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WHEN: Today, Wednesday, November 14, 2018
WHERE: CNBC's "Squawk on the Street " – from Liberty Media Day in NYC
The following are excerpts from a CNBC EXCLUSIVE interview with Liberty Media Chairman John Malone and CNBC's David Faber on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today, Wednesday, November 14th from Liberty Media Day in NYC. The following is a link to video of the full interview on CNBC.com: https://www.cnbc.com/video/2018/11/14/watch-cnbcs-full-exclusive-interview-with-liberty-media-chairman-john-malone.html.
All references must be sourced to CNBC.
JOHN MALONE: They're throwing Hail Mary passes in content. They're disrupting the traditional studio architecture— going directly to talent, bidding against each other for anything that looks unique. I mean, this is going to be a food fight for a while. And you know if Disney gets in the middle of the food fight, they're just going to have to live up to their brand in terms of what they deliver. And they're got to figure out how to make it somewhat unique because you know their contents been out there forever, so people are used to getting it and not paying for it. Right? Or not understanding that they're paying for it, right?
FABER: Right. Right.
MALONE: So to make that transition – and the question is how much pain are they willing to suffer pulling back rights from existing distribution, so that they create this appetite or starvation even for their brand and their content. So that when they then offer it as a premium direct consumer service people are willing to say –
FABER: There's real value.
MALONE: -- I should pay for it now.
FABER: And guys, and Jim, that goes back to this question we've been asking when it comes to Disney certainly is: what's it all going to cost? What's the incremental cost going to be to the company as it of course tries to compete robustly with Netflix and Amazon? And John was sort of pining a bit on -- on that and on the evolving world, in terms of that food fight he was talking about where so much money is being spent for those who create the content.
MALONE: They have great brand, there's no question. And they really know the entertainment of business. What -- what they don't have is a massive number of global credit cards. They don't have massive direct consumer relationships at this point and those are not easy to come by. You know, if you look at the other people in the space: Amazon, because of their retailing businesses and the creation of Prime has been able to tie into consumer interest pretty globally, and -- and so it's very easy for Amazon to sell an incremental service. You have Apple wanting to be in this space. Apple is the big gorilla.
FABER: When you say wanting to be in this space what do you mean?
MALONE: Wanting to develop a direct consumer entertainment relationship beyond music, let's call it into video. And I -- I -- we're estimating that Apple has probably 650 to 700 million direct consumer relationships, in which Apple has a credit card, a lot of information about the consumer. They've started to put money into original content and they're certainly having lots of discussions in and around the content industry to figure this out. And you know they want to drive their consumer interface technology, their ecosystem into the video space in the living room, more heavily than Apple TV has so far. And Jeff is on a roll with his fire stick and his prime and his content and so he's in the living room. And Alexa is a – is a voice-activated interface that that works well as well, thought-through well, well-engineered, interfaces with Netflix. I mean well engineered, okay. So the technology side, if Disney has a problem, okay, I believe it's going to be those two things: it's going to be the technology platform and it's going to be establishing those one-to-one consumer relationships.
FABER: All that said, when I did put the direct question to him he does say he believes Disney will be the third significant entrant and successful entrant overtime in direct consumer after Netflix and Amazon. Guys.
CARL QUINTANILLA: Let's get over to David Faber as we said earlier at Liberty Media's Investor Day once again. David?
FABER: Thanks, Carl. Yeah, earlier today I had a chance to sit down with John Malone, of course the man who helped create the overall company and as its Chairman also still sits on nine boards of directors. Always like to talk to John about, well, a variety of things in the larger media business and about deals themselves, something he's no stranger to. We talked about globalization. It's been a key theme of his through the years. In particular we talked as well about our parent company, Comcast's, decision to buy Sky. And we went on as well to talk about a deal that didn't happen last year, namely the sale of Charter Communications, of which Malone and Liberty own more than a 20% stake. The first question that I asked was did Comcast get a good deal in purchasing Sky?
MALONE: Brian will shoot me if I say no. He paid a lot of money for Sky. I think the proof is going to be how he goes -- the bulk of the Sky business is UK and the bulk of the UK business is a satellite-to-consumer business. He has to make the transition from satellite distribution to internet transmission over time.
FABER: It seems to have passed. Do you --
MALONE: For now.
FABER: For now?
MALONE: For now.
FABER: Do you regret it passed? Do you regret there was an opportunity there that wasn't seized given the stock is 328 right now?
MALONE: Look, you're always worth more dead than alive in the business world. Right? And on any given day you can usually sell a company for more than its market trading value. So in the short run, would that have been something to pursue and if you know, we owned -- instead of a 328 stock and you know, we had $350 worth of Verizon stock, would we be better off? Would the future be brighter? You know, I don't know. I mean, I think clearly some of us on the board and in the company thought we should have more aggressively pursued some of those interests. I can tell you that the deals that were on the table would not have gotten anybody's support. Okay? So Verizon would have had to get more aggressive for that deal to have had any chance. The problem with Masa's overture was it wasn't deemed to be equal for all shareholders. And as a result, some of us felt a) that it would be awkward to propose it.
FABER: At the same time –
MALONE: Do you think a T-Mobile/Sprint wanting to go into -- just look forward a few years. If it turns out that 5g is an attractive -- involves to be, demonstrated to be an attractive fixed solution, Charter will have a maturing high speed powered network in the part of the world it serves. Very incrementally positive to add a 5g on that-to-that platform.
