LMCA - Liberty Media

[LongTerm]

OK. I'll give the bear case for cable.

 

I personally think cable companies have a less than rosy future. If you look at the dynamics of the business I think it is quite simple. Cable operators started as a regulated monopoly. As they grew they were able to reduce the cost of programming as a percentage of income from 40-50% to the current 30-35% of revenues as systems were rolled up and cable operators gained clout with programmers; discounts for scale. When new technology (DTV) was introduced, regulation was loosened, ostensibly because competition was introduced, and operators were then able to jack up prices faster. But ultimately there was a limit to how much they could squeeze from programmers and how much they could squeeze from customers. So 10 or 15 years ago they went looking for alternative sources of revenue (and make their video services sticky)... and came up with telephony and internet access. These have now been almost fully rolled out in most cable systems. So where does future incremental revenue come from? Programmers have been actively looking for alternate distribution technologies to enhance their margins; no chance for the cable operators there. The more they squeeze the more programmers concentrate on alternate delivery technologies. Fixed telephony is saturated, even declining; not much upside there. So they want us to believe that the growth will come from internet access (or 'bandwidth')? Already the cost of internet access for an individual user in the US is 2 to 3x what it is in Europe. Well, you may say that this is the case with mobile telephony as well, so there's no threat there. But I think there is! Cable operators may be close to maxed out on what they can ask for internet access. I say this because operators have been trying for the past 5+ years to change the paradigm for charging out internet access by changing for bandwidth rather than just access. That makes sense for them because the price of delivery is a function of the amount of bandwidth they make available. But for most consumers any discussion about charging by the amount of bandwidth used is a very nebulous thing; they just want to be able to watch youTube videos or Netflix offerings, and, unlike telephony, they are used to the paradigm of fixed pricing for internet access. Pricing paradigms are hard to change and especially so in (even minimally) competitive environments. 'Over-the-top' services are a major threat to operators as they threaten both the artificially high 'bundle' revenue behind which operators have been hiding (read force feeding price increases) for the past 30+ years and increasing costs related to ever-higher internet bandwidth consumption from internet video viewing. Just consider, how many of you receive cable programming from your cable operator that you never watch? How attractive would a service be that offered you only what you want for a lower price than you pay today? I think the majority would migrate to this kind of service if it was offered. Video is the highest margin service cable operators provide, and, it should be  remembered, these are highly leveraged businesses where small reductions in revenues have a major impact on the bottom line. So even a small success of the 'over-the-top' services have an inordinate impact on the profitability of cable operators. Now I can't say if over-the-top as a technology will really take off for mainstream programming; existing programmers tread a very fine line in offering their services over-the-top without threatening their existing cable business revenues, and operators are outright hostile to it for reasons that are obvious. But it is a risk, the extent of which is may be debateable, but a risk nevertheless. I think Mr. Market realizes this risk and is reflected in the decline of the cable operator valuations (EBITDA multiples) as the industry has matured.

 

That's a long answer to your question of which Liberty Media business I prefer; by a long shot the LMCA/B/K over the LBRDA/B/K, at least in the long term. Yes, there may be rationalizations that Rutledge can bring to Charter which has a more rural tinge and was underbuilt (and under penetrated) compared to competitors, and these could well add value, even significant value, to the company (and by extension shareholders) over the next 2,3 even 4 years. But after that, watch out. All bets are off as far as I'm concerned; we may continue on this same trajectory for the medium term ... or some new technology (even OTT) could effectively change the 'gatekeeper' role cable operators have historically enjoyed. In the end, I always prefer owning the content over the distribution channel; customers want the programming and don't really give a hoot how they get it. (not that this applies to the Liberty Media vs. Liberty Broadband question)

 

Just my 2 cents.

 

[ItsAValueTrap]

This white paper does a pretty good job of explaining the economics of Internet infrastructure:

http://www.libertyglobal.com/pdf/public-policy/Liberty-Global-2014-Future-Of-The-Internet.pdf

 

But there is an interesting twist: I think broadband prices do not yet reflect the massive use of OTT services. In the past cable companies could sell you high speed broadband, but most people would not use its potential. Im not 100% familiar with the technological side, but as far as I know you don't have an individual pipe to your house. There is one big pipe to your neighbourhood with capacity X (=speed).

