Lee Masters surprised a lot of cable executives about one
year ago, when he decided to jump from E! Entertainment Television to head up a new
division at John Malone's Liberty Media Group, then called Liberty Interactive.
Shortly after Masters came on board, Liberty Interactive merged with TCI Music, creating
Liberty Digital, a holding company with interests in several different interactive
programming and software companies. The stock has had a wild run since Masters arrived --
it was trading at about $50 per share at the time of this interview. And although he was
known for building E! into the powerhouse it is today, Masters has a much different
challenge with Liberty Digital -- he has to successfully gamble on technologies that will
shape the future of how consumers watch television and buy goods. Masters spoke recently
with Multichannel News finance editor Mike Farrell. An edited transcript follows:
MCN: What's your assessment of the time
you've been there so far?
LM: It's been a phenomenal year. When I started
Jan. 1, Liberty Digital was a private company with a handful of assets. Then we did the
[TCI Music] reverse merger, and the value of the company went through the roof. It's
over $10 billion in market cap -- multiples and multiples of shareholder value.
MCN: Liberty has been doing a lot of deals lately.
What's next for the company?
LM: There are two different kinds of deals. [One
type is] investments where we take a stake in a company, and you will continue to see us
do these. The return has been astronomical. In terms of other types of deals, there are
the ones that help us to launch these services. We've done a lot of them. We're
very strongly in it.
We're in an outstanding position. We're out there
with every one of these deals. We have a real sense of the marketplace.
There are a number of players buying into [this market]
significantly, but very few are our size. Our view of how things are going to roll out --
we have a very television-centric view . Then there are all of the obvious things, like
MCN: There have been some cable operators that have
been a little leery of buying these huge set-top boxes with lots of PC-based electronics
and software crammed into them. Then there is another school that says a lot of that
functionality can be placed at the headend. How is it going to work out?
LM: It will work in three stages, staring with the
initiation of the deployment of the [General Instrument Corp.] DCT-5000 [digital set-top],
which should be in mid-2000 through other cable operators. But when it becomes
commonplace, does that mean 30 percent, 50 percent or 70 percent penetration? My guess is
that it will be three to five years until you get to where it is fairly commonplace.
MCN: Is it Liberty's mandate that you make sure
this happens sooner, rather than later?
LM: We can nudge and make it more attractive for our
distributors. But at the end of the day, there are capital restrictions. They may think
it's attractive, but there are other things they have to put their money into.
MCN: Is putting this functionality in the headend
where you think the industry is moving?
LM: Some functionality will work at the headend. In
some of the speeches I have made, I talk about the 10 trends that are going to have a
dramatic impact. One of the things I really believe in is the home-area network, using the
set-top box. But is the cable operator really willing to cede that? I don't think
they are. Right now, they're at that point where they're trying to justify the
If you look beyond and look to where the home is going,
with wired homes and network homes, that's a very, very valuable piece of real
estate, and the cable operators will do whatever it takes to try to keep their position.
They're probably wrestling with the relative values right now.
MCN: One thing you hear a lot about as far as
digital boxes is the cost. If you put a lot of that functionality in the headend, is it
going to be a lot cheaper to roll out those boxes, or is it just a matter of shifting the
costs from one side to the other?
LM: There's a lot that can be done at the
headend, and if something can be centralized, it makes a lot of sense. There's a lot
of debate with Internet folks right now about servers and where the hard drive and data
should be. Even with PCs, there's a lot of discussion: Why keep all of the
information at the PC? Why don't you keep it centralized and have huge server farms?
So is it at the home? Is it at the headend? Is it a
regional server? Or is it one national server? You have various companies that have
You have Broadcast.com [Inc. with] a centralized server in
Dallas. Then you have regional companies like Intervu [Inc.] that have their servers kind
of dispersed outward around the country regionally. Then you have Akamai [Technologies
Inc.], which has them even further dispersed, closer to the edge, and companies like Ivy,
which we invested in, which is a satellite distributor -- they want to have the servers at
each of the headends. And then you have something like TiVo [Inc.] and Replay [Networks
Inc.], which have a server and a hard drive right in the home.
