and here's the relevant
phone numbers of the relevant federal officials who seem to be making this decision.

Q: But that's never worked for you. Any time you've taken off a channel for any reason,
it's always backfired on you.

Malone: This is massive. You are not talking about a channel with a programmer
who's upset. You're talking here about lots of channels and lots of programmers who will
be upset.

It's just that you can't put 10 pounds of programming in a five-pound bag. You can't do
it. If they are going to force the programming decision, then they are going to force some
pretty tough ... near term.

Now as I said before, the way they do this is probably to say, "We'll phase it in
over rebuild time," or whatever. Or they'll have some rule that says you don't have
to use more than x percent of your channel capacity for this in any event.

I just don't see our government telling us that we've got to drop lots of currently
carried networks in order to accommodate a spectrum-inefficient transmission for a
customer set that does not even exist today.

Q: But they have done it before, and the arguments you're making didn't work
politically the last time and didn't work legally.

Malone: Well, they really didn't do it before. If you remember how they phased in
must-carry: There was phase in; there was a rule you're only required to carry a certain
percentage of your channels have to be broadcast. They were careful about the imposition.

Q: You didn't think so at the time.

Malone: My job is to bellyache, right? I mean it did hurt. It wasn't fun. But it
was at least rational and you were talking about making a judgment call between two
signals -- both of which everybody was going to get to see. Now you're talking about
making a decision between one signal everybody gets to see and another signal nobody gets
to see -- unless they pay $8,000 for a TV set. I wouldn't want to run for political office
on that platform, OK?

Q: What sense are you getting from regulators and Congress?

Malone: They want us to work this out. They want a summer of love between the cable
industry and the broadcast industry.

Q: If that's the case, they why are we all talking about this every day?

Malone: Because it hasn't been decided yet, it hasn't been announced yet, and
because the broadcasters are building up their intestinal fortitude to decide how much
risk they take on these licenses and just how greedy they can afford to look. And there is
clearly a big split between the networks and the NAB [National Association of
Broadcasterts] on this.

Q: How far along would say talks are?

Malone: We've been talking for about 9 months -- "we" being CableLabs
[Cable Television Laboratories Inc.], since this is a technological issue and I'm chairman
of CableLabs.

We've had seriatim meetings with all the networks now I think three times and
one-on-ones with several of them and a lot of sidebar discussions. I think we are making
progress.

Basically, the array, as I read the array, is that Fox would love to stay at 480p and
multiplex, but they are willing to do 720p as a high-def standard.

Disney -- Preston Padden -- has clearly signed up for 720p. And he expects to do 480p
during the day and 720p at night. And, of course, 720p is a high-def standard. So there is
no question that it is high-def.

I think NBC is thinking about it. And I think there is a split within CBS.

Q: I talked with CBS in the last week and they said 1080i.

Malone: Well, then they are not getting on my systems and they may be the only
broadcaster that doesn't.

Q: So you're saying that if CBS picks 1080i, they're not getting on your systems.

Malone: They are not getting on my systems.

Q: That's different from what Mr. Hindery said last week at the hearing.

Malone: They're not getting on my systems. I'm not saying I can't technologically
carry them, but I am not going to voluntarily put them on. No way.

Q: Can they get on Leo [Hindery's] systems?

Malone: They can get on all Leo's systems and none of mine. We'll make a deal. I am
not going to voluntarily put a spectrum hog on my systems. I'm not.

If I am ordered to do so, I'll comply with orders ... by the FCC [Federal
Communications Commision]. They have the authority. They can do that, if they want.

But I am not going to voluntarily do that ... for all the reasons I have just been
describing. It's wasteful, it's inefficient, it's not the wave of the future, it's a
spectrum hog, it'll force many programmers off. It just doesn't make sense.

If they are dug in on a technical standard that we don't think makes sense and the
other guys are willing to go the other way, then I'm going to go as far as I can with the
guys who are willing to go the way I think they ought to go and I'll play hardball with
the guys who won't. I mean, what else do I do as a businessman?

Q: Is there some misunderstanding between you and Mr. Hindery on this issue?

Malone: Well, I'm more, I'm more ... I'm not our politician. All I know is that
it's my money, it's my consumer and I'm trying to satisfy my customers' needs and be as
efficient as possible and I am not going to do something voluntarily that I think is
against the interests of my end customer.

Q: Have you lost the 16-by-9 battle? Are the new sets going to be made in that format?

Malone: At 720p, the set-top box can accommodate either format on the fly, which
means the signal we put out can go either way. Also, at 720p we can decimate the digital
signal and offer it for standard definition. In other words, every TV set could receive
the broadcast transmission whether it was high-def or standard def, which means the
broadcasters, if they want to differential their signals, would get two bites at the apple
instead of one.

It's what makes it so attractive. And, you know, for the life of me, I don't why these
guy are dug in where they are. But that's kind of where it sits.

But my guess is that if one of the broadcasters hangs in at 1080i, that there will be
no general agreement reached and it'll it be a marketplace-driven agreement and we'll just
start going ahead doing bilateral deals with the broadcasters who do want to do it with
us. And the ones who don't just won't get parity, won't get carried, won't get whatever.

Q: Some thoughts on satellite as an ally on this? Maybe a competitor?

Malone: I think satellite has exactly the same issues that we have on this subject.
They want to be spectrum efficient. They wouldn't have a business if they weren't spectrum
efficient. So we've got more spectrum to play with than they do.

Q: So why not demand must-carry and screw up their lives?

Malone: I think it's bad for the public. How can you possibly justify taking
programming away from everybody in order to inefficiently deliver programming to a very
few people? That's the question.

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