LBRDA - Liberty Broadband

[loganc]

Overview of the Malone cable and media empire, covers many of his companies (not just LBRDA):

 

http://www.jnvestor.com/malone/

 

Very good post! :)

 

How do you think the cable industry today compares to the pharma industry (VRX), the aerospace industry (TDG), or the software industry (CSU)? Don’t you think it lacks the predictability those other businesses enjoy instead?

 

Thank you,

 

Gio

 

Why do you think it lacks predictability?  Because of an association of the cable business with the video bundle?  People still need a broadband connection to use SVOD offerings.  I think broadband internet is about as predictable a business as you are going to find.  Also, there is nothing to say that cable cos with smart operators (i.e. CHTR) cannot eventually repackage bundles that are more competitive with SVOD offerings and also improve their own "on demand" offerings. 

 

Also, just another point - Malone wouldn't advocate putting 5x leverage on a business that isn't extremely predictable.

[giofranchi]

Why do you think it lacks predictability?  Because of an association of the cable business with the video bundle?  People still need a broadband connection to use SVOD offerings.  I think broadband internet is about as predictable a business as you are going to find.  Also, there is nothing to say that cable cos with smart operators (i.e. CHTR) cannot eventually repackage bundles that are more competitive with SVOD offerings and also improve their own "on demand" offerings. 

 

I don’t understand it easily enough… As far as content is concerned, it seems to me that the cable industry is an intermediary between the content creators and the final consumers… Couldn’t content creators do without content distributors through the internet? Of course, they would still need a cable… But then the industry would shrink to “cable providers” instead of “content providers”… Big difference! Don’t you agree?

 

Also, just another point - Malone wouldn't advocate putting 5x leverage on a business that isn't extremely predictable.

 

With this I cannot argue! And that’s why I am saying I don’t think I understand the dynamics behind the cable industry easily enough…

 

Gio

 

[loganc]

Why do you think it lacks predictability?  Because of an association of the cable business with the video bundle?  People still need a broadband connection to use SVOD offerings.  I think broadband internet is about as predictable a business as you are going to find.  Also, there is nothing to say that cable cos with smart operators (i.e. CHTR) cannot eventually repackage bundles that are more competitive with SVOD offerings and also improve their own "on demand" offerings. 

 

I don’t understand it easily enough… As far as content is concerned, it seems to me that the cable industry is an intermediary between the content creators and the final consumers… Couldn’t content creators do without content distributors through the internet? Of course, they would still need a cable… But then the industry would shrink to “cable providers” instead of “content providers”… Big difference! Don’t you agree?

 

There certainly is a big difference between the video business and the broadband business for cable companies.  The difference is that broadband is a significantly higher margin business.  I think if you do some research and thinking, you will come to realize that the hybrid fiber-coax network that cable companies own can provide the highest broadband speeds with the least incremental capital expenditure.  That provides a very significant competitive advantage against telcos and Google, for example. 

 

The reality is that the video business is challenged for more reasons than just stagnant subscriber growth in the US.  The rate of increase in pricing for retransmission, for example, has outpaced the increase in pricing of the video product that cable cos provide.  Handicapping the big winners and losers from a fracturing of the big bundle is hard to do.  However, the position of cable companies in owning the "last mile" is much more powerful in my view than that of just a "dumb pipe."

 

 

[Liberty]

Whether through video bundles or broadband, customers are paying for access to the infrastructure. That's not going to change. This is a highly predictable subscription business, churn can be mitigated with things like triple play and quad play, and scale is everything, so there's great operating leverage if you can get big enough. If anything, broadband should be more profitable than video because with video, most of the revenue is passed on to content producers anyway. With broadband, you keep that revenue and the marginal cost of extra bandwidth gets pretty low, especially once you phase out analog signals which frees up tons of space that should be able to handle broadband growth for a long while. Average speeds are still relatively low in the US, so if New Charter comes around and starts offering a minimum of 60 mbits or 100 mbits like Global does in Europe, it'll be quite the revolution.

