Inside John Malone's Strategy to Corner Broadband (Analysis)
This story first appeared in the July 19 issue of The Hollywood Reporter magazine.
John Malone doesn't get the attention lavished on Rupert Murdoch or Netflix's Reed Hastings, but the media-shy mogul behind international cable giant Liberty Global and Liberty Media could be on the verge of matching their global profiles.
In early June, Malone, 72, quietly closed one of his biggest coups to date: a $24 billion deal to buy Virgin Media, the largest U.K. cable operator. The move came after a series of other acquisitions in Europe. With Virgin, Liberty Global extended its reach to a 14th international market and, with 21.99 million subscribers, became the world's largest pay TV operator, besting Comcast's 21.94 million subs.
Many on Wall Street expect Malone's Colorado-based Liberty Media to begin a similar domestic push via Charter Communications, the fourth-largest U.S. cable operator. In May, Liberty acquired a 27.3 percent stake in Charter. And in early June, confirms a source, Liberty Media CEO Greg Maffei met with Time Warner Cable CEO Glenn Britt to discuss the benefits of a possible combination and broader cable consolidation.
What is Malone up to? With media investors worrying about cord-cutting and rising programming costs, the billionaire has doubled down on the cable business, betting big that it is the key to the future thanks to its broadband capacity. Broadband increasingly is seen as cable's new core offering as consumers move from pay TV packages to online video.
"John Malone isn't buying media companies here; he's buying infrastructure providers," says analyst Craig Moffett of Moffett Research. "The assets he's collecting will be the digital distribution platform for media, regardless of whether that media is delivered via traditional cable packages or via Netflix and Hulu."
At the Liberty Media shareholder meeting in June, Malone outlined his vision for cable operators' relationship with broadband video services like Netflix. He predicted that cable operators could offer "various tiers of connectivity," possibly with built-in video offerings or bundles. That means Netflix and others would have to pay for some of the bandwidth they consume -- or, as Malone said, Netflix CEO Hastings would have to keep in mind some of the cost of broadband capacity "that he is burning."
Such a shift would position Malone's expansive cable holdings nicely. Still, some Wall Street observers believe Time Warner Cable might be too big a target for the Liberty-backed Charter (for now) and that Malone instead will try to gobble up smaller public and private cable firms. Deutsche Bank analyst Doug Mitchelson predicts that while some investors would go for a $110- to $125-a-share offer from Charter, TWC's board will hold out for a price closer to $146. "While TWC investors might be willing to sell at a lower price, we do not see how the TWC board could accept such an outcome," he says.
But Moffett says Liberty doesn't need Charter to go after TWC. "As programming costs rise, small cable operators are going to be forced sellers," he predicts. "The private-equity buyers of the past few years will end up as sellers as well. There are going to be bargains to be had; we're heading into a buyer's market of epic proportions. Malone has simply bought himself a ticket to the fire sale."
Observers say Dr. Malone, as he is called (he has a Ph.D. in operations research from Johns Hopkins), won't rush things. His patience is legendary -- the Virgin pact culminated a hunt that took about a decade -- and on Wall Street, his knack for lying low until a deal comes to him has earned him the nickname "swamp alligator."
The Virgin transaction reignited an on/off rivalry between Malone and Murdoch, whose News Corp. owns a 39 percent stake in leading British pay TV platform BSkyB. "A new headache for BSkyB" is what Informa analyst Ted Hall calls the Virgin acquisition.
The most recent standoff between Malone -- net worth $6 billion as of March, good for No. 57 on the Forbes 400 list of richest Americans -- and Murdoch ($11.2 billion, No. 36) came during the mid-2000s when Liberty accumulated a 19 percent voting stake in News Corp., making it the second-largest shareholder behind the Murdoch family. Some expected Malone would try to wrest control of Murdoch's family business, but in 2007, he swapped his stake for News Corp.'s controlling stake in U.S. satellite giant DirecTV, an investment he kept for a few years.
It was a typical move for a man who has bought and sold shares of some of the biggest media companies. During recent years, Malone has been involved with the likes of Discovery Communications, Starz and IAC. Among his current holdings are Live Nation, Barnes & Noble, Sirius XM Radio, the Atlanta Braves baseball team and minimal stakes in Viacom, Time Warner and Time Warner Cable.
If Murdoch tries another run at full control of BSkyB or seeks to expand his global pay TV empire, and as Netflix plots the next step of its international expansion with a new European launch planned by year's end, they are only too aware: The swamp alligator already is there, waiting to strike.