John Malone: Equity Markets Are In A ‘Land Rush’ Similar To ’90s Bubble

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John Malone: Equity Markets Are In A ‘Land Rush’ Similar To ’90s Bubble
Image source: CNBC Video Screenshot

Following is the unofficial transcript of a CNBC exclusive interview with Liberty Media Chairman John Malone on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Thursday, November 18th for Liberty Media Day in NYC. Following are links to video on CNBC.com:

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Liberty Media Chair John Malone: I Would Like To See CNN Evolve Back To The Journalism It Started With

Part I

DAVID FABER: Well, you know it’s funny you mention that because of course I did have my annual sit down with Malone. He is not here at the conference. But we were able to speak as we did last year as well remotely in an interview that we did the other day, and we did talk about the markets love of growth, guys. Now we did it in the context of a conversation that began about how do you go about valuing all the direct-to-consumer platforms that are out there, in particular Netflix, and will the market ultimately move perhaps from sub metrics to actual profitability? Take a listen. We talked about the results from Netflix, or any number of the other companies, Viacom even. We look at the sub numbers that's all we look at right now. We're not really looking at, to your point, profitability. I don't know when that's going to start to change. I mean with Netflix, it's more so but to your point, when do we sort of make that pivot or when do investors make that pivot and say, well, you know what, the overall number may not be nearly as important as to what the margin looks like and to your point, the stickiness, and the value of that customer over time.

JOHN MALONE: Every investor has a different time horizon, a different perspective. To me, I've always been a long-term investor and so I'm much more interested in, in building this business brick by brick, making it solid and sticky, and how can you grow and how can you grow pricing power and how can you defend the franchises that you're building. It's that kind of, that kind of a thing. It's too early. I really think it's too early to assess. The market is obviously putting huge market valuations on Netflix and frankly, Netflix relative to Disney. And, you know, I mean, hell there's a car company that I guess is just going public that has $130 billion market cap—

FABER: There is.

MALONE: And hasn't built a car yet.

FABER: That’s true. Rivian.

MALONE: So really, there's no question that the equity markets right now are so interested in growth above all other criteria, and this is like the bubble in the late 90s, up through 2000. It's all about growth. This is a land rush.

Part II

FABER: Alright, let’s talk a little bit more about my sit down with John Malone. Of course, we do spend a lot of time here talking about direct-to-consumer, all the different platforms that are out there that are emerging and their importance to so many of these companies, whether it be what will be the combination of Warner Brothers and Discovery and Discovery Plus and HBO Max, whether it is Netflix, whether it's Disney Plus, Paramount Plus, our parent company Comcast, Peacock, we can go on and on right? Apple, Amazon. I asked Malone what he thinks will ultimately be the arbiter here in terms of success.

MALONE: I think the real issue, David, that that you'd have to start thinking through is, is what is going to be the profitability profile of these businesses, you know, as, as they increasingly go global, as they achieve various levels of scale and, and, and various levels of stickiness or content cost and to me, it's almost looking back at the history of our business, the cable business, where we learned how to deal with bundling and pricing and end up with a hybrid service offering that was ad supported but also had something presumably for everybody in the household. So, I think that those, those are the lessons that these direct-to-consumer companies are going to be learning and competing over and that will ultimately determine things like profitability, growth in economic value of the enterprise, the appropriate mix of ad and, and, and direct-to-consumer and the level of bundling.

FABER: So, John, what, what do you need to see from your opinion? What still needs to sort of develop for you to be able to begin to answer the question you originally posed which is, you know, what is the profitability?

MALONE: Yeah, well, I think it's early in the game still and I think what you're going to find is that there will be a broad set of services provided to the consumer, some of which will be entirely ad supported, some of which will be hybrid, and some of which will be subscriber funded only.

FABER: I'm curious what you think about Disney because of course they also seem to establish themselves as the number two player if we can call it that. They still have a goal of what some 230 million worldwide subs at some point, but there are some wonder whether they've hit a bit of a wall.

