Liberty Media chairman John Malone slammed AT&T, praised Reed Hastings and affirmed his faith in the Warner Bros. Discovery team led by David Zaslav amid the drama and red ink of today’s streaming wars.“At the moment, there is a lot of blood flowing down the gutters of people who are streaming. Some of them can afford it, and some of them can’t. So my guess is the ones who can’t will ultimately have to look for some kind of consolidation or exit,” said Malone during a Q&A at the end of Liberty Media’s annual investor day in NYC. It’s one of the rare, regular public appearances for the savvy longtime media investor, a major shareholder of Discovery and now of Warner Bros. Discovery.One question: What makes him confident the merger will be a success and not “an LBO [leveraged buyout] gone bad?” The company missed expectations last quarter on slow advertising and high mergers costs.“One thing that gives me confidence is the management. I have enormous confidence in [Warner Bros. Discovery CEO] David Zaslav and his guys, having seen the integration of Scripps with Discovery a couple of years ago,” Malone said.Second, the balance sheet, which is “very light on near-term maturities” despite a hefty debt load.Third, “even in its absolutely worst year, it is generating a 10% cash return on its equity value. So, to stay in as an investor and look to the future, where the cash return is almost certain to dramatically increase, is a pretty good upward pointed vector,” said the billionaire with degrees in electrical engineering and economics. The company is generating “meaningful” free cash flow and targeting $3.5 billion in synergies.Warner Bros. Discovery in any case can’t be sold for at least two years because the deal was a tax free spinoff, Malone noted. “So I am not wasting any time or energy thinking about who [Warner Bros. Discovery] could merge with or what corporate transaction could take place.” He hinted, however, at some shakeout. “There are a ton of small streamers, who are very specialized, who… might have to consolidate into the bigger guys if their content is unique and relevant.”“Let’s face it. Everybody went through this mad Oklahoma land rush. I am not going to call AT&T management fools, but they certainly … threw everything but the kitchen sink at it and put the run rate of the business in a little bit of stress,” he said of Warner Media’s previous parent.He’s not sure how easy it will be to replicate the dual revenue stream of a shrinking linear business, which still generates lots of cash. And he blames sports in large part for cord cutting by driving up the price of the cable bundle. “A lot of the consumers were not bailing on the content, but the price tag, compared to what Netflix and others were offering for entertainment.”But “as long as there is competition between distributors, sports will continue to have a disproportionate market power,” he said.Even Netflix is moving into the arena. Malone called that streamer a “foundational service” and said “Reed Hastings’ shareholders should build him a huge monument…He got out in the lead saw the opportunity, and exploited the opportunity and went for scale. Netflix was there early and does an excellent job.” But broadening out the service “by spending so much on so much content is not likely to be successful.”Netflix started a huge scare earlier this year when it lost subscribers for the first time. A previously rah-rah Wall Street cooled to the business with a much sharper eye on spending and profitability. Streaming profits depend on discipline, controlling costs and “rational growth expectations,” Malone said.Meanwhile, experimentation, especially around bundling, will continue. “Disney is trying a bundle of three different streams serving three different audiences [with Disney+, Hulu and ESPN]. HBO Max is attempting to bundle with Discovery+ to see what kind of stability that creates,” he said. Warner Bros. Discovery plans to roll out its combined service this spring.“If you can buy a sports event exclusively you can always gain users.” But given marketing costs and churn, in the long run the service with the best bundle and the lowest costs will be the most profitable,” Malone said.Malone even addressed Zaslav’s pay package, after one attendee called him “overpaid.”“Yes, on paper he is quite overpaid. But remember, almost all of his compensation is in options that are priced at multiples of today stock price. So unless the stock really performs, he is really not overpaid.”Zaslav’s total pay package came to more than $246 million for 2021, inflated by an option grant valued at an eye popping $202 million. But the options require the stock to hit certain metrics over seven years before they’re in the money. Discovery shares were at $23 when the package was announced and would have needed to hit $35, for instance, for the first tranche to be exercised. It hasn’t been a great run and the shares closed today at just under $11.Malone’s Q&A, with Liberty CEO Greg Maffei also presiding, followed presentations by executives from Liberty’s various holdings, including the Atlanta Braves, Formula 1, Charter Communications, SiriusXM and Live Nation. The Braves will become a public company. And Liberty Live, a new tracking stock, will house Liberty’s Live Nation holding. That company’s Ticketmaster division is currently immersed in its own Taylor Swift/concert ticket drama.
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