John Malone At Liberty Investor Day transcript of Malone on the Q&A and the full audio below.

Also see Denali Investors Updated Presentation: The Malone Complex

Q&A with John Malone.

A – John Malone: Cost saving?

<Q>: Obviously the prospects of broadband regulation is talked, but I just want to get your perspective on what do you think is happening and how do you think this plays out in the appetite for Charter Communications, Inc. (NASDAQ:CHTR) and Liberty Media Corp (NASDAQ:LMCA) to – for the consolidated cable?

A – John Malone: Yeah. Sure. Not sure what it implies, we’re – a couple of things, one is delay in getting the Comcast Corporation (NASDAQ:CMCSA) deal completed, maybe a timing issue, while the SEC studies the issue further. It’s unpredictable what government does. My view is, it would not change our behavior. We are in a race to get this kind of service into the consumers’ home and lock up that opportunity as fast as we can before other people overbuild this, upgrade their networks and compete for that same opportunity.

So I don’t think it will materially affect behavior. Financial returns could be affected, I doubt that they will be, there’s nothing broken about the Internet right now. And it seems to me, it’s kind of farfetched to come up with a monopoly theory for broadband.

The idea that you can differentiate, speeds above 25 megabits from speeds below 25 megabits seems pretty artificial than they – in terms of defining a market. I’m not – I don’t have a degree in anti-trust theory, but it does seem to me that that distinction is a reach. And my guess is that, Tom Wheeler, will be able to thread the needle here and do something that satisfies some cosmetic concerns, but there’s really been no abuse that anybody can point to. This material, that would justify a heavy-handed government intervention at this point. So that’s my guess.

A – John Malone: And cable by the way is in an enviable position, take it speeds up with much lower risk capital than in a shorter period of time than most of the incumbents. Time is offering 60 meg minimum now on its digital footprint and the incremental cost [indiscernible] (01:38:58) that is fairly attractive, [indiscernible] (01:39:03).

<Q>: You think the President was really worried about that charge?

A – John Malone: Sir, I’ll [ph] serve those soft-boileds (01:44:14) up for you, okay?

<Q>: A follow up, do you think the ISP should be paying or the consumers, right now…

A – John Malone: Equal traffic.

A – John Malone: Well, and these content providers were cutting deals with traditional ISPs, not consumer facing ISPs, but in many cases traditional ISPs paying for peering, because they had unbalanced peering and they decided it was more attractive to cut the deal directly with Comcast. And then to say, “Oh! My goodness, the deal we cut was wrong,” where you’ll be paying some other ISPs or you’re paying Comcast. I think, I mean, it’s wonderful verbiage.

<Q – Jeff D. Wlodarczak>: [inaudible] (01:46:20 – 01:46:25) I wanted to get your thoughts around Pay-TV, the effects of digital OTT, and what you view as sort of the long-term outlook is for Pay-TV? Thanks.

A – John Malone: Yeah, well I think that the current model where consumers have to buy $70 worth of video, before they could buy a pay service is, is got to come apart, because we now have the Netflix equivalent going direct to the consumer. And therefore, the marginal cost to the consumer of Netflix, Inc. (NASDAQ:NFLX) looks very cheap as a video service. So the marketplace has got to find a solution to that, HBO has announced kind of an over-the-top effort, it’s not really a Netflix effort, it’s more supplemental.

But that business, the appetite of the public to watch original content, primarily and first [ph] of all (01:47:31) movies is a pretty strong demand. The question is, what’s the business model? And historically, the business model is to stack premium as a buy through from the big bundle. And I predicted that model will change over time. And in some cases, it will change with the cooperation and involvement of the distributor; particularly, as you make the transition from linear to random access.

It does change the character of the service offering, even if the content is essentially the same. So there’s got to be that adaptation to that. The cable industry have an opportunity for TV Everywhere, four years, five years, six years ago. And unfortunately, it didn’t accelerate the implementation of that. If they had done that, there would’ve been much less appetite for Netflix.

Now, what you see in, in say Xfinity or what Time is doing, is increasing the free VOD offering. So, there’s going to be a lot of random access television offered on a free basis, on incrementally free basis as well as on a premium basis. And I think the consumer will have to sort this out and decide how much and what they want. I don’t believe that we’re going to see 27 different over-the-top services that the consumer is going to have an individual relationship with. I just don’t see it going that way. I don’t think the consumer wants that much trouble in their lives.

<A – John Malone>: Yeah. I think it’s important on behalf of the pay services, which we happen to be involved in one of them, that they have relatively low penetration and zero marginal cost. So on one hand, it’s a wonderful opportunity for them to get out from under the stack and offer their services at a much lower perceived cost to the consumer, and therefore expect volume market share increases over time. So it cuts a lot of different ways. Lot of it’s just industrial relationships that have to be worked through as consumer demand shift. One over here. Right here, sorry.

<Q – Tuna N. Amobi>: Hey, I’m Tuna Amobi, S&P Capital IQ. So John, I wanted to get your sense on scale. I know that Charter has standstill provisions up until year four for GreatLand and I’m wondering what’s your view beyond that, and how – what role you think you can play and how big you think you need to get to realize all of the scale economies that you’ve talked about in the past.

