Where I think Malone thinks the media industry is headed
“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.”
– John Malone, CNBC interview (http://www.cnbc.com/id/100637283)
The various wires/cables that enter a household can deliver phone, cable/video, Internet, and other services. As everything is moving towards digital signalling, all of these are increasingly becoming pipes that we send digital signals across. It is going to become a business about selling bandwidth. More bandwidth for video means more channels, better quality, etc. More bandwidth for Internet means faster Internet. Fiber technology is the highest bandwidth technology while Malone thinks that cable technology is the most cost-effective. Cable is probably the best place to be. However, a fiber company can overbuild and cause lower returns for all of its competitors. The pipes with lower bandwidth will likely be at a competitive disadvantage. In the past, high-speed DSL/cable displaced 56k dial-up and history may repeat itself again with the faster technologies winning out.
Malone recently bought a stake in Charter Communications for Liberty Capital (LMCA/B). Key factors for Charter are:
- The new CEO, Tom Rutledge, is arguably the best operator in the American cable business. At Cablevision, he started bringing in many new innovative services and pushing high-speed Internet. According to Netflix, Cablevision’s Optimum is second in speed to Google Fiber (and faster than Verizon’s fiber).
- Charter has low penetration of high-speed Internet so it has a lot of growth potential.
- Charter has a more rural footprint so it faces less competition from other technologies.
- (Minor) Charter has a lot of net operating losses to offset taxes.
- (Minor) In a low interest rate environment, Charter can roll over its debt into much cheaper debt. Eventually, cheap leverage can add fuel to its growth.
I don’t believe that this is an exciting part of Malone’s empire. He bought Charter for LMCA/B instead of Global. On the other hand, I think that Malone likes the cable industry again and will probably hold onto his Liberty Global shares (unless they are overpriced and it makes sense to sell them).
The future of video content distribution
It’s unclear what the future might look like. There is an obvious uptrend in the usage of Youtube and Netflix. It is likely that future consumers will consume a lot of video content over the Internet rather than over cable, over a phone line, or from satellite broadcasting. If Internet connections had infinite bandwidth, then I think that Internet-based TV would no doubt be the clear winner. Such a technology would offer more convenience than any PVR and more selection of content than everything else out there. Internet speeds will likely double every 2 years and push the future in that direction. Cable and telcos will likely become mostly Internet providers.
It is unclear to me whether video will mostly be distributed on a subscription model (e.g. Netflix), an advertising model (e.g. Youtube), or widely pirated (e.g. it may become like the music industry). Selling TV shows and movies individually (e.g. iTunes) does not seem to be very popular with consumers. It is also unclear to me whether the cable channel and broadcast network business models will still hold. The bundling of content and brand-name recognition of these networks may or may not have value in the future. The cable companies may be reasonably well-positioned since they don’t have to worry that much about how video content is bundled and monetized. Their business simply morphs into selling Internet bandwidth.
Satellite television / DTV
Satellite television will likely eventually start losing market share in the US. The other technologies will increase bandwidth much faster than satellite and offer more channels, better quality, Netflix, Youtube, etc. I believe that Malone is worried about a future where satellite television rapidly loses its subscribers. While DTV is rapidly growing in Latin America, the long-term future may be dismal for satellite TV. I think Malone wanted DTV to sell itself to another company (e.g. AT&T) in a tax-efficient manner. It could be claimed that such a merger/takeover would have synergies since the telcos can bundle high-speed Internet with satellite TV. Part of what Malone presumably wanted is for a telco to overpay for DTV. Then he would go on to sell his DTV shares in a tax-efficient manner and reinvest the capital elsewhere. I don’t think he wants to own telcos or DTV as those businesses will eventually be in decline.
Malone probably gave up on that idea as he felt that DTV management would not go for his idea. In the end, Liberty gave up on trying to control DTV. Liberty exchanged its DTV shares for shares in DTV and a few miscellaneous other companies, and Liberty distributed the DTV shares to Liberty shareholders. The B shares were exchanged at a premium and cancelled. Malone/Liberty no longer had unusual control over DTV but came out of the deal slightly richer. It seems that DTV management just wanted Malone to go away. I don’t know what Malone did with his shares. I am guessing that he will eventually sell them if he hasn’t already.
If Malone wanted to hold DTV stock forever, he would have hung onto as much control over DTV as possible. He learned from bitter experience that bad management can destroy value quickly.
