Tele- Communications, Inc TeleAccelerating Digital Deployment

Ashok Kumar Himanshu S. Nayak Kalyan Prasad Sovesh S. Jena

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Roll No. 07 Roll No. 27 Roll No. 34 Roll No. 51

TCI Brief History

TCI was incorporated in 1956 by Bob Magnese Line of Business Cable system for entertainment Grew through acquisitions and franchising till 1970 when the company went public, but had to face rough weather afterwards till 1973 and was in the brink of bankruptcy. John Malone became CEO in 1973 Formed Joint Venture with large media companies : Scripps Howard, Knight Rider and Taft Broadcasting

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TCI Brief History

By 1985 TCI was the largest multiple system operators(MSO) with 3.7 million basic subscribers out of 35 million and providing service to additional 1 million subscribers through JVs By 1996 TCI was having 14 million basic subscribers and additional 3 million subscribers through affiliated companies

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Case QuestionQuestion-1

How did TCI create value for its shareholders through 1995?

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Case facts
After TCI became public in 1970, it had to face rough weather afterwards till 1973 and was in the brink of bankruptcy. In 1973 the company had floating rate debt of $ 126 mn. The revenue was only $23 mn., cash flow was almost nil. Interest rates were also rising pushing the company to almost bankruptcy. So the challenge for CEO John Malone had do go for a debt restructuring to access capital for expansion. By 1980 the company could access capital for expansion and growth.
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Challenge for CEO John Mallone & strategy for value creation
So John Mallone was trying to redefine the business by focusing on entertainment business rather than cable business. The company adopted a combined strategy of horizontal expansion in the cable business and creation of verticals through JVs along with media companies TCIs cash rich partners expanded the cable operation through off balance sheet vehicles avoiding earning per share dilution.

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Challenge for CEO John Mallone & strategy for value creation
He also convinced Wall Street analysts and institutional investors on the concept of evaluating the cable companies based on operating cash flow preventing dilution of EPS As a result customers reposed faith on the company and the basic subscriber base grew upto 3.7 million and an additional they were serving through JVs and equity participation. Stock price of $1 in 1975 became $800 in 1989

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Challenge for CEO John Mallone & strategy for value creation
Between 1973 and 1994 there were 650 acquisition, divestitures and joint ventures By 1996 TCI was having 14 million basic subscribers and additional 3 million subscribers through affiliated companies

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Case QuestionQuestion-2

Why did the companys financial performance deteriorated so rapidly during 1996?

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SWOT Analysis
Threat
Huge capital expenses to upgrade the plant to fiber optic transmission technology Deregulation of cable industry from 1996 by Govt. Facilitate Telecom Companies to enter the Business after deregulation Competition from Direct To Home satellite broadcasting. (Substitutes growth rate was high)

Opportunities Highest market share being the largest operator to leverage the market First mover advantage if new technology is deployed

Weakness High SG&A cost High debt High degree of centralization in decision making Organization structure was not suitable for diversification

Strength Existing Infrastructure to sustain future growth TCI could profitably used more capital

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The Centralized Headquarter Model

TCI Communication Headquarters

Cable Division
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Joint Ventures
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Rapid deterioration of financial performance during 1996

Cable Industry operating cash flow did not equate to free capital cash flow as cable operators were investing heavily in the capital expenditure 19 % of the revenue on an average was going in Interest Payment 1996 Companys operating cash flow grew by about 3 % only. Unexpectedly company also lost 70000 subscriber loss -Competition from DTH satellite services High SG & A cost, high staff cost high due to customer service rep , staff added to digital data & phone service

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Rapid deterioration of financial performance during 1996

Technology strategy was out of synchronization with the priority, which was to address the threat by satellite channel capacity Digital video as a mass market offering was not considered as the strategy part Only spending on Fiber Optic upgrades heavily Centralized structure was followed for major decision making in HQ Many cable systems were not being Integrated properly to get the benefits No clear accountability for profit
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US cable industries Financial Performance summary 19931993-96

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TCI Communications Financial Performance 19941994-1996 ($ in Millions)

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Case QuestionQuestion-3

Should TCI proceed with ubiquitous deployment of digital converters?

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Case QuestionQuestion-3
2nd Generation digital converters can generate $17 wrt $ 10 per home from traditional 1st generation cable( DLJ projected) Extended quality HDTV High speed Internet Already telecommunication companies big players like AT & T were already coming in as IP providers

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Comparison
1st generation digital converters $10 per home Saturated market but well established player status 2nd generation digital converters $17.44 per home Interactive market like banks,travel agents etc when consumers use the basic screen of TCI in exchange for preferential placement AT & T would love to provide IP phone service 1st MSO TCI will get the advantage for broad reach Status quo Move up the value chain

Horizontal Integration had already put economies of scale for TCI

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Proposed Organization Structure

CEO

COO & VP

Head Communication

Old Co. Sales Marketing Information technology Installation and repair Network operations

New Co. Sales Marketing Information technology Installation and repair Network operations

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Ubiquitous deployment of digital converters?

In the last question, we have already analyzed the reasons for rapid deterioration of the performance of TCI during 1996 although they were the largest MSO The ubiquitous deployment of digital converters have both advantages and disadvantages Advantages ITC would have the first mover advantage There is a possibility of capital conservation, which would boost free cash flow of ITC They could able to face competition
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Ubiquitous deployment of digital converters?

Disadvantages Technology was not well tested Likelihood of failure Risk associated with loosing the market share, drop on stock prices etc. Loss of subscribers confidence. Erosion of subscriber base

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Case QuestionQuestion-4

What are the strengths and limitations of Malones management Style?

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What are the strengths and limitations of Malones management Style?

Strengths Good Negotiation Skill Top Down Management style Strong and flexible intellect Thought Process Complex cause and effect His tendency of Think out of Loud His mind is like Rubik Cube he thinks while he talks. His strategy some time in fluid state Technology driven outward looking Broad horizon vision
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What are the strengths and limitations of Malones management Style?

Weakness Thought process constantly challenged by team members. Approach was difficult to decode for less experience manager to follow.

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Thank You
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