Rewiring TCI : New President Strives to Bring the Cable Giant Back Into Focus

When Leo Hindery showed up for his first day on the job as the new president of Tele-Communications Inc., his arm was wired in three places from falling on the over-buffed floor of his old office. The break is so severe it could keep Hindery from his passion, racing stock cars, and he has steadily been forcing small movements in his fingers to restore the flexibility needed to get him back on the track.

The 49-year-old executive is bringing the same determination to the nation’s largest cable company, which some analysts say is also severely broken.

TCI has come to embody the shortcomings of the cable monopoly--years of customer neglect, unkept promises about the delivery of new services and the piling on of debt. But new competition from satellite rivals is forcing a change.

Under pressure from Wall Street, Chairman John Malone relinquished the title of president in mid-February to Hindery, a relative newcomer to cable, who ended a career in corporate finance eight years ago to build InterMedia Partners into the 13th-largest operator.

For the last two months, Hindery has been working feverishly to reshape TCI’s image, clean up its balance sheet and reinvigorate a demoralized work force. While telephone and high-speed data transmission services have been put on hold to save money, Hindery has accelerated the roll-out of digital television equipment that will allow TCI to offer expanded channel lineups.

“We love the hand we were dealt,” Hindery said in a recent interview at TCI’s headquarters in an industrial park south of Denver.

Hindery’s emphasis on customer relations and his open-door approach is winning him points with programmers frustrated by the fortress mentality that developed under Malone, whose rate gouging and strong-arm practices earned him the nickname “Darth Vader” in Washington.

But TCI’s problems are so deep that many analysts are skeptical about its chances of digging out. They worry about TCI’s entrenched culture and antiquated and poorly clustered systems that make service inefficient and upgrades costly.

“In theory it sounds good, but we haven’t seen any results yet,” said Robert Schiffman of Donaldson Lufkin Jenrette. “It’s difficult to jump on the bandwagon, especially since they have missed so many targets.”

Analysts say TCI, more than any other cable company, bungled its transition into the free market. After investing heavily to cobble together the country’s largest cable system, with 14 million subscribers, TCI dabbled in ways to use its wires to deliver hundreds of channels, data at high speeds, interactive television and telephone, preparing for the day when phone companies and other competitors entered the business.

But in the process, TCI overextended itself. TCI shares closed Thursday at $12 on Nasdaq, down 50 cents, near an all-time low.

Rumors that Malone is shaping up the company for sale have never died since the collapse of TCI’s proposed merger in 1994 with Bell Atlantic, and his withdrawal from day-to-day operations last year.

While Malone has denied such plans, analysts say Hindery, in dividing the company into six regional clusters containing 2 million to 3 million customers each, could be positioning them for sale.

The company says it plans to form joint ventures with other cable operators to manage certain of those clusters, enabling TCI to shift debt from the parent to the new partnerships in a technique commonly used in the cable industry to gain borrowing power. Hindery, once chief financial officer of Becker Paribas Inc., a New York investment banker, used this method to grow InterMedia.

Hindery said the restructuring is designed to dismantle the centralized structure that stands in the way of improved customer service. “We’ve got to bring the company back to a sense of localism,” said Hindery, who explains how TCI lost touch: “We did a significant acquisition every quarter for the last 15 years. Somewhere in the process of becoming the largest cable company in the world, we consolidated operations too much.”

He said regional managers will be responsible for programming and rate decisions that had been dictated by headquarters.

TCI has been criticized, for example, for forcing its systems to carry channels owned by its affiliate, Liberty Media Corp., sometimes sacrificing popular services.

While industry executives are doubtful that years of customer neglect can be easily reversed, Hindery said a new compensation system will reorient the troops.

“We will reward people for going to Rotary meetings and marching in parades and living in the communities they serve,” said Hindery, who also plans to rehire “several hundred” marketing executives who were let go last year.

Hindery is undoing other initiatives undertaken by the previous management team, many of whom have been reassigned or pushed out. Brendan Clouston, president of the cable unit since 1992, became chief financial officer of the parent company when Hindery came in.

While Hindery sees merit in the expensive, state-of-the-art subscriber monitoring system Clouston’s team developed to track customer billing and service, he has disbanded plans for centralized support centers because they put too much distance between the company and its customers.

Hindery learned the importance of localism in the newspaper business. Before forming InterMedia, Hindery served as chief financial officer of Chronicle Publishing Co., the owner of the San Francisco Chronicle and the Western Communications cable operation. He recalls the frenzy of consolidation in the 1980s that was supposed to lead to management efficiencies but that yielded only discounts on newsprint. He said cable “fell into the same trap,” with consolidation generating little more than bulk discounts on programming costs.

