John Malone Laid the Groundwork for Cable TV. Then Streaming Arrived

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1:42Bloomberg Audio Studios. Podcasts. Radio. News. Billionaire John Malone made a fortune off of a big bet that cable was going to revolutionize television. And in less than a decade, Malone grew the company he ran, called Telecommunications Inc., into one of the largest cable operators in the United States. That attracted the attention of lawmakers, who summoned Malone to Capitol Hill in 1989 and accused him of overseeing a monopoly. C-SPAN aired the hearing in its entirety. May I call on Mr. Malone? Yes, sir. I guess it's warnings like this that I wish I had studied public speaking instead of thermodynamics in school.

2:28Malone studied electrical engineering at Yale. And while he started his career at Bell Labs, it didn't take long for him to pivot to business. Malone has a gift for making deals. He estimates he's done more than 1 ,000 of them during his lifetime, mergers and acquisitions. And at that congressional hearing, he responded to one of his fiercest critics, Al Gore, who said Malone was as ruthless as a Star Wars villain. I know Senator Gore has referred to me in public as Darth Vader. The cause of great humor, I guess, to a lot of my friends and employees. My wife told me the other day that she found me to be more like the Wizard of Oz.

3:12credited with a lot more power and influence than I really wield. But back then, Malone was well on his way to becoming the media mogul he is today, someone whose empire grew from cable distribution to content. Malone helped launch channels like CNN and BET, and the companies he's run have invested in satellite TV and satellite radio and live events, including Formula One. Today, Malone is the chairman of Liberty Media, Liberty Global, and Liberty Broadband, and he's chair emeritus of Warner Brothers Discovery. Malone has written a new memoir, and at 84, he's still on the lookout for new opportunities.

4:02I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, a conversation with John Malone about the deals he's done, mistakes he's made, Malone's appetite for risk, and how he sees the future of media.

4:18Well, thank you very much for doing this. I appreciate it. Thank you. It strikes me as I look at the world today where there is broadband and 5G and refrigerators are connected to the internet and I can watch any game I want on my phone, that we tend to forget what underpins all of that, what gave birth to all of that. And that's the work that you and others did really just a few decades ago, stringing coaxial cable around towns and cities around this country. As you look back on that, what do you think of that arc of progress? I just think evolution of technology is unstoppable and accelerating.

4:48By the time I got through at Bell Labs, we already had integrated circuits. My doctoral dissertation was artificial intelligence. So these technologies have deep roots, but the technologies available have paced really the industry. I don't want to say that TV is in your DNA. I think it's more nurture than nature, but your dad worked at General Electric on television. It's a very seminal moment in their development. What got you into cable made you think it was something where there was a lot of promise? Just luck, really. I went to work for Bell Labs because they would send you to graduate school and pay for it, which allowed me then to get married and go to graduate school.

5:34That put me into a certain category at AT &T. Went on to McKinsey consulting for technology companies. Ended up consulting for a company that offered me a job. Took the job. that put me into cable TV. That company was Telecommunications, Inc. And at the time, Denver-based TCI was one of the largest cable operators in the country. It wired towns and cities with coaxial cable so customers could watch TV in better quality. By the end of the 70s, stationary satellites had provided the industry with scale, with the capability of scale and to deliver a differentiated content. And that is really when the industry took off.

6:28Because once we had a product the public wanted, the funding became available and then it became a race for scale. It was then, can you get big enough, fast enough to have scale advantages? Back then, the cable industry was what Malone called a patchwork of tiny local operations, rather than a handful of conglomerates. Malone saw the potential of scale. TCI could grow and make money by buying up these independent cable systems. If you got a franchise, then you were essentially the sole provider in that community for probably 15 years. And so the faster you could accumulate that, the more leverage that gave you over the content suppliers, because you were important, became an important customer.

7:19And the more important customer, the better deal you could cut, the better economics you had to go do the next acquisition. And we found ourselves doing an acquisition about every two weeks. Every two weeks. Some were large, and I would personally do. And many of them were virtually pro forma. As long as they could check the box, we delegated the ability to buy the guy next to you. And I think I made the comment, it's the most fun in life, in business, is to have a monopoly, which we were, sort of. Now, so was every cable operator, I have to say, in his territory. You mentioned scale a moment ago, economics of scale.

