Cable’s survival strategy

If there’s one thing you can rely on with John Malone it’s that his big media deals get the attention of the entire industry, writes Kate Bulkely.

The recent agreement by Malone’s Charter Communications to buy Time Warner Cable for US$55 billion (€50 billion) is an example of Malone’s ability to turn heads. Malone secured a deal after regulators blocked Comcast’s US$45 billion bid. He also locked out another interested bidder, his former employee Patrick Drahi, now chairman of cable and telecom group Altice.

Drahi can’t be happy given that this is the second time in a matter of weeks that he has lost out to Malone; Liberty Global outbid Alice for Belgian mobile operator Base in April. But Drahi hasn’t been sitting on his hands of late: days before the Charter-Time Warner Cable deal, Alice agreed to pay US$9.1 billion for Suddenlink Communications, a regional US cable operator. Drahi has big ambitions, grown out of the sale of his first business, a French cable company that he sold to Malone’s European cable group in the 1990s.

The strategic background to Malone’s recent dealmaking is that over-the-top video is becoming a key differentiator, especially on mobile networks. Hence BT shelled out £12.5 billion for mobile operator EE and Sky is developing an MVNO mobile platform with 02 to launch next year. Therefore it is no surprise that Malone has been eyeing Vodafone, the mobile giant that has acquired Kabel Deutschland and which paid US$10 billion last year for cable network Ono in Spain.

Vodafone wants internet and TV services to compensate for falling mobile revenues and to position itself as the platform of choice for the always-on consumer, while cable operators want mobile platforms because video is being consumed on mobile devices.  The win-win is to have both platforms, which is why Malone and Vodafone are discussing a combination that could see the European businesses of Vodafone merged with the European businesses of LG.

Malone, who relishes complex financial deals, at the end of May described a potential merger with Vodafone as trying to extract a banana from a jar. Vodafone’s market capitalisation, at £62.7 billion (e88 billion), is twice that of LG’s and any such deal would require both companies to re-jig their structures. LG has already taken a step in this direction by announcing a tracking stock for its Latin American business to happen this summer, a precursor to spinning off this business.

These shifts are underlined by the launch of OTT services by some of the biggest traditional pay TV content owners like HBO and Starz, going direct-to-consumer like Netflix and Amazon. In this new world cable operators need to scale up and broaden their platforms if they are to continue to be relevant and have clout in content negotiations.

When you realise that Comcast reported more broadband than cable TV subscribers for the first time last month, then you’d be dumb not to recognise the power of OTT. In the first quarter of this year Comcast added 407,000 broadband customers and lost 8,000 TV customers.

To get a feel for the more complex future facing pay TV operators, just check out what Spotify is up to. In May the online streaming music service announced a raft of video initiatives, including licensing deals with ESPN, Comedy Central and Vice Media, that it hopes will make its service more attractive. Spotify will soon be a place for videos including news, sport, original content and more – note that I did not say music videos – that it plans to match to its users’ moods, much as it has been doing with music playlists.

Spotify’s highly-sophisticated playlist system was competing with the likes of iTunes but now it is battling for eyeballs with YouTube, Netflix and literally anyone with some video content, including cable networks. And if a former audio-only online network feels that it needs moving pictures to sell more subscriptions it is not alone. Facebook and Twitter are adding more video by the day and Apple’s rumoured web TV offer will include live as well as on-demand video.

The overriding question facing all these players is how to create the most compelling offer that people will pay for.

For me the answer has to include better personalisation as well as a high speed internet connection. Consumers now have even more power so the next phase of development for service providers has to be about being more in sync with them. At a time when Netflix is using data to track what content you might like to watch and then getting it made, and when Spotify is tailoring its service to fit your moods in real time, the competition for a consumer’s time and attention is only going to grow. The legacy cable guys have to recast their business to meet the demands of this empowered consumer, even while the digital players are cherry-picking the stuff that works.

What we’re seeing from Malone, Drahi and Vodafone is underpinned by an attempt to figure out what mixture is just right.

Kate Bulkley is a broadcaster and writer specialising in media and telecommunications. [email protected]