Inside the Curious Mind of John Malone

NEW YORK — Before Liberty Global’s investor day meeting earlier this month, Multichannel News and Broadcasting & Cable editorial director Mark Robichaux sat down with chairman John Malone to ask him about the state of the cable industry. Later that day, before a crowd of investors and Wall Street analysts, Malone would unveil a set of complex tracking stocks to follow the far-flung tentacles of his media companies here and afar. The conversation digressed, frequently, and in his classic Socratic style, Malone — who spoke more like a business professor than a global media chairman — ended up asking more questions than he answered. Still a big cheerleader for Charter Communications, Malone shared his opinion on buying versus partnering, his dim view about the go-it-alone over-the-top cable network business model, and the beauty of a scalable business serving billions of people in Asia.

MCN:This last quarter seemed to better than most in terms of subscriber retention for cable operators. Do you think it’s sustainable?

John Malone: The industry is doing better. I mean, I don’t have the inside look at anything other than Charter in terms of U.S. cable. But I would say in Charter’s case, absolutely it’s sustainable. They are delivering a value package to consumers.

If you think about it, it’s all-digital, it’s all high-definition on the video side, it’s higher-speed Internet and it’s simple. There’s a package. And the public seems to like that.

If [customers] have to contact the company, the company’s CSRs are here in the U.S.; they are well trained and the services are straightforward. So, if you can make the relationship with the customer painless and give them a lot of value, I think that’s Tom’s [Charter CEO Tom Rutledge] whole approach.

MCN:A lot of those gains for cable seem to be coming from telephone and satellite companies.

JM: I think that it’s just a better service. Very simple: You give the consumer a better service. You should gain share if you’re better than your competitor. There is no mystery to it.

What Tom’s secret, I think is, is demanding simplicity, consistency. And in his view, you give the consumer value. You look at what you’ve got to give them and you try and give them a package that conveys the most value for the least dollars. And that’s what you train your people to deliver.

And if you can do that consistently, you win. Now the big capital commitment that Charter made — people forget about this — was going all-digital. This is not something you can do overnight, it’s not something that will happen in Time Warner [Cable systems that Charter is acquiring] overnight.

But once you get people into that platform to where your program guide can be in the cloud and the quality of your television picture is very consistent and it’s all high-def, you can do everything easier.

MCN:Will cable operators continue to take more share from telco and satellite competitors?

JM: If your network is reliable and your pictures are consistent — it’s Cable Operating 101. And if you do it really well, better than the other guy, you’re going to gain share and you’re going to grow. Now having watched Tom and his team, that’s what they do. It’s not rocket science, it’s discipline.

Incidentally, I saw Chase Carey do exactly that with DirecTV when he went there. It was just blocking and tackling. Let’s get rid of these contract installers. Let’s have our own people, let’s train them well and let’s hold them accountable. The guy who delivers the goods gains share and grows, and I think that it’s just as simple as that.

MCN:Many in the industry are obsessed with “cord-cutters” and over-the-top video delivery. What’s your take?

JM: OTT will continue to grow and succeed and be experimented with. And in some cases, the services will be supplemental to some other package. In some cases and in some households, it’ll be replacement. And the bottom line is connectivity is here to stay, both stationary and mobile. The question really is, who can provide it in the best way?

There are always going to be content aggregators, in my mind, because there’s no one entity that has enough stuff. The public’s not gonna want to have 27 subscription services and 27 different bills. So is the NFL big enough to go stand-alone subscription? Yeah, maybe — maybe. But the distribution curve looks like this. [Draws a big hump in the air with his finger.] Demand — there is a lot of demand right here, that’s the sweet spot, but can you walk away from this revenue and this revenue? Right?

Here, I’m talking about the distribution of demand at various price levels. So I mean when everybody talks how about ESPN would do great as a standalone service, well, they get about 20% reach at $10, or whatever it is, and they wouldn’t have a business. That’s why they don’t unbundle. Now, if you took all the Disney content and you could create an over-the-top with the network … you might be big enough to have something that might reach 70% penetration of households with an affiliate fee that, therefore, could be low enough.

This is what Apple is struggling with right now. Can they find enough stuff — cheap enough but good enough — that they can offer a service that’s better than the cable bundle, right?

MCN:Can they?

JM: Well, I don’t know. The jury is out. But … what they think they bring to the table is a superior consumer interface. And the question is, can they then populate that consumer interface with enough content that they can deliver their own version of cable TV in a sort of an over-the-top way and get enough scale to drive their hardware and their software? In other words, can they bring the TV set into the Apple ecosystem?

Now you could say, “Well if [Comcast chairman and CEO] Brian [Roberts] or Time Warner had said to [Apple CEO] Tim Cook, ‘We would love to endorse and embrace your set-top or device and ecosystem, and we think that adds enough value to our services and to our customers that this can be an industrial product’ — then Tim probably wouldn’t be out trying to put together his own cable service.” But nobody wanted to put an Apple device between their network and the consumer.

MCN:Don’t you think that’s justified? Why bring in a middleman — X1 is doing just fine.

