Economics Changing for Cable, Bundling Threatened: John Malone
Markets are forcing change for cable operators, and the big players have a unique opportunity to work together, billionaire media titan John Malone told CNBC.
In a wide-ranging interview with CNBC's David Faber, Liberty Media's chairman said the industry will focus on international expansion and domestic broadband services. Although potential for collaboration exists with Internet-based, over-the-top content providers like Netflix or Hulu, he said, bundling of cable networks could begin to unravel within five years.
"I think it's at a point in history when the most addictive thing in the communications world is high-speed connectivity," he said. "Everywhere in the world that we operate, we've just seen the public want more and more data rate. Whether it's wireless or wired. There's a big appetite for it. Cable technology right now is the most cost-effective way to deliver that growth in speed."
Malone said that as more alternatives become available and broadband connectivity grows, over-the-top systems, which bypass cable operators for control and distribution, may begin to offer sports content and challenge the established system.
If sports networks decoupled from cable distribution and offered consumers standalone services at market prices,"you have an unsustainable model" for cable companies, he said. Despite long-term sports deals signed by cable networks, Malone said, in the next five years, bundling may begin to be relaxed because sports programming in every home becomes "not mandatory."
Sports programming is considered by many in the entertainment industry to be the holy grail of cable, a highly guarded space that is thought to be a major justification for U.S. households in keeping their cable subscription. For this reason, sports networks are able to generate high subscription fees from cable operators, and networks are often able to sign more lucrative content deals by "bundling" less popular networks to must-have sports channels.
"As the cable guys and the satellite guys start to lose customers to the over-the-top guys, some of those economics will be reflected back on the sports guys. They'll start losing advertising revenue. They'll lose affiliate revenue. And they have to face reality that maybe you need to segregate your market like everybody else," he said in the "Squawk on the Street" interview taped Wednesday and broadcast Friday.
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Malone has influence across the media space, and along with other big players have been referred to in the past as part of the "cable mafia." He said that era was marked by increased coordination allowing for broad scale in development, something he would like to return to.
However, Malone was not suggesting that cable companies operate through nefarious means. New products, increased stability and consumer benefits can come through increased cooperation, he said
"I think we do want to bring back the days of @Home, the days of Ted Turner, the days when we all got together, because together we provided national scale," Malone said. "Now I think we have the opportunity to create global scale," he said. "The goal is not to be bigger. The goal is to be more cost-effective."
"We all see the world about the same," he added, "a unique opportunity to take this vehicle and grow it through both superior marketing and promotion and other internal growth."
Malone's company is making big bets on growth, Earlier this year, Liberty took a 27.3 percent stake in Charter Communications, the nation's fourth-largest cable provider. Malone said he sees Charter as an undervalued asset and called Charter President and CEO Tom Rutledge "the best operating manager in the business." (Watch: Liberty Media Acquires Rare Stake in Charter)
In this environment, Malone sees the future of cable going global. That way, he said, cable operators can benefit from scale that can only be achieved by reaching outside of domestic markets. "I certainly will be promoting that," he said.
Malone also sees potential for cable operators to market and deliver their own over-the-top services along with broadband access. "People aren't going to stop watching TV," he said. "They're just going to watch it coming over the top."
In an environment of cheap borrowing, he said, media companies should be looking for both vertical and horizontal acquisitions, taking advantage of cheap capital. He also pointed out that cable companies, with relatively reliable cash flows, can constructively take on more debt than cyclical companies.
Malone's Big Regret
In 2000, Liberty Media was spun off from AT&T into its own publicly traded company, something that Malone "absolutely" regrets.
"Broke my heart to do the AT&T deal," he said. "When you're the controlling shareholder and somebody comes along and offers you a 40-percent premium to a record high stock price, really full valuation, and to a liquid security, you just can't turn it down. In retrospect, I wish I hadn't done it."
Problems for America
Malone also spoke about politics.
"We have a serious structural problem in America," Malone said. "This cheap money is driving up the value of financial assets, so that the wealthy get wealthier, on paper anyway, and the middle class get stressed. I worry a lot about the political ramifications if that's sustained for too long."
"We have got to rebuild the middle class in this country. And this is, I think, the greatest political challenge for the next few years: How do you rebuild the middle class? How do you make America a better place for business?" he said. "We have the worst corporate tax structure in the world, on the margin. Decisions aren't made on the average. Decisions are made on the margin."
"Caterpillar is looking at building the next plant, where are they going to build it? Where the tax rate's 12 percent in Brazil or where the tax rate is 39 percent in Peoria? I mean, and they've got a lot of money overseas already."