FABER: Right now, Hans Vestberg, who is running Verizon --
MALONE: He's focused –
FABER: He's very focused on 5g,
MALONE: -- he's focused on 5g --
FABER: -- and they've been rewarded in the marketplace for doing so overtime. Last time when they went to 4g.
MALONE: Well, let me point out, Charter is trading at, what, 9.1 times. Comcast attributed to that business maybe seven. Tom is being rewarded for a clear pure play leveraged cash flow growth buyback story. Not experimenting over here, not trying to buy a content company or a – right? So Charter is currently, and the Charter shareholders are currently being rewarded the same way -- with premium valuation and a big buyback program that gives liquidity to its shareholders. Okay? Now that is not my traditional way of building a business but it's Tom's, and it's working.
FABER: And you clearly believe there may be another opportunity to revisit, if it makes sense, a sale of Charter at some point?
FABER: And perhaps Tom will be in a different place in terms of his view of value as well?
MALONE: Yes. And, you know, Tom is a terrific operator, right? And so he's got a very clear vision. This is a stage, right, where Tom is basically saying "Don't bother me with all this other stuff. I've got this focus and this vision and this challenge and I've got to get this done and once I've got that done then you guys, you naysayers, right, can say 'Now what should we do?' But if I don't get this done everybody will be disappointed." So I think for that board, in a year, two years this there will be a big question. Okay. "Now what?" "Now we're generating this big free cash flow. Are we going to have an opportunity to steal an NBC Universal from somebody like Brian did?"
MALONE: Yes, really. I mean, you don't know. Timing, timing, if you have dry powder –
FABER: Are you trying to get Brian to split the company? Is that sort of what I'm hearing here too, John? Are you --
MALONE: No I'm talking about him being Brian.
FABER: I see. Okay.
MALONE: I think he made a fabulous transaction.
FABER: Always a good place to stop, saying that our boss made a fabulous transaction. Carl, back to you.
FABER: Thanks, Carl. Yeah, it's a yearly investment meeting and a chance every year to sit down with John Malone. Typically we do talk about, of course, the changing media landscape, something you and I talk about every morning at 9:00 with Jim as well. And certainly we tend to focus on Netflix. As has Mr. Malone for years now, by the way, in terms of originally his belief that the cable companies should have gotten together to try to combat it and his admission that, well, its place is fairly cemented when it comes to being the number one player. I did ask him: does he believe that that will continue?
MALONE: They've got a massive lead in that space. It's difficult to imagine that anybody can displace them.
FABER: Is there any chance that Netflix hits a wall at some point?
MALONE: So far it's an equity play that is based upon growth, valuation of growth, and the general belief that there will be a point at which they can take their foot a little bit off the throttle, right? They demonstrated -- their stock really took off, David, when they could demonstrate pricing power. So when they raised their prices and didn't lose any material subscribers, I think the financial markets said "Aha, glue," right? So if you have glue and you have growth and pricing power, right, now the question is how to manage that. So unless Reed, you know, which he won't, does something really nuts, I think it's a question of modulating their spend and coasting in to maturity, at which point they should be enormously cash generative. Okay? And the only thing that I can see that interrupts that is number two comes in and starts a price war. But I don't see why number two would start a price war, right? I think Netflix right now provides a pricing umbrella, and as long as the competitors come at it either under that price umbrella or, like Amazon is doing where it's a whole different bundle, right, I think there's clearly room for two or three global providers in this space coming at it from slightly different perspectives. So, you know, I think Netflix, will be very successful in my opinion. And I think Amazon obviously is going to be very successful. And the question is who's going to be number three.
FABER: I think you've answered it to a certain extent. You expect it to be Disney.
MALONE: I expect it to be Disney.
FABER: One question that I also put to Malone is his future. In the last year he stepped down from the boards of Charter and Lionsgate, raising at least some questions as to whether he was pulling back to a certain extent. Here is what he had to say:
MALONE: First of all, my wife has a health condition that makes it much more difficult for me to travel for business. So the travel obligations of being on boards that aren't where I am, you know, is a challenge for us. You know, we're coming up on 60 years of marriage, so you know, she's very, very important to me and that's number one. And then I have ISS and those types of people saying I'm on way too many boards to begin with and they're recommending, "Don't vote for John, he's on 13 boards," or something. And so I'm still on nine boards.
FABER: That's plenty.
MALONE: And the guys who are on the boards representing our collective interests are terrific people. So I don't think we lose a beat. On Charter, for instance, they've invited me to be an emeritus. So I call in, I listen to the board meeting. I do it. I read the board material. I call in. I'm an insider anyway, because of my ownership, so I get lots of connectivity there.
FABER: For those who view it in a larger context, "Well, John Malone is pulling back," or "He's starting to think about what he wants to do with his empire."
MALONE: No. But I would say, David, as you get older you have other interests, right? And so you want to spread your time – I have a lot of philanthropy interests. I have a forestry business. I have a hotel business in Ireland, I have a big thoroughbred racehorse business. These all -- these all are personal interest things.
FABER: "As you get older, you have other interests." I'm trying to figure that one out myself, Carl. Back to you.
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