Digital Doughboys

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Cable operators are waiting to see what John Malone will do to change the competitive landscape when his Liberty Media takes over a 38.5% interest in the nation’s largest satellite-TV service, DirecTV, from News Corp. chairman and media emperor Rupert Murdoch. That $11 billion deal is being held up as the Federal Communications Commission reviews whether DirecTV should be banned from acquiring any additional exclusive programming, like its popular “NFL Sunday Ticket” package of out-of-market pro football games (“Access Issues Stall DirecTV,” Oct. 22, 2007, page 8). And there is the chance, according to a report in The Wall Street Journal last week, AT&T is considering making a run at taking over DirecTV even before it lands in Malone’s hands. That’s ironic in that Malone is remembered by one-time rivals as the seemingly ruthless head of Tele-Communications Inc., once the largest U.S. cable multiple-system operator — until he sold that business to AT&T in 1998. That business became AT&T Broadband, which was bought in 2002 by Comcast, now the largest operator. While operators watch warily what cable pioneer Malone might do now in competition with their basic video business, he is relying heavily on a former Microsoft chief financial officer, Greg Maffei, as Liberty’s president. Whether or not Malone and AT&T wind up making another deal, he and Maffei are putting their heads together to figure out how to make billions out of the Internet and digital media. First noteworthy fact: Liberty Media last year generated $8.6 billion in revenue from its Starz Entertainment unit, shopping network QVC and other video-based businesses. But, by Maffei’s count, its unheralded digital businesses now generate $3 billion or more in annual revenue. Multichannel News editor in chief Tom Steinert-Threlkeld caught up with Malone and Maffei to discuss their unfolding digital-media plans — and why they think they can be among the best at cross-promoting video and online commerce — the morning after this year’s Cable Hall of Fame ceremonies at The Cable Center in Denver, the cradle of the cable TV business. An edited transcript follows:

John Malone: We will be a distribution and content company built around DirecTV, starting with the content assets we already have, which will be enhanced by the regional sports networks we’re getting out of News Corp, and, of course, Starz [Entertainment] and Game Show [Network] and stuff like that.

MCN: What kind of programming networks would make sense for you?

MALONE: Certainly sports. Keep in mind, DirecTV has a very strong footprint in Latin America. Global stuff, particularly looking at Latin America and looking at the ability to distribute globally because of Liberty Global and … DirecTV in Latin America, Direc­TV here [in North America].

[Also] clearly movies. I mean, American movies have always been huge internationally. And American television series have always done well internationally. 

So the concept of having a global distribution footprint and encouraging and investing in and owning content that’s driven by [or] drives that footprint is sort of the long-term ambition.

Greg Maffei: Two more things in our portfolio just jump out to me that way. One is QVC. Clearly we’ve developed a brand, an international business there.

And I think there’s a nascent one with what we’re doing in the games space. Casual games is a category that plays across lots of venues. 

[We have] a familiarity with building the games, a familiarity with promoting the games, and we have a unique opportunity here in the U.S. with GSN, GSN.com, Fun [Technologies], for providing [venues for] casual games. One can imagine doing [this] in other venues as well.

MALONE: You start with things that are sort of global, where every­body in the world is interested in the same stuff. Then you back up from that to stuff [where] the actual content has to be customized market to market.

MCN: For each nation?

MALONE: For instance, in Holland, we have the Dutch soccer rights. If you go to Italy, Rupert [Murdoch] just wrote a huge check to get exclusive rights to the Italian soccer league for his satellite platform.

Or if you look at, you know, the big check that DirecTV writes for NFL Sunday Ticket (in the U.S.), those are content investments that distributors make in order to satisfy consumer demand, but also in order to drive penetration of their platforms.

I call it a bootstrap. We start with distribution. [Then] you add content and then that allows you to broaden your distribution and then you can afford to have more content and you try to build the business that way.

The most important thing, the challenge that Greg really has [is how to deal with new forms of media].

MAFFEI: Do you notice when he got to the end, after all the strategies, all the great words, suddenly it’s Greg’s problem?

MALONE: Probably 30 years ago, I would have made the same speech I’m making now. The thing that’s changed is the new media. The challenge that the Liberty team faces in addition to implementing, once again, the strategy that we’ve pursued pretty relentlessly for 35 years is the new technologies.

The cross-platforms. The

Internet.

MCN: The mobile platform?

MALONE: What do you do about mobile? What do you do about Internet? What do you do about cross-platform, and how does content shape and be affected by those issues? 