Starz & Discovery
It’s possible that these programming businesses won’t be great businesses in the future if there is a shift towards Internet-based TV. Will their business models translate to the Internet well? I don’t know. In the long run, I think that Malone will patiently wait and try to exit these companies if he sees an inflection point coming. In the short run, these companies may be reasonably valued or undervalued so they may continue to buy back shares if that’s the case.
With Starz, I think that management will be actively looking to be bought out. The way Starz was spun off makes it very acquisition friendly as it isn’t complicated like Liberty Media.
Sirius XM makes up almost all of Liberty Media (LMCA/B). I think that Malone is pretty bullish about Sirius as Liberty has been buying Sirius shares on the open market. He might also be more bullish about Sirius as he has installed a new CEO (he thinks that management is better now). Tailwinds for Sirius are:
- Subscriber growth and increasing number of satellite radio-enabled cars.
- Operating leverage from more subscribers. Their satellite costs are fixed so there is fixed cost leverage. On the content side, bigger size gives Sirius much better negotiating power. Content providers will be willing to receive less money per Sirius subscriber if their overall volumes and profits go up.
- Increasing numbers of subscribers, price hikes (Sirius has been able to raise its prices), and higher margins may generate significant growth in profits.
- (Minor) Most of Sirius’ capex is behind them.
- (Minor) Sirius will be able to roll its debt into much lower interest rates as it is no longer a distressed company.
- (Minor) Tax shield from prior operating losses.
Headwinds for Sirius are:
- Competition from Internet radio. In particular, there is an increasing trend towards consumers streaming Internet radio over their smartphones. Sirius’ technology lead (mainly over terrestrial radio) will lessen. Ultimately, Sirius will have a very small technology edge as they can deliver content over the Internet too. Sirius subscribers may be able to get the best of both worlds (e.g. sometimes smartphone reception is poor).
- On the content platform side of things, Sirius will likely face intense competition from Internet radio especially for music listeners. To thrive, Sirius will likely need to monetize audio content better than its terrestrial and Internet radio competitors. Currently Sirius receives significantly more revenue per listener (free or paying subscriber) than Clear Channel and Pandora (Pandora loses money).
- Regulations. Usually regulators/politicians target companies with dominant market share or extreme profitability. While regulations would be bad for Sirius, it is probably a good problem for them to have.
- High short interest (10.6% of float). I believe that short sellers are often right (even if they don’t make money). Maybe there is something to the short thesis that I am missing.
The majority of Interactive’s assets is in home shopping networks. If you read Interactive’s 10-K, it states that an important part of the home shopping business is channel placement. It wants to be on channels that viewers go over while channel surfing. Therefore television viewers might catch something interesting on QVC/HSN and stay to watch an infomercial. I don’t believe that Interactive’s business will be great in the long run if viewing habits shift towards the Internet. On the Internet, these home shopping networks won’t have the benefit of channel surfing. I don’t think that many people will choose to watch infomercials given the variety and quality of content on the Internet (e.g. Youtube). On top of that, Internet marketing is extremely cutthroat/unethical. A lot of affiliate marketers will setup fake independent review websites to generate affiliate commissions. They lie (e.g. many of these marketers are men who pretend to be women bloggers) and they are very, very good at generating sales. I don’t think that the home shopping channels can compete effectively in such a world. They are bound by regulations and don’t have experience in lying and ruthless shill marketing. What works well on cable TV probably will not compete effectively online.
In the long run, I don’t think that home shopping channels are a great place to be. In the short term, these home shopping channels are still highly profitable and their valuation is reasonable.
Ventures is an odd company. It is somewhat like a mini version of Liberty Media- a collection of complicated assets and businesses. It is currently sitting on a lot of uninvested cash earning very low returns.
As Malone has been putting his best ideas into Media, I’m not sure if the prospects for Ventures will be as good as they will be for Media.
I don’t really know what this company does. Malone has left the board and hasn’t installed any of his typical lieutenants on the board (his favorite lieutenant being Maffei). I assume that he is going to sell his stake in this company and therefore I haven’t bothered to research it.
*Disclosure: I do not own any of Malone’s companies. Unfortunately, I did not understand Liberty Capital/Media in the past and didn’t buy it. I didn’t buy Interactive common either (I bought out of the money options in 2009 and they expired worthless). Had I bought either in 2009, I would have made several times my money.