WHEN: Today, Thursday, November 9, 2023
WHERE: CNBC’s “Squawk on the Street” – Liberty Media Day
Following are excerpts from the unofficial transcript of a CNBC exclusive interview with Liberty Media Chairman John Malone on CNBC’s “Squawk on the Street” (M-F, 9AM-12PM ET) today, Thursday, November 9 for Liberty Media Day. Video will be available on CNBC.com.
All references must be sourced to CNBC.
MALONE ON CONSOLIDATION & BUNDLE
JOHN MALONE: All of these companies should be talking to each other about whether there are synergies. Synergies in total combination, synergies and sharing content, synergies and one guy becoming an output engine and the other guy being the platform. I think we’re in a period of rapid transition. And for survival, all of these guys who don’t have it made need to become creative. And the only way you can be creative is to get ideas from your brethren, you know.
DAVID FABER: You’ve talked about bundling the streamers? In other words, some sort of new or at least one proposition to the consumer?
MALONE: Sure.
FABER: Is that, could that really happen? I mean—
MALONE: Well, it could certainly happen if if one, one of the streams was focused on one type of demographic and the other, another type of demographic. So like a Disney+ together with Max might be a pretty decent combination. You might also see sports related or focused bundles. You know, David, you know, your old buddy Zaslav. He’s experimenting right now with putting a form of CNN on the Max bundle. He’s also going to put some sports stuff on the bundle and see what that does to churn to consumer interest. Does it bring a different set of eyeballs?
FABER: Does that upset the distributors or no?
MALONE: I think the distributors are all in this world of we’ll get him when he renews. Right. And just just like Charter did with Disney, which is yeah, Disney can experiment, they can do this, and that and the other thing, but when they have to come back to us for the vast bulk of their profitability, we’re going to sit down and have a serious discussion about the future. And I thought, both sides handled themselves with great dignity, in that they didn’t go out and say the other guy is a jerk. And, you know, they negotiated. They were trying to get the other side to understand it from their point of view. You know, here’s how we look at, here’s, and I think they ended up with a good a good solution, which I think will be the model now for some of these old media streams.
MALONE ON ESPN & SPORTS RIGHTS
FABER: ESPN, which we have talked about and you have talked about for many years in terms of the cost of the bundle and what it did to it? Sports rights we’ve discussed. What do you think happens to ESPN?
MALONE: Well, one of two things happens. Disney gets bought and ESPN gets sold to private equity, right? Which I’ve been predicting for 10 years now.
FABER: I don’t know who buys Disney. I don’t think Apple does it—
MALONE: Apple.
FABER: They don’t do, John, they don’t do deals, you know that. You went out and—
MALONE: That’s the one—
FABER: Met with Cook I remember that. I know you did.
MALONE: I suggested to Tim—
FABER: And he didn’t even know what you were coming to talk to him about.
MALONE: I suggested this to Tim. I’ve been talking to Tim Cook about this for 10 years so—
FABER: And he’s not listening.
MALONE: So I know, no, he always asks me the same question. John, what would I do with ESPN? And I say you’d sell at the private equity so—
FABER: Is he interested?
MALONE: I say this a little tongue in cheek. I think if there were no antitrust issues so on, and don’t forget, he was on Iger’s board and Iger was on his board. I mean, those guys are, they know each other’s business.
FABER: I know but Apple’s biggest deal is a $3 billion deal to buy Beats. They just don’t do it.
MALONE: I understand. That said what happens to ESPN very similarly what happened with Disney+. When they start streaming it, the streaming version with ads will be part of the cable bundle, okay. And it’ll be like, — no difference. You know, you’re, you could go buy the stream of ESPN if you want or you can just continue to receive it as part of your bundle. And, you know, why would you pay for it twice? Okay, is going to be the theory. And, and so, to me, when I saw that solution, I said, yeah, this is rational, these guys are going to have businesses that will transition slowly to the future instead of this being some kind of an abrupt break. And that was what I was afraid of, an abrupt break, because it would get to the point where, you know, the cable guys are saying we don’t get any margin out of this. It’s a terrible business, it has too much capital. To hell with it, we’ll go out of it and there have been cable companies in the U.S. that have done that and they’re, they’re multiple has gone up, okay, at least for a while. I said that was a terrible outcome. I would much rather see the cable, the broadband companies, be distributors of streams in bundles, in packages, whatever. Because the two are kind of tied to the hip. And you know, if old media goes down, it isn’t going to be good for the cable guys to only deal with big tech.