I mean, if you look at the financial performance of old media the last 10 years, the guys who have been, have stayed strictly with old media and stayed domestic have terrible returns to the shareholders. I mean Time [Warner] Inc., Viacom, you know, their 10-year compound shareholder returns are substandard, to tell you the truth.

MAFFEI: Ai yi yi.

MALONE: They are!

MAFFEI: Substandard. I mean the reason Time [Warner] Inc. reached for AOL was they saw that, and they tried to move over into the Internet in a major way, and it didn’t work out for them, right?

Rupert [Murdoch] has been able to do that better because he’s combined both globality along with [an] admittedly fairly recent investment in Internet. I bet you that [$580 million] MySpace investment probably was paid back three or four to one in his stock price movement immediately.

This the same challenge [Comcast CEO] Brian [Roberts] has. All of us have the same challenge, how do you take into account new technology, new media?

MCN: What interests you in the new media? The stuff so far that you’ve invested in or bought are companies like Backcountry, and different kinds of commerce-oriented plays.

MALONE: The first thing that we were involved in was a [high-speed data delivery] company called @Home [Networks], OK? And it tried to move out of pure transport by acquiring a portal called Excite. It also bought a thing called Blue Mountain [a distributor of free electronic greeting cards]. Those were about as disastrous a set of investments as the AOL acquisition by you know [who]. So a lot of us have made mistakes as we’ve tried to figure out how to move from our traditional businesses into this new world of the Internet.

One of the great tragedies for the cable industry, and I’m certainly as to blame for this as much as anybody, was it took us way too long to create CableLabs and to create standards.

So we found ourselves with proprietary Balkanization in cable technology at the same time that the Internet founders standardized and drove innovation because of that global standardization, I mean that was really where I think the Internet took it away from the cable industry.

MCN: If, 15 years ago, you’d had standards like you have developed now, and you already had the bandwidth, what difference would it have made?

MALONE: The cable industry could have owned the phenomenon called the Internet, right? And could have vertically-integrated into Internet services and content the way they did into cable.

But because we didn’t, right, until late — we didn’t get boxes and CableLabs and MPEG-3 standardization, and so on, until fairly late in the game. And by then the Internet was already exploding technologically, and instead of interactivity [on cable] being something that started with video interactivity and migrated to data and telephony, it went the other way.

MCN: Cable was even promising [video interactivity], in the early franchising days.

MALONE: Oh yeah, you could go back to Irving Kahn’s franchise proposals [for TelePrompTer] in the early ’70s and you can find all of these triple-play type services and then some. But we didn’t execute.

[At TCI], we had a thing called XPRESS, which was a two-way data service, oh, probably in the late ’80s. And Microsoft was actually helping us with it, believe it or not. This was pre-Internet, and we couldn’t get the cable industry to agree on standard frequencies to allocate to it. So we couldn’t get scale. And in the end it didn’t go anywhere, then the Internet superseded it. 

MAFFEI: But if you look at the current stuff, you asked about, like Backcountry, Liberty’s more transaction-oriented than most major media companies. Right? Think about it, QVC. And [our investment in] IAC [Interactive Corp., run by Barry Diller]. That’s us.

[Compared to] Time Warner, we’re more transactional. We’re less advertising-oriented, right? We’re more subscription-oriented. We have the least amount of advertising exposure.

We believe there’s interplay between QVC on-air promotion [and] helping these guys generate online transactions. In addition, we probably feel more comfortable with the transaction business in general and we like that because, in a lot of cases, [our companies are] bringing a real competitive advantage in distributing products. Backcountry has great user groups, great customer affinity and leading-edge customers who help the next group and want to buy because they’re a part of that cool thing. There’s an aspirational element.

ProFlowers [has got] an ability to re-engineer the supply chain for flower distribution. [Pro] has a real competitive advantage over people who come through local flower shops.

MCN: Why do you prefer transaction plays to content plays on theInternet?

MAFFEI: If you look at the content side, it’s a lot less clear. The biggest place where you get paid for video and content is in the U.S. television and the U.S. movie markets, and then everything else is a subset of that. I don’t think there’s a company out there which is creating content for the Internet, creating content [just] for the Internet, which is making money.

That’s a very tough market.

MALONE: Even Dow Jones, [parent of The Wall Street Journal, which News Corp. is buying]. Rupert’s talking about making that free, or at least a portion of it. Because he can’t sell it [to subscribers on the Internet].

MAFFEI: We’re kind of like the U.S. drug business, right?

MCN: How so?

MAFFEI: [Take] Pfizer [or] Lilly. You spend all the drug money, you spend all the R&D money against the U.S. market because that’s where all the money gets made, and then you hope that you can make that subset at the end and repurpose it cheaply in India.