 

Speed depends on a number of things.  The last mile to the consumers' homes is usually not the bottleneck (though in practice sometimes it is if they haven't yet upgraded a particular neighborhood).  What an ISP can do is to make certain connections to its network slow by underinvesting in infrastructure.  So a connection that uses up a lot of bandwidth (e.g. video services companies) will be in the "slow lane".  The slowness can be fixed by having the video company place servers deep within the ISP's network.  This reduces the virtual "distance" between the consumer and the video server.  They will also widen the pipes between the servers and the ISP's network so that bottlenecks/congestion don't happen.

 

What the ISPs want to do is to charge fees for the right to get into the fast lane.  Suppose Netflix doesn't pay.  Its users will experience slow Netflix during peak hours.  Netflix customers only have a few solutions available to them:

1- Switch to a competing ISP.  If they only have 2 choices for high-speed Internet, this may not be a viable solution.

2- Use a VPN.  While this makes the route longer, it may speed up Netflix.

3- Complain to Netflix.

 

---

In the long run, the cost of Internet infrastructure should come down dramatically.  I personally think that resolution will max out at 4K or ultra HD.  To enjoy higher resolution, TVs would have to get really really big.  Because most consumers will not want to buy a TV that doesn't fit through their door, I don't think we will go beyond 4K.

In theatres, consumers did not care about 4K versus 2K.

 

If resolution maxes out for mainstream usage, then eventually bandwidth usage will stagnate (when over-the-top becomes mature).  After that, the cost of delivering video will begin to drop off dramatically.

[ItsAValueTrap]

That makes sense for them because the price of delivery is a function of the amount of bandwidth they make available.

 

The cost to the ISP is building infrastructure to handle peak hours usage.  There are some economies of scale as bandwidth usage increases.

The value to the consumer is likely proportional to bandwidth.

 

In Canada, there are many different pricing schemes in place.

Rogers heavily penalizes users for going over their data caps.  The pricing is totally disconnected from the cost of delivering the service.  Rogers has some unlimited usage plans.

Teksavvy previously gave its users unlimited data because the cost of bandwidth isn't that high and because billing customers for data usage creates added costs for Teksavvy (customer service).  Now they are experimenting with their "zap the cap" plan.  During peak hours, users are throttled to lower speeds.  If they agree to this, they can download as much as they want.  Or, users can go with one of the unlimited usage plans.

 

Teksavvy's cost structure is weird because they buy the last mile connection from companies that own the co-axial cables (Rogers) and the phone lines (BCE, etc.).  They pay certain rates that are set by the CRTC.

[ItsAValueTrap]

Just consider, how many of you receive cable programming from your cable operator that you never watch? How attractive would a service be that offered you only what you want for a lower price than you pay today?

If you buy a Netflix subscription, you will have access to several thousand hours of video... most of which you will never watch.

17,000 hours at 8 hours a day would take 5.82 years to watch.

 

Nobody wants to make several hundred purchasing decisions to pay for what they want to watch.  That's the value proposition of bundling... you make a few payments to buy what you want to watch.

 

I think the right way of looking at it is:

1- How much is the value of the data flowing over the co-axial cable or phone line worth?  I think that over-the-top increases the value of these pipes.  Also, content is continually getting better.

2- How much of this increased value will translate into higher profits?  Airlines created value but didn't make money for shareholders.  In the case of cable, I think that low competition will mean that cable companies will be able to find ways to increase rates.

 

[wbr]

In the long run, the cost of Internet infrastructure should come down dramatically.  I personally think that resolution will max out at 4K or ultra HD.  To enjoy higher resolution, TVs would have to get really really big.  Because most consumers will not want to buy a TV that doesn't fit through their door, I don't think we will go beyond 4K.

In theatres, consumers did not care about 4K versus 2K.

 

If resolution maxes out for mainstream usage, then eventually bandwidth usage will stagnate (when over-the-top becomes mature).  After that, the cost of delivering video will begin to drop off dramatically.

 

I agree that TV resolution is likely to plateau at 4k. But over the long term you have to think beyond TV.

 

Games are one area of growth. 10 years ago graphically demanding games were 5GB big and the majority of them were distributed on DVDs. The new Call of Duty requires 50GB harddisk space and while it might seem crazy to think about that today, I could imagine graphically demanding games using 500GB within another 10 years. And they will be played by more people and mainly bought digitally.

 

And then there is virtual reality with Oculus Rift and other devices in development. We can't even imagine what that is going to do to media and the filesizes of content.