There are certain things each one is appropriate for, and I
don't think we really know what the ultimate shakeout is going to be. I think the
more sophisticated, high-end homes are going to want a high-capacity server -- a hard
drive in their homes -- so they can record things and watch them, so I think that will be
There will be a certain amount of businesses that will
allow stuff to occur at the headend of the cable system, whether it's true
video-on-demand, and I think there are going to be a lot of things that occur regionally.
I don't know that there is a clear answer there. I do
know that there is a wonderful opportunity for that piece of real estate in the home.
MCN: So you see a future with a whole lot of
LM: Oh, there are so many players out there --
companies like Broadcast.com, RealNetworks [Inc.], Intervu, Akamai, iBEAM [Broadcasting
Corp.], and then there's Sandpiper [Networks Inc.], Exodus [Communications Inc.],
Digital Island, the cable operators, the CLECs [competitive local-exchange carriers]
getting involved in high-speed data and the wireless broadband providers.
There are going to be a ton of ways into the house. But if
you believe in home networking and the notion that people are going to want to have a lot
of things put together -- have more than one computer go online -- I think right now
it's kind of hard to imagine.
The immediate response is: 'Networking just sounds
like such a technical thing, and only techies would want that.' But we're in the
phase now where homes are shifting from having one PC to two. And if you have kids, and as
the cost of PCs comes down, and as Internet access becomes cheaper and more available,
everybody wants to be online -- you're going to be looking at some very simplified
networking. It frightens people because it sounds really techy, but I think that's
the next step.
And then there are other things that will be introduced
over the next five to 10 years. The cable operators are really in a wonderful position to
provide a lot of these services, these wired services. They're wrestling with costs
and the installation today, but I think there is a wonderful opportunity out there.
MCN: One of the companies you have an investment in
is OpenTV Inc. How did that all come about? And what's your strategy for the
LM: Well, again, what we're trying to do is to
invest throughout the value chain in interactive TV. There are a lot of things. For
instance, one of the great interactive-TV applications is the electronic program guide.
Well, we can't make an investment there. That sector of the business is very well far
along, and Liberty Media has the investment there. But had this been five years ago, that
would be the place where we had first put our money.
Another area would be VOD. That's a very controversial
sector right now because of the hardware costs, and you have these studios wanting to
extract a lot and the distributors wanting to get their fair share. It's very
difficult to be middleman in the equation, although I guess it could be done.
We haven't quite figured out a way to make the
economics make sense for us. But there are a whole lot of other areas that we think do
make sense that we're making bets in.
One of them is this whole notion of middleware. Right now,
there appear to be three companies that are positioned for middleware on the set-top box:
Liberate [Technologies]; Microsoft [Corp.] with 'TV pact'; and OpenTV, which has
done a fabulous job offshore, internationally.
So we've made an investment there. We think they are a
great player. We think they've done one of the best jobs of creating software for
interactive television. We've seen it in Europe, and it's pretty impressive. We
think even if it's only successful in Europe, it's still a great investment for
us. The IPO [initial public offering] goes out this week. We have very big hopes for it,
and we think there's a good opportunity for some great growth here.
MCN: Does this mean that in the future, you may be
interested in forming some kind of strategic alliance with Liberate or Microsoft?
LM: If you're talking about strategic
alliances, of course we have had conversations with all of the obvious players, and some
of them may come to fruition. Most of them probably will not.
(At this point, Masters' assistant shouts out in the
background that Liberty Digital's stock just hit the $50-per-share mark.)
LM: What? We just hit $50?
LM: That's my assistant. She has options.
We have had conversations with everybody. When you're
in the deal business and you're always talking deals, you know that 15 percent to 20
percent of them happen, and 80 percent to 85 percent of them don't happen. So we have
a lot of balls in the air. We talk to a lot of people. I don't want to be vague in my
answer. We see a lot of possibilities. You know, getting deals done with very large
companies is difficult.
MCN: OpenTV has had success in Europe, but not a lot
of luck in the United States yet. Is part of the strategy behind the investment in that
company to use your connections and your influence in the industry to try to get some of
the other set-top-box makers to look at them in another light?
