(FORTUNE Magazine) – Often credited with brilliance, John C. Malone, 55, CEO of cable TV giant Tele-Communications Inc., seems lately to be trending toward incoherence. He laid the base for confusion in May, when the opening letter in TCI's annual report trumpeted optimism: "We are in exactly the right place at the right time." But hey, how does that fit with the stream of bad news in October and November: poor third-quarter results; credit-rating alarms; a freeze on most supplier shipments; 2,500 employees laid off (wrong place, wrong time?); cuts in executive salaries of 5% to 20%? And what exactly are we to make of Malone's recent announcement that he is "back" running TCI, when he'd never owned up to not running it?

Moreover, what are we to think of the John Malone who turned up on a California stage in December and implicitly admitted to an epiphany, telling a startled audience of cable executives it was time to demonstrate that "this industry is not a cash alligator that eats every nickel that can be raised." A pox on debt, he said, labeling it a "curse." The industry must progress, he preached, and reward its shareholders with earnings--not just cash flow, mind you, but jet-black, bottom-line profits, the kind that companies pay taxes on.

Debt is bad? Well, this would mean that Malone has hung a $15 billion "curse" around TCI's neck. Earnings are good? TCI never shows an operating profit. And how does this view click with the John Malone who, during the Bell Atlantic-TCI merger talks three years ago, denounced the very idea of profits, calling them damning evidence that a company has stopped growing? Is this what he's really telling us now about TCI? Malone wouldn't answer this question, or any others, for FORTUNE's readers, but it appears that this could indeed be his underlying message.

There's no question that Malone has picked an inordinately suspenseful time to suddenly get religion about spending. In the past 18 months, the cable industry has watched its monopoly, and the pricing power that tags along with it, begin to fade; after years of inching up to the starting line, the direct broadcast satellite (DBS) industry has finally become a bona fide threat to every cable operator around. All of a sudden there really are at least two "cable" systems in every town, with the second and third and fourth brought to you by the magic of satellite--a technology that can reach everyone and offer every cable channel under the sun.

One knowledgeable FORTUNE 500 CEO calls this competition "a race in time" in which the traditional cable industry must head off the nascent satellite threat by increasing the number and quality of channels it offers. That means big spending on digital technology, the imperative that makes Malone's new posture about debt and profits seem so out of whack. At just the moment when he needs to plow big money into technology and service, he announces a new posture of fiscal respectability. Weird.

All this conflict and confusion surrounding TCI certainly seems a rude comeuppance for the man who has regally bestrode the world of cable for more than two decades, earning him his reputation of master strategist and dealmaker. He has done and undone deals, sometimes stooping to tactics that his critics call chisels. He is famous for moving pieces of TCI around like chessmen, occasionally in ways that do more for Malone than his shareholders. He has powerful friends, like Bill Gates, and powerful enemies, like Vice President Gore, who stuck him with the name "Darth Vader." But today the aura of the King of Cable is markedly different. He's been brought down to earth by this peasant managerial problem, this awkward matter of rationing scarce resources just when a war is beginning.

Confronted with such workaday woes, the good doctor--he is accorded that honorific in TCI's documents because of his Ph.D. in operations research from Johns Hopkins--surely must sometimes rue his decision to fold up his chessboard and bow out of the Bell Atlantic merger rather than accept a renegotiated price for TCI. True, that price wouldn't have been to his liking. As Bell Atlantic did its due diligence, it grew increasingly aware that many TCI cable systems were in poor shape. Consequently, CEO Raymond Smith's notion of what he should pay kept dropping, sliding well below the $33 price per share the market placed on the deal in an early rush of euphoria.

Still, had Malone swallowed his pride and chosen to apply his legendary skills to extracting every last dollar, he could have emerged with wealth in his pocket, the road to retirement sketched out, and the knowledge that this very rich uncle, Bell Atlantic, would spend all that was needed to bring TCI's systems up to snuff. But that's history. Malone opted out.