[giofranchi]

loganc and Liberty,

 

In other words, it is not the content that matters, but the infrastructure used to deliver it to the final consumer. Whoever owns that infrastructure owns a “toll bridge” type of business, highly predictable indeed! Am I right?

 

What about consolidation? Do you see any regulatory issue that could prevent consolidation from happening in the industry?

 

Finally, how do you like LBRDA if compared to the other Malone’s companies?

 

Thank you very much,

 

Gio

 

[giofranchi]

I have just opened a 12% position in LBRDA.

 

My thesis:

 

1) Malone & Company (Maffei, Rutledge, etc.) are superb operators: this I already knew.

2) I was wrong about the predictability of the cable business: it is not about the content, it is about the infrastructure needed to deliver the content instead. Whoever owns that infrastructure, owns a “toll bridge” kind of business. Which is among the most predictable of businesses!

3) There will be consolidation in the US cable industry.

 

If 1) + 2) + 3) are true, I think this investment will turn out to be a very profitable one.

If 1) + 2) are true, but 3) never materializes, I think this investment will turn out to be profitable, though a modestly profitable one.

If only 1) is true, I might end up losing some money… Though the strong leadership of Malone & Company should be able to minimize the damage.

 

Cheers,

 

Gio

 

[ni-co]

I have just opened a 12% position in LBRDA.

 

My thesis:

 

1) Malone & Company (Maffei, Rutledge, etc.) are superb operators: this I already knew.

2) I was wrong about the predictability of the cable business: it is not about the content, it is about the infrastructure needed to deliver the content instead. Whoever owns that infrastructure, owns a “toll bridge” kind of business. Which is among the most predictable of businesses!

3) There will be consolidation in the US cable industry.

 

If 1) + 2) + 3) are true, I think this investment will turn out to be a very profitable one.

If 1) + 2) are true, but 3) never materializes, I think this investment will turn out to be profitable, though a modestly profitable one.

If only 1) is true, I might end up losing some money… Though the strong leadership of Malone & Company should be able to minimize the damage.

 

Cheers,

 

Gio

 

Welcome aboard the cable train, Gio! I think 1), 2) and 3) are almost certainly true. And don't forget those companies really prosper in this low-cost of leverage environment. They are able to borrow very cheap and long-term and the Liberty family is led by one of the greatest capital allocators of all time.

 

Whether cable cos will be a hugely profitable investments depends on 2 risks materializing, in my opinion:

 

1) First and foremost, there is regulatory risk – the pipes are only growing in importance in everyday life and I think you're going to see politicians realize this. There are several countries worldwide that separate ownership from cable/broadband services (e.g. Singapore). So, there is a non-zero risk that cable cos will be regarded and regulated as utilities sometime in the future. 

 

2) There is a risk of technical obsolescence.

 

Both risks appear to be small today but I watch them very closely. For the time being, I haven't found any sector as attractive as cable and this is why cable cos are a substantial part of my portfolio.

 

[giofranchi]

1) First and foremost, there is regulatory risk

 

I understand of course this is a risk, which could make the cable business less predictable than I think it is right now. We will see.

 

2) There is a risk of technical obsolescence.

 

Anything more specific? Is there already a technology that could be faster and cheaper than cable? If not, I guess it takes time to find one, and to build the new infrastructure needed to replace cable. Maybe years, right? And who knows? Probably Malone & Company will be among the first ones to invest in such new infrastructure through one company of theirs… And I will always be able to follow him, shifting my investment from LBRDA to whichever other company they use to invest in a superior technology. ;)

 

Cheers,

 

Gio

 

[ni-co]

2) There is a risk of technical obsolescence.

 

Anything more specific? Is there already a technology that could be faster and cheaper than cable? If not, I guess it takes time to find one, and to build the new infrastructure needed to replace cable. Maybe years, right? And who knows? Probably Malone & Company will be among the first ones to invest in such new infrastructure through one company of theirs… And I will always be able to follow him, shifting my investment from LBRDA to whichever other company they use to invest in a superior technology. ;)

 

Cheers,

 

Gio

 

This is exactly also my line of thinking. I haven't seen anything threatening so far.

