John Malone’s Prized Operator: Bob Johnson
Here is an excerpt from our new book, Intelligent Fanatics: Standing on the Shoulders of Giants:
“We had a number of partners [at Black Entertainment Television] over the years, including Mario Gabelli, but at the end of the day, Bob [Johnson] was very successful and he retained majority ownership all the way through, which was quite a testimony to his doggedness, his willingness to keep his budget down and grow the business.”
—John Malone, interview
“He [Bob] is what creates value for BET. Without him, I wouldn’t want to be involved.”
—John Malone, in “The Branding of BET”
From 1973 to 1998, John Malone of Tele-Communications Inc. (TCI) produced a 30.3% compounded annual return for shareholders, and Malone has since maintained high rates of return through his various Liberty ventures. His philosophy has been to trust able-minded partners with authority and responsibility and then hold them accountable for their performance. At one point, Malone had more than forty partnerships with intelligent fanatics. When a person with Malone’s track record praises someone, it shouldn’t be taken lightly. One of the first partnerships John Malone ever participated in was with Robert “Bob” Johnson.
Bob Johnson and John Malone partnered to create Black Entertainment Television (BET). BET was fully Bob Johnson’s creation; Malone was just there for support. And Johnson would make it one of the most profitable independent cable channels ever. Other early investors in BET did not hold on as long as Malone or Johnson. Great American Broadcasting, owned by Carl Lindner, invested $1 million in BET early on and sold out for $38.5 million in BET’s initial public offering. That money was used to pay huge interest payments on the leveraged buyout debt Great American had accumulated. Had Lindner not had debt problems and held, his $1 million investment in BET would have been worth about $460 million.
Gerald Levin, CEO of Time Warner Inc. at the time, and Richard Parsons, a Time Warner board member, also made a large mistake in selling their investment in BET too early. Time Inc. received a 15% stake in BET for little to no money in the early 1980s and had a debt-heavy balance sheet. After the merger of Time Inc. and Warner Communications Inc., in 1991, the executives couldn’t figure out what Bob Johnson was doing and questioned his vision at BET. Despite Johnson urging it to not sell, Time Warner sold its stake of 3.3 million shares back to BET for $58 million (implying a $390 million market capitalization) in 1995. Had Time Warner owned BET until it was sold to Viacom, in 2000, the company would have made nearly $300 million more.
John Malone would be the first and only investor to stick with Bob Johnson. He was greatly rewarded, turning a $500,000 investment into nearly $805 million. Malone’s Liberty company continues to own the legacy position in Viacom, which BET owners received in the sale to Viacom.
When you find what looks to be an intelligent fanatic–led organization backed by an equally gifted individual, take a hard look at it. The smaller the business, the better, because it means it has more room to run. The key to successful long-term investing is finding and buying intelligent fanatic–led businesses early and holding on with a death grip.
The cumulative effect of doggedness is enormous. With fanatical focus, Bob Johnson’s tiny BET would overcome racial divides. As a black-focused cable programming station, BET was the last thing cable operators thought was worthwhile. Most cable operators, except TCI, needed convincing to carry the channel, which Johnson was able to execute with uncanny persistence. And, along the way, Johnson and his team were able to overcome other setbacks as well.
BET would be able to succeed where others failed. The Turner Broadcast Systems Cable Music Channel (CMC) had significant initial capital, yet it was unable to compete against Music Television (MTV). Bob Johnson and his team eventually competed against number one MTV.
BET’s team was highly innovative and had a first-mover advantage. The industry tailwinds allowed Johnson to make more mistakes than would be possible in other “difficult” industries. Bob Johnson, along with some other intelligent fanatics, had some regrettable traits that we feel should be avoided, but he would continue to find ways to ensure that BET had the best chance at succeeding.
You can read Bob Johnson’s story in our latest book, Intelligent Fanatics: Standing on the Shoulders of Giants. Become a Member and we’ll send you the eBook-Kindle version for Free.