And separately for Greg, I wanted to get your take. You mentioned earlier in your presentation that Spotify and Pandora that you were raising questions about your business model, I don’t know if you meant that literally or figuratively, but I wanted to…

A – John Malone: We’re only literal here.

<Q – Tuna N. Amobi>: With regard to Sirius and streaming.

A – John Malone: Yeah.

<Q – Tuna N. Amobi>: How do you view the streaming opportunity? Clearly, there’s work that’s been done, but the monetization seems to be lagging, and that’s one of the concerns, is, how big of an opportunity so that Sirius can keep up with the trends in there?

A – John Malone: Well, first of all on scale. I mean as Charter sits right now assuming the deal [ph] has discussed (01:51:48) goes forward, they will pull off what I regard as somewhat of a miracle. They’ve doubled the size of the company, and they’re going to issue roughly 10% incremental share dilution.

So that’s scale, okay. The World Box that Tom was talking about is scale. You don’t have to consolidate ownership necessary to benefit from scale. Cooperation in amongst players is an important ingredient to scale. I’m going to bet that there is more efficiency and synergy in the market consolidation of the trade that Tom is doing, then there is; and just the absolute increase in size, okay. So that’s another element of scale through local market, rationalization as opposed to universal scale.

That said; I believe that as these technologies become more complicated, just the ability to offer them to a consumer in a rational way is going to drive consolidation of ownership. Small guys just can’t do what Tom’s doing. There’s just no way, they’re not going to have the ability to have virtual call centers. They’re not going to have the ability, even if they had the scale to buy world equipment, World Boxes, okay, they’re not going to have the technical staff to be able to keep up with it.

So all of these things are driving to a larger ownership; and then within that the whole thing has to go global, because the people you are ultimately competing with are selling their products and services on a global, a world scale, not just a subset of a nation, but global.

I mean, when you look at the extra zero, one or two zeros that all the Internet-based guys are looking at as their target markets, these are huge numbers; and we have to think in terms of global scale for cost, for technology development and so on.

So it has multiple layers. Some of them can be achieved just through cooperation. B2B for instance should be a branded cooperative thing across the national footprint. Wi-Fi, I mean for instance, Liberty Global that we’re involved in has already done a Wi-Fi universal deal with Comcast, so if you’re roaming on Wi-Fi in Europe or in the Comcast’s footprint, it all works. It’s all authenticated. And so you can bring your video package with you for instance when you travel seamlessly. Those kinds of scale-driven cooperations will enable what is otherwise a vulcanized cable industry, okay, to more effectively compete with the big guys.

<Q>: Can you talk about small cell opportunities and cables potential role in these [indiscernible] (01:56:38)? I guess it’s even more dark matter in terms of the long-term complexity. But it feels like it’s interesting opportunity longer-term at least?

<Q – Benjamin D. Swinburne>: But I’m curious if you think the Suddenlink decision to drop Viacom is a one-off or a real sign of change. Charlie’s got Turner up right now and he is suddenly sounding like someone who doesn’t know, if he is going to go sign the contracts. So, are we really seeing a fraying of the bundle or is this more noise to your perspective?

A – John Malone: Well, I think you’re seeing increasing friction because of the price pressures on content and the – so much of the oxygen has been taken out of the room by sports and the rising cost of sports that it’s putting pressure on the distributors who are attempting to control costs wherever they can and they’re more likely to put pressure back on the weaker suppliers than the ones that they’d like to retaliate on, but they can’t. I think that’s the phenomenon you see going on. And it’s a challenge through diversity basically. But it really is the phenomenon that we’re seeing. I mean if 80% of the incremental price pass through is going to the sports supplier, right, there is very little room for  inflation or budget – budgetary increases for the non-sports driven. And keep in mind, Broadcast television Retrans is basically sports driven. I think the numbers wouldn’t look anything like they are if it wasn’t for the major sports that are on the Broadcast distribution.

<Q>: [Inaudible] (02:04:27). If the Comcast deal works great for any reason, would you resume your pursuit of Time Warner Cable Inc (NYSE:TWC)?

A – John Malone: But that said, we’re totally happy with the deal has been negotiated and in many ways, and I’m speaking now from a Liberty Broadband perspective. We’re perfectly happy with the deal has been negotiated and in many ways from our point of view, it’s a better deal than going after a 100% of the deal.

<Q>: And then just as a follow-up, if I could. In the event that it does proceed as expected, then the follow-up would be, as you think about consolidation targets, how do you prioritize the sort of screening of potential targets? Is it a clustering benefit with what you already have? Is it the fiber overlap that you talked about in your presentation and what are the criteria that you would say make the potential target to motivate?

A – John Malone: I’m sure, it’s all of the above. It’s marginal investment for anticipated return and obviously it’s always the target of opportunity. You can’t buy things that aren’t for sale. So and you pay too much if your try, so it has to be a coming together of needs on the part of the current investors and opportunities to improve the economics overall on the part of Charter. And I think you would normally add bandwidths of management, but I think in the case of Charter bandwidth is infinite.

John Malone Denali