Michael Wolff on Charter's Future as John Malone Makes Last Grasp at Netflix
Charter's merger with Time Warner Cable could give the legendary mogul a final chance to take on the company whose domination of the streaming market he helped create.
This story first appeared in the June 12 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
John Malone invented the modern cable industry. He also made the strategic blunder that is causing its radical disruption. Now, with the announcement May 26 of a merger among Charter Communications, where he is the controlling shareholder, Time Warner Cable and Bright House Networks, Malone, at 74, is trying to stage a lion-in-winter comeback — not least of all to rectify his error.
In the cable industry, there hardly is a more bitter voice than Malone's toward Netflix, the symbol of cord-cutting and, too, of Washington's new allergy to cable companies. Perhaps more woundingly, Malone was the key enabler of Netflix, and yet — failing to follow the strong-arm customs of the industry he created — got nothing for his leverage.
The Malone model was to roll up cable franchises and then, using his distribution clout, exchange carriage for an interest in cable stations, achieving something of a distribution-content stranglehold. Since selling his company, TCI, then the largest cable operator, in 1998, he has established control of a checkerboard of content and distribution companies — including Discovery Communications, Starz, DirecTV and Charter — buying and selling to gain more efficiencies and leverage. He is, arguably, the most successful media owner of his era and, among other moguls, vaunted for his preternatural talent for the squeeze play. ("The bastard never goes to sleep," said Rupert Murdoch after Malone in 2004 snatched up a large block of Murdoch's News Corp. voting stock during the few minutes it was available in its shift from the Australian to U.S. stock market, allowing Malone to trade that stock for Murdoch's stake in DirecTV.)
But, ideally positioned, he missed the Netflix squeeze. In 2008, Netflix began its transformation from disc mailer to streaming service on the back of a deal with Malone's Starz to stream 2,500 movies and TV shows. Against expectations, Netflix's growth exploded, single-handedly creating the streaming market — presenting Malone with a clear opportunity. Netflix would have done almost anything to re-up its Starz deal ending in 2012. But Malone, knowing he was Netflix's only first-run movie option, figured he could short-circuit the company and its growing effect on cable by walking away from the deal, even one that might have given him a large stake in the company.
Losing Starz, Netflix was forced to rely on easy-to-license television libraries — content that proved not only more popular than movies but also made the point that Netflix wasn't just a premium movie option, it was television. Better and cheaper television that you could get without a cable subscription. Just as galling, Malone's happenstance creation became among the most potent voices in the FCC's new tilt to the interests of streaming companies over old-line cable interests.
Still, this is John Malone. Even his mistakes create his opportunities. Charter tried to buy Time Warner Cable, only to be thwarted by a bigger bid from Comcast. But Comcast's $45 billion play was derailed in part because of Netflix's opposition. Malone, sweeping back into the cable business, sees a two-front war: It's a war to bring over-the-top distributors from outside the television ecosystem inside, subjecting streaming to many of the same pressures as broadcast and cable; and it is a war to keep Comcast from being the one to do this.
Part of the Malone offensive — led by Starz CEO Chris Albrecht — is jawboning networks to hold back hit shows from Netflix. That has helped ring the competitive alarm that has propelled HBO's and CBS' streaming services. If the Charter-TWC-Bright House merger succeeds, it will give Malone further clout with content holders in limiting the deals they can do with Netflix. And if, as many believe, Malone is executing a larger distribution-content strategy — seeking to combine Viacom or CBS or Time Warner with Discovery — then he becomes another order of roadblock for streaming services.
Then there is the new cable grail of a unified interface. In this scenario, broadband providers will offer subscribers (or, really, subscribers will default to) a personalized navigation system that will guide, save, recommend, share and create on-the-fly packages — giving it, operators hope, Google-like power over the video world. That was Malone's fear of Comcast-TWC: The Comcast X1 box would rule. In a Charter-TWC-Bright House world, Malone hopes his cloud-based platform will hold Comcast at bay and force streaming services through another hurdle and make room for a VOD service he controls. (Pay no attention to the fact that cable operators are notorious for tech screwups.)
And there is regulation. If Netflix appears to have won the net neutrality debate in Washington, the award for this might be something of a booby prize. Netflix now has subjected itself to the system of lobbying, litigation and changing political fortunes out of which the broadcast and cable industries have grown — a game Malone believes he plays better than anyone else.
The prospect of a new Malone colossus — the smartest player in media again holding the most cards — might well give him back the leverage he failed to use against Netflix. Or not. In a transformed world, even John Malone may not be able to put it back together again.
TWC's $102M Merger Man
Time Warner Cable CEO Robert Marcus has been in his position less than 18 months, but he stands to earn about $102 million ($4.5 million in salary, $23 million in bonuses and stock worth $74 million) if the merger succeeds and he is ousted as a result.