The cable industry faces the prospect of more regulation, more competition from over-the-top providers and more consolidation overall, but Liberty Media chairman John Malone said fears that the cable business is headed for the scrap heap are exaggerated.
Anyone with any history in the business knows that cable’s demise has been predicted almost from its start more than 50 years ago, and the industry has managed to survive, and thrive, through it all.
Lately, though, the naysayers have been in overdrive, seeing the overhanging threats of Title II regulation and “cable killer” over-the-top video packages coming from Sony, Verizon Communications, Dish Network and others.
Malone has weathered his share of onerous regulation and competitive threats in the past, and he offered some needed perspective at his company’s latest investor day.
NOT PANICKING
The spur was President Obama’s statements favoring the stricter Title II approach to broadband oversight. Malone said he believes Federal Communications Commission chairman Tom Wheeler, who has favored a hybrid approach in the past, will work out a compromise, though the option of Title IIbased common-carrier regulations can’t be ruled out.
“My guess is Tom Wheeler will be able to thread the needle here and do something that satisfies some cosmetic concerns,” Malone said. “There is no abuse that anybody can point to that is material that will justify a heavy-handed government intervention at this point.”
The industry also has struggled with the issue of rising content costs. On that front, Malone said the linear approach — in which distributors bundle desirable programming into a package they hope will be profitable and doesn’t cost so much that viewers will defect — would eventually go away.
“I predict that that model will change over time,” he said. “In some cases, it will change with the cooperation and involvement of the distributor, particularly as you make the change from linear to random-access.
“I think you’re seeing increasing friction because of the price pressure on content,” Malone said. “So much of the oxygen has been taken out of the room by sports and the rising cost of sports that it’s putting pressure on distributors who are trying to control costs wherever they can and are likely to put more pressure back on the weaker suppliers than the ones they would like to retaliate [against], but they can’t.
“It really is a phenomenon we are seeing,” he added. “If 80% of the incremental price pass-through is going to the sports supplier, there is very little room for inflation or budgetary increases for the non-sports-driven.”
One way to combat those rising costs is for distributors to get bigger, something Malone has been a huge proponent of, especially through Liberty’s investment in Charter Communications.
Liberty’s $2.6 billion investment last year in of 27% of Charter’s stock helped fuel the MSO’s attempt to acquire Time Warner Cable. And though Charter ultimately did not win that prize — Comcast did, in a $69 billion deal that should close early next year — the midsized operator reached a compromise that will double its footprint in a series of swaps, sales and spins after the larger deal is completed.
Charter is expected to be a major player in an anticipated consolidation wave after the close of the Comcast-Time Warner Cable deal. Malone said he sees Charter as a vehicle for rolling up the sector’s smaller companies.
As technology becomes more complicated, Malone said, the ability to offer new services in a rational way would drive industry consolidation.
SCALING TO INNOVATE
“Small guys just can’t do what [Charter CEO] Tom [Rutledge] is doing,” Malone said. “They’re not going to be able to do virtual call centers. They’re not going to have the ability, even if they had the scale, to buy global equipment. They are not going to have the technical staff to be able to keep up with it. All of these things are driving toward larger ownership.”
That thirst for scale will continue even if the Comcast-TWC merger isn’t completed. Malone said if regulation becomes the straw that breaks the Comcast-TWC deal’s back, he hopes Charter would be ready to swoop in.
“Hell, yes,” Malone answered as to whether he hoped Charter would rekindle its pursuit of TWC if the Comcast deal were scrapped. “That being said, we’re happy with the deal that was negotiated. In many ways, in our view, it’s a better deal than going after 100% of TWC.”
