Liberty Global (LBTYA/B/K): Cable on a global scale + yet another Malone tracking stock

There are parts of the cable industry where scale is a massive advantage.

  1. On the content side, a broadcast network or cable channel with scale is incredibly profitable and is very difficult to compete against.  Scale allows dominant companies to outspend their competitors on content because their per-viewer costs are lower.  Because they have better content, they retain their dominant market share.  Historically, it has been extremely difficult for competitors to compete against superior scale.
  2. On the infrastructure side, a lot of equipment and software costs come from the fixed cost of R&D.  Scale allows a cable company to purchase in bulk and to get reduced pricing on set-top boxes, cable modems, and other equipment.

While Liberty Global largely owns cable systems (with a mishmash of other assets from its various acquisitions), it is also looking to use its subscriber base to get into the content game.

My Prime / Over-the-top

My Prime is Liberty Global’s attempt at doing a Netflix-esque service.  Currently, it seems that Netflix is a superior service because it has better content.  Going forward, anything can happen.

Historically, everybody in the content distribution game has lost money in the beginning trying to gain the scale needed to become successful.  This is a concept extremely familiar to John Malone as the original Liberty Media spinoff consisted of many money-losing cable channels that were in their infancy.  As John Malone’s vision of cable channels played out, most (though not all) of these cable channels became wildly profitable.

I think that it is likely that Liberty will pour a lot of money into buying better content for their OTT service.  This will depress free cash flow and GAAP earnings for a few to several years.  I believe that the short-term earnings hit will make Liberty Global appear less attractive than it actually is.  Unfortunately, it is difficult for me to determine how much money Liberty is temporarily losing on growth initiatives.  In my opinion, John Malone’s companies have always had little transparency and have always been incredibly difficult to understand.

Netflix on the other hand is much easier to understand.  Their earnings release clearly breaks out how much money they are losing on their international expansions.  Liberty Global doesn’t have that type of investor transparency.

An on-demand future

I think the future that John Malone envisions is a world where most (though not all) viewing is on-demand.  This requires a few things:

  1. High-speed broadband Internet.
  2. Content rights and a monetization model.
  3. A user interface to select content.

Faster Internet will naturally happen.  A hybrid fibre-coaxial network seems to be the most economic solution for providing consumers with access to broadband Internet.

The business models may play out like the early days of the cable industry.  Cable companies banded together to nurture the growth of upstart cable channels.  By working together, the cable companies could use their collective scale to achieve lower content costs.  Some of the cable companies took equity stakes in the new channels or struck agreements to carry a channel at a low fixed rate for a very long period of time.

User interface

Basically, anybody starting an on-demand viewing service will need software similar to Netflix (or various video-on-demand solutions available).  There may be many innovations in this field such as better recommendation engines.

The more hardware and software differences there are, the more costly it will be to develop software that runs on all types of set-top boxes, PCs, tablets, etc. etc.  John Malone wants to see fewer hardware/software variations in the field.  I believe that Liberty Global’s RDK joint venture with Comcast and Time Warner Cable is an attempt to drive down the costs of technology.  Malone also likely wants to see more collaboration on other technology joint ventures for things like ‘TV everywhere’ (being able to watch content on a TV, tablet, smartphone, PC, etc.).  For example, he is interested in having Comcast license out its Xfinity platform to other cable companies (e.g. Charter, which is partially owned by Liberty Media).

Yet another John Malone tracking stock

On October 22, 2014 Liberty Global announced its intention to create a tracking stock out of Liberty Global’s Latin American assets (PDF press release).  I think the idea here is to highlight the rapid growth of Liberty Global’s Latin American assets.  That tracker should fetch a high valuation because stock market investors love growth.  Malone (chairman) and Michael Fries (CEO) will likely try to use that tracking stock as currency to roll up assets that they like.

The other tracking stock will consist of Liberty Global’s European assets.  There may or may not be hidden value in that tracker.  Presumably, the European tracker will house various start-up ventures such as:

  • Liberty’s over-the-top attempts, e.g. My Prime.
  • Horizon, which is Liberty’s TV everywhere system.  There is software that sits on a set-top box with wireless Internet and DVR capabilities.  It will allow families to stream photos and music along with video from the set-top box.  Horizon will also provide a user interface to access Liberty’s over-the-top services (subscription) and video on demand services (a la carte).  It will run apps to allow users to watch Youtube on their TV.  The Horizon brochure does not mention Netflix as a potential app, which may suggest that Liberty Global sees Netflix as a problematic competitor.

It is likely that the new ventures will depress cash flow / EBITDA / GAAP earnings at whichever tracker houses them.  This may cause investors to miss the inherent value in those new ventures.

*Disclosure:  No position in LBTYA/B/K.

One thought on “Liberty Global (LBTYA/B/K): Cable on a global scale + yet another Malone tracking stock

  1. Pingback: Tracking John Malone (Part 5) – Nov 2014 update + Why control matters | Glenn Chan's Random Notes on Investing

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