Unleashing LibertyJohn Malone on The Global Cable Business, Content and The U.S. Economy 10/21/2012 8:00 PM Eastern
With cable stocks up and subscriber losses down, these are good times to be in the TV business, and especially in international cable. But when Multichannel News editor in chief Mark Robichaux caught up with Liberty Global (and Liberty Media) chairman John Malone last month, the “cable cowboy” seemed to have a burr under his saddle on certain subjects.
Sure, business was fine — better than fine — but he was more concerned about how bigger things are getting run, like the country. During a conversation that took place shortly after the Democratic and Republican conventions, he was frustrated. He’s also complicated. He’s a visceral patriot — think Liberty — but he can’t stand most politicians. He’s a fiscal conservative, but a social liberal. And though he abhors small talk, he can spend hours theorizing how to make his company — or the country — work more efficiently.
He offered an astute analysis of the U.S. cable industry, as well as Liberty Global and Liberty Media, which he considers more of a hedge fund. He’s currently the largest landowner in the U.S. (his longtime friend Ted Turner is No. 2), with 2.2 million acres, mostly for conservation. And the kid who grew up sailing off the Connecticut coast is still in the cattle business in the West. But Malone’s lasting legacy may be education.
His donations total more than an estimated $300 million to U.S. schools, personally and through his Malone Family Foundation, including gifts to Yale University, Johns Hopkins University and his old high school in Connecticut. That includes $100 million funneled to independent secondary schools for kids who make the grades but don’t have the money.
An edited transcript of the conversation follows.
MCN: How’s business?
John Malone: LGI is now 50% bigger than TCI [Tele- Communications Inc.] was when we did the deal with AT&T. So I guess I’m back in the cable business off-shore.
MCN: Fifty percent?
JM: Well it depends on what you’re counting. But if you’re talking about cash flow, which is what I care about, it’s 50% bigger.
MCN: Are you going to continue to be as aggressive as you have been?
JM: We’ve been repositioning, of course. We sold Japan and Australia and bought into Germany. So I wouldn’t say we’ve been that aggressive. You know, we decided to sort of consolidate in Europe so that those were pretty good economic swaps.
It’s not that I don’t like the U.S. cable business, but you have to be a scaled player to play in the U.S. and there is really no way to become a scaled player in the U.S.
MCN: You want to focus more on the European assets?
JM: Pretty much. Our biggest non-European operation would be Chile, which is a terrific business where we’re experimenting with owning our own 4G wireless. We will have a wireless component pretty much everywhere, but in most cases it’s MVNO [mobile virtual network operator]. And in Chile we are actually building our own. We’ve got the licenses. So LGI is a very pleasant company to be a big shareholder of.
MCN: Can you give me an assessment of the U.S. cable market?
JM: Cable is winning. Cable is winning the terrestrial game, I would say, more against the telcos than against the satellite guys.
The satellite guys, I think, have a very good, stable video business for now. Cable guys are winning the broadband business. It looks to me like broadband is even, if it’s possible, more sticky than video. And ultimately a lot of video may come over the broadband. So, terrestrially cable is beating the telcos, wireless; the telcos are consolidating a duopoly; and the satellite guys, I think, have a sustainable video business in the U.S.
So that’s my view of it. I think it’s a fine business; it’s theirs to lose. And it’s exactly the kind of a business that investors want today — predictable, it’s got glue, sustainable revenue streams, modest but meaningful growth and a little bit of pricing power still in parts of the business. And some green-field areas, like Comcast discovering business-to-business.
MCN: Do you think cable operators should be concerned at all about the hemorrhaging of video subscribers?
JM: They’re not really hemorrhaging. That’s kind of stabilized at this point, I think. I mean if you really look at it, share loss in the last two years has been mostly, as far as I can tell, to telco overbuild rather than to satellite.
MCN: The sub losses are still in the tens of thousands though.
JM: Yeah, but that’s tiny against 70 million. That’s only noise. So we are evolving to a pretty stable market-share arrangement, with cable continuing to take share away from not just on incremental customers but on base away from telcos.
