NEW YORK (FORTUNE) - Ever since John Malone carved out Liberty Media from AT&T in a spin-off in 2001, he has struggled to define its identity. Is it a media company or just a big investment firm?

Malone first aspired to become a global media king by buying up cable TV providers in Europe, Japan and Latin America and feeding them with content from his various programming companies, like Discovery and the Game Show Network.

When he failed to boost the stock that way, he spun off cable, quickly followed by Liberty's 50 percent holding in Discovery and declared that his new goal was to become the Warren Buffett of media, making savvy investments in companies such as TruePosition, a wireless location technology outfit, and Wildblue Communications, a satellite broadband company. That hasn't worked, either.

In November, Malone, who is chairman and CEO of the Denver-based company, hired Greg Maffei as CEO-elect, taking over from Malone in the second quarter of next year. He wants the former CFO of Microsoft and Oracle to help him figure out why Liberty Media, which has a market cap of about $22 billion and trades at less than $8 a share, is still valued at a discount to its net asset value of some $37 billion, and what it should do about it.

Liberty is paying Maffei $1 million in salary, plus bonus and 5.5 million in stock options at a strike price of $7.95 a share.

Malone and Maffei sat down with FORTUNE's Janet Guyon to talk about what they intend to do with Liberty's 18 percent stake in UNESCO., how they plan to grow QVC, and how crab cakes will help Liberty's latest turnaround plan, a tracking stock for its e-commerce and QVC businesses.

You're planning to issue a tracking stock for QVC and your two other interactive holdings, Expedia, the travel site and IAC/Interactive Corp., the Internet company run by Barry Diller. That's supposed to boost the stock price?

Malone: The principle problem Liberty has in terms of valuation is what the Street calls dead money assets. A large proportion of our balance sheet is in old media stocks, roundly $21 billion to $22 billion worth. Some of that we prudently hedged back in 2000 pretty close to the top. So we protected that capital asset, but we also limited our upside, which, actually, wasn't very much, anyway.

Maffei: The actively managed pieces, the 100 percent-owned QVC and the cable business, have done better than the stock portfolio. That's why we're putting QVC and the interactive assets in the tracking stock.

Malone: We've said that 70 percent to 80 percent of our market value is in the QVC piece and its related interactive ventures. So why not give the shareholders clear visibility of that in a tracking stock and further narrow down what we would regard as the undervalued portion of our portfolio?

Maffei: Those operating businesses like QVC not only have good growth characteristics, but there are a bunch of things that could be added to them.

What would you buy to add to QVC?

Malone: There are a lot of specialized things like gourmet food where the economic model of building sales is better on the Internet than through brick and mortar or using a catalog. And the beauty of using video -- the QVC channel -- to brand and promote and drive traffic to those Internet sites is a very powerful and attractive model.

Fortune: And the tracker then should be valued at a higher multiple than an ordinary retailer like J.C. Penney?

Malone: Hell, yes. If you look at the capital deployed compared to the cash generated by the QVC model, there is nothing in retail that comes even close. QVC doesn't have a big infrastructure capital cost, it doesn't have huge inventory exposures -- it is very efficient. It generates bottom-line free cash flow like no retailer I know of.

A great example of the power of QVC is crab cakes. Our guys at QVC in Philadelphia went out to dinner one night and they had crab cakes. They loved the crab cakes. So they found the vendor and asked him if he'd like to sell crab cakes on QVC. He now does a $27 million a year annual business.

What about that old media stock portfolio that you say is undervalued because it's got tax liabilities of over $6 billion? The part you're calling Liberty Capital?

Malone: That's the unsolved problem.

Maffei (whispers): Opportunity.

Malone: It is an unfulfilled opportunity. But it's clearly going to get a lot of focus and a lot of creativity and a lot of energy.... We're not sure where we're going to take it, but we are going to be very opportunistic about it. It could well turn out that we want to buy something that has absolutely nothing to do with anything we're already in.

Like General Motors?

Malone: It might be. Maybe Kerkorian is on to something. But I doubt it.

Has it occurred to you that you might be invested in the wrong industry, what you call old media?

Malone: That's absolutely possible. And that is one of the things we are going to look at. We are sure the interactive business (the tracker) is one that we're going to love and develop, just as we loved international cable and Discovery. With respect to the rest of it, Liberty Capital, we are not entirely sure where we ought to take it.

personally believe that in the Internet and media space the value will accrue to both ends of the curve. It will accrue to the content owners and creators and it will accrue to the people with the relationship with the end customer.

Maffei: But the easy idea that all content is going to increase in value is not true, because a lot of content is getting devalued. What is the value of the New York Times editorial if you can get Drudge's opinion and 17 blogs for free?

What about the idea that you're just going to sell the rest of your assets to Rupert Murdoch so he gets the 18 percent of NewsCorp. that you own?

Malone: We are not engineering it today in that direction. We think the NewsCorp. asset is undervalued because it has the best position of any of the vertically integrated media companies: it is both global and controls its satellite distribution. That said, we would love to see Rupert be a little more aggressive on leverage and shrinking his equity (by buying back stock). Not necessarily ours. We are not really up for sale at this point.

You've said you think NewsCorp. will be successful where some of the other old media companies haven't been, like with its new Fox business channel. CNN had to shut down its CNNfn business channel. Why will Fox do better than CNN?

Malone: Because Rupert's got the creativity and the drive. He's got the guts to drive it. It will be more sensational, it will have topless news reporters if it has to. It doesn't really matter. Rupert is just more aggressive than other people. He's smart and he puts the pieces together. The bottom line is it's more important to him than to other people.