Rare Power Struggle Erupts Between Cable TV Figures

A curious power struggle has quietly erupted between the mighty John Malone, who controls the nation’s largest cable system, Tele-Communications Inc., and one of his chief allies, the young and ambitious Brian Roberts, the head of the fourth-ranked cabler, Comcast Corp.

In recent weeks, it has come to light that Roberts was secretly plotting last summer with his new investor Bill Gates, the head of Microsoft Corp., in an aborted attempt to buy a block of “supervoting” stock in competition with Malone that is key to controlling TCI.

For the 37-year-old Roberts, whose company has about 4 million cable subscribers compared with TCI’s 12 million, the maneuver could have delivered mogul status, while fulfilling what Microsoft believes is its manifest destiny to control the flow of information into living rooms through the TV set.

The antagonism triggered by the failed bid is something new and rare in the cable business, whose history has been marked by mostly collegial relationships between companies that govern monopolies in different territories. It may become more common as cable, phone, software and entertainment companies find themselves converging on the same turf.

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Such acrimony has become standard fare in the incestuously complicated media business, where a handful of giant companies--and the bulging egos in charge--balance roles as business partners and as cutthroat rivals. While News Corp.’s Rupert Murdoch and Time Warner Inc.’s Ted Turner exchange insults, for example, their companies must make amends because of a labyrinth of business interconnections.

For their part, Comcast and TCI are joined at the hip as investors in a number of key businesses, including the QVC shopping network, the At Home online service and the Primestar satellite television service. Distrust between Malone and Roberts could cast a shadow over many of the decisions related to those and other business interests.

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The stock that Microsoft and Comcast sought, accounting for a 26% voting stake that is the largest single control block in the Englewood, Colo.-based cable company, belonged to the late founder Robert Magness, who died of cancer in late 1996 leaving a disheveled $1-billion estate.

In a complicated sequence of maneuvers in June that assured him control over TCI, Malone swept up the valuable shares at what in retrospect was a sweetheart price. But hours after the deal closed, an unsolicited higher bid arrived in the form of a letter from New York investment banker Lazard Freres & Co. Lazard never disclosed its client, but sources identify the secret suitor as Comcast, with backing from Microsoft.

Magness’ two sons sued Malone and TCI in the fall to rescind the stock sale, contending that the estate executors could have gotten a higher price through an auction.

In announcing a settlement of that lawsuit on Monday, TCI said it agreed to pay Malone and the Magness family a combined $274 million for the rights to buy their supervoting shares.

Sources say Malone privately suspected Microsoft and Comcast of working in tandem with the Magness bothers--perhaps even financing their suit against TCI. Under this theory, the Lazard letter was a ploy to help unravel the stock sale rather than a serious offer.

Lawyers for the Magness estate say that contention is preposterous.

Because of the litigation, none of the parties has been willing to talk about the situation for the record.

Sources say Malone was livid with Roberts, in particular because TCI had brought Robert’s Philadelphia-based cable company into a host of lucrative partnerships over the years, including Turner Broadcasting Systems, At Home and the Teleport Communications Group Inc., a phone company now worth $8 billion.

Inside TCI, Roberts’ maneuvers were seen as “childish,” one executive said. TCI sources believe Roberts has long envied Malone’s status and has struggled to overcome the “silver spoon” reputation that came from having the business handed to him by his father, Ralph, who recently retired.

Roberts, however, may still be smarting from Malone’s handling of their joint ownership of QVC. Two years after bringing media mogul Barry Diller in as a partner to run the home shopping network in 1992, Diller, with Malone’s blessing, made a run at CBS that would have reduced Comcast to a passive investor because of laws preventing the cross ownership of cable and broadcast properties.

Roberts derailed the merger by waging a takeover of QVC, which it now controls, with Malone’s Liberty Media programming arm reduced to a minority owner.

Some friends of Comcast depict Roberts as a white knight for Malone. Under this scenario, the secret bid was submitted by Lazard in case TCI needed to fend off a possible unfriendly bidder. The Magness executors, according to court filings, approached such parties as AT&T;, News Corp., Oracle Corp., US West Communications Inc. and Walt Disney Co. in an effort to get the best price for their block of TCI stock.

Others believe Comcast was dragged into service by Microsoft, whose $1-billion investment bought an influential 11% stake in the cable company.

Microsoft also has held discussions with TCI about a possible investment. It is unclear whether the Comcast-Microsoft bid for TCI shares changed the course of those negotiations, but one source said Tuesday that those talks have ended.

Microsoft sees the nation’s 250 million television sets as a way to expand the home market for its operating system beyond the 30 million personal computers.

Despite strained relations between Comcast and TCI, the two companies are doing their best to put the situation behind them. After mentions of the secret bid in several trade papers, an article in the New York Post in late December prompted the two companies to issue a joint statement.

“For many years our companies have enjoyed a cherished and productive association, resulting in many key alliances and partnerships,” said Roberts and Leo Hindery. “As the presidents of two of the leading companies in the cable television industry, we have always worked in a spirit of cooperation and with the best interests of our industry in mind. We will continue to do so in the future.”

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A master strategist, Malone needs Roberts’ support in several transactions underway. For instance, one cable source said the two executives had a “friendly” lunch in Anaheim to discuss an industrywide order for digital set-top boxes. Ultimately, Comcast joined TCI and others in placing an order for 15 million advanced boxes from General Instruments Corp. at $300 apiece, cutting their costs by more than half.

More important, perhaps, Comcast is considered a swing vote in the Internet wars on which Malone has staked a fortune. Comcast is a partner in At Home, the high-speed online service in which TCI has a controlling interest.

That issue also involves Microsoft, which may seek to compete with At Home. Microsoft, as part of its investment in Comcast, gained the right to force the cable company to break its exclusive relationship with At Home in June 1999.