 

Maybe mobile technologies could emerge that give those networks greater capacities. Malone says that momentarily simple physics is prohibiting that. Cable bears always forget that 80+% of the traffic which is considered to be "mobile" is actually over wifi – i.e. broadband. Mobile networks simply don't have enough carrying capacity for all this data. Everybody watching Netflix over mobile networks is just a pipe dream.

 

On the terrestrial side, fibre obviously carries greater capacity. But it's that damn last mile that gets them. Building out fibre networks (into every single home) will be the long term technological "threat" to cable but it's linked to huge capex for the companies doing it. Apart from that, there seem to be promising technologies for upgrading the existing (last mile) cable networks to fibre by essentially pulling fibre through cable pipes. Anyway, cable cos will have ample time to react – years of solid and increasing cash flows before cable will eventually be replaced by fibre. We're just at the beginning of the age of cable, full fibre networks are at least 20 years off.

 

We discussed shortly discussed alternative technologies (DSL vectoring) in the LBTYA thread, starting here.

[giofranchi]

This is exactly also my line of thinking. I haven't seen anything threatening so far.

 

Maybe mobile technologies could emerge that give those networks greater capacities. Malone says that momentarily simple physics is prohibiting that. Cable bears always forget that 80+% of the traffic which is considered to be "mobile" is actually over wifi – i.e. broadband. Mobile networks simply don't have enough carrying capacity for all this data. Everybody watching Netflix over mobile networks is just a pipe dream.

 

On the terrestrial side, fibre obviously carries greater capacity. But it's that damn last mile that gets them. Building out fibre networks (into every single home) will be the long term technological "threat" to cable but it's linked to huge capex for the companies doing it. Apart from that, there seem to be promising technologies for upgrading the existing (last mile) cable networks to fibre by essentially pulling fibre through cable pipes. Anyway, cable cos will have ample time to react – years of solid and increasing cash flows before cable will eventually be replaced by fibre. We're just at the beginning of the age of cable, full fibre networks are at least 20 years off.

 

We discussed some technologies in the LBTYA thread, starting here.

 

Good! Thank you very much! :)

 

Cheers,

 

Gio

[giofranchi]

We're just at the beginning of the age of cable, full fibre networks are at least 20 years off.

 

This might be a very dumb question, but I am not sure I understand the difference between cable and fiber… Isn’t fiber inside a cable? In other words, why couldn’t cable companies just change the material they put inside their cables to transmit data?

 

Gio

 

[cubsfan]

We're just at the beginning of the age of cable, full fibre networks are at least 20 years off.

 

This might be a very dumb question, but I am not sure I understand the difference between cable and fiber… Isn’t fiber inside a cable? In other words, why couldn’t cable companies just change the material they put inside their cables to transmit data?

 

Gio

 

I think he means fiber optics, which is a light beam!

[giofranchi]

I think he means fiber optics, which is a light beam!

 

Aren't they fibers made of glass, and put inside a cable?

 

Gio

[ni-co]

We're just at the beginning of the age of cable, full fibre networks are at least 20 years off.

 

This might be a very dumb question, but I am not sure I understand the difference between cable and fiber… Isn’t fiber inside a cable? In other words, why couldn’t cable companies just change the material they put inside their cables to transmit data?

 

Gio

 

Yes, fibre is also inside a similar looking tube but it's a different kind of cable. "Cable" (in the TV/broadband cable sense) is a coaxial cable, in contrast, "fibre" is an optical cable.

 

The problem with changing the "material inside" is that you'd have to dig up the streets to every single home and exchange the old cable for a new one.

 

Cable cos are actually using optical fibre cable to bring the signal to whole streets/blocks etc. but then they use the old coax cable for the last few meters into every single home ("the last mile"). Those wires into every single home – i.e. the last mile – are tremendously valuable because they are the "largest" (highest data capacity) pipes into every single connected home. Cable cos don't have to dig up the streets to upgrade the speeds of coax cable up to 1 gbit/s and thereby keeping up with ever increasing capacity demands.

