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Mogul’s plan to kill Netflix: Unite cable companies to build a competitor

October 10, 2013
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October 10, 2013

Cable giant Liberty Media issued a blunt warning at its investor day on Wednesday: US cable providers should band together to create a unified, national internet-streaming platform to rival Netflix.

Liberty Media, the $17 billion holding company controlled by Colorado-based billionaire John Malone (who also owns the US major league baseball team the Atlanta Braves), has stakes in satellite radio company Sirius XM and bookseller Barnes & Noble. But it’s best known for its cable TV investments; it has a 27% stake in cable giant Charter Communications, and a small stake in Time Warner Cable. Malone also has extensive cable interests in Europe and the Americas in Liberty Global, a separately listed company.

Malone’s theory about the future of cable is that providers could prevent their demise by buying content rights as a group and driving down programming costs (those are fees paid by cable providers to networks to air their content). According to Malone, the fragmented US cable industry has opened the door to Netflix and its CEO Reed Hastings  “because the fact is, he buys programming on a national footprint, and he distributes it ubiquitously over the Internet and at the moment, his distribution, local distribution is incrementally free then,” he said at the company’s investor day. “That’s not a situation that I think, can persist indefinitely.”

US cable providers face a barrage of competition by satellite providers like DirecTV and Dish Network, as well as telecoms operators like Verizon, which runs FiOS TV. They’re also losing business to “cord-cutting,” or customers abandoning high cable TV fees in favor of much cheaper Netflix subscriptions.

That cable providers pay millions of dollars every year to install and maintain physical infrastructure doesn’t help. Online streaming services like Netflix and Hulu, meanwhile, are able to offer content much more cheaply because they pay nothing to transmit content over the internet.

What’s more, cable providers in the US are largely regional players, whereas Netflix is a national outfit, which gives it more bargaining power with the studios that sell content. And cable companies have to wrangle with network middlemen that inflate content prices. For example, CBS watchers with Time Warner Cable service recently endured a month-long blackout due to a dispute between the two companies over pricing.

That leaves cable providers with two options. One is to pare back their operations and become broadband utilities that deal only with infrastructure rather than content (to get their media fix, customers would be left to choose between various streaming services like Netflix and Hulu). The other option is to cut costs by banding together to buy more content more cheaply. The second route is not inconceivable. Already there are major rumors of a tie-up between Charter and Time Warner. If that goes through and other cable mergers follow, Malone may have his way.

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