John Malone's Outsized Ambition Drives Charter's Time Warner Bid

NEW YORK (TheStreet) -- And so it begins. At last, John Malone's mission to roll-up the cable industry and create a broadband provider bigger than any phone company, one with the power to tame the Internet and make it more like the cable and phone systems that existed before the Web was spun.

Charter Communications' (CHTR) $61 billion bid for Time Warner Cable (TWC) was quickly rejected as inadequate but that was to be expected.

Truth be told, it is inadequate. The offer price of $132.50 a share, much of it in cash, is lower than Time Warner Cable's valuation at the start of the year.

What the newly released letter from Charter CEO Tom Rutledge to Time Warner Cable CEO Robert Marcus shows is that Charter has been working to make this deal happen since last June.

Charter's view is that the gains in Time Warner Cable shares since that time (the stock was trading in the low-$90s) are due entirely to Charter's interest, and should now be locked in.

If Charter walks away, the letter implies, shareholders will be facing huge losses. The hope is that shareholders now pressure Time Warner Cable to take a deal.

John Malone's Liberty Media (LMCA) agreed to buy 27.3% of Charter last May, in a friendly transaction, agreeing to hold less than 40% of the company at the end of 2016. Since then the value of Charter is up by about one-third.

Our Antoine Gara says Malone is trying to buy "an EBITDA empire," aiming to use net operating losses (NOLs) to create tax benefits that make the deal work. (EBIDTA is the abbreviation for earnings before interest, taxes, dividends and amortization.)

Such a deal makes no sense unless there's some other motivation behind it, and in this case there is.

Malone's plan is to own the means of distribution for all Internet content, and then squeeze both sides of each digital transaction. 

If a company such as Netflix (NFLX) wants to sell movies to consumers, Malone thinks, it should pay for carriage just like any cable channel, and compete with the cable operator's own copycat services.

Netflix, for its part, has been working for years to minimize costs for downstream service providers with its Open Connect Network, caching its content closer to subscribers, at Internet Service Provider (ISP) offices.

But if cable operators can demand payments for the "last mile," all that effort may turn out to be worthless. Netflix itself may not be killed, but any start-up that tries to emulate it, or anything like it, may be stifled in its crib by such last-mile charges.

For the last few years Malone's Liberty Media and Liberty Global (LBTYA) have been buying cable networks on both sides of the Atlantic, with this idea in mind. Malone was no doubt pleased with AT&T's (T) "Sponsored Data" plans, announced at the Consumer Electronics Show, which is the first step in having Internet companies pay for carriage.

But it only works if Malone and the two remaining Bell companies, AT&T and Verizon (VZ), can go toe-to-toe with Internet giants such as Google (GOOG) in both Washington and state capitals, and win. That takes size, which is what Malone is trying to build through purchases such as this one.

Internet industry advocates have been warning against this type of thing for years, saying that "net neutrality" is essential to innovation. But the continual consolidations in the Internet space, with companies such as Google and Yahoo! (YHOO) swallowing every small innovative company that crosses their path, is helping Malone make that argument moot.

It's one thing if voters and consumers see big, bad cable company trying to extort money from small, weak Internet start-ups. It's quite another if the age of Internet start-ups is strangled by Internet giants and there's no longer a small guy to root for.

It's not his own greed that Malone is relying on, in other words, but Google's as well. His plan just might work.

At the time of publication the author owned shares of Google and Yahoo!.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

 

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