Nobody will compete with Verizon and AT&T on wireless, because there’s no more room.
And then satellite is a pretty good, pretty stable video business. It has that advantage of being ubiquitous and covering a whole market. So that’s their edge and if they are adept at finding and differentiating their programming and doing a good job at customer service, they’ve got a decent business. And, of course, DirecTV is growing like mad in Latin America where there is still quite a bit of open highway ahead of them.
MCN: What about Washington?
JM: Cable only has to worry about regulation. They are back to where they were at good periods in the past where the most important thing for them is the government not to get in there and screw up, force them to open their networks, force them to do anything particularly onerous.
They’re just getting a lot of pressure in pricing of their video product and I think that’s to some degree responsible for the decline in units. But I don’t see anybody intervening on that subject, government or anybody else.
That would be the one thing that would be helpful to the cable industry is some kind of unbundling requirement. But I don’t see that happening.
So to me, really, the question is: Is the cable business going be a great business; who is going to make the money? It may well be that the Disneys of the world make the money and cable and video continues to get squeezed. But I think at least for now they’ve got enough pricing power in broadband to make up for that.
MCN: What about the threat of over-the-top players such as Netflix?
JM: I don’t know. I mean his (Netflix CEO Reed Hastings’) business model, of course, was to buy flat into the future and hope he grows into it. And if he doesn’t grow he’s got serious cash flow problems facing him. His stock has reflected debt, to some degree. I mean he’s got what, a couple-billion-dollar market cap? But that’s pretty low for 24 million subs.
I don’t see how Reed gets scale. That’s the curse for him. I mean he needs 40 million to 50 million households. I don’t see how he gets it if it’s split four ways.
I’m surprised that he hasn’t formed a combination with somebody with deeper pockets, a Google or somebody. I don’t think Apple wants to get into that, but I think somebody like Google that’s already playing around the edges of it with YouTube …
MCN: Do you think Netflix, or any over-the-top player for that matter, can be a true competitor to cable?
JM: It all has to do with access to content. It really is about access to content.
The content that people care about, the content that will really move people, is pretty much controlled by big programmers like Disney, who are not about to shoot themselves in the foot. And so they are going to exploit it across all platforms in a very orderly and well thought through way. You know, right now cable has been a very effective monetization scheme for cable networks …
I was screaming at the Discovery [Communications] guys and the Starz guys about don’t shoot yourself in the foot with your Netflix thing. And ultimately, of course, Starz pulled back and Discovery was able to do a limited extension. Reed’s money is good, but I don’t know if he’s got a business model that really works for him.
So that’s not to say that there couldn’t be one. I mean for instance, if DirecTV was to acquire Netflix, it would give them entrée really to all the footprint that they don’t have, plus their combined programming budget would be a monster. And they could also drive Netflix in Latin America. That would be a combination that to me makes a certain amount of financial sense.
MCN: With the economy in flux and 7.8% unemployment, some analysts say we’re now reaching a point where families literally can’t afford cable. Do you agree?
JM: The real threat to the cable industry is if somebody could come over the top without all the sports. If Barry Diller’s theory [behind Aereo] worked, in other words, you can have the antenna, so you can get all your broadcast stuff on the Internet, plus you can get selective entertainment programming and random access to services like Netflix, you know?
MCN: Without paying for sports?
JM: Without paying for sports, can you deliver a quality service, random access, at a price point that could undermine cable? And to me, that would be a slam dunk if you could get the programming and not have to take the sports.
MCN: So who is standing at the gate on that?
JM: I’d say Disney, News Corp., Comcast, the guys who actually own the sports programs. And they are basically saying, “Well we won’t let you have the entertainment programming unless you take the sports stuff . What are we, stupid?” Right?
When I talk about, “they’ve got to worry about the government, about regulatory” … It’s in those areas where if some federal court was to say, “You’ve got to unbundle … ”
If I was still a U.S. cable operator, I’d be sorely tempted to take that one on and shake things up a little bit. Now Disney has backed away a little bit from requiring 100% penetration of the ESPN package.
MCN: Are you surprised at all with how much retransmission-consent payments have been growing?
