The cable, broadband, and mobile worlds are all colliding, so keeping each company's strategy straight can be a challenge for investors. Many competitors are merging into larger conglomerates, while the streaming revolution is disrupting the whole industry.
One person to look to for guidance in the chaos is John Malone, perhaps the greatest cable and media investor of all time. In recent years, Malone has given a lengthy interview to CNBC at television and media conferences each November. I profiled a bit of last year's interview, when Malone took on the topic of streaming disruption.
One of Malone's largest companies is Liberty Broadband (NASDAQ:LBRDK), which owns a 25% stake in Charter Communications (NASDAQ:CHTR). Charter is interesting in that it is pursuing a somewhat different strategy from its telecom and cable cohorts ... at least for now.
Malone shed some light on Charter's strategy in the interview, during which he was complimentary of management but also questioned their hesitancy to merge with a wireless or content company.
A pure play on connectivity
Unlike its larger rivals in the cable and broadband space, Charter isn't distracting itself with content and streaming. That's in contrast to AT&T, which purchased Time Warner earlier this year; Disney, which is purchasing the entertainment assets of Fox; and Comcast, which is purchasing Sky--and which started the content-cable merger trend by purchasing NBCUniversal back in 2011.
Of course, Charter is busy handling a huge merger if its own with the 2016 acquisitions of Time Warner Cable and Bright House Networks -- a big job in and of itself.
More than two years later, the company is still uniting the patchwork of cable operations into a single, uniform, national platform, while upgrading the company's network speeds. The replacement of analog cable with DOCSIS 3.1 digital will provide speeds that can rival 5G, and it could even become a part of the backbone of other 5G networks.
According to Malone, Charter's focus is what has allowed it to retain a valuation premium to peers. Charter CEO Tom Rutledge "is being rewarded for a clear, pure play, leveraged, free cash flow, growth, buyback story," Malone said. "Not experimenting over here, or not trying to buy a content company."
But while Malone may praise Charter's focus at the moment, he built his fortune on ambitious mergers and may not be satisfied with a stand-alone cable network forever.
Charter might not stay single
When the integration with Time Warner Cable and Bright House is complete (which should be sometime in 2019), merger talk around Charter -- either as a buyer or seller -- should heat up again. In fact, Malone also hinted in the interview that he may have preferred Charter to be a bit more ambitious on the mergers and acquisitions front over the past few years. Still, he trusts Rutledge's narrow focus -- at least for now:
I really in all honesty think this is a stage, right? Where Tom is basically saying: "Don't bother me with all this other stuff, I've got this focus and this vision and this challenge, and I've got to get this done. And once I've got this done, then you guys, you naysayers, right, can say, now what should we do?"
Malone also explained how Charter received indications of interest from both Verizon (NYSE:VZ) and Sprint (NYSE:S) around this time last year, but Charter, which was still in integration mode, didn't pursue them at the time. Malone also hinted that although those mergers did not happen, the synergies between a large wireless network and Charter's best-in-class digital cable footprint are still there.
Then there is the outside chance that Charter decides to buy a content company. Malone wondered, "Now that we're generating this big free cash flow, are we going to have the opportunity to steal an NBCUniversal, like [Comcast CEO] Brian [Roberts] did?"
That may be less likely and less wise. The streaming wars are going to get heated and crowded in the years ahead, and it is unclear how much value there is in being the fourth- or fifth-best content bundle. In addition, it would probably take multiple content acquisitions to gain the scale to launch a competitive streaming service.
Stick with the network
Once Charter's integration is complete, pursuing a merger with Verizon or Sprint could make sense -- likely Verizon, since the two companies already have an agreement with Charter's new mobile service, which leases Verizon's network. No matter which streaming or linear bundle you're using, it all has to come over a network, and the synergies between Charter's wire-line network and another's wireless infrastructure could lead to cost savings and better experiences for customers. Hopefully, that's what eventually happens.