 

 

[dwy000]

The way I look at it at the end of the day is that the cable providers have a monopoly.  Just as they had a monopoly on cable television until satellite came along, they have a monopoly in internet access (well, a duopoly with the phone companies).  And that is increasingly something that people can't live without.

 

If you have a monopoly in something people can't live without, I have confidence in their future.

[yadayada]

@wbr: so your saying they will rape customers even harder then they do now? Just seems that prices are already sky high, and quality of the product is shit, how much room is there to push that even further?

 

You also have to look at what value all that extra bandwith provides, and what willingness there is for people to pay for it. Im not sure they will pay like 30$ extra each month if they can just go to the store and get the discs instead.

[wbr]

@wbr: so your saying they will rape customers even harder then they do now? Just seems that prices are already sky high, and quality of the product is shit, how much room is there to push that even further?

 

You also have to look at what value all that extra bandwith provides, and what willingness there is for people to pay for it. Im not sure they will pay like 30$ extra each month if they can just go to the store and get the discs instead.

 

I think that while video revenues are declining, cable companies will earn significantly more by charging frequent internet users more or get fees directly from OTT services like Netflix pays to Comcast already.

 

And yes, at the moment people can buy a disk and avoid downloading games and other content. Prices in digital distribution are about the same as in physical retail even though they could be significantly lower. That's because big physical retailers can force content creators to charge the same amount online, but once the power shifts more towards digital the content will just be so much cheaper that buying a physical copy is inferior -  even if you include costs for good internet.

 

There is pretty much no marginal cost (on the provider side) for digital content + infinite shelf space. In that environment you can go extremely low with prices. Not necessarily at release, but later down the line. I have seen high quality games sell for $5 (90% off their initial $50 price) during special sales one year after their release.

 

So I actually think consumers will benefit a lot and embrace this in the long run -  even though they might pay more for their broadband.

[yadayada]

but customers already pay much more for slower speeds in the US.. The US has some of the worst internet in the western world. How can they charge even more? It seems like google fibre will be rolled out in that case. Or at the very least people will start demanding change in regulation.

 

http://news.bbcimg.co.uk/media/images/70699000/gif/_70699733_cost_broadband_around_the_world_v2.gif

 

Also we are one breakthrough away from super fast wireless internet? To extrapolate raping the customers 10 years into the future seems a bit dangerous?

 

I mean lets not pretend the cable industry are not a bunch of complete arseholes bribing politicians to rape their customers and stave of competition. Comcast is not one of America's most hated companies for nothing. Im not sure consumers really benefit by massively overpaying something that is not regulated by the free market? They are already getting a bad overpriced product with internet, and your saying, hey they will just raise prices by a lot on something that is already overpriced? Those superfast internetspeeds without bandwith caps are already available for lower prices elsewhere in the world.

[val740]

John Malone said on the Q3 2014 Liberty Media Corporation Earnings Call:

 

"I think that ultimately we will end up with some kind of volume-based billing where consumers essentially - in some form or other - pay for the capacity that they utilize."

 

This and other comments he has made make it clear he believes at some point that Charter and Liberty Global will be able to make more money from broadband as utilization increases and demand for higher bandwidth increases. This is just getting started.

 

Also consider that Charter only has 40% Internet penetration in the 12.8 million homes it passes. The number of homes is about to close to double with the subs being purchased from Comcast and via Greatland Communications. 

 

Charter is already offering basic speeds of 60mb and the new footprint has de minimis overlap with FIOS and U-verse.

 

As demand grows from OTT and high def, they are essentially - at least for now - the only game in town.

[jay21]

John Malone said on the Q3 2014 Liberty Media Corporation Earnings Call:

 

"I think that ultimately we will end up with some kind of volume-based billing where consumers essentially - in some form or other - pay for the capacity that they utilize."

 

This and other comments he has made make it clear he believes at some point that Charter and Liberty Global will be able to make more money from broadband as utilization increases and demand for higher bandwidth increases. This is just getting started.

 

Also consider that Charter only has 40% Internet penetration in the 12.8 million homes it passes. The number of homes is about to close to double with the subs being purchased from Comcast and via Greatland Communications. 

 

Charter is already offering basic speeds of 60mb and the new footprint has de minimis overlap with FIOS and U-verse.

