Cable Must Pair Consolidation with Jointly Developed Services, Malone Says

While Liberty’s purchase of 27.3 percent of Charter Communications has been viewed by analysts as a potential step toward combining it with Cox Communications or Time Warner Cable, Malone said consolidation alone won’t solve the cable industry’s need for a national footprint. Cable companies in the past have jointly supported “programming vehicles” through separate investments and “I think we can do it again,” Malone said. “I see no reason why Xfinity couldn’t be syndicated” to other cable operators, he said.

Comcast’s Xfinity TV Everywhere platform and over-the-top content suppliers like Vudu are ripe for investment that could expand their reach, Malone said. While Comcast has 25 percent of the cable market, it still can’t buy content on a national basis, leaving it to a “joint venture or entrepreneurial effort to organize and offer these services on a scale efficient basis,” Malone said. The joint ventures would be attractive to small cable operators that may not have the R&D capability or capital to mount a TV Everywhere effort independently, but would be willing to align with other companies on a project, Malone said. The joint projects and industry consolidation are “complementary,” since with “fewer big players, it is easier to get along,” Malone said.

"The idea that the industry can get together to solve the issues of ubiquity and scale certainly increases my appetite as an investor to be willing to invest in the business through consolidation,” Malone said. “If it’s a fragmented, balkanized sub-scale industry, then you are going to be much more cautious about your incremental investment dollars than you are if it’s part of a broader evolution that’s dealing with the industry issues broadly and not just what each individual company can do for itself."

Charter doesn’t need a merger or acquisition to be successful, and “we think there is pathway to do that with our existing customer base” of about 4.9 million video subscribers, Charter CEO Thomas Rutledge told us at the investor conference. Charter bought Bresnan Communications recently and about 300,000 subscribers of the Optimum West service for “the same reasons we can grow Charter, we can expand it,” Rutledge said. “We don’t need to do anything right now, and if we did there would be more. We'll see what happens."

The emergence of OTT services has created an “unusual tension” in the cable industry, and the promise of TV Everywhere hasn’t arrived yet, Malone said. While services such as Netflix buy programming on a national basis and transmit via the Internet without a distribution charge, “this is a situation that cannot persist,” Malone said.

Seeking to expand its business, Charter expects to complete a switch to an all-digital system by late 2014, Rutledge said. Charter networks in Fort Worth, Texas; Greenville, S.C.; Long Beach, Calif.; and Saginaw, Mich. -- consisting of a total of fewer than 1 million subscribers -- have shifted to digital, boosting the number of channels available to 170, Rutledge said. Charter will reuse analog spectrum freed up by the move to digital to increase speeds for its broadband service. It’s targeting to achieve 1 Gbps download speeds by 2016 with the arrival of DOCSIS 3.1 products, Rutledge said. Some Charter networks can already support 500 Mbps speeds.

"We can do that now if we wanted to in some markets, but I don’t [know] where we should go with it yet,” Rutledge said, saying pricing packages still have to be worked out. “From a technology perspective, the plant is already out there."

Charter also is preparing to test a cloud-based user interface in the Fort Worth market by year-end, Rutledge said. New digital set-tops include an IP-based version of the interface, and an MPEG version will be downloaded to existing boxes, Rutledge said. Charter is continuing discussions with TiVo about possibly including its software as an interface option, but no agreement has been reached, Rutledge said. While Charter originally planned to re-sell TiVo DVRs, it has since abandoned the effort, Rutledge said.

"We were buying the set-top through them, but it wasn’t consistent with our road map in terms of where we wanted to go with customer-premises equipment,” Rutledge said. “We would rather have a generic box with downloadable security that we could buy on the open market from any vendor to take cost out. The TiVo relationship didn’t let us do that. I am still talking to them about whether they would like to be a user interface in our environment, but I haven’t come with business deal to do it."

Liberty Media has no plans to spin off Sirius XM despite an agreement to buy back $500 million worth of its investment in the satellite radio operator, Liberty CEO Greg Maffei said. The buyback, which will occur in three stages starting Nov. 1, will reduce Liberty’s ownership of Sirius XM to 52 percent from 53 percent. Liberty completed the buy of a majority of Sirius XM earlier this year. The repurchase of Liberty shares is part of a $2 billion stock buyback program that Sirius XM unveiled Thursday. “We have spun some assets when they reached a point where their value is not being fully recognized within Liberty or when they have reached their own apogee, and neither of those has happened” at Sirius XM, Maffei said. Sirius XM expects to be embedded in 110 million vehicles by 2018, up from 60 million this year and 70 million in 2014, CEO James Meyer said at the investor conference. Sirius XM also will benefit from its proposed acquisition of Agero and could increase its share of the connected car market to 45 percent “if we do job right,” Meyer said. Agero, which supplies location-based services through two-way wireless connectivity including safety, security and data services, has a customer list that includes Honda, Kia and Toyota.