JM: That’s a business decision. See, if I was a little guy, I would say, “Come help me figure this out, ’cause I can’t do it and there’s nobody doing it for me.” Right?

But if you’re Brian, you’ve got 3,000 engineers working on this; you say, “Who the hell needs Apple, we have a better mousetrap and why would we put them into our food chain?”

Now Brian thinks he can do it himself; he’s trying very hard. [Liberty Global CEO] Mike Fries believes he can do it himself.

We’re working, by the way, with Comcast on common technology. Cox makes a decision to use X1. Let’s piggyback on all of this technology investment that Brian is making. Let’s not let Apple in, let’s let Brian in. We trust Brian more …

MCN:It’s the devil you know.

JM: Yeah, it’s the devil we know.

MCN:What’s your vision for Lionsgate? [Liberty Global and Discovery Communications acquired 3.4% stakes in the company earlier this month.]

JM: I’m just a director in Lionsgate. Lionsgate has these great production capabilities in both theatrical and video, television. The idea is, by working together, can we create more value for Lionsgate content by making it more global? From Discovery’s point of view, can Lionsgate help them up the game in scripted with a certain amount of scripted content to essentially improve the quality perception of Discovery programming? Is there a nexus there?

From an LGI [Liberty Global] point of view, can working with Lionsgate help LGI with the equivalent of their X1 VOD service? I mean LGI is on the same page that Brian is. We want to have a massive random-access VOD offering that is just part of our service so that when you sign up for — call it the big bundle — you get everything: TV everywhere, all platforms, all systems, all you can eat, whenever you want it, everywhere you want it. And we think, to a large degree, that will reduce the demand for some of these narrow over-the-top services. Not entirely but, you know …

MCN:What’s your opinion of Lionsgate CEO Jon Feltheimer?

JM: Everybody speaks well of him. I think they are a very good organization. They are an independent production business, and they want to stay independent. If I’m in an area that I don’t know, I always go to people who I think do know. So I call [IAC chairman and longtime media executive Barry] Diller up and I say, “What do you think of these guys?” and he said, “They are absolutely as good as it gets.” So that’s a big endorsement.

MCN:Outside of Comcast and NBCUniversal, not that many people still combine distribution and content. Is there anything to these theories of content is king or distribution is queen or …

JM: It’s whatever works. It is certainly working for Comcast at this point. Steve Burke has done a great job.

MCN:Are you leaning in that direction now, marrying distribution and content?

JM: Well no. I’m just an investor. If Mike [Fries] wanted to go vertical, what he has done is he’s gone out and made a few investments — like this Lionsgate one — testing the water, seeing if there’s a “there” there. He’s a 9.9% shareholder of ITV, for instance. He did All-3 Media with Discovery to start testing the waters, let’s call it. Now he’s got this small stake with me and with [Discovery Communications CEO David Zaslav] and Lionsgate.

This is what I call the very early stages of trying to explore the synergies of working together; not necessarily that you’ve got to own it, but if you understand what they’ve got and what they’re trying to achieve, and you understand what you’ve got and what you’re trying to achieve, maybe somewhere there is a pony in there by working together.

There’s a lot of common interests that you can create value in by working together, not necessarily combining but just understanding other industry perspectives. And you know, if you ask me what I try to do, I try to be a synthesizer of these kinds of things, of trying to understand what fits with what. You’re always trying to say, “Gee, could you create something interesting, unique or more valuable that you could do this over here and this over here?”

And you take shots. I have always had a theory that if a cable company could own a broadcast enterprise in its market, that could be an important synergy for advertising, promotion,to give you access to content that you otherwise wouldn’t have access to.

Does it lead anywhere? I don’t know. We just bought Channel 3 in Ireland, the No. 1 Irish-based TV station. And we’ll see. We bought a 50% interest in a Belgian TV station.

Of course, Discovery went out and bought SBS, which is the No. 1 or the No. 2 broadcaster in Scandinavia. It has really worked well for Discovery. The question is, does it work well for a distributor to do that?

MCN:Do you think there’s more opportunity abroad than there is in the U.S. in terms of broadband and cable?

JM: There is more growth-potential opportunity internationally. It’s not necessarily financially that easy. I mean, some of these markets are very, very tricky. You have political, economic and regulatory issues.

Some of these, like China, remain intriguing but I haven’t met anybody yet that made a lot of money in China and got it out. So hope springs eternal. The Asian markets are still pretty tough. If you get it right, anything divided by 3 billion households makes your cost per household look pretty low.

I mean, this is the secret of Facebook. This is why the Internet entrepreneurs, with global standards and global reach, can go from nothing to huge overnight, ‘cause they’re dealing with another couple of zeros.

So if [Facebook founder and CEO] Mark Zuckerberg has 1 billion average daily users, just think about that. No wonder these guys are seeing their market caps go through the roof. That’s something to understand and emulate and try and copy if you can.

MCN:How do you see the U.S. market consolidating?

JM: You have some free radicals floating around on the content side that you could still see aggregation taking place that would have a lot of synergy. And I mean, some of it’s driven by ego, but most of it’s driven by synergy.