Cable’s Pied Piper of Consolidation: Why Liberty Media Chairman John Malone is back in the cable business

Cable’s Pied Piper of Consolidation

Why Liberty Media Chairman John Malone is back in the cable business.

HOLMAN W. JENKINS, JR.

Dec. 3, 2013 7:11 p.m. ET

Never have so many been spurred to such frenzy by so few. By “few,” of course, we meanJohn Malone. The 72-year-old Mr. Malone, the original cable guy, has sidled back into the industry he helped create decades earlier. In March, his Liberty Media LMCA -0.91% bought a 27% stake in Charter Communications, CHTR -2.57% a midsize operator with a laggard history. Mr. Malone announced the time was ripe for consolidation. That’s all it took.Time Warner Cable, TWC -1.95% his intimated target, is up 40% since the summer.Comcast, CMCSA -0.71% the nation’s biggest cable company, has been dragged into the discussion as a possible white knight. Cablevision and Cox are rumored as alternative targets and/or buyers. Wall Street analysts now talk of an industry-reshaping deal wave as a foregone conclusion since Mr. Malone dusted off his magic flute.

The impresario has made his thinking clear enough, yet most renditions focus on the narrow if neuralgic issue of programming costs. Combining Charter’s four million subscribers with Time Warner’s 11 million supposedly would improve the new company’s bargaining leverage vis-à-vis program suppliers—in theory.

Arguably, Time Warner destabilized the whole industry last summer when it proved it couldn’t hold out against CBS’sCBS -0.43% exorbitant fee demands. In the same quarter that Time Warner eventually ran up the white flag, it reported losing 300,000 customers—as if households no longer would deign to do business with an operator who deprived them of a few episodes of “Under the Dome.”

One big doubt afflicts the bargaining-leverage theory of consolidation’s benefits, though. Time Warner already was the nation’s second biggest operator, controlling indispensable markets like New York City and Los Angeles. Its heft and strategic position didn’t save it from retreating like a frightened little girl in its showdown with CBS. Hardly obvious is that being a bit bigger would have altered the outcome.

But listen closely: Mr. Malone sees cabledom’s “scale” challenge as involving much bigger stakes than just getting on even terms with content suppliers. The cable industry is both blessed and cursed by its history as a bunch of noncompeting local franchises. Cursed, because no operator can achieve a national footprint the way its suppliers (e.g., CBS, HBO, ESPN) or the way its emerging competitors (e.g., Netflix, NFLX -0.27% Amazon, YouTube) can.

But cable is also blessed. In most of the country, it owns the premier last-mile network, upgradeable at low cost to meet customers’ rising bandwidth demand. And as noncompeting monopolists, cable operators in theory are free to cooperate with each other and engage in extensive joint ventures without triggering antitrust scrutiny.

Mr. Malone sees salvation here. He sees the cable industry pooling not just R&D dollars to advance broadband technology, but to create its own Netflix-like programming packages to market nationally. The industry just needs “fewer big players,” which will make it “easier to get alignment.”

Here’s where we pull out our little gray cloud and rain on Mr. Malone’s vision.

While there’s much to be said for consolidation and cooperation, cable’s strength is still ownership of the local last mile. At bottom, Mr. Malone and others want to preserve cable’s function as a program-bundling middleman. Why bother? Bundling programming in our world is becoming a crowded trade. Everyone from Verizon and Intel to Amazon and DISH is eyeing the same opportunity. With his characteristic slight exaggeration, Google’sGOOG -0.12% Eric Schmidt recently told an audience that only writing a big enough check stands between one of these “over the top” players and NFL games being broadcast over the Web. The Internet, he claimed (this is where exaggeration comes in), is already up to the job of delivering live, hi-def sports to 40 million viewers simultaneously.

Mr. Malone understands all this, so why squander the rents flowing from cable’s main asset—strategic control of the last mile—by bidding against Google, Apple, AAPL +2.74%Amazon and others for program rights? Frankly, a better plan might be to soak them for delivering their programming to cable’s end users with guaranteed quality and without triggering data caps or usage charges on the viewer’s end.

Cablers could remake their own customer relationship. Instead of annoying households by trying to pass along higher and higher programming costs for shows watched by fewer and fewer people in the fragmented audience, cable could claim it’s working hard to keep customer broadband bills low by making sure content suppliers like Google and Netflix pay their “fair share.”

This will be salable to programmers and regulators, however, only if the cablers aren’t simultaneously competing to offer their own content bundles. Cable has been lucky lately. Net neutrality, the principle by which regulators have sought to regulate how operators use their networks, has been dying a natural and legal death. Mr. Malone and big cable ought to be leery of adopting a business strategy guaranteed to resurrect it.