 

As demand grows from OTT and high def, they are essentially - at least for now - the only game in town.

 

Did you see the LMCA transcript somewhere? I usually go to seekingalpha but they didnt have it this morning.

[Guest JoelS]

Here is an article relevant to this discussion: http://www.ft.com/intl/cms/s/0/0bc54d54-639e-11e4-8216-00144feabdc0.html?siteedition=intl#axzz3Ide021hA

[val740]

John Malone said on the Q3 2014 Liberty Media Corporation Earnings Call:

 

"I think that ultimately we will end up with some kind of volume-based billing where consumers essentially - in some form or other - pay for the capacity that they utilize."

 

This and other comments he has made make it clear he believes at some point that Charter and Liberty Global will be able to make more money from broadband as utilization increases and demand for higher bandwidth increases. This is just getting started.

 

Also consider that Charter only has 40% Internet penetration in the 12.8 million homes it passes. The number of homes is about to close to double with the subs being purchased from Comcast and via Greatland Communications. 

 

Charter is already offering basic speeds of 60mb and the new footprint has de minimis overlap with FIOS and U-verse.

 

As demand grows from OTT and high def, they are essentially - at least for now - the only game in town.

 

Did you see the LMCA transcript somewhere? I usually go to seekingalpha but they didnt have it this morning.

 

I could not find a transcript. The quote is taken from the audio.

[jay21]

I think people are underestimating the optionality in the broadband company (and maybe broadband in general):

 

- Malone has gone on record to say that Charter can be an acquisition machine. He believes they are the only logic buyer of cable assets since Comcast and TWC merged

 

- Common platforms/bundles. Malone has also stated that further developing TV anywhere and more VOD are logical steps for cable. He can envision cable cos adopting common platforms (such as xfinity or Hulu) for VOD that will compete with Netflix

 

- Imo, the logical extension of the above is an acquisition of content (possibly even Starz if they develop valuable content). Now you can put exclusive content on your platform which drives demand/strengthens your competitive position. You will also share that content on the common platform which creates massive scale.

 

- Capital flexibility. CHTR, LBRDA, and GreatLand all have their own capital structures. Acquisitions can take place at anyone of these companies. Each can also be levered differently.  Maffei also mentioned he thinks he can raise capital in less conventional ways (e.g. pooling Liberty capital with outside third party capital).

 

I think these companies are well positioned to react to change that seems to be inevitable.  And I always think when an industry is changing or in distress, you want to bet on the best management.

 

All that said, I have not increased my position in LBRDA (yet) as the future doesn't seem too predictable and I can't grasp the possible outcomes. Cursory analysis tells me that almost all outcomes will be neutral to good for CHTR, but I could be wrong.

[giofranchi]

Ok! Thank you very much for all the answers and the very interesting discussion. After reading all of your posts, this is what my course of action will be:

 

I will listen to every quarterly conference call in which Malone speaks his thoughts. As long as he is upbeat about both LMCA and LBRDA, I will keep both. Instead, if he starts putting much more emphasis on one or the other, I will act accordingly. Once again my only plan is to stay with Malone for the next 10 years, and I don’t think I need to have a clear vision about the future of broadband to do so. ;)

 

Gio

 

[Liberty]

http://www.theverge.com/2014/11/10/7185933/fcc-should-reclassify-internet-as-utility-obama-says

 

President Obama has come out in support of reclassifying internet service as a utility, a move that would allow the Federal Communications Commission to enforce more robust regulations on it and protect net neutrality. "The time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do," Obama writes in a statement this morning. "To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act — while at the same time forbearing from rate regulation and other provisions less relevant to broadband services."

[jay21]

http://www.theverge.com/2014/11/10/7185933/fcc-should-reclassify-internet-as-utility-obama-says

 

President Obama has come out in support of reclassifying internet service as a utility, a move that would allow the Federal Communications Commission to enforce more robust regulations on it and protect net neutrality. "The time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do," Obama writes in a statement this morning. "To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act — while at the same time forbearing from rate regulation and other provisions less relevant to broadband services."

 

I believe Malone was asked about this on the call and said there's a small chance of it and he expects Wheeler to be rational.

[val740]

http://www.theverge.com/2014/11/10/7185933/fcc-should-reclassify-internet-as-utility-obama-says

 

President Obama has come out in support of reclassifying internet service as a utility, a move that would allow the Federal Communications Commission to enforce more robust regulations on it and protect net neutrality. "The time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do," Obama writes in a statement this morning. "To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act — while at the same time forbearing from rate regulation and other provisions less relevant to broadband services."