 

[Disclaimer: I'm not an engineer but I did some research and also talked to a cable engineer who explained it to me. So this is my layman's understanding of it.]

[cubsfan]

I think he means fiber optics, which is a light beam!

 

Aren't they fibers made of glass, and put inside a cable?

 

Gio

 

Maybe I misunderstood you - I don't think so - I thought they were installed in bundles of optical strands, perhaps inside a tube, like ductwork.

I let one of the experts clarify.

 

 

[giofranchi]

The problem with changing the "material inside" is that you'd have to dig up the streets to every single home and exchange the old cable for a new one.

 

If you change technology, and therefore you have to build up a new infrastructure, that must be done anyway… Am I wrong?

 

I understand it is a different technology, but I don’t understand why cable companies cannot simply adopt a new technology… In other words, if a “tube” is actually going to replace a “cable”, imo the cable companies which laid down that “cable” in the first place are the best positioned players to implement such a change.

 

What am I missing here?

 

Gio

 

[ni-co]

I think we're talking a bit cross-purposes.

 

If you change technology, and therefore you have to build up a new infrastructure, that must be done anyway… Am I wrong?

 

"If" is the right word to use – because it won't have to be done for 10 years or so – which is exactly my point. Cable has ample capacity left in their pipes. They can make their networks 10x faster (and keep their capacity) without replacing the pipes. This is their single competitive advantage compared to the telcos – low capex!

 

I don’t understand why cable companies cannot simply adopt a new technology… In other words, if a “tube” is actually going to replace a “cable”, imo the cable companies which laid down that “cable” in the first place are the best positioned players to implement such a change.

 

Yes, they are in a good position but this is not what makes them great investments! When cable will hit its capacity ceiling cable cos will have to dig up the streets and replace those cables. In this respect, there is no big difference compared to their competitors (mainly telcos but also Google) which would have to do this today to keep up with cable. Someday in the future, however, ROI for cable cos and telcos will be roughly the same. Then cable cos will lose their competitive advantage (low capex) – but this is several years down the road. Until then, there will be ample FCF for shareholders.

 

And as long as cable cos can increase speeds to meet ever increasing demand (all those future Netflix customers…) there is no need to lay fibre cable to homes. This is why competitors don't do it or do it only very slowly. It's just crazy expensive! And people don't need it – yet.

[giofranchi]

Yes, they are in a good position but this is not what makes them great investments! When cable will hit its capacity ceiling cable cos will have to dig up the streets and replace those cables. In this respect, there is no big difference compared to their competitors (mainly telcos but also Google) which would have to do this today to keep up with cable. Someday in the future, however, ROI for cable cos and telcos will be roughly the same. Then cable cos will lose their competitive advantage (low capex) – but this is several years down the road. Until then, there will be ample FCF for shareholders.

 

And as long as cable cos can increase speeds to meet ever increasing demand (all those future Netflix customers…) there is no need to lay fibre cable to homes. This is why competitors don't do it or do it only very slowly. It's just crazy expensive! And people don't need it – yet.

 

Ok, thank you! This is very helpful and now I think I understand it better. :)

 

One last question: why do you say cable cos will have no advantages over telcos, when the time finally comes to build a new infrastructure? After all they are the incumbents, aren’t they? It won’t be like building a new bridge… It will be more like building one where another bridge already exists… Those who own the already existing bridge should somehow be better positioned to build the new bridge than anyone else, shouldn’t they?

 

Gio

 

 

 

[ni-co]

Yes, they are in a good position but this is not what makes them great investments! When cable will hit its capacity ceiling cable cos will have to dig up the streets and replace those cables. In this respect, there is no big difference compared to their competitors (mainly telcos but also Google) which would have to do this today to keep up with cable. Someday in the future, however, ROI for cable cos and telcos will be roughly the same. Then cable cos will lose their competitive advantage (low capex) – but this is several years down the road. Until then, there will be ample FCF for shareholders.

