To get a sense of the challenges facing

Liberty Media

(L) - Get Report

Chairman John Malone these days, imagine what it would be like to show up at Cleveland's Gund Arena to watch Cavaliers rookie LeBron James play ... chess.

Maybe he'd be good. Maybe he'd win. But wouldn't you really rather watch him play basketball?

That's how it is with Malone -- who, depending on the description you read of him, is either a legendary dealmaker, a savvy dealmaker or a consummate dealmaker. The man who once assembled the nation's largest operator of cable TV systems is signaling to Wall Street that he's trying to transform Liberty Media from an entertainment investment vehicle into an operating company.

Malone might succeed. He might excel. But it seems hard for people to get excited about Liberty Media as an operating company.

What they really are waiting for, it seems, is to see John Malone make another deal. And that attitude will likely color Liberty's discussion of third-quarter operating results, scheduled for Friday.

Extreme Diller

Malone's situation appears to be a more extreme version of that which faces Barry Diller, head of e-commerce conglomerate

InterActiveCorp

(IACI)

. Wall Street appears confident that Malone, like Diller, won't be one of the patsy-anytime-men-in-suits gathered around a conference table to buy and sell assets. But just as investors reacted unenthusiastically to IAC's recent operating results and distaste for new deals, Liberty investors appear less than excited about Liberty's operational focus. (More about Liberty's relationship with IAC below.)

Liberty's shares, which have performed unspectacularly over the past three years, rose 3 cents Wednesday to close at $10.08, in the middle ground of the stock's 52-week range of $8.44 to $12.27.

Certainly, Liberty -- which holds stakes in Rupert Murdoch's

News Corp.

(NWS) - Get Report

, InterActiveCorp,

Time Warner

(TWX)

and Discovery Communications, among other companies -- is edging toward an operational business, both in word and in deed. Earlier this year, Liberty passed up the chance to sell its minority stake in home shopping channel QVC to majority owner

Comcast

( CMSCA); instead, Liberty bought out Comcast's QVC stake to operate it itself.

"Our first priority right now is we're focusing on the businesses that we have," Liberty CEO Dob Bennett recently told the

Denver Post

. "This is part of an overall plan to increase our involvement in the operations of the businesses in which we hold an interest."

But to get a sense of how irrelevant Liberty's operations are to Wall Street's opinions of Liberty, all you have to do is take a look at analysts' forecasts for the company, or lack thereof.

Brokerage information clearinghouse Thomson First Call lists 16 firms that follow Liberty Media. But only one of them has submitted a third-quarter earnings estimate to First Call. Five have submitted full-year 2003 earnings estimates.

It's a clear contrast to analysts' participation in judging the operations of other media companies -- Time Warner, for example. Of the 27 analysts that First Call lists as covering Time Warner, 22 have submitted estimates for the current quarter, and 26 have forecasts for the full year.

Conflict Resolution

With Liberty now in control of QVC, the parent company appears to be living with a puzzling, unresolved conflict between its roles as an investor and an operator. Not only does Liberty hold more than 10% of InterActiveCorp's shares (which are voted by Diller), but also both Malone and Bennett sit on the board of IAC. One of IAC's biggest businesses, accounting for one-third of its revenue in its latest quarter, is the home shopping channel HSN -- a direct competitor to QVC.

Thus, Malone and Bennett are sitting on the board of a company that competes head-to-head with the company they're now operating. "Liberty Media has owned a large interest in both QVC and HSN for the past nine years," said an InterActiveCorp spokeswoman. A Liberty Media spokesman said the company had no comment on the subject.

Meanwhile, one of the latest pieces of news out of Liberty regarding its operated businesses isn't wonderful.

A settlement of litigation between Liberty's Starz Encore movie channel business and Comcast ended up with Comcast winning much better terms for carrying Starz Encore's premium channels. In response, analysts cut forecasts for Liberty; Starz Encore is cutting 100 jobs, the

Denver Post

reported this weekend.

So what will get investors excited when Liberty holds its Friday conference call?

Perhaps more overseas dealmaking, which has been a focus of Liberty's over the past few years. Liberty owns a controlling stake in European cable operator

UnitedGlobalCom

( UCOMA), which is attempting to take over its main subsidiary, UPC Europe. In a recent note, Merrill Lynch analyst Jessica Reif Cohen wrote that UGC was reportedly considering an acquisition in France. In a Thursday note, she also speculated that Liberty, now in control of QVC, could push consolidation of home shopping channels in Japan and launch start-up versions of QVC overseas.

As for individual segments of the company, Cohen forecasts third-quarter QVC revenue of $1.11 billion and earnings before interest, taxes, depreciation and amortization of $209 million. At Discovery, she estimates, revenue will be $448 million and EBITDA will be $103 million. Starz Encore revenue will be $231 million, with EBITDA at $77 million. Cohen has a buy rating on the stock and a $15 price target; her firm has recently done banking for Liberty and has managed a recent public offering of securities.