 

Seems unlikely given Republican opposition to such a measure. I assume the lobbying effort to thwart such a reclassification is massive and ongoing. Nevertheless, this regulatory risk is present in cable stocks.

 

Malone said on the Liberty Media call that Tom Wheeler is a reasonable man and that he thought the issue would be worked out. Malone seemed to think it was more likely that the neutrality would reside on the backend - thereby making peace between Silicon Valley (Netflix, Google, etc.) on the one hand and the cable industry on the other - leaving the cable industry free to move towards usage-based billing on the other. (See quote from Malone in previous post yesterday.)

 

The following quote from a Nov. 8th NYT article is concerning in tone and spirit and appears to diverge - at least slightly - from Malone's characterization.

 

"Craig Moffett, senior analyst and a partner at MoffettNathanson Research, who has been closely following these developments, pointed out that Sept. 4 was when Tom Wheeler, the F.C.C. chairman, said in a speech that “there is simply no competitive choice for most Americans” who want high-speed Internet in their homes.

 

“Stop and let that sink in,” Mr. Wheeler said. He added that “three-quarters of American homes have no competitive choice for the essential infrastructure for 21st-century economics and democracy.”

 

Mr. Moffett said of those words: “That was a very strong speech for the chairman of the F.C.C. The market took notice.”

 

http://www.nytimes.com/2014/11/09/your-money/the-stock-market-is-on-edge-about-a-cable-merger.html?_r=0

 

Aside from raising regulatory concerns, one valuable nugget from the quote is an explicit recognition that - if cable can navigate the regulatory waters - they truly own a Buffett toll bridge to the 21st century. This is even more so with Charter given its small overlap with Fios and U-verse. 

 

This, IMHO, is what Malone (along with Combs/Weschler, Ancient Art, Tiger & cubs, etc.) is betting on.

 

[dwy000]

I thought the more interesting part of Obama's statement was the direct comment that the FCC should forebear from rate regulation.  From the cable company's perspective this is much more important because if the FCC put rate caps on broadband the impact would be direct and negative.  The real risk is they classify this like telephony service and make it highly regulated, price limited and force provision of service regardless of cost.

[Fat Pitch]

They should just force the pipes to be open to any ISP that wants to enter the market and become competitive. The internet is no different than public roads and it’s time for the government to enter this space. The economy is being more leveraged on the internet and it’s in the country’s best interest that this shouldn't be controlled by 2-3 for profit players. Take a look at other countries and notice how much faster bandwidths they have at the fraction of the cost. 

[merkhet]

Between what should be and what is stands a legion of lobbyists.

[dwy000]

I have to imagine that a good part of the problem is not the ISP's (incl cable companies) but the infrastructure.  There are really only 2 internet wires coming into everyone's house - cable and phone.  For the most part these are probably 20-40 years old (unless you have FiOS buildout).  To upgrade those would cost billions and it's not going to be in anyone's interest to spend those billions unless you are assured that you will earn a strong return on investment without interference from too much regulation.

[dwy000]

There's got to be some irony in the fact that net neutrality will inevitably slow down the OTT roll out.  If you have to buffer for 15 seconds every time you change the channel it will make moving to a full OTT package that much less appealing.

[jay21]

They should just force the pipes to be open to any ISP that wants to enter the market and become competitive. The internet is no different than public roads and it’s time for the government to enter this space. The economy is being more leveraged on the internet and it’s in the country’s best interest that this shouldn't be controlled by 2-3 for profit players. Take a look at other countries and notice how much faster bandwidths they have at the fraction of the cost.

 

I am biased, but:

 

- Notwithstanding the current state of our infrastructure and roads, I don't think the analogy is appropriate. And even if it was, then volume based pricing would make sense as that would analogous to tolls. I also wouldn't want to subsidize someone dl'ing and uploading movies 24/7.

 

- I don't believe that our internet is much slower than the rest of the world when you control for density and other factors.

[ItsAValueTrap]

Malone said on the Liberty Media call that Tom Wheeler is a reasonable man and that he thought the issue would be worked out.

 

Malone has ended up on the wrong side of government regulation a lot of times.

 

*I own LBRDA and will gladly add on major dips.