 

And as long as cable cos can increase speeds to meet ever increasing demand (all those future Netflix customers…) there is no need to lay fibre cable to homes. This is why competitors don't do it or do it only very slowly. It's just crazy expensive! And people don't need it – yet.

 

Ok, thank you! This is very helpful and now I think I understand it better. :)

 

One last question: why do you say cable cos will have no advantages over telcos, when the time finally comes to build a new infrastructure? After all they are the incumbents, aren’t they? It won’t be like building a new bridge… It will be more like building one where another bridge already exists… Those who own the already existing bridge should somehow be better positioned to build the new bridge than anyone else, shouldn’t they?

 

Gio

 

I don't know about that. If the old bridge is too small and a new huge new bridge is to be built, will the incumbent really have a competitive advantage in building the new bridge? His cost for building it will be the same like the cost for competitors, his future cash flows won't be higher. Yes, maybe he's known to be a reliable bridge operator but in the end, it's a matter of financial strength who's going to build the new bridge, isn't it?

[jay21]

By that point cable cos could be so embedded into mobile that the concept of "last mile" may not exist and they just have to upgrade their wifi networks.

 

Highly speculative though. I think they are able to execute on quad plays then they win handsomely and I wouldnt spend too much time thinking about fiber build.

[Sunrider]

I've recently had fibre installed in my house ... in South Africa of all places (where regulation is weak and enforcement generally lacking and labour is very cheap). Despite all that, they still had to dig up the road across the suburb, install cable channels, run the cables down the streets and to the boxes at each of the houses - a major effort.

 

The way it works: A fibre cable running down the road is a strand containing numerous fibre bundles (think one bundle to each house, so something like at least two fibres to each house ... one for the normal operations, at least one for backup in case something happens so they don't need to dig again). The fibres themselves are hair thin, coated like a thin copper wire with some polymer, those are then bundled and coated again, etc. the whole thing is wrapped/looks like a a pipe about an inch think ... that covers the road. This cable connects to an interconnection cable shaft the company had to put in at basically each block (otherwise they'd have to run thicker cables down the street). At your house the cable goes to terminator box (unpowered, just to have a clear break-point between fibre in the road and fibre in the house, I presume), there it is fused with another fibre cable that runs into your house and goes into a powered end unit, which your router plugs into.

 

Most people in the US will know what a coaxial cable looks like (Europe: think the antenna connector you used to have to normal antennae to hook up your TV) ... so perhaps the thickness of a thumb at most.

 

Anyway, the thickness doesn't matter too much - the main point, I think, that Gio was asking was upgrade costs - it's quite simple: If you want a new cable (wire, fibre, weyl fermions) you need to lay it. It is *not* the case that there's a cable channel in each road that you can simply pull it through - that may be the case in the some cities in Europe with proper regulation, etc. but it's not the case in many other countries where the cables are basically just buried. It's also not the case in much of NA where the cables are strung above ground, even in some major cities. So you can't just attach the new fibre (if you're a cable co) to the one end of the cable you have in place and then pull the end on the client's home to pull the fibre through - it's a major infrastructure investment and those are the costs that were referred to above when telcos/cable cos would have to invest similar amounts to upgrade infrastructure. There may be one component - such as rights of ways that exist that may make it easier/cheaper for an incumbent but I suspect that regulation aimed at fair access would level that bit out of the playing field.

 

C.

 

 

Yes, they are in a good position but this is not what makes them great investments! When cable will hit its capacity ceiling cable cos will have to dig up the streets and replace those cables. In this respect, there is no big difference compared to their competitors (mainly telcos but also Google) which would have to do this today to keep up with cable. Someday in the future, however, ROI for cable cos and telcos will be roughly the same. Then cable cos will lose their competitive advantage (low capex) – but this is several years down the road. Until then, there will be ample FCF for shareholders.

 

And as long as cable cos can increase speeds to meet ever increasing demand (all those future Netflix customers…) there is no need to lay fibre cable to homes. This is why competitors don't do it or do it only very slowly. It's just crazy expensive! And people don't need it – yet.