Because you’re only going to get paid a fraction. Well, the U.S. content business is the same. We’ve got some pretty nice U.S. content assets we are trying to repurpose, but we haven’t figured out how to make enough money to go focus on Internet content, and we are not sure anybody else has. There is no competitive advantage. In fact, there’s a lot of pricing disadvantages. There are piracy issues, there’s a lot of issues, which say it’s a negative.

Conversely, on the other side, the transaction side, there’s a lot of reasons that you have competitive advantage. So we like that space in trying to link the on-air promotion and online transactions better than we like trying to figure out these Internet-commerce models right upfront, or Internet-content models upfront.

MALONE: If you look at, for instance, Expedia and how it’s built up the transactional Internet side … it’s been very successful in user-generated content in its trip advisory business which feeds back into content, but user-generated content, or vendor-generated content, as opposed to [self-]produced content.

You can look at what the Internet has done for QVC. Where the Internet has intersected QVC is the QVC Web site. About 25% of all of QVC’s revenue is now coming in from Internet orders. A healthy portion of that is just convenience for the consumer.

MCN: And repeat buys.

MALONE: Repeat buys, or you can buy it whenever you want. You don’t have to have it fresh in your mind from having watched the show. What we’re trying to do is extend the model to see if there are certain niche areas where Internet retailing makes great economic sense as a business and can be driven [by] or drive QVC. So a Backcountry, for instance, these are great little businesses in and of themselves, but the real interest to us is how does video play into the development of those kinds of nichey retail businesses.

MAFFEI: And plus, we like having Internet commerce expertise. We think that there’s opportunities to increase those. There’s opportunities to have cross-­fertilization. We just had a CEO summit, where all of our, or almost all of our, Internet-portfolio companies and many of the video companies were here meeting and talking about best practices and the like, and we are developing an expertise in Internet commerce that I think is among the tops, and certainly among the tops among the media companies, and so that’s a good point of differentiation.

MCN: How do you expand on what you’re doing?

MAFFEI: I think there are three or four areas. One is, John and I keep looking for cracking the code on video promotion from on-air to online. Now I think there are places we can do that and QVC is already doing it and thinking about the cost of seasons. We have Buyseasons here, at Halloween, promoting costumes online. Costumes [shown] on-air that can be purchased online. But we like to think about more broad ways to do that.

There’s clearly cross-promotion just among the Internet sites [and] other sites we love. One of the issues facing a lot of Internet companies, virtually all of us, is how to attract traffic to the site. How much can I generate my own interest whether because of on-air [or other kinds of] promotion or how much do I generate my own interest because I have unique content?

John mentioned what’s going on, for example, with Trip­Advisor, but versions of that are going on in Backcountry or at ProFlowers. 

I think we are trying to share best practices across all those, and I think we are well down the road compared to our peer group, our competition, in taking those through.

MCN: How does this apply to casual games?

MAFFEI: Here’s the example. [GSN series] Lingo. Five-letter word game. You play this game, I’ll give you the first letter of the word and you try and guess, see how many letters you can come up with.

People play this game on-air. It’s one of our most popular shows. I know you’ve been missing it yourself.

MCN: Obviously.

MAFFEI: But they play it also at home online. And the idea obviously is how many can I do versus the people on air. 

But lots of real interesting potentials come up. One is, at the end of the game, the last two minutes you show, how do the people at home do? Who were the top 10 people? And you give them an opportunity not only to put their scores up, but let them upload a picture and get their 15 seconds of fame promoted across those 60 million households.

MCN: If you’re in their top five.

MAFFEI: Because these are games of skill and not chance, they’re legal tournaments. You can run tournaments not only for money but you could run tournaments for fame where those people who get promoted and play for big prizes but also get to play on-air.

So there are lots of variations when you can play between those two, commerce slash online slash on-air, and the interplay between those three, I think we’re as far as down the road in thinking through this (as anyone) and have opportunities to do.

MCN: What about adjacencies? If you learn how to deal with flowers, if you learn how to do it with outside gear, then you go to industries that are similar, next.

MALONE: Yes, those can broaden their scope.

MAFFEI: No question. And they’re doing that. I mean ProFlowers is going to gifts and the like, but I think our strength at the moment is actually trying to figure out as much about the adjacencies that they look at is, what core competencies do we have in Internet marketing. What core competencies in promoting. 

I mean they’ve got their own business plans to expand, and we can help them with that, with capital and hopefully some knowledge, but even more, this best practice across them [is what] I think is really interesting.

