John Malone sizes up the threat to cable posed by fiber overbuilders
US cable operators are increasingly threatened by the vast sums of money being plowed into fiber overbuilders, but cable industry legend John Malone believes that MSOs such as Charter Communications are well-prepared to handle the hazards of more capable competition.
Malone, whose Liberty Broadband unit holds 26% of Charter and owns Alaska's GCI, remains upbeat about Charter's prospects in the face of new and emerging competition from fiber overbuilders.
"I believe they can defend their territory quite effectively," Malone said Thursday in a wide-ranging interview with CNBC's David Faber. To amplify that point, he said Charter has done well defending against AT&T's surge in FTTP buildouts and network upgrades. While AT&T has certainly gained customers from that work, both companies are growing.
But he also likes Charter's position with mobile services, and its ability to "step on the accelerator" with aggressive pricing and extract a premium when mobile is bundled with high-margin home broadband service.
"I think if this grows to become a stable duopoly in the US…Charter has a lot more to gain on the wireless side," he said. "And the [mobile] incumbents have a lot more to lose on the wireless side than the [cable] incumbents do in the overbuild side."
Meanwhile, he believes the threat posed by fiber overbuilders will vary by market and be gauged in part by how committed they and their investors are to the long game.
"Certainly if you have capital that's willing to settle for very low returns, it's a big threat," Malone said. "The biggest threat has always been the stupid guy with a lot of money coming into your business. They might not end up with a lot of profitability, but they sure as hell can damage the profitability of the incumbent."
But Malone also believes that history is on Charter's side, as the "ultimate returns [for overbuilders] were very poor."
On that point, he recalled a conversation with former Verizon Chairman and CEO Ivan Seidenberg when Fios was all the rage. "His comment to me was: 'We may not be very smart, but we're big. And if we fall on somebody, we can hurt 'em.' Well that's not a great motivation for investment return."
Malone also acknowledged that fiber technologies and buildout costs have improved since those early days of Fios, but notes that it's just one piece of the puzzle. There's a greater, total cost of building a business, marketing it and gaining share from the incumbent provider, he explained.
"We've seen this play before," Malone said. "And really it comes down to how low a return on capital a new investor is willing to [accept]."
Favors a 'hybrid' model, more niche-based approach for streaming
Malone, who played a significant role in brokering the proposed combination of Discovery Communications and AT&T's WarnerMedia unit, also had lots to say about the future of the direct-to-consumer streaming industry.
He acknowledged that the markets continue to reward growth and scale over profitability, and that players will need to focus on a balanced "hybrid" model focused on subscriptions and advertising support. Some of that is already in play, with the likes of HBO Max, Discovery+, NBCU's Peacock, Paramount+ and Hulu all offering subscription VoD services equipped with both ad-supported and ad-free options.
Malone also believes that streaming services will have to spend more effort creating niche-based services, as all-encompassing, be-everything-to-everyone OTT services will struggle to become profitable.
"I think the real issue you have to start thinking through is what is going to be the profitability profile of these businesses as they increasingly go global, as they achieve various levels of scale and various levels of stickiness or content costs," Malone said.
On that point, he believes the DTC market can learn from the lessons of cable TV, which learned how to deal with bundling, churn and pricing, and ultimately ended up with a hybrid service offering based on advertising and subscription revenues.
"I think those are the lessons that these direct-to-consumer companies are going to be learning and competing over," Malone said. "And that will ultimately determine things like profitability growth and economic value of the enterprise."
Malone believes that the various DTC players will need to evolve their services into "defendable niches" rather than focusing too much on all-encompassing, supersized services.
"I'm a big believer that there will be many offerings, not just one gigantic offering," he said. "Trying to satisfy every taste and every interest in one omnibus offering is going to turn out to be unprofitable."
But he's also wary that the market continues to apply huge valuations on Netflix, a service that does take a broad approach and, thus far, has stayed away from developing less expensive, ad-supported options.
"It's all about growth. It's a land rush right now, and profitability to be determined later," Malone said.
And speaking of Netflix, Malone said he once made a play for the company in days of yore.
"I tried to buy Netflix from Reed Hastings when the stock was $8," he said. "But he wouldn't sell it to me. Damn that bad luck."
Bad luck, indeed. Netflix, which ended Q3 with 213.56 million streaming subs worldwide, was trading at $677.86 in mid-day trading Friday, down $4.16 for the day.
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— Jeff Baumgartner, Senior Editor, Light Reading