 

Ok, thank you! This is very helpful and now I think I understand it better. :)

 

One last question: why do you say cable cos will have no advantages over telcos, when the time finally comes to build a new infrastructure? After all they are the incumbents, aren’t they? It won’t be like building a new bridge… It will be more like building one where another bridge already exists… Those who own the already existing bridge should somehow be better positioned to build the new bridge than anyone else, shouldn’t they?

 

Gio

 

I don't know about that. If the old bridge is too small and a new huge new bridge is to be built, will the incumbent really have a competitive advantage in building the new bridge? His cost for building it will be the same like the cost for competitors, his future cash flows won't be higher. Yes, maybe he's known to be a reliable bridge operator but in the end, it's a matter of financial strength who's going to build the new bridge, isn't it?

[giofranchi]

By that point cable cos could be so embedded into mobile that the concept of "last mile" may not exist and they just have to upgrade their wifi networks.

 

Thank you all! Very helpful! :)

 

Jay, could you explain what you mean by "cable cos could be so embedded into mobile"... Do cable cos deal with mobile? Please, be patient with my ignorance! ;)

 

Cheers,

 

Gio

[jay21]

By that point cable cos could be so embedded into mobile that the concept of "last mile" may not exist and they just have to upgrade their wifi networks.

 

Thank you all! Very helpful! :)

 

Jay, could you explain what you mean by "cable cos could be so embedded into mobile"... Do cable cos deal with mobile? Please, be patient with my ignorance! ;)

 

Cheers,

 

Gio

 

They are. I believe Cablevision is currently trying a voice over wifi. Quad play is common in Europe (see Liberty Global). A lot of mobile data is carried over cable's infrastructure. Most cable cos have launched mobile hotspots.

 

I mean if the wifi network gets to be so strong and ubiquitous, why do you need a last mile? Just use the strong wifi signal. (I am sure there is an issue with this; let's see what the cable experts say).

[frommi]

They are. I believe Cablevision is currently trying a voice over wifi. Quad play is common in Europe (see Liberty Global). A lot of mobile data is carried over cable's infrastructure. Most cable cos have launched mobile hotspots.

 

I mean if the wifi network gets to be so strong and ubiquitous, why do you need a last mile? Just use the strong wifi signal. (I am sure there is an issue with this; let's see what the cable experts say).

 

Try watching a video over a free wifi with several users and you see what the problem is. :)

I can see that 15-20 years down the road mobile technology is fast enough to replace cable or DSL, but at the same time bandwidth usage is growing, too. So who knows if we ever reach that point.

[Sunrider]

Depends on how many hotspots you think you can have in a given area - which will depend on how many users you want to serve at what speeds. Wifi also has interference issues (remember Apple keynote a few years ago where their demo had a hitch because there something like 500+ wifi hotspots in the auditorium). There is only a limited frequency band available and the more users you want to serve, the harder it is to give them high bandwidth on that hotspot, even if the pipe from the hotspot itself is very fat.

 

And, of course, unless I misunderstand you, you *do* need the last mile to get to the hotspots because they will have to be installed every 50m or so (more if in a city/a big apartment building ... although there they could act as one cell, so to speak but you'd still need the last mile to that particular building).

 

 

 

By that point cable cos could be so embedded into mobile that the concept of "last mile" may not exist and they just have to upgrade their wifi networks.

 

Thank you all! Very helpful! :)

 

Jay, could you explain what you mean by "cable cos could be so embedded into mobile"... Do cable cos deal with mobile? Please, be patient with my ignorance! ;)

 

Cheers,

 

Gio

 

They are. I believe Cablevision is currently trying a voice over wifi. Quad play is common in Europe (see Liberty Global). A lot of mobile data is carried over cable's infrastructure. Most cable cos have launched mobile hotspots.

 

I mean if the wifi network gets to be so strong and ubiquitous, why do you need a last mile? Just use the strong wifi signal. (I am sure there is an issue with this; let's see what the cable experts say).