MALONE: As you understand where this kind of cross-industry promotional power really pays off and where it doesn’t it, you can build on what [you’ve] done. I would, say so far, our investments, collectively, they’re becoming material.

MCN: How much of your revenue now comes from Internet commerce?

MAFFEI: Well, if you look inside Liberty Interactive, the vehicle that’s most that way, you’ve got three pure e-commerce businesses that are going to do revenue headed towards $500 million. Four hundred-plus million.

And you’ve got QVC, which is a $7.5 billion business, roughly; which is doing 20% on the Internet. So about a billion and a half in that. Plus you’ve got those investments in IAC and Expedia. I don’t know how you want to take it, but say we own 25% of them both, and one is 100% Internet basically in Expedia and Expedia’s revenue is going to be $5 billion? John, is that right?

Five bill. So you’ve got about a billion and a quarter there.

And then IAC is probably, you’re going to get another — they’ve got to have four billion of Internet revenue, probably, maybe more. We’re going to get another billion there.

So I would say if you cumed it all up, we’re well in excess of four or five billion dollars of Internet revenue.

MCN: That’s pretty significant. How many other [media] companies have that much Internet revenue?

MAFFEI: I don’t think there’s a media company per se out there — it’s hard to argue that Barry [Diller and Interactive Corp.] is a media company, right? — with as much e-commerce and Internet-commerce-related business?

MCN: So what do you think your opportunity is, over the next four or five years?

MAFFEI: Well, I think there’s a lot of places we’ll continue to look at buying. [The] challenge is there aren’t that many really interesting standalone e-commerce businesses to buy.

MCN: With size.

MAFFEI: I like ones with good protection. Unique business or strong business proposition. Good management teams at reasonable prices.

You know, you shrunk that universe, it’s pretty tight. There are only a handful of companies out there, or a couple of handfuls maybe.

But we got growing into some of these adjacencies, continuing to drive the Internet percentage. That’s key. 

Malone, Maffei: Cable Guys Out To ‘Kill and Squash’ Programming
Even if Liberty Media builds up its digital revenues past $5 billion a year, the linchpin of its content and distribution business in the foreseesable future will be DirecTV, the 16.3-million subscriber multichannel video service. Liberty chairman John Malone and president Greg Maffei argue that satellite services are now more creative and hospitable to innovative programming than cable rivals. They stated their case Multichannel News editor in chief Tom Steinert-Threlkeld at Liberty’s headquarters in Denver. An edited transcript follows:

MCN: What about on the video side of things? You’re of course getting the 40% stake in DirecTV and that adds a lot of distribution capability. You’ve got Starz generating a lot of content or starting to become a more significant production house, but you’d think there’s a lot of cable networks under pressure at this point.

JOHN MALONE: Well, [Comcast CEO] Brian [Roberts is] putting cable networks under pressure.

And DirecTV is [not]. I see a real dichotomy developing, being an old programming guy. To where the cable guys are out trying to kill and squash programming to a large degree. Crushing you know, trying to squeeze down fees, limit distribution.

GREG MAFFEI: How short-sighted is that?

MALONE: I really sense a complete shift here to where the satellite guys because they have lots of capacity. They seem to be much more encouraging of guys with new programming ideas. Whereas the cable guys seem to be trying to starve the programming industry to some degree and what you’re seeing is all the money, all the incremental money is going to a few big guys with market muscle like ESPN.

So it’s quite a dichotomy. I mean having been the guy that sat at the cable convention and really said to the industry, we’ve got to start subsidizing these networks if we expect the programming to ever be worth a (deleted descriptive), right?

I now find the cable industry is kind of going the other way in the sense of no longer feeling that it’s important to the cable industry to sponsor, unique, or differentiated programming, but in fact quite the opposite. So it is kind of ironic that we find ourselves going into the satellite business at a time when the satellite guys — and Charlie [Ergen] who has always been the tightest fisted guy around — you see him being encouraging of certain programming networks, and willing to put some money behind it, at the same time the cable guys are going the other way.

I just find it ironic, you know. I don’t know how it is all going to turn out, it may turn out that because of video-on-demand and because of the Internet and everything, you know, the public is less interested in new categories of programming or maybe they’ll be able to find it. 

But you see the problem — you know, I’m not going to name names, but if a guy with a good idea for some new content walks into the typical cable company today, what they’ll tell him, is, it sounds like a good idea. We’ll put it on our VOD platform, right?

MAFFEI: Right, with no promotion.

MALONE: With no promotion. The chances of that guy building a viable business on that basis is zero. OK? As opposed to the old days, where a guy would walk in with a good idea and the cable companies would say, you know, give me some warrants in case it’s successful —

MAFFEI: I’ll put some dough up.