TCI's stock hasn't burned as brightly since. To compare today's price with the Bell Atlantic marker, you have to make adjustments for the stocks of two TCI subsidiaries put into shareholders' hands (see chart). Even then, the record is dismal: Instead of the $30 or more the TCI investor once dreamed of, he recently held stock valued at just under $21. That thud occurred during a period in which the S&P 500 average rose more than 55%. Says one Wall Street analyst: "What has this stock done for you? You've stuck with it through all the disappointments and overpromises and kept telling yourself it was going to work. And all that's happened is that you arrive at this point looking like an absolute fool."

Even so, if you're a Malone diehard, you might be intrigued by his declaration that he's "back," a word that deserves a certain scrutiny. Some skeptics believe the characterization is pure spin, as in, "I have returned, folks; sleep easy." Other listeners simply deem it mysterious or maddening. Where has he been? After all, he never ceased being CEO in title or pay.

In retrospect, it appears that Malone took a step back from day-to-day operations to focus on "bigger" issues. One that took a lot of his attention was the government-impeded, and therefore long-pending, merger between Time Warner (parent of FORTUNE's publisher) and Turner Broadcasting, in which TCI was a major shareholder. With that deal now completed, a TCI subsidiary, Liberty Media, becomes Time Warner's second-largest shareholder, with about 10% of its stock--a stake recently worth some $2.1 billion.

Unfortunately for Malone, that diversion has been superseded by another more personal: the fallout from the November death of Bob Magness, TCI's founder and chairman, and Malone's close associate. The two met in the early Seventies after Malone had moved through jobs at Bell Labs and McKinsey & Co. to Jerrold Electronics, a supplier to the just-sprouting cable business. Magness, operating out of Colorado, sized up Malone as the fellow he needed to run TCI. Malone was hard to convince because he was also considering a job offer from Steve Ross at Warner Communications. But he signed up with Magness in 1972, and from that time on they were a powerful pair. Emotional ties developed as well. Magness, said Malone in November, was to him both a "mentor" and "father figure."

Magness was TCI's principal owner, holding 26% of its votes. With his death, that control block of shares will move into new hands, though precisely whose is not yet clear (see box). The outcome obviously matters a great deal to Malone, who for the moment has lost the peace of mind of knowing that maximum power is in the pocket of a friend just an office away.

Not that anyone is likely to fire Malone. To the cable world--one of the tightest-knit of societies--he remains the compelling cowboy from Colorado (even though he's an avid sailor who vacations in Maine). He also remains the industry visionary, the superintellect, the man often called the smartest guy in the business (which does raise the question of how he got into the hole he's now in). Malone has played Houdini before, and industry execs seem to expect that he will once more make an elegant escape.

The financial legerdemain Malone has in mind for the very near future--like next year--would not go so far as to move TCI from its habitual operating losses to real earnings. But Malone is talking about the next closest thing--"free cash flow," i.e., money thrown off by operations that is not automatically jailed by the capital budget, but can instead be applied to such cable unorthodoxies as reducing debt. Free cash flow is virtually unheard of at TCI, where the practice has been to reinvest all cash flow--and, as Malone says, "then some."

Evidence of that pattern is contained in TCI's ever-increasing debt, grown by last September to that curse of $15 billion. A second piece of testimony comes from the fact that TCI's deficit in free cash flow--obviously a contradiction in terms--ran to an estimated $400 million in 1996.

In what would amount to a miracle if it occurs, Malone is proposing to move from that deficit to free cash flow of between $750 million and $1 billion in 1997. "Financial engineering," said TCI's chief financial officer recently, is not part of the plan, which represents another about-face, given the company's penchant for spin-offs, recaps, and joint ventures.

No, this plan calls for TCI to amass free cash flow by cutting costs and increasing revenue. Despite the satellite threat, more rate hikes are in the blueprint for many of TCI's 14 million subscribers. And in a step that has revolutionary overtones, Malone is trying to reshape the compensation arrangements between TCI and its content providers.

Traditionally, cable operators have paid programmers for the privilege of carrying their offerings. These fees keep rising, complains Malone, while he sees little evidence that TCI is getting anything more for its dollar. So he's trying to arrest the rise in fees to existing programmers, reminding them just how sorely they would miss the homes that TCI delivers. But here's the revolution: Malone has succeeded in extracting one-time payments from new networks--most notably, the $200 million he got from the Fox News Channel--so programmers are actually buying their way onto the air.