LM: Absolutely. I don't know if you've
noticed, but GI invested in OpenTV in a round with us. We led that round -- we led the
consortium on that one, and the notion is to try to help get cable operators and
Pace [Micro Technology plc] already uses the [OpenTV]
platform in the [United Kingdom]. So you have Pace, which is now being introduced in the
United States, I guess, with Time Warner [Inc.]. GI is an investor, so our intention is to
try to put together a consortium of set-top-box manufacturers and cable operators to make
this into a viable opportunity.
The industry won't back just one. We know that, so we
think there is a wonderful opportunity there. And when people see what this does --
it's a pretty mature product. They've done a lot of work, and it's up and
running and being used in Europe with great success.
MCN: And you also have control of that 6-megahertz
channel as part of Liberty Media's spinoff from AT&T Corp. Can you use that as
LM: For what?
MCN: For the software that ends up on the box?
LM: No, not really. I don't think we have any
leverage there. We have a wonderful distribution footprint that we'll use to
distribute these interactive-TV channels, but it doesn't give us a whole lot of
Nor would we do that. We think the product that OpenTV has
is terrific, and we think when the cable operators and the satellite providers see it --
EchoStar [Communications Corp.] is going to be using Open TV -- they'll be very
satisfied with it. The product and the service will speak for itself.
MCN: Have you decided what you'll ultimately do
with that 6-MHz channel?
LM: Specifically, the notion is for 12 to 15
24-hour-per-day electronic-commerce channels -- very category specific: one for
automotive, one for travel, one for health, a whole big series of them. And we'd be
introducing them a handful at a time.
MCN: So that's a done deal? When will AT&T
Broadband & Internet Services subscribers start seeing it?
LM: Again, that's going to be contingent on the
deployment of the boxes. What we're targeting for is that when they set their
showcase cities up, we could have some of our services available to make their tests more
attractive. Probably at the end of the second or the beginning of the third quarter,
MCN: This seems pretty much like an Internet channel
on the TV. How is it going to look?
LM: It's a good question. I decided I'm
going to spend some money and actually do a prototype because I don't do a very good
job articulating, and people always want to know what it's going to look like.
It's going to look more like a cable channel. I mean,
a series of cable channels, with a very specific kind of graphic look. You'd watch it
as if it were a cable channel. You'd find it as you would a cable channel, but on it,
you'd have icons on the screen that you would click to order something directly from
the screen, instead of picking up the phone and calling an 800 number.
There would be another icon on there so that if you were
watching a gadgets channel and you weren't particularly interested in buying what was
on the screen, but you were interested in something else, you could click into that and
get additional information on other things that were being offered.
They would be Web-like pages. They wouldn't be pages
from the Web, necessarily -- they would probably be from a headend on the Intranet -- but
there would be graphics text like on a Web page.
MCN: Who would be doing the programming?
LM: We are going to create a company to do that.
We're going to start at the beginning of 2000. In a couple of months, we'll get
it under way. I have the budget approved for creating the company. We intend to create it
at the beginning of the year so that we'll be ready for the tests when they get done.
MCN: Does it have a name yet?
LM: We have a name, but we may not use it: "TV
MCN: Once it comes out, it wouldn't just be for
the AT&T Broadband subscribers -- you'd offer it to the other operators, as well?
LM: That's the idea. Our goal is to get
MCN: Now aside from that, what type of deals do you
have in the works? Is there anything you're working on that maybe nobody ever thought
you would be interested in? For example, a while ago, Liberty made some early investments
in Netscape Communications Corp. and things like that. Is there anything that you guys see
as being the next wave that maybe everybody else hasn't?
LM: Well I wouldn't say it until after I
invested in it. I will say that a handful that we're doing recently, we're most
excited about, and we think they are telling for the future.
We've invested in TiVo and Replay. We believe in
personal-video recorders. We think it's a huge category. I have one in my house.
I'm a kind of a light television viewer, and it's probably increased my viewing
of television 25 percent to 30 percent because there's just a lot of stuff on that
I'm not around for. It's a dramatic technology, and I really adore it. We think
that's really going to change behaviors.
