Broadband Cable Association of Pennsylvania

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August 5, 2013

Billionaire John Malone's re-emergence in the U.S. cable business is a bet on the growth of broadband, and he believes the industry can soon deliver speeds that are at least 10 times faster than the connections available to the majority of Americans today.

In an exclusive interview Friday with The Denver Post, Malone also said residential high-speed Internet service will ultimately move to a tiered-pricing model that's similar to the wireless industry, where fees are based on the amount of data consumed rather than speed. Malone's Liberty Media, a communications and entertainment conglomerate based in Douglas County, completed a deal in May to acquire a 27 percent stake in cable-TV provider Charter Communications for $2.6 billion. The investment, which marked Malone's return to the U.S. cable industry after more than a decade, was spurred, in part, by the anticipated surge in demand for broadband capacity as consumers view more online video. "In prime time, about half of all the traffic on the Internet is Netflix or Amazon - in other words, it's video," he said. "As that trend continues, the need for greater capacity on the local distribution of the Internet really favors cable, and our belief is that cable will be able to charge more for higher speeds and greater capacity."

The 72-year-old cable pioneer built Tele-Communications Inc. into the largest operator in the U.S. in the 1980s. He sold the Denver-based cable company in 1999. Until recently, Malone was unable to jump back into the U.S. cable business because of his stake in DirecTV, the nation's No. 1 satellite-TV company. "It was only in the last year that I had reduced my interest in DirecTV to a level that the government feels no longer represents a conflict," Malone said in a phone interview from his ranch in Elbert County. "That involved having to put a substantial amount of stock into a trust." His re-entry has driven speculation that the industry is headed for a shake-up. In addition to his Charter stake, Malone is reportedly attempting to acquire Time Warner Cable, the No. 2 U.S. cable company. "Given that John Malone was at the center of the last significant consolidation wave for the U.S. cable industry, his investment with Charter and the overtures of further acquisitions have been great grist for the M&A conversation," said Ian Olgeirson, a senior analyst with SNL Kagan. "I see it as primarily about programming scale and the ability to cut more favorable deals on content, but there is also an innovation edge, and both get a little more interesting if you combine a big U.S. (cable systems operator) with Liberty's international holdings."

While Malone has been absent from cable domestically since selling TCI, he has been active in the industry overseas. He built Liberty Global into one of the world's largest cable companies, serving about 25 million subscribers in 14 countries. Malone believes U.S. cable operators need to consolidate and work more cooperatively to increase scale, drive down programming fees and take advantage of synergies. He pointed to the development of @Home Network, a joint venture between the nation's cable companies in the 1990s that marked the industry's foray into the high-speed Internet business. "The industry, without that cooperation, doesn't have enough scale to be a serious player in a global world, competing with people like Google or Apple, who are basically thinking in terms of billions of customers rather than tens of millions," Malone said.

Comcast, the largest cable operator in the U.S., serves about 20 million broadband customers. Malone acknowledges that companies such as Google, which is reportedly pitching an online video service to content owners, pose a threat to the profitability of cable's pay-TV business. "On the other hand, in order to deliver to the end customer, they have to use largely the cable industry's facilities," Malone said. When compared with the fiber-network build-outs facing telecom companies, Malone believes cable operators can deliver broadband speeds of 500 megabits per second "relatively quickly and relatively inexpensively." "We think that demand for those services will be there," Malone said. "That's the bet that you basically make when you invest in U.S. cable right now."

In Europe, Internet speeds of 100 Mbps are the norm, far ahead of the U.S., where the majority of residential subscribers have access to speeds of up to 50 Mbps. "We're just launching 500 megabits in Holland this summer," Malone said. "We plan to roll that out across Europe next year." It's a just matter of time before those types of speeds reach the U.S. "We're just an investor in Charter. I'm not going to make any commitments. But based upon our experience overseas, I would say it could be done quite quickly," Malone said. "The technology exists."