On the expense side, TCI is trying to rein in costs that seem to have gotten out of hand--one rumor reports an unexplainable $50 million in missing inventory. The company is even selling its fleet of four planes. But the truly significant cuts must come out of capital expenditures for property and equipment, which is where cable companies spend their real money. In 1996, for example, TCI probably put around $2 billion into capital spending, against $1.8 billion the year before.

Which brings us once again to the Big Question: How does Malone plan to head off the satellite broadcasters while dramatically cutting capital spending? In the cable business, he is not alone in the need to spend. But the pressures on TCI are particularly great because of Malone's decision in the early Eighties to bulk up subscriber ranks by buying hundreds of rural systems.

Nearly 43% of TCI's customers are served by these "classic" franchises, as TCI euphemistically calls them. The systems tend to be small, old, and in poor repair, and deliver a relatively meager lineup of, say, 35 channels. When direct broadcast satellite appeared two years ago, such podunk systems were at risk of becoming carrion on the hoof. Suddenly, anyone anywhere could gorge on more than 200 channels of cable TV programs, pay-per-view movies, and sporting events. And since DBS dishes are just 18 inches in diameter, rural viewers could junk the old six-foot dishes that cluttered their yards.

Now, let's not get carried away. For starters, cable is in 65 million U.S. homes; DBS has not quite three million subscribers, and even though that's nearly a 100% jump from the year before, the growth rate is actually slower than what satellite companies predicted. Furthermore, DBS has drawbacks. It will never be suitable for two-way communications, such as phone calls. The basic dish serves only one TV set in a house. And most seriously, the satellites lack the capacity to carry every local broadcast affiliate, and for the moment are legally proscribed from beaming those stations into their home markets. Thus DBS subscribers who want local channels either must use antennas or keep the basic tier of cable programming.

Still, it seems remarkable that cable outfits once shrugged off the threat, expecting DBS to take off only in corners of the country where cable didn't reach. Instead, a huge fall in the price of dishes--from $700 to $200--has pulled in subscribers broadly. Today, 60% of DBS customers live in areas served by cable. Dillon Read analyst William Vogel sums up the situation: "Cable companies have gotten hammered. Satellites have taken away their growth."

Indeed, TCI lost 70,000 subscribers in the third quarter, not counting those it picked up in acquisitions. And even when DBS users hang on to cable service for the local stations, cable operators pay a severe penalty because the lowest tier of service costs only about one-third of the average bill. As an example, were one million cable customers to switch to DBS and retain basic service--and not all of them would keep even that--the annual hit to cable company revenues would be $250 million.

Malone's desperate moves for cash flow may play right into the hands of the DBS camp. Replacing old networks with new ones that pay him is a sure way to annoy subscribers who basically want to feel they're being offered everything that's out there. In 18 cities where cable rates rose in 1996, DirecTV pounced with a marketing campaign promising new customers a price freeze through 1999. As Stan Hubbard, CEO of satellite broadcaster USSB, says: "In a competitive environment, you'd better think about the competitor. We like TCI's moves."

Until recently, Malone might have claimed he would fight back with superior technology. TCI was committed to larding each of its systems with fiber-optic cable to boost channel capacity and make possible new services like high-speed Internet connections and telephony. But to do so requires digging up streets and installing expensive gear. So Malone has instead decided to allocate investment dollars by triage, with separate plans for TCI's urban, medium-size, and rural systems.

Only TCI's big-city systems, like Hartford, Chicago, and San Francisco, which offer enough revenue and economy of scale to justify big capital outlays, will be candidates for the full treatment. But such systems serve only 7% of TCI's customers. And TCI has yet to demonstrate that it can actually manage a complex two-way network. In fact, one reason Bell Atlantic cut the price it would pay for TCI was its discovery that few of TCI's systems had the computerized back-office networks essential to managing a modern communications network.