Hindery met Malone in 1986, after he wrote him a letter about his interest in becoming a cable entrepreneur after overseeing Western Communications. Encouraged by Malone, who bought Western last year, Hindery formed InterMedia with backing from TCI.

Though TCI is his tallest order, Hindery has taken on other extracurricular assignments from Malone, whom he considers a mentor. He took a board seat on the troubled Home Shopping Network after Malone took control in 1994 and, more recently, helped him negotiate the complicated purchase of Viacom Inc.’s cable operations.

Executives who have worked with him say he’s a team-builder. Frequently during the interview, Hindery gestured to Robert Thomson, senior vice president of communications, articulating his vision using “we” or “Bob and I” in demonstration of the approach.

Hindery said reining in programming cost increases is essential to improving profit margins and keeping customers. TCI claims that two-thirds of its rate increases last year were because of rising programming fees, which increased an average 20%. “We expect programmers to use CPI as the right index for increases,” said Hindery, adding that the company has done a poor job of explaining rising cable bills to its customers.

The deal TCI signed with Walt Disney Co. this month for carrying its family of channels is indicative of the company’s new approach. By agreeing to expand carriage of the Disney Channel and ESPN’s sister channels, TCI held the line on fee increases of 50% that ESPN had been demanding. While most program agreements span three or four years, Disney agreed to a 10-year term, giving TCI more predictability over costs.

While analysts are encouraged by TCI’s steps to cut spending and reduce debt, the bigger unknown is whether the company can grow its core cable business. While most cable companies are rebuilding their networks to offer high-speed access to the Internet, TCI is banking on digital set-top boxes.

Hindery admits that data transmission is the industry’s best competitive weapon. “What’s the single product that excites us most? It’s data,” he said. “There is no evidence that satellite delivery of data works. All you need is one rainstorm to interrupt the signal.”

But TCI’s singular vulnerability to satellite has dictated the strategy. More than 40% of its systems are in rural areas, where satellite is popular and cable command centers are so old they can deliver a limited 39 or so channels, compared with satellite’s 175-channel packages.

Although TCI claims it can add digital boxes without costly system upgrades, analysts are skeptical. “It doesn’t work as well as they are making out on older systems,” said John Aronsohn, senior analyst at Yankee Group, who said TCI’s successful digital trials were conducted on three state-of-the-art systems. “TCI is pursuing a showcase strategy to impress financial markets. They need to move up the stock so they can raise money for upgrades.”

Encouraged by its digital trials, showing that subscriber bills expanded when customers had more channel and movie choices, TCI plans to make the digital service available to more than 20 million of the homes it passes by mid-1998, up from the 5 million it had planned by the end of this year.

It is unclear, however, how the company will finance the purchase of those boxes, which Aronsohn estimated cost about $400 apiece, compared with $100 to $200 for analog boxes.

“I’m generally optimistic,” said Schiffman. “But until we see first-quarter results, we don’t know if it’s for real.”

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TCI Incarnations

Tele-Communications Inc., the nation’s largest cable operator, is a troubled company that has gone through several incarnations in recent years as it seeks the right formula for revitalization in the difficult business. Here are the three key players in the 1990s:

The Visionary

Name: John Malone, architect of the company’s strategy as president and chief executive.

Current Role: Chairman

* Cobbled together the nation’s largest cable system by completing a major acquisition every quarter for 15 years.

* Used monopoly protection to raise cable rates and squeeze discounts from programmers, building enemies in Washington, where he became known as the Darth Vader of cable.

* Raised expectations with unkept predictions of a 500-channel future and interactive television.

The Dreamer

Name: Brendan Clouston, took over as president of TCI’s cable division in 1992 to prepare the company for competition from phone companies that has yet to happen.

Current Role: Chief financial officer

* Built up middle management and overhead in an effort to jump start digital television, cable modems, satellite and telephone services.

* Centralized decision-making in company headquarters and contracted with a Los Angeles public relations firm to improve the company image.

* Increased capital spending to $1.7 billion a year, from $500 million.

The Realist

Name: Leo Hindrey, became president of TCI in mid-February, assuming the title from Malone.

* Reassigned various managers, including Clouston.

* Decentralized the company into six regional clusters to bring management closer to the customers. Programming and rate decisions previously handled by the home office will be determined locally.

* Seeking to shift debt from the parent company to new partnerships formed with other cable operators to manage local clusters.

* Accelerated the rollout of 200-channel digital packages.

TCI’s Long Decline

Tele-Communications Inc., has had a skeptical audience on Wall Street. Investors are worried about high debt levels and rising competition. Weekly closes, except latest:

Feb. 8, 1996: Government allows telephone companies to complete with cable companies.

Oct. 24, 1996: TCI announces disappointing earnings, promoting layoff of 7% of work force.

Thursday: $12.00, -$0.50

Source: TradeLine