7:58That was certainly the driving factor at the beginning. As you look at sort of how you've built your portfolios over the years since, Is that still your biggest motivators or how have you approached growth? I had a great mentor, Moses Shapiro, at General Assembly. He was the chairman and he was a tough old bird, but he would teach me about the Talmud. And he said, one of the things the Talmud teaches you is ask yourself the question, if not, if not, if not. So if your model, if your business plan works great, but ask yourself the question, well, what if it doesn't? What if your assumptions are wrong?

8:34What if this doesn't work or that doesn't work? Where are you at that point? What's the downside? How much risk are you really taking? So you really try and look risk very hard in terms of how you finance something. Do you have partners in it? The government's always your partner from a tax perspective. So don't forget that you can deduct your failures from your successes. Don't ever get to where you can't. You're going to have lenders. they're going to help you make sure that you're not taking too much risk. So they become good partners in assessing risk. And if you structure it properly, if you do get in trouble, they're buying lunch, you're not, right?

9:17Kind of an attitude. You know, don't ever count on it, anything being for sure. And so that has colored the structure of the organizations that I've put together over time. We could talk about any number of successes, but let me ask you about SiriusXM, where you made an incredible amount of money on that bet and on that investment. And in the book you write, the way music is owned and monetized is undergoing continuous evolution. Begs the question, where do you see opportunity in that space today? Well, a couple of points I want to make there. First of all, on SiriusXM, we were an early founding investor in XM.

9:59But when we saw the competitive environment emerge, we got out of it. Then we got the phone call that said, are you interested in Sirius? They've had their deal with XM approved for merger, but we're in the middle of the financial collapse. And we said, we don't have to have control, but we want options for 40 percent cheap options. And we'll loan you enough money to get you over the hump. And it worked out great. So that was a great, a great transaction. But the home run in music, frankly, is live nation, live performance. In a world of random access where you can basically have anything at any time and generally affordable, live has become a very important component.

10:50After the break, I asked Malone about Rupert Murdoch and Fox News and what lies ahead in the age of streaming.

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13:42Billionaire John Malone was a fencer in high school. And in business, he's crossed swords with many other big-name media moguls, including Barry Diller and Charlie Ergen. He was a key advisor to David Zasloff in Discovery's acquisition of AT &T's Warner Media. You categorize Rupert Murdoch as someone you have been friends in business with and occasionally kind of a corporate adversary of. And I wanted to ask you just about why you think the Fox News channel has been successful as it has been. Well, I can tell you, Rupert called me up. I was already heavily in television news at TCI. We had McNeil-Lair, which we actually owned.

14:23We owned, I think, 80 % of it. And we supported that in the public interest. I had helped start CNBC. And not only did we carry CNN, but we had bailed Ted Turner out when he got in a little bit of financial distress. And I was on Ted's board then from that point forward, so I knew that side of it. Rupert called me up and he said, John, do you think there's a place in America for another video news channel? And I said, in all honesty, Rupert, I think if you came down on the conservative side of the middle, right, I think there is an appetite for a video news service because Ted and CNN are tending to go a little more liberal culturally and politically.

15:16And I said, the reason I think that is Rush Limbaugh has got a massive radio audience. It's extremely loyal. And he mixes politics with humor. And he's been very successful. After giving up the advisory role, I put my financial hat on and said, you know, we'd be happy to carry you, but we need an economic interest in its success. And so we cut a deal that we had warrants to purchase 20 % of Fox News at whatever the net invested capital was at the time we chose to exercise that warrant. And that was the deal. And he said, well, why don't you go talk to Limbaugh and see if we can make him our anchor?

16:00And I did. I had two delightful luncheons with Rush, and I was unsuccessful in talking Rush into going on television again. But he suggested Roger Ailes, and so we recruited Roger. But the deal from the beginning was, they're going to be successful because it's a hybrid of entertainment and news. We're at this moment where Newsmax is suing Fox News, alleging that Fox News has used hardball tactics. And I thought of how in the book you detail how Fox News at the beginning was paying distributors to carry the channel. There's also this kind of delicious inversion of what's happening here, which is Rupert Murdoch sued Time Warner, if I remember correctly, for not carrying the station in Los Angeles and New York.

16:50Correct. What do you make of that suit? Do you see any foul play here? or is this just kind of a continuation of the tactics we've seen kind of the Murdoch enterprise use from the beginning? I think, you know, the issue of exclusivity and carriage and bundling, to me, okay, I've got to take you back a notch. There was a time when John McCain, he sponsored the concept that programming above a certain cost should be a la carte, right? which I wholeheartedly believed in. And his idea was his grandmother is paying for a lot of sports she doesn't watch. And so if anything over 50 cents a month was going to be on, it should be on optionally as an a la carte service, which I totally believed in.