Customers in medium-size systems won't enjoy the glory of fiber optics. They may get a form of superior digital television, however, given an eight-year deal Malone signed last spring with Imedia, a San Francisco startup whose witty CEO, Efi Arazi, earlier made a bundle as founder of Scitex, an Israeli software company. Imedia has an elegant technology that allows cable operators to cram as many as 24 programs down a single channel. Once implemented, Imedia's technology can quadruple the number of channels a subscriber receives--without TCI having to spend to upgrade its cable plant. The first rollout is scheduled for April.

To use the technology, subscribers will need new digital set-top boxes that are just beginning to come off production lines. Malone is in a big hurry to deliver as many boxes as he can as soon as possible. Besides giving subscribers a raft of new channels, the digital boxes will also make possible a limited range of new services like push-button ordering of pay-per-view movies.

Not to suggest that making customers happy is the most pressing reason Malone wants to pump out these boxes. Thanks to the Telecommunications Act of 1996, the units will generate a return for TCI before they create any revenue. The bill lets cable operators set high enough rates on their lowest tier of service to earn an annual return on assets of 11.25%--and a little-noticed provision allows them to lump in the cost of all their set-top boxes, even ones that those low-tier subscribers will never see.

What a nice, tidy subsidy. But Malone plans to go even further, extracting a second payment for the boxes: Customers who sign up for digital service will hand over a monthly rental fee calculated to recoup the cost of the boxes as if they were never blended into the rate base.

Sounds great: an instant return and more channels to fend off satellite. Why didn't TCI think of this sooner? In fact, it did. It ordered its boxes years ago from its principal supplier, General Instrument, and was supposed to have had a million installed by now. But TCI's relations with this company--which owns Jerrold, Malone's old outfit--have been rocky at best. In fact, one industry executive calls the state of affairs between the companies "a co-dependent dysfunctional relationship."

TCI first insisted that GI license its digital technology to others so TCI could have more than one supplier. Fair enough--but TCI didn't understand that this kind of sharing was an unnatural act for GI, which was accustomed to making its money from proprietary technology. Working out cross-licensing agreements with Scientific-Atlanta and Zenith took months. Then GI kept slipping its deadlines. According to the industry insider, "GI completely bullshitted TCI about when the product would be ready."

To be fair, perhaps GI dawdled a bit because initially, at least, it would have lost money on each unit it produced. TCI had insisted on negotiating a firm price for the boxes before GI had finished developing the technology, which turned out to be more costly than expected. And TCI's continued fiddling with the specs added to the delay. TCI insists that GI will soon be making 100,000 boxes a month, but to date the company has shipped just 40,000. All told, GI is two years late, and Malone now expects that only 25% of cable customers will have digital boxes by 1999.

If you don't think the problem has Malone peeved, consider this incident at the recent cable show in Anaheim, California. TCI and some of its partners had imported a bunch of top-40 types for the evening's entertainment. After emcee Dick Clark greased the audience with his oldest-living-teenager patter, he introduced Malone as an unscheduled guest. Malone was to take the stage only long enough to bring on Little Richard, but the band wasn't ready, so Malone shifted his feet for a moment, smiled his boyish, crooked grin, and said, "Well, I guess I'd better tell you a story.

"There was a young woman who went to a psychiatrist, and she said, 'Doc, I've been married three times, and I'm still a virgin.'

"And he said, 'How could that be?' "And she said, 'Well, my first husband was a traveling salesman, and he never got home, and then he was hit by a bus.'

"The doctor said, 'Yeah, but what about your second husband?'

"She said, 'He was a college professor. He used to write about it and talk about it, but he never got around to it, and he died of a heart attack.'

"'So what about your third husband?'

"'Well, that's easy,' she said. 'He's a Jerrold salesman.'"

The crowd hoots at the reference to GI's set-top box division.

"'And he keeps telling me how good it's going to be when I get it.'"

TCI's rural subscribers may never get it--a digital box, that is. For technical reasons, systems that introduce digital boxes must divert some of their existing channels to carry a separate digital signal. For rural customers who just want to keep what they have now without paying for a new box, this would mean losing programming from an already anemic channel roster.