MCN: John, what about the other side of the coin: programming? Liberty is about to spin Starz into its own public stock. It makes me wonder: Is Starz a buyer or a seller now?
JM: Starz can go either way. It can get bigger through acquisition or it can get merged into somebody who can drive ’em better. My view is Starz needs to be part of something bigger. They need a currency to get there. And so this gives them a stock and a currency. If somebody wants to come and make a proposal after it’s spun for why it would be a great combination, you know, we’ll be all ears at that point. We’ve got [Starz president] Chris [Albrecht], we’ve got a flow of original series now …
The business is performing well, series are performing well.
MCN: Are you still enamored with home shopping now, with interactive apps?
JM: QVC is doing fine. It’s a flat retail environment, they’re flat to modest growth, probably 5% growth.
More and more of QVC’s volume is coming from mobile and Internet. They’ve got runway ahead internationally. I mean they’ve launched in Italy, China … and we’re very happy with HSN, they are doing well, they’ve grown their cash flow, they have paid off pretty much their debt, they’re shrinking their equity, they’re paying a dividend. I mean we’re just a happy investor right now.
MCN: Of your other programming assets, which are the ones that you’re eyeing or have special plans for?
JM: Well of course Discovery is a standalone company, a terrific company. [CEO David Zaslav has] just done a great job running the business.
What’s below the water line is much more impressive than what’s above the water line, because they’ve gone from a company that didn’t own any of its own content, produced very little, had very little of it produced, to where the vast majority of their content now is produced by them, owned by them, all technologies, all markets. I mean that’s a huge transition.
So they’re building a library asset of inestimable worth as they go forward. And it wouldn’t surprise me in a year or two that over half their revenue will be outside the U.S. They are now to the point where even after paying a lot of taxes, they still are generating a lot of cash and that’s after upping their programming budget substantially. So they are modestly shrinking their equity at this point. So as a shareholder, their returns are very attractive and I just think that team has done a great job.
MCN: You’ve been down on the U.S. economy in terms of media companies.
JM: Well, it’s mature. There’s not a lot of growth. It’s a pretty saturated market. And, of course, the U.S. economy is pretty flat-ish.
Our stocks are all benefitting from artificially low interest rates, which causes our kinds of companies to have unusual value, right, because of the recurring revenue, because where else are you gonna put money and because of lowered financing costs, among other things.
We’re all enjoying stock prices that are close to record highs right now in the media business and that’s because of the nature of our cash-flow streams and the cheapness of money. Valuation is really the present value of future cash flow discounted by an interest rate, and the interest rate right now is low and the Federal Reserve tells us it’s going to stay low for a while.
So from that perspective, we’re all doing fine. Our businesses are all growing slowly, some a little faster than others. The ones that have international presence, like Discovery, are growing a little faster depending on the markets they’re in than the ones that are purely domestic. But we’re all experiencing kind of inflation level growth. The typical cable guy is projecting two to three percent basic organic growth.
We’re holding our own as an industry and as companies from that perspective. Advertising revenue is a little soft in some places but we’re still seeing growth overall.
MCN: So am I hearing optimism, or not hearing optimism?
JM: No I don’t see any basis for optimism unless our political system gets its act together. We have no leadership that’s worth a damn, and that’s true on both sides. America is uncompetitive in a lot of ways and it’s its own worst enemy. The tax code is completely screwed up. We’re running a huge deficit. It’s not sustainable.
MCN: What’s the answer? What needs to be done?
JM: Well the answer is pretty simple. I wish that [Republican presidential nominee Mitt] Romney had gotten up there and said we’re going to make America competitive again — the best place for any corporation anywhere in the world to locate and build their next high-tech factory and we’re going to do it by driving our energy costs to the lowest in the world on a margin, we’re going to have the lowest marginal tax rates for capital for those kinds of growth opportunities.
We’re going to reform our educational system to support and train the kind of people that are needed in the next century. We’re gonna make America competitive again, right? That’s what he should have said.
At this point the country is still fixable. We are rapidly getting to the point where it ain’t fixable. And we have the president saying, “You didn’t build it.”