As speeds increase, Liberty Global wants to move toward billing based on consumption. "There are lot of people who would love the high speeds, but they don't use the Internet that frequently," Malone said. "To be fairer to the consumer, it would be better if we get over to volume-based rather than speed-based pricing. ... I do see the U.S. going that way." Olgeirson, the SNL analyst, said consumption-based billing could come in the long term, although the industry has struggled to find the right mix. "I think there will be a usage-based billing component, but I don't believe it will be around volume," said Nancee Ruzicka, president of Denver-based research firm ICT Intuition. "It will be more around application and transaction-type of activities, meaning when we download a movie, we get charged." Denver Post

Predicting that transmission of TV will move to the Internet eventually, Cablevision Systems Corp. Chief Executive James Dolan says "there could come a day" when his company stops offering television service, making broadband its primary offering. His comments may be the first public acknowledgment by a cable CEO of the possibility of such a shift, long speculated about by analysts. It comes amid growing tensions between cable operators and channel owners over rising programming costs, highlighted Friday night when Time Warner Cable Inc. dropped CBS from its channel lineup in major markets such as New York and Los Angeles. If cable operators drop TV service, charging only for broadband, channel owners would have to sell directly to the public or through Web outlets.

In a 90-minute interview on Friday, the usually media-shy 58-year-old executive also talked about his marriage, his relationship with his father Chuck and his after-hours role as a singer and songwriter. He said his rock band, JD & the Straight Shot, toured with the Eagles last month. Mr. Dolan said that on the rare occasions he watches TV, it is often with his young children, who prefer to watch online video service Netflix, using Cablevision broadband. He added that the cable-TV industry is in a "bubble" with its emphasis on packages of channels that people are required to pay for, predicting it will mature "badly" as young people opt to watch online video rather than pay for traditional TV services. To ensure Cablevision is prepared for the future, he said, he is investing heavily in the company's network connectivity and overhauling operations to improve efficiencies. If Cablevision does drop video service, "I don't want to be saddled with an infrastructure that is as big as the one that I have now," he said.

He was speaking at a point of intense uncertainty for the cable industry, which faces a wave of online competitors offering cheaper video options. Meanwhile, cable pioneer John Malone and other cable executives have been calling for consolidation among U.S. cable operators, in part to push back against entertainment companies over rising program costs. Cablevision-the fifth-biggest U.S. cable operator, serving about three million customers—is considered a likely acquisition target, given its hold on much of the New York area. Mr. Dolan's family controls the company and gives little sign of whether it is interested in selling.

In the interview, asked if the Dolan family will continue to control Cablevision in 20 years' time, Mr. Dolan said: "I would not go so far as to say that." He added, "We are going to continue to do the right things for the shareholders. That's why you can't rule out the possibility of a sale." Mr. Dolan declined to comment on whether the company was having any talks currently or had received any approaches. Later in the interview, he said that "business is in our blood, particularly these businesses, but if it wasn't this business there would be another business."

But Mr. Dolan doesn't expect consolidation to necessarily help cable operators gain leverage against programmers to push back on rising fees. While he said "size helps," he added that Cablevision's position in the valuable New York market "helps us have more leverage than our size would dictate." Much of his family is involved in running the business, including an uncle in his late seventies. Mr. Dolan recently promoted his wife Kristin, a veteran cable executive, to lead sales, marketing and product management, shortly after the two said they were taking a trial separation. "I didn't promote my wife; I married an amazing executive. We're really good friends," he said, adding that "we're figuring things out."

As for his father Chuck, the 86-year-old company founder and chairman, Mr. Dolan said with a laugh that he "comes over everyday and harasses me." The two talk over the weekends "for extended periods of time" and throughout the week about direction and philosophical differences. "He guides me," Mr. Dolan said. The father of six boys ages 4 to 26, Mr. Dolan has plenty of outside interests, such as chairing Madison Square Garden Co., owner of the National Basketball Association's New York Knicks, and performing with his rock band.

Still, Mr. Dolan has immersed himself deeply in Cablevision since late 2011, after a period in which the company experienced severe subscriber defections amid signs of customer dissatisfaction with its service. A Federal Communications Commission report earlier that year indicated the company was trailing its main rival, Verizon Communications Inc.'s FiOS, in Internet speeds relative to what each advertised. The company at that point had pushed capital spending down to "fairly bare-bones maintenance levels," Chief Financial Officer Gregg Seibert said in June.