MALONE: Disney at some point has to decide to choose between profitability and scale. And though it may well be that that they could have a much more profitable business by focusing on the people who have young families and really want their intellectual property, I mean, or do they put it all in a bucket and say you buy the whole, the whole bucket at a higher price point but your satisfaction may not be as high because you're buying a lot of things that that you don't necessarily value. So, you know, Disney has a lot of, has a lot to work with in that space. But they also have a lot of legacy commitments, and how they morph from a very profitable linear sports world into a hybrid world of direct consumer with some advertising. These are the, the evolutionary things that I think will determine the ultimate outcome.

FABER: To your point to how this evolves, do you have a sense when you talk to David what and how it should be thought about in terms of what the direct-to-consumer offering from Warner Brothers, Discovery will look like?

MALONE: Yes, we've had many discussions and, you know, I don't know that I would say there's a conclusion at this point. I'm a believer that there will be many offerings, not just one gigantic offering.

FABER: John, you seem to be of the belief that one size doesn't necessarily fit all for these kinds of offerings.

MALONE: Totally. I'm totally on that page because I think trying to satisfy every taste and every interest in one omnibus offering is going to turn out to be unprofitable. I don't think that, that going 100% consumer or subscriber paid as a model is going to leave an awful lot of people on the sidelines who would be content with something that was less expensive or free, but much more ad supported.

Part III

FABER: Yeah, of course, a lot of talk here as you might imagine about well, all of liberties businesses, including Liberty Broadband, you know, they own that large stake in Charter Communications, which has been a great performer over a longer period of time, in fact, the best of the Liberty sort of entities over the last five years. But when you take a look at Comcast and Charter stock over the last couple of months, well, our viewers know of course, there's been continued or increased concern perhaps about what it's going to mean in terms of competition from these so called overbuilders, you know, a recent downgrade from Deutsche Bank saying it's a new environment one that in our view has to be characterized by lower returns because the business is transitioning to a more competitive environment. I asked John Malone about that environment.

MALONE: If you have capital that's willing to settle for, for very low returns, okay, it's a big threat. I mean, the biggest threat has always been the guy, the stupid guy with a lot of money coming into your business because they may not end up with much profitability, but they sure as hell can damage the profitability of the incumbent and I believe the vulnerability of incumbents varies very much from market to market depending on specifics, depending on just how cheap it is to overbuild and just how cheap it is for the incumbent to upgrade. So, you could well be in a situation where the incumbent is forced to expend capital that it otherwise wouldn't or does it early in order to repel a competitive overbuilder. The whole, the long experience of overbuilders in our cable industry was quite negative. The ultimate returns were very poor.

Part IV

FABER: Well, we're here at the Liberty Investor Day, of course, and even though Discovery is not one of the participants here because of course it was owned personally by John Malone, it's certainly on the minds of many of the attendees here. The deal in which Discovery will combined with, with Warner is still moving along, in fact, many expected perhaps it will close sooner than perhaps had been anticipated, which is still said to be the first half of next year. I think we're going to get a proxy on the deal very soon as well. But Discovery shares and AT&T shares have not been good performers since the deal was announced. And that's where I began a conversation with John Malone who was so key to helping this deal along by giving up his super voting shares for no premium, started on asking him about the deal itself and investor concerns. There's a lot of investors though concerned when it comes to Warner Brothers, Discovery about being five times levered and still having a lot of cash flow come from the good old linear TV business. How do you reassure them?

MALONE: Well, my, my understanding is first of all that that it has been indicated that right out of the box. Well, first of all, the deal may happen sooner than people think. Number two is right out of the box, the leverage, the initial leverage is going to be lower than people think. Number three is the free cash flow characteristics of this combined business and then enhanced by synergies, operating synergies generated fairly quickly will take that leverage down quite fast. And number four, this is investment grade debt. Long-term, cheaper interest rates, right? Higher cash flow through synergy and a rapid pay down of anything that is regarded as excess leverage, I think it's, it's, that shouldn't really be the focus. I think the focus should be the creativity whether or not these engines of creativity can make stuff that's unique that the public really wants to see.