17:42We could not convince the bulk of our industry to get behind McCain and support him. And I think that was the beginning of the end, frankly, of the cable industry's success as a video distributor. It's funny because in the book, there's a chapter in which you say you're surprised the DOJ never went after cable bundling. At a bundling. And yet I think of you as the father of the cable bundle and somebody who has decried a lot of government regulation. So just explain that to me, your surprise and why it sounds like you might have been in favor of that happening. Oh, I was, yes, we bundled, of course.

18:19But the ability to a la carte in order to control cost, to me, was an essential ingredient. And what happened to the industry was that once these guys, these big guys could bundle, you couldn't say no. And so there was never a successful new cable channel that wasn't owned by somebody who had market power. OK, and the crime for the cable guys was allowing their video bundle costs to get so high. When I was chairing DirecTV, I don't know what the numbers are now, but we were up to one hundred and eighteen dollars was our charge for service, base service. And it was at a point where a big percentage of Americans couldn't afford it.

19:08So Netflix succeeded really because the big bundle was way too expensive. You bought it all or you didn't get any of it, right? Which to me was suicidal for the industry, especially as sports bidding became so aggressive. So I think we just as an industry got caught ourselves with a product that was just too highly priced with too little margin. According to Deloitte's Digital Media Trends report, the average American spends close to$70 a month on streaming. That's less than the$125 a month that cable or satellite TV subscribers say they spend on those services. But almost half of those streaming customers say they pay too much.

19:55We have seen the proliferation of streaming services, now the bundling of streaming services. How do you see all of that playing out? Well, I think other than live sports and maybe news, this random access capabilities, particularly if it can be curated by an intelligent curator, an AI curator, I think is a huge public service. It gives enormous flexibility, quality and potentially efficiency to it. But with sports, I've got a big hostility toward network neutrality as it's applied through live because to send out a NFL game is one channel, right? Linear. Cold country, one channel. And yet streamed, it's 40 or 50 million channels.

20:49Why does that exist other than government intervention? And the answer is, well, for the big tech guys, it gives them a chance to sell advertising at a higher, because they know more about the customer, at a higher price. Malone is chair emeritus of Warner Brothers Discovery's board. Now, that company is planning to split into two separate companies, one that'll be studios and streaming, the other that'll be its networks. Earlier this month, Warner Brothers Discovery's CFO announced it could sell a 20 % stake in its studios and streaming business before that split happens. Who do you see as a buyer of that?

21:28Where would the interest be in that kind of equity stake? Public investors. Public investors. Yes. I think that the reality is the Warner Studio Library and rapidly growing streaming business will have a much higher valuation than it is attributed in the combined company. And the reason is it's over levered. You have a declining linear video business and you have a growing streaming business. I think the public investors, institutional investors will value that quite highly. that growth and that potential, once that, I laugh about it, but once that pickle is out of that jar, there are going to be a lot of people interested in doing business deals with that pickle.

22:16People ask me, was I stupid to do the Time Warner deal? And the answer is, Discovery, while it was doing great, was facing exactly the same future that Warner Brothers was. We were both confronted with having to make a transition to a new technological platform and a completely different form of consumer behavior. And discovery would have found itself way too small in that trajectory. If you actually had sat there, even last year, and looked at the economics of Netflix in the U.S. and the economics of HBO in the U.S., they look almost identical. One trades at$200 billion and the other trades at$20 billion.

23:10I mean, it's about growth, right? Future. Because the real secret of Netflix is global, is international. 70%, I believe, of their customers are outside the U.S. and that's where the growth has to come. And, you know, we think Discovery's brand, which is well-known, combined with Warner Brothers' content, which is pretty well-known, should succeed in growing internationally much faster than people generally think. Last question. In the book, you address legacy and retirement. You write, retirement is going to be an imperceptibly slow transition. Is it happening? Are you simplifying the business?

23:53You sound like my wife. You sound like my wife. She says, you've been telling me you're going to retire since you were 30. No, it is slow because I've been involved in so many things. To me, retirement is primarily extricating myself from the public corporate roles that I play. I have a ton of private businesses, everything from ranching, farming, forestry, multifamily, horse racing. You know, I got a lot of things that I'm still saying grace over. And I intend to continue with my control positions in the various enterprises from which I will be slowly leaving the boards.

24:42This is The Big Take from Bloomberg News. I'm David Gurra. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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