Interacting With the Future

Signaling its aim to be an active investor in the Internet, Liberty Media Corp. unveiled a plan Tuesday to shift several of its online stakes to an underperforming company it controls called TCI Music, causing the stock to triple in value.

The move is the latest in a flurry of developments that have media watchers speculating about cable mogul John Malone’s next big adventure. Liberty agreed this week to sell most of its sports interests to partner News Corp. for $1.43 billion.

Since closing the $44-billion sale of Tele-Communications Inc. to AT&T; Corp. early last month, Malone, TCI’s former chief executive and controlling shareholder, has been feverishly repositioning Liberty Media, the investment arm of the cable giant, to ride the interactive-television and Internet waves.

While Liberty is technically a subsidiary of the phone giant, Malone continues to control it with nearly 50% of the voting shares. The company is sitting on a $5.5-billion cash stockpile and expanded borrowing power from the AT&T; transaction to play with.

While Malone has said little about his plans for Liberty except that it will pursue new media, analysts expect big things from the company’s next act. Malone has built a reputation as one of the most brilliant and ruthless operators in the television business by using the cable distribution might of TCI to extract ownership interests in cable channels from BET to Discovery for Liberty.

The majority of Liberty’s assets, valued at nearly $60 billion, are investments in traditional media companies such as Time Warner Inc., USA Networks Inc., Discovery Communications Inc., TV Guide Inc. and soon News Corp. But its most recent bets are designed to exploit the new world of home entertainment, as television promises to become a useful tool for shopping, e-mailing and information retrieval and as the Internet becomes infused with video on its way to becoming more of an entertainment medium.

The most recent incarnation of Malone, who is considered by Wall Street to be one of America’s most astute investors, has drawn comparisons by some analysts to Warren Buffett. But while Buffett’s Berkshire Hathaway Inc. has taken stakes in a broad smattering of big world brands, from Coca-Cola to Disney, Malone is concentrating his portfolio on companies with interlocking agendas that can be allied strategically to their mutual benefit--as well as to the benefit of Liberty shareholders like himself. (Malone’s 5% stake in Liberty is currently worth more than $1.5 billion.)

For instance, Liberty has big investments in a leading set-top box manufacturer, General Instrument Corp., that is exploiting the ability of cable wires to deliver advanced services--including interactive channels Malone is developing. Another of its investments is in a company developing a navigational guide for TV that will incorporate local entertainment listings and other services. Liberty also owns stakes in a host of online services that could provide the foundation for interactive channels plugged on the guide.

The transactions unveiled this week provide some clues to Malone’s strategy. In a move that sources say reflect Malone’s interest in converting operating assets into investment stakes in large publicly traded media companies, Liberty agreed Monday to swap its 50% interest in Fox/Liberty Sports to News Corp. for stock in the Australian-based entertainment company. Through a related transaction, Liberty would buy shares in News Corp. sold by MCI WorldCom Inc., which would increase its stake to about 8%, making Malone one of the largest shareholders in a company whose pay TV services reach viewers from the U.S. through Europe to Asia.

As part of the deal, sources say Malone has been invited onto the News Corp. board by Chief Executive Rupert Murdoch. News Corp. presumably could help Malone secure international distribution for the interactive channels and services Liberty develops.

In January, Liberty hired Lee Masters, the former chief executive of Los Angeles-based E! Entertainment Television, to develop these channels for use on advanced set-top boxes due on the market later this year.

Part of Malone’s deal with AT&T; guarantees Liberty space on its cable systems for up to 12 digital interactive channels that would exploit electronic retailing in categories that have worked on the Internet, such as travel, music and books.

Masters is also spearheading Liberty’s investments in Internet technologies. During the last nine months, Liberty has invested in about 11 Internet companies, including IBeam, IVillage, Priceline.com and Drugstore.com. Analysts speculated that these companies could become partners in the interactive channels Masters is developing.

Under the Internet initiative unwrapped Tuesday, Masters now will have a currency besides cash and Liberty stock to use in investing in cyberspace, in which valuations have soared beyond the reach of many old-line media companies.

Liberty plans to shift a handful of Internet investments into TCI Music, whose main assets are a cable music channel called the Box, the SonicNet music Internet site and the DMX digital music service. TCI Music would be renamed Liberty Digital.

Wall Street liked the idea of transferring Liberty’s investments in Priceline.com, IVillage, SportsLine USA and Drugstore.com to TCI Music. TCI shares rose $21.19, or 253%, to close at $29.56 in Nasdaq trading on Tuesday. Liberty shares closed at $59, up $3.12.

“Malone created $6 billion in value for shareholders overnight through this transaction,” said Spencer Grimes, an analyst at Salomon Smith Barney, referring to the roughly $3.6 billion in added value to TCI Music shares and the $2.6 billion added to the value of Liberty Media shares Tuesday.

The deal follows Monday’s announcement by Liberty that it would become the largest shareholder in General Instrument, a leading manufacturer of set-top-boxes that will enable viewers to send e-mails, shop and surf the Internet over their television sets. Liberty is buying an additional $280 million in General Instrument shares to increase its stake to 18%.

Liberty also has stakes in other companies supplying services developed for advanced set-top boxes. For instance, Liberty owns 8% of ACTV, which will initially supply sports applications that enable viewers to click a remote to get alternative camera angles, sports statistics and replays while they watch games.

A bigger play for Liberty is a partnership sealed last month with News Corp., called TV Guide Inc., which intends to convert the weekly magazine’s household name into the dominant navigational guide for television.

Many cable operators are worried about Malone’s influence over both the set-top boxes and the navigational guide because of the enormous control it may give him over the viewing experience and his ability to give better placement and promotion to services and channels within the Liberty portfolio.

But Wall Street is having a love affair with Malone’s financial engineering. Many are predicting that Malone will spin out Liberty Media from AT&T; after two years and that he could convert his stake in AT&T;, worth more than $2 billion, to Liberty shares even sooner.

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Media Man

John Malone, who built a cable empire in Tele-Communications Inc., is entering a new phase of his career as a media mogul. Malone, through Liberty Media Corp., controls nearly $60 billion in cash and investments in a galaxy of new and traditional media companies. These investments put Malone in a unique position to drive strategic alliances in the cable, Internet and interactive-television arenas.

Publicly Traded Holdings

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Company % held by Liberty Media Value, in millions Time Warner 9% $8,545 USA Networks 21 2,484 Sprint PCS 15 5,551 TV Guide 44 2,553 Telewest 22 2,364 News Corp. 8 1,761 General Instrument* 18 1,409 Flextech 37 718 TCI Music*,** 94 6,571 Antec 19 182 CSG 5 26 ACTV 8 60

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Privately Held Investments

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Company % held by Liberty Media Value, in millions Fox Kids Worldwide (debt) -- $345 BET Holdings 35% 380 Discovery Communications 49 3,518 QVC 43 4,598 Encore Media Group 100 2,000 Court TV 50 125 E! 10 84 International Sports 50 50 Programming Partners Telemundo 50 115 Odyssey 33 72 Others -- 50

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* Proposed transaction

** Will include Priceline, IVillage, SportsLine USA and Drugstore.com

Source: Salomon Smith Barney