John Malone Says Netflix's Direct-to-Consumer Strategy Leaves Studios, Networks Ripe for M&A Activity

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"You can expect a lot of transactions," the billionaire investor told a Liberty Media investors day session that was webcast.

Billionaire investor John Malone on Wednesday said Netflix removing middlemen from content production and going direct to consumers globally will leave a lot of major studios and networks as "free radicals" — smaller media companies without a home and ripe for mergers and acquisitions.

"You see a lot of public vehicles that are or will become free radicals," Malone told a Liberty Media investors day session that was webcast. He argued Netflix, and increasingly Amazon and Apple, are disintermediating traditional content producers in Hollywood, and making them M&A targets.

"The power of these direct consumer distributors on a global basis is creating some orphans. Whether or not those orphans could be aggregated, where there would be synergies and combinations, is an important thing you'll see over the next couple years," said Malone, who is chairman of Liberty Media and Liberty Global.

He pointed to Discovery Communications acquisition of Scripps Networks Interactive for $14.6 billion as a sign of an industry trend that's only gathering steam. "The merger of Discovery and Scripps would be the example of a very synergistic combination of two companies facing the same challenges but in the short term taking advantage of the synergies to create a stronger and more durable enterprise while they figure out what the long-term strategy is in a transitioning distribution industry," Malone said.

Liberty Media CEO Greg Maffei, who appeared on stage alongside Malone, underlined the ups and downs of a fast-changing media landscape. "A few years ago you would have been very jealous of ESPN's business model ... things change. Now the king is Netflix. It's a very volatile world. You have to give Netflix credit for what they achieved," Maffei told investors.

But he added Netflix faces steep challenges as it enters a talent war with Amazon, Apple and other direct-to-consumer entertainment giants.

"How long can they hold their breath? This market, if it really is $100 billion of (content) spending a year, that seems unsustainable in the long term. So, at some point, somebody will bail. And the question is who?" Maffei asked.

Malone then discussed major TV networks in Hollywood likely to fall behind in their own battle against Netflix, Facebook, Google and others for global audiences and ad dollars. "Their entertainment programming is being supplanted by the Netflixes of the world. They really don't have the budgets to compete in the creation of this kind of content, such that they can hold a long audience," he said.

"They're in an awkward position... The question is: What are they doing? Are they becoming free radicals or can they be protected by the collective?" he added.

Hollywood content producers aren't immune from Netflix, Malone then ventured. "Initially, it was, 'Oh, boy, Netflix needs a lot of content and they will buy it from us or lease it from us.' Then it became, 'They will buy it from us and we can keep some rights.' Then it became, 'They will buy it from us and we don't get to keep any rights.' Then it got to be, 'If we don't deal with them, they will go to our producers and our talent and do it themselves,'" he noted.

"So the studios have to figure out, do they get together and get bigger?" he added, as Malone cited Disney picking up most of 21st Century Fox for $52.4  billion.