MALONE: I’ll put some dough up, and maybe I’ll pay you a nickel [a sub a month], and that makes your business plan viable, and you go out and see if it works and see what you can scrounge up and put together and we’ll test it.

MCN: So how do you take advantage —

MAFFEI: But there’s another dichotomy which I believe — one sec — which is I think you’re right, I thought where you were going Tom, with just, you know, the haves and the have-nots, right? And in the world where you talk about — you may not have a la carte, but obviously some people are making noise and regulatory circles and the like.

MCN: And will again.

MAFFEI: And we’ll get — and you see that, the haves and the have-nots, where a couple of other dichotomies emerge. If the guy is not a have, and he’s a have-not either because he’s weak or he’s new, how does he get jumped and started, particularly if he’s an independent, if he’s a new guy or if he’s a standalone guy.  There’s that widening gap between — you know, if I don’t have somebody either protecting me because I’m part of a group, right? Which I either use my distribution muscle or my retrans muscle or my sheer mass of programming, how is it ever going to get created, promoted, protected because rightly, Charlie will say -- let’s pick Charlie, Charlie will say, hey, I don’t need it.

MCN: Now you’re seeing that Henry Schleiff of Hallmark Channel is going to the FCC for help.

MALONE: From the day that the government decided retransmission consent was required there have been no more independent programming businesses started, and everything has migrated toward the broadcast network ownership. So Rupert can feel perfectly free to launch a business news channel today because he has muscle to drive it but do you think an independent would have a ghost of a chance of launching a channel?

MAFFEI: No.

MALONE: No chance in hell. So, you know, what we’ve seen here is an enormous concentration of power.

MCN: It sounds like a marketing opportunity for you guys.

MAFFEI: Well, I actually think it’s very interesting. I totally agree. The number of buyers [for new programming networks] has shrunk to eight or nine, and I think national consolidation is likely to occur because those are the natural and logical buyers for every one of the [independent] cable channels. We’re one of them, hopefully.

MCN: How do you take advantage of that?

MAFFEI: You’ve got to figure out what ones you want to own. We want to own sports, and I’d say brands that have customer propositions and identities that are broader than just the underlying content which can change over time.

MCN: What besides Discovery?

MAFFEI: Well, I think QVC is certainly (that kind of) a brand, and uh, we own the content in a lot of ways. We buy goods and we have propositions, but a lot of that material that’s sold on there is our goods, either under our brands, Northern Nights, Diamonique, you know, things that we do, that we own that brand. Discovery only does [has] a brand and a position but owns its content, and it is wonderful because it’s long-life content. Excellent shelf-life. Portable. Across both geographies and portable across platforms.

Those are the kind of things that are interesting, right? 

MALONE: We like the three legs of the stool. If you’ve got commerce, if you’ve got interactive subscription-type business, and advertising …

MAFFEI: And you have … a clearly-defined niche, (where) you own the content, (and) you’re not going to get squeezed

Like, let’s take Oxygen. Oxygen would make no sense for us. Right? Zero. We couldn’t do anything with it. We’ll see whether Zucker and NBC, at least they have a proposition where promoting it with iVillage and promoting it with the third hour of the Today show — I don’t know whether it’s good or not but there’s a logic, and there’s a set of tools that they can pull and levers.

We don’t have those levers. So we’ve got to concentrate on the ones we think we’re good at (and the business has) got multiple ways to play it. It’s probably less ad-oriented. Ad(vertising provides) the ups, not the basis.

MALONE: [You] can go out and offer five different channels for the NASCAR driver, where you take your favorite and you’re riding along with your favorite driver in high-def.

This is a capacity game that satellite can play to take existing well-known content and make it more relevant, and more important to the consumers in that niche, and then charge you for it.

MAFFEI: It’s hard to own NASCAR. But you can own that relationship and create new and different kinds of programming given the variability. You’re going to use that (satellite) platform to have differentiated content, which is original, maybe not owned but definitely different.

MALONE: Absolutely, look, if you’re a program owner, right, and you’ve got a choice, you can try and visit 100 different cable operators and they tell you go visit my regional manager because we don’t make those decisions at headquarters, or you can go to Charlie and Chase and cover the whole country and if you can make the deal, you know, where are you going to go?

If you’ve got something that’s unique and special and you know it’s not everybody’s cup of tea, but you want to get it out there and you want to give people who are interested a chance to get to it, I think that’s a very distinct advantage that the satellite side has.

And you know, it’s just part of the advantage of one platform, one technology [and its] ubiquity.

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