FABER: You think ESPN finds a strategic partner of some kind?
MALONE: I don’t know if they have to. I mean the problem they face is escalating sports rights’ costs.
FABER: Which we’ve discussed and competing against—
MALONE: And competing incrementally as renewals come up with big tech. I still think it remains to be seen if big tech ultimately just decides that this sports game is profitable. I, there’s, you know, my experience has been, you know, maybe 20, 30% of households are sports fanatics. And if all you got is, Thursday night football is going to work for Amazon because they can say it works. How do you know if adding it to Prime and raising the Prime price was because of Thursday football or just because they have pricing power? You don’t know. And so whatever happens there, but my suspicion is that, that Google, YouTube is going to have a big loss on out of market football, they paid too much. And I think they’re gonna discover that they paid too much. You know—
FABER: Do they care?
MALONE: Eventually, they do. Yeah, eventually, you know, the accounts catch up with divisions that lose money.
MALONE ON BROADCAST VERSUS BIG TECH
MALONE: The anomaly is that network neutrality, the government policy creates this crazy world in which Amazon can go buy Thursday Night Football for multiples of what the industry has been paying. And for the distributors like Charter or Comcast, instead of being one linear channel, which consumes you know, which is everywhere, and it consumes perhaps 1,000th of 1% of the capacity of the network, suddenly it becomes 30 million streams on Thursday night, essentially choking the networks with – and forcing the distribution companies to spend a lot of money on expanding capacity rapidly. And yet, it costs Amazon nothing for the transport. So what we’ve created here is an open path for big tech to essentially decimate, let’s call it.
MALONE ON INTEREST RATES & NETFLIX
MALONE: Well, I tell all my guys hire for longer. Look at your balance sheets. Make sure you’re bulletproof on your balance sheets. You know, you’re gonna take a hit on your equity valuations, because every one of my companies has used debt leverage to boost up equity returns. And so, it doesn’t mean that that’s a bad strategy particularly if you’ve been able to lock in long fixed rates. Look at your balance sheet for opportunities to take advantage of the fact that you do have long fixed rates. Maybe you deleverage now at a discount, you know, capital allocation becomes very important in terms of you know, is there growth in this environment to a large degree? The businesses I’m in are maturing in their industries. And so growth will slow or has slowed. There’s more competition because of cheap capital bringing in new competitors and new technologies.
FABER: Right, so previously cheap capital.
MALONE: And so and we’re also seeing the period but I think we’re going to see very serious distress in our industry by companies that didn’t leverage prudently.
FABER: Such as?
MALONE: Drahi. We’ve already seen it with—
FABER: I mean Drahi’s—
MALONE: Paramount just had their debt that downgraded to junk. I think that they’re running probably negative free cash flow. Shari had to go out and seek some kind—
FABER: Got rid of the dividend essentially there.
MALONE: So you know, streaming just isn’t working for most of the players that are trying it. It’s not being the success or profit, profitable cash flow and service for most of the players that they were hoping to be. And, and they’re seeing attrition of the traditional cash flow streams. So you know, whether it’s distribution or content, old media is having a hard time with this transition to streaming.
FABER: Well, that’s a conversation you and I have been having for years. I want to get deeper into that. But I would like to just come back for a minute just to hit Drahi and Paramount a little bit more. Drahi styled himself as sort of on you know, using leverage—
MALONE: To a point.
FABER: Altice here in the states not looking good.
MALONE: Toast. It’s all toast. You know, I think admitted in a Goldman session, public session, that everything’s for sale, but you have all of this distressed debt trading at discounts, and it’s going to start to mature and are going to default if it has covenants. So it’s either people having to refi because they issued investment grade that ain’t anymore or because they took on covenant, subordinated debt.