We think OpenTV is a fabulous investment because
they've really done a great job developing the software for interactive television.
We have another investment called Online Retail Partners [a joint venture with global
retail partners, Comcast Corp. and investment firms like Pequot Group]. The whole point of
that business is to provide a great solution for bricks-and-mortar retailers that would
like to 'dot com' their business, but that don't want to start from
scratch. We're very excited about that.
People always say, 'Are you working on deals?'
and its pretty funny. We're owned 95 percent by Liberty Media -- what do you think?
[Laughs] The day I'm not working on deals is the day we shut our doors. But it's
a matter of which ones come to fruition, because in the deal business, you do a handful of
the deals you work on. You don't do that many. Most of them disintegrate for some
reason or another.
MCN: How many solicitations for investments are you
getting every day? Being connected with Liberty Media and with John Malone, your phones
must be just ringing off the hook.
LM: It's nuts. [Laughs] It's nuts. The
quantity is outrageous. The issue is trying to find the quality deals. Unfortunately, they
both tend to go hand-in-hand. As the number of quality deals increases, the number of
quantity deals increases at the same time. Because of the relationship with Liberty Media
-- either calls directly to us or to Denver -- it's a pretty impressive number of
deals that we look at a week.
MCN: I though I heard once that Liberty Media was
getting at least 10 offers per day, mostly from Internet companies.
LM: Oh, it could be, but that actually seems low. I
think I get 10 calls a day here. So if I'm getting 10, Liberty Media must be getting
a lot more.
MCN: Do you and Malone talk frequently?
LM: No, not really. John is doing exactly what I
think he articulated when he sold the company. He said -- I'm going to paraphrase
here -- 'I want to sit in a corner and scheme and come up with ways to build
shareholder value,' and I think that's what he's doing.
You know, [Liberty Media president] Dob Bennett really runs
the business day-to-day with [executive vice president] Gary Howard. We see John from time
to time, but most of our communication -- 95 percent of it -- is with Dob.
MCN: So Malone isn't really involved in
LM: Not day-to-day, but it would be wrong to imply
that he is not involved. I think John is doing exactly what he likes doing, which is
coming up with the big ideas, and then kicking it around with Dob and Gary. Those guys add
their two cents and figure out how to get it done. I don't think he's sitting
behind his desk every day pushing paper around, which I don't think he likes doing.
MCN: He comes up with the big ideas and goes to you
guys to 'make it happen for me?'
LM: Well, it's back-and-forth. He's always
coming up with ideas and mentioning them to us, but I think the notion -- Dob would be a
better one to answer this than I would, because I'm not there in Denver. But in
response to the question, 'Do I deal with Malone that much?' the answer is,
'No, I don't.' When I blow into Denver, I'm usually in there for a
half-day, then I split.
MCN: Is the job anything like you thought it would
LM: Good question [laughs]. I'm exhausted. I
went from a situation that I had run for nine years, so I wasn't as intellectually
challenged by it as I would have liked to have been, to one where its just nonstop,
pedal-to-the-metal, all day, every day, with a ton of traveling.
It's a lot of fun. It's very exciting. I will
tell you I got completely burned out on people giving me 'PowerPoint'
presentations [Laughs], but other than that, it's a riot. There's a lot of hype
and a lot of PowerPoint.
MCN: When you were at E!, you were pretty much
responsible for turning the network around. Do you feel like you are in the same situation
LM: Well, this is different. They're similar in
that even though Movie Time [E!'s original name] was a turnaround because it existed,
I really liked to treat it as a start-up because it was losing so much money. It
hadn't really gotten off the ground. We almost felt like we took bulldozers to it,
leveled it and started over.
So it was in a sense a start-up, and this is a start-up,
although it is pretty funny to think of it as an $11 billion-plus start-up. But we're
starting from scratch -- we're building the company, and those are the things I get
the biggest kick out of.
MCN: Is there anything that you consider to be the
hardest part of your job, or the easiest part?