Even [former President] Clinton [at the Democratic National Convention in August], what does he say? He says what kind of a society do we want? One where we all pitch in together or one where winner takes all? Right? Denigrating success in this country — using an analogy of gambling and winning, as opposed to ennobling hard work and effort.
I mean if Romney had turned to the camera and said look, we all know that we’re going to have to pay more in taxes, especially those who can afford to, right? But not so much that will take away and detract from the kind of effort and performance that success that has built the country. I mean that’s leadership. We don’t have leadership. Right?
MCN: Let’s talk about something you do love about this country, besides liberty — land. You’re currently ranked as the largest landowner in the U.S.
JM: I think so. Or Ted [Turner] has an arguable claim to be equal. But we are about the same, yeah. But I still have dry powder.
I think it’s a hard asset that is going to stand the test of time in a stable government against inflation, which is the biggest risk that we end up just printing money to the point where the currency loses its value and then what’s going to have value is hard assets.
I started out with it being primarily conservation, stuff that I thought was worth keeping from being developed or ruined or whatever. And then the forest land looks a little more like it’s a blend of preservation and economics.
MCN: Because of timber?
JM: Because trees grow and money is cheap, at least for me to borrow against land, and it looks like housing, the demand for at least saw-lumber, a lot of uses for wood, was at a bottom. And so an asset you could buy at the bottom of a cycle using a substantial amount of cheap money and an asset that tends to replace itself, you know, how wrong can you be? And in an inflationary environment, you’re sort of in a commoditized, commodity field that should have pricing power in an infl ationary environment.
MCN: Is that what you want your legacy to be, the land?
JM: I don’t know. I mean I don’t think so much of legacy. The educational stuff I’ve done is probably the more rewarding, at least in the near term. What’s my legacy? Hell, I don’t know.
I would like to have some elements of preservation that continue to protect things that should be protected for a period of time … I want to have as many kids well-educated, the way I was, as I can because I think that helps make the country more competitive. I care intensely about this country and I just feel terrible that it’s getting wrecked by bad leadership on both sides.
MCN: The Media for Liberty Award encourages journalism about economic and political liberty, with a $50,000 prize. What was the thinking behind it?
JM: I’d have made it more about economic analysis, but a lot these [entries] are mind-expanding. You learn a lot. It’s a libertairian kind of effort. I’m a fiscal conservative and a social liberal, more of a libertarian than anything. So the award reflects to some degree my personal beliefs. I love to see works of media that educate the public on what matters in America.
MCN: You’ve given a lot of money to schools — why so focused on education?
JM: We have a lot of different educational things going, including big gifts to universities, buildings, endowed chairs. We also do an endowed scholarship program for independent secondary schools for the best kid that can, that should and can’t afford to go there. So right now we’ve got about 300 kids that are on full scholarship either at those secondary schools or at Stanford University’s gifted program. We are supporting the [Denver School of Science and Technology] here in Denver.
The results so far are incredibly good and I think it’s well worth supporting. We’ve got the education stuff , we’ve got the preservationist stuff and I’m interested in some cutting edge health-care stuff .
JM: Mostly stem cells, which I think is a fascinating area. Adult stem cells. In fact, Discovery is doing a documentary on it to try and get the public more aware of what’s going on, what the potential is. I’ve made contributions to Yale and Johns Hopkins in biomedical engineering. And then I’ve invested in a couple of private practices that are directly in adult stem-cell research.
MCN: A lot of the land you own is for working cattle ranches. How’s that business?
JM: We’ve got about (18,000). The drought was brutal. You to have to sell cattle that you would prefer not to sell because you can’t feed them. In the case of some of the ranches, there is so little grazing for them that you really have to sell them, sell cows, which you really hate to do.
MCN: Who’s the bandaged revolutionary war soldier in the picture behind your desk?
JM: Oh, I’ve had that since my first day at work at TCI. I looked up there and said I know how you feel. (Laughter) That was during the hard times at TCI. It’s not a particularly valuable piece of work. I just identifi ed with it.