Mr. Dolan said that he became more involved shortly before Cablevision's chief operating officer at the time, Tom Rutledge, left to run Charter Communications Inc. "Tom has a different operating philosophy than the operating philosophy I wanted to follow," Mr. Dolan said, while adding that Mr. Rutledge was an "excellent executive." Mr. Rutledge, he said, was more focused on marketing while Mr. Dolan is "focused more on the relationship with the customer," which is crucial to "the long-term health of the company." "I felt that we needed to reinvest," Mr. Dolan said. "When we took a hard look at what we were offering,?it just wasn't what we wanted it to be."

He boosted capital expenditures 32% to $1.1 billion in 2012 and poured about $150 million directly into the broadband network. And for this year, the company has told Wall Street that capital spending will remain at "elevated levels." The result, so far, has been higher Internet speeds, expanded outdoor wi-fi service, new modems for customers and an array of products that Mr. Dolan promised will reinvigorate subscriber growth, including a cloud-based digital video recording feature that allows 10 shows to be recorded at once-even through older set-top boxes. He has also beefed up network-monitoring systems so the company can detect outages before customers call in to complain.

Despite the investment, in the past two quarters the company lost video-subscribers, unlike in the year-earlier periods, while it added broadband and voice customers at a slower pace. But, Mr. Dolan said Cablevision is "finally starting to see a little light at the end of this tunnel." A recent FCC test found that the company's Internet speeds were faster than advertised and nearly matched FiOS's performance. "I think he's taken some very positive steps," said Chris Marangi, portfolio manager at GAMCO Investors Inc., a Cablevision shareholder. "Jim has a multigenerational view, a longer-term view." Mr. Marangi added that the reinvestment is "having a positive impact" on customer satisfaction and customer adds. "But it's coming at the expense of margins in the short term," he said. Mr. Dolan, who first started playing guitar at age 17, said he has learned a lot from watching the downfall of music companies that used to require consumers to buy albums of songs rather than letting them choose what they want. The lesson: If you don't "ride the wave" you "get eaten by the wave." Wall Street Journal

For Dish Network, the future is up in the air. The satellite-television provider hopes to offset a lack of subscriber growth by using wireless airwaves it has amassed to team up with a national phone carrier. But after failing to buy Sprint out from under SoftBank in June, Dish is left with dwindling strategic options. When Dish reports second-quarter results Tuesday, analysts expect earnings per share of 53 cents on revenue of $3.65 billion, compared with 50 cents and $3.57 billion a year ago. They also expect Dish's subscriber growth to continue stalling: Subscribers at the end of 2013 are projected to be about 14.03 million, or roughly flat against the prior year.

But investors will be focused more on prospects for Dish's spectrum. This has only grown more valuable as the race by wireless carriers to snap up limited airwaves accelerates. Based on prices implied by AT&T's July 12 deal to buy Leap Wireless, Dish's spectrum is worth about $11 billion, according to Macquarie. That is more than half its market value. Of course, Dish isn't likely to sell its spectrum because Chairman Charlie Ergen sees it as his ticket to a new business. And Mr. Ergen hasn't fully exhausted his list of potential partners. One possibility is a merger with T-Mobile US, which is expanding its MetroPCS brand. In buying Leap, AT&T is snatching up spectrum that would have been highly complementary with T-Mobile's holdings, potentially pushing it closer to a deal with Dish.

Another option has been bandied about recently by analysts: the possibility of a merger with satellite competitor DirecTV. Such a deal would come with huge cost savings. DirecTV Chief Executive Mike White indicated on his company's earnings call last week that he continues to be interested in such a prospect. But analysts believe there could be significant regulatory hurdles. It also wouldn't accomplish Mr. Ergen's goal of transitioning into a new business that uses his spectrum. Meanwhile, Dish is trying to add spectrum to its arsenal through its $2.2 billion bid for bankrupt LightSquared. All this should mean plenty of drama ahead for Dish. For investors, only one thing is certain: The final act will see spectrum in the lead role. Wall Street Journal

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