FABER: He still owns Sotheby’s that might be helpful in some way.
MALONE: Well he owns that personally. I don’t think he’s about to hock that one to try and save the ship. But no, I think what you’re going to see is distress and so you’re asking me about what happens in periods of distress. Well, historically the right thing for a business to do in distress is survive, and if they can take advantage of the distress, focus on what they do with their free cash flow, what they do with dry powder and try and figure out how to take advantage of distress because out of distress usually comes the reduction and competition, increased pricing power, and the opportunity to buy assets at a deep discount.
FABER: Are we there yet?
MALONE: Not yet. We’ll be there.
FABER: We will?
MALONE: We’ll get there. Yeah.
FABER: How long, what’s the cycle like in your opinion?
MALONE: Somewhere in the next two years. The refinancing pressures. The pressure from big tech, out betting the industry for important content. The guys who have balance sheets that have a lot of reasonably near-term maturities are going to be in trouble.
FABER: Right. Netflix is not amongst them now. It’s not the trillion-dollar camp of Apple, Amazon and Alphabet. But it does seem to standalone Netflix and I’m curious, you know we’ve had this conversation going on for years.
MALONE: Those guys, they were brilliant. They took advantage of a lapse in both the old media and the distributors in recognizing the opportunity to date.
FABER: Right.
MALONE: Which was random access using the internet and they jumped into it and they implemented it in a very orderly way. Built scale and they they’ve sort of become almost a basic service for our household.
FABER: You believe that? Does Netflix standalone? Is it almost like represent what TV used to represent when you say TV?
MALONE: I would call it Entertainment Television. Okay. library television. Random Access. Not live. Not sports.
FABER: Not sports or news.
MALONE: But in the area of library. Watch it wherever you want conveniently, as part of the service. They’ve done a I think a wonderful job they’ve implemented beautifully, and they’ve demonstrated they have pricing power.
FABER: Just last quarter.
MALONE: You know, their churn is still pretty high, but I think what you find is probably 80% of their customers don’t churn at all. And 20% are samples, they come and they go and they come and they go based upon an episode or series or something. And it’s so easy to connect and disconnect that the churn numbers probably don’t give you a complete picture of the economics. They probably have a very stable base. People like me, that you know, it’s just for 12 bucks a month or something, absolutely you’re going to have Netflix.
FABER: Right. Alright. But John, if Netflix stands alone, in a way and then you’ve got unlimited capital, they want to use it from the apples, the alphabet through YouTube, and the Amazon. What does it mean for Comcast Peacock for Paramount Plus, MAX? What does it mean for these companies and these direct-to-consumer strategies that we’ve been talking about now for years.
MALONE: So in the entertainment space, which I would say is sort of library combined with whatever new things you can come up with, right? It’s going to come down to a…
FABER: And Disney+ excuse me I forgot to include that one.
MALONE: It’s going to come down to an outfit like Warner Brothers and everybody to create new content and promote it in a way that people really want. Okay, can they create unique content that is not available to Netflix or on Netflix? So can they build themselves a continuity in the library space in the entertainment space?
FABER: What does that mean?
MALONE: That means we come out with Barbie or Lord of the Rings or whatever, this becomes a very creative side man. Can they be a better creative engine and capture it, do it vertically so that that becomes the underpinning of their continued success in producing entertainment content for whatever distribution platform monetizes it the best and it may be their own or it may be somebody else’s. So that’s got to be the core question of whether they could have and continue to have and make profitable their own streaming service. Can they have their own vertical driven by the fact that they create exclusive uniqueness?
FABER: But they’re never going to get to the scale that Netflix has.
MALONE: That’s not clear. It’s not clear. Now you know, if you take the earlier model, we watched HBO become the dominant pay TV service. And then we have Starz and Showtime and Showtime and stars never got to the scale of HBO but they got up to 65-70% of the distribution. Probably a little lower price point it bundled. And it was pretty stable. And I can tell you that for years. It was very profitable. So it was a good business. So the question really is can you be successful and sustain number two to three? Maybe four?
FABER: That is my question.
MALONE: That is the question. I believe there can but only if it’s driven by something that’s unique and exclusive.