LM: The hardest part is getting on top of returning
phone calls. We really want to have an open door to the industry, and we want to make sure
that we're accessible, because that's how you're going to be successful in
the deal business. That, in itself, is just maddening. That has to be the hardest part of
As I joked before, sitting through a lot of hype and a lot
of PowerPoint is another hard part. But the rest of it is such a kick. I mean, it's a
chance to learn every day. Even the bad presentations, even the bad pitches -- you learn a
lot about the sector of the business.
MCN: Have most of the deals that have presented
themselves to you been along the Internet side?
LM: Well, not really. Let's just look at the
last handful: TiVo and Replay are not Internet. OpenTV is not Internet. Online Retail
Partners was Internet. Some are and some aren't. We're primarily interactive TV,
but the best thing to say is, where does the TV and the Internet and the Web connect, so
there would be investments on both sides.
MCN: When you are presented with a proposal, what
exactly is the process you go through?
LM: We have a business-development-strategy group.
They're kind of the first pass. They look at it. They make an assessment of whether
they like the sector. We have two guys in that group, and there is soon to be a third.
They're former consultants with Bain [& Co.] and LEK, and they make an assessment
of whether they like the sector.
And then we get together. We talk about it. We really spend
a lot of time looking at the management team. We think that's critical. Then we look
at the technology and the business plan.
But our belief is that if we have a great management team,
and the technology or the business plan is not quite there, an excellent management team
-- we've seen this time and time again -- will find a way to make it work.
So we place our bets with people and sectors, and then the
details sometimes aren't quite flushed out at first, yet figured out along the way,
if you've got the right folks.
MCN: Who makes the ultimate decision?
LM: We have an investment-committee meeting with Dob
Bennett and Gary Howard. Dob is probably the one who makes the ultimate decision on
whether we make an investment or not. We'll sit around and talk about it, but by the
time it gets to us, [it's been through] the business-development group, it gets to
me, then it gets to Bruce Ravenel, our executive vice president. Bruce and I and Dob will
talk about it and decide whether we're going to do it or not.
MCN: Was that a change for you, too, because when
you were with E!, the buck stopped with you?
LM: To an extent. The difference is that there, I
had an operating budget. Once I got the operating budget approved, sure, I could make
decisions about how I was going to push those resources around. [At Liberty], if I'm
talking about placing $10 [million], $15 [million], $20 million bets on companies, I never
had that kind of freedom at E!. So therein lies the difference.
We're talking about huge chunks of money and, even at
the end of 10 years, we had E! valued at just about $1 billion. This one's an $11
billion company and today, it represents the largest single item in the Liberty Media
portfolio. So it's really hard to compare them because we weren't making
investments. We weren't taking any bets or spending money anywhere near to the extent
that we are here.
But I will say that the process is very easy. We get all of
our information together. Dob knows that by the time we come to him with something,
we've really done our homework. It's not a torturous process at all; it's
quite helpful, actually.
MCN: At E!, you also had bosses in the form of the
Roberts family (the founders of Comcast, which owns E!).
LM: Sure. If ever I wanted to spend anything above
the budget or anything, I would always have to go back to a board. Frankly, considering
the magnitude of the investments we're making, it's been frictionless.
MCN: Liberty Digital just hit $50 per share today.
That's a pretty good appreciation since you came on board.
LM: Well, when I was hired in September, it was
$2.50 [per share]. By the time I had started, it had crossed $4.50. Then it popped up in
the $6 range, and then we announced the reverse merger [with TCI Music], and that's
when it started screaming. So we have some very happy shareholders.
MCN: When you were at E!, you had the reputation of
being a very health-conscious guy, a person who worked out pretty regularly. With the
constant flow of deals and the additional workload, do you still have the time to hit the
LM: Well, I'll give you one little factoid that
will answer the question. Since I took the job, I've gained 20 pounds. I certainly
get it in on the weekend. I try sometime during the week, but I'm not very successful
with doing that.
MCN: How long is your average workday -- 12 to 14
LM: Well, actually, if you count reading -- reading
business plans, reading the trades -- I would say it's probably 12. But a lot of
that's at night. I bring the stuff home, and I have a balcony at my house. I can look
at the ocean and the city and read business plans. If you're going to have to work a
lot of hours, it's a beautiful way to do it.