So Malone's plan for these "classic" systems is a kludge: TCI will augment its meager lineup with--guess what--a satellite signal. It will give subscribers a dish that can pull in signals from TCI's own direct-broadcast satellite, to be launched early in 1997. The satellite won't have the capacity to work as a stand-alone service--only as a system enhancer.

Even then, TCI would have to give subscribers a new type of hybrid set-top box that handles both cable TV and satellite signals. And it doesn't exist yet. Bernardo Paratore, manager of residential equipment technology for General Instrument, says: "The brute force approach would be to put two sets of hardware in the same box. But that's very expensive. The right idea would be to integrate the two in a single piece of hardware. And that's tricky." Paratore is confident that a solution can be found, but, he says, "it won't be in the first quarter of 1997." When, then? They're working on it.

You have to wonder whether TCI would find itself in this kind of bind had Malone not diverted his attention from operations. While he pondered Time Warner-Turner and other grand problems, he clearly hoped that Brendan Clouston, the smart, tough-guy CEO of TCI's cable and communications division, would step up to the job of running the business. But in the last year, costs spiraled ever higher--staff at TCI was up by 16%, for instance.

Now Malone has brought back former operations chief J.C. Sparkman, who retired in 1995, to help clean up. Sparkman had a reputation for ruling with an iron fist in an iron glove, and his mitts are all over TCI's recent cost-cutting plans. But Malone's reliance on a pensioner points to the lack of depth in TCI's senior management ranks. What's more, Sparkman was the guy in charge of operations when TCI was plagued by a reputation for poor service. So it seems pretty clear that if anyone can breathe new life into TCI, it will have to be Malone.

The rescue effort will not be pretty--this doctor lacks a bedside manner. Malone is actually something of a Midas for the legal profession, with everything he touches turning into a lawsuit. In TCI's 1995 10-K, for example, the section on legal proceedings begins thusly: "There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject, except as follows." The description of exceptions runs from page 53 to 64.

There was a time when Malone clearly wished to leave such headaches behind. Back in July 1993, when he and Ray Smith were just beginning to talk about a deal, Malone jotted some personal notes on a legal pad. Then--as now and always--he was sensitive to the wishes of his wife, Leslie, that he not be consumed by work. So the notes, according to Ken Auletta's description in a 1994 New Yorker article, had a heading that read "John and Leslie's goals and objectives."

Malone listed six: (1) reduce stress; (2) have more fun; (3) ensure a safe and liquid personal investment portfolio; (4) generate predictable income that would fund the Malones' lifestyle; (5) reduce government, legal, and media exposure by getting John out of the public eye; (6) honor commitments and moral obligations to his family and business associates.

So, 3 1/2 years later, what's the score? By still running TCI, Malone appears to be honoring at least some commitments. On the lifestyle front, he and his wife seem eminently comfortable: In spite of deferring a big part of his $850,000 annual salary, Malone supports a 200-acre hilltop spread in Boothbay, Maine, and a new 80-foot racing yacht named Liberty. As backup riches, he owns some $550 million of TCI securities. He once, of course, tried to exchange this wad for Bell Atlantic securities, but since that deal fell through he has sold only relatively small amounts of TCI paper, seeming to indicate little need for liquidity.

TCI's stock performance, though, is a big reason to believe Malone has not met all his objectives. It surely hasn't alleviated stress, or provided a barrel of fun, or offered financial comfort, or come close--as this article itself testifies--to warding off the attention of outsiders. No, John and Leslie have a ways to go.

TCI's program of spinning off subsidiaries could conceivably lighten Malone's burden. But the company's core--the messy cable business--is still on his hands. Which makes you wonder if John Malone doesn't sometimes revisit the idea of selling his company. The Delphic question is, Who would be interested in taking on this load? AT&T, once it's interred the pain of NCR? Another Bell company, not named Atlantic? Microsoft, whose riches alone bring it to mind?

Well, selling is a thought. It would probably present the tidiest opportunity for Malone to add liberty, lower case, to the upper-case version he's already launched in the waters off Maine.

REPORTER ASSOCIATES Joe McGowan, Joyce Davis, and Henry Goldblatt