How Dr. Malone drove his Rolls Royce to Liberty Global

Steve Donohue, FierceCableThe deal Liberty Global (Nasdaq: LBTYA) Chairman John Malone struck this week to acquire Virgin Media (Nasdaq: VMED) left me thinking about the first cable convention I attended, the 1997 Western Show, where Malone unveiled a plan to deploy what he described as the Rolls Royce of cable set-tops.

While most cable operators were still selling subscribers analog cable, Malone envisioned using a $500 digital set-top to offer subscribers hundreds of channels, interactive TV applications, e-commerce and Internet access. In December 1997, he led the nation's top nine cable operators in striking a $4.5 billion deal with General Instrument (later acquired by Motorola) to order digital set-tops, including what was supposed to become the Rolls Royce of set-tops, the GI DCT-5000.

But TCI ended up deploying the DCT-5000 to few subscribers, and focused instead on rolling out the less expensive DCT-2000, a box that remains in thousands of cable homes today. Two years later, Malone exited the U.S. cable business, striking a deal to sell TCI to AT&T (NYSE: T), which allowed him to focus on growing Liberty Media, a company that was spun off from TCI in the early 1990s.

While AT&T eventually began to deploy the DCT-5000 to some former TCI subscribers through AT&T Broadband, software integration issues limited its capabilities. It never activated the DOCSIS modem contained in the set-top, and used it more like the less expensive DCT-2000, which could only tune cable channels.

A few years later, AT&T decided to exit the cable business, and sold AT&T Broadband to Comcast (Nasdaq: CMCSA), which made it the nation's largest cable MSO. That deal, which closed in 2002, made Comcast CEO Brian Roberts the leader of the U.S. cable industry--a position formerly held by Malone.

Dr. Malone (he has a Ph.D. from Johns Hopkins in operations research and studied electrical engineering at Yale) turned his attention overseas, and quietly began acquiring cable systems in Europe. He formed Liberty Global in 2005, when it merged with UnitedGlobalCom.

Liberty Global has done more than buy cable systems. The company has focused on deploying some of the most advanced digital cable set-tops and software in the world.

Malone's new Rolls Royce is the Horizon TV platform, which Liberty began deploying last fall. The product, which may be more advanced than Comcast's Xfinity X1 service, offers subscribers access to an app store and Facebook, YouTube and other web content. It also lets subscribers watch programming on tablets, smartphones and other IP devices in their homes.

Comcast and Roberts remain the most influential U.S. cable MSO, and can use Comcast's reach of 22.3 million basic video subscribers to extract volume discounts on cable programming, set-tops and other gear. But with his $23.3 billion deal to acquire Virgin Media, Malone and Liberty Global could become the biggest cable operator in the world, reaching 25 million subscribers, and could have an even bigger influence on cable technology and programming than Comcast. -- Steve