FABER: You know, they've stated cost synergies that around 3 billion, You, we talked a little bit about this previously, but you certainly seem to think there are going to be some significant revenue synergies there and I wonder why that is and where you see those coming from?

MALONE: Well, I think just the ability to bolster service offerings with library that exists, you know, in the, deep in the Time Warner vaults is going to be an interesting revenue, synergy opportunity. So, I would guess that you put the two together and you start launching these direct-to-consumer offerings outside the US, where you already have Discovery, in place, in language, and on TV screens. You've got a major benefit there in terms of lower marketing cost and higher probability of consumer acceptance.

FABER: How about news John? Is there any place for news in a streaming world? You know, I obviously see it as part of this company but I don't know how to view that. I would assume there's any number of potential suitors for that property. Should Mr. Zaslav and the board decide that it really doesn't fit.

MALONE: I would like to see CNN evolve back to the kind of journalism that it started with and, you know, actually have journalists which would be unique and refreshing. I think a coward's way out would be to sell it or spin it off and then sell it, do it in some tax efficient way. There's, there isn't a lot of tax basis, David, in CNN so a straight sale would probably be a little bit leaky, let's call it but doable. I do believe that good journalism could have a role in this future portfolio that Discovery, Time Warner is going to represent but, you know, I'm just one, one voice here.

FABER: You know, I get this question sometimes and obviously, you know, I’m very personally fond of David Zaslav. I know you have great respect for him. You pay them a lot of money and over a 10-year period Discovery stock has not really done that much other than the crazy Archegos move. How do you answer those critics who say well, he's done really well, but we haven't?

MALONE: I mean, he's the kind of guy that can deliver a Scripps merger or a Time Warner deal. Without the Scripps deal, Discovery would really be in the third tier today. Okay. You know, what if you hadn't had David Zaslav there delivering the Scripps deal. Okay. What would Discovery be worth today if you hadn't had that? So, I always look at the glass as at least half full.

FABER: I do want to take a minute to just ask you about the performance. You know, you mentioned earlier you’re a long-term investor. You have a certainly in your history shows that. The five-year performance of a lot of the Liberty entities other than Liberty Broadband, which obviously has been charter. Over the last five years, I don't think any of the others have outperformed the S&P and I wonder, are you disappointed by some of that performance at this point? Or you know—

MALONE: You got to look at, look at the pieces though, David, look at Formula One. Look at Live Nation. Look at look at Sirius. Liberty, Sirius with this recent transaction with, with Berkshire Hathaway.

FABER: Berkshire, yup. Take it above 80%, yup.

MALONE: Some of these, yeah, some of these structural discounts are, are starting to go away which we knew they would with time, but patience in order to be able to structure things properly, you know, some of these things have taken, have taken a period of time. If you took the Big Techs out of the, out of the indexes, I don't think you would see the indexes have performed all that well. So, you should be asking me, John, why didn't you invest more heavily in Google or Facebook or Amazon? Why did you stay with the old, these old businesses you were in? You know, and I plead guilty to that, you know, I tried to buy Netflix when from Robert Reed Hastings when the stock was eight bucks, but he wouldn't sell it to me. You know, damn that bad luck. The other thing you really have to ask when you're looking at the indexes is how did you miss those massive oligopolistic tech companies? I mean, there, there is the challenge. They are big, they are highly profitable, they're getting bigger, their market powers are growing, not shrinking and if you compare anything to that, it's not, it's not going to look good.

FABER: But my old libertarian friend here, you know, what do you want? You want them to get regulated somehow?

MALONE: I think they are natural monopolies, and they need to be regulated in some way. I'm not sure, I'm not sure that I understand the right way that they should be regulated. But they shouldn't use their market power to, to prevent competition. But there's no look, Jeff Bezos is a genius with what he's created. You know, Steve Jobs and Tim Cook have been masterful at what, these have been brilliant business create, Reed Hastings, these are brilliant businessmen who have seized an opportunity, seeing the power of global scale and have exploited it.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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