Q3 2014 Liberty Media Corp Earnings Call

Nov 04, 2014 AM EST
FWONA - Liberty Media Corp
Q3 2014 Liberty Media Corp Earnings Call
Nov 04, 2014 / 09:30PM GMT 

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Corporate Participants
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   *  Courtnee Ulrich
      Liberty Media Corporation - VP of IR
   *  Greg Maffei
      Liberty Media Corporation - President and CEO
   *  Chris Shean
      Liberty Media Corporation - CFO
   *  John Malone
      Liberty Media Corporation - Chairman

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Conference Call Participants
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   *  Ben Swinburne
      Morgan Stanley - Analyst
   *  Denis Kelleher
      Buckingham Research Group - Analyst
   *  James Wlodarczak
      Pivotal Research Group - Analyst
   *  Amy Yong
      Macquarie Securities - Analyst
   *  Tom Eagan
      Telsey Advisory Group - Analyst
   *  Barton Crockett
      FBR Capital Markets - Analyst
   *  Matthew Harrigan
      Wunderlich Securities - Analyst
   *  John Tinker
      Maxim Group - Analyst

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Presentation
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Operator   [1]
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 Good day, everyone, and welcome to the Liberty Media Corporation Q3 2014 earnings call. Today's call is being recorded. It is now my pleasure to turn the call over to Courtnee Ulrich, VP of Investor Relations. Please go ahead.

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 Courtnee Ulrich,  Liberty Media Corporation - VP of IR   [2]
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 Thank you. Before we begin we would like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, market potential, new service and product launches, the proposed rights offering by Liberty Broadband, the future financial performance of SiriusXM, stock repurchases, and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, the ability of our businesses to attract and retain customers, competitive issues, regulatory issues, and market conditions conducive to buy backs. These forward-looking statements speak only as of the date of this call, and Liberty Media expressed the disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based.

 On today's call we will discuss our non-GAAP financial measures including adjusted OIBDA. The required definitions and reconciliations, preliminary note and schedules 1 through 3 can be found at the end of this presentation.

 And now, I'd like to introduce Greg Maffei, Liberty's President and CEO.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [3]
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 Thank you, Courtnee. Good afternoon to all of you out there. Today, speaking on the call beside myself we will have Liberty Media's CFO, Chris Shean.

 Starting off with Liberty Media itself, we plan to distribute to Liberty Broadband shares this evening, and they will begin trading regular way tomorrow. You may recall that as a part of that, we have a related Series C rights offering with a plan to distribute on December 10 to holders of Liberty Broadband shares. Now, you must be a holder of Liberty Broadband through the ex-dividend to receive this right, and we will announce this ex-dividend date in the near future.

 The rights will trade for 20 trading days and then they will expire. We expect the 20-trading-day period to begin promptly following the distribution date on December 10. The price for these rights will be a 20% discount to the 20-trading-day volume-weighted average trading price of the Series C Liberty Broadband stock.

 Now, obviously that's a lot to follow and remember. And I'm sure many of you will be calling Courtnee and Joe, et cetera, to get more details. But that also will be more prominently discussed in the Q.

 Related to the spinoff, Liberty Broadband closed on a $400 million margin loan. And we drew down $320 million of this money and distributed $300 million as a dividend back to Liberty Media. At Liberty Media, I would note, we also did some refinancings, and we refinanced the Series margin loan on October 28, extending the maturity of that loan to October 2015.

 Let me move to some operational highlights. First at SiriusXM, Sirius reported strong -- very strong -- Q3 results. They increased subscribers to 26.7 million.

 Revenue for the quarter grew 10% to a record $1.1 billion. Adjusted EBITDA for the quarter grew 29% to $381 million. And share repurchases totaled nearly $2.1 billion for the year to date. Liberty's ownership as a result of those repurchases and our lack of participation in any sales back to the Company have increased our ownership stake to 57.5%. On their call they also raised 2014 subscriber count, revenue and free cash flow guidance.

 Turning to Live Nation, it also had a fantastic quarter with strong performance across all of its businesses. Concert revenue is up 11% and we continue to grow our global market share. Sponsorship and advertising business sold out over 90% of its plan for the rest of the year. And at Ticketmaster we've had great success in the secondary ticketing efforts with gross transaction values up 44% year to date.

 Let me turn to Charter, it grew its revenue in the third quarter 8%, led by strong residential revenue growth of 6.7%, and even faster growth in the commercial space. At the end of Q3 we completed over 80% of our all-digital initiative capital spending and we're on schedule to complete the full digital initiative by year end. In addition, in conjunction with the plan to fund the Comcast Time Warner purchases and swaps, we raised $3.5 billion of debt at Charter.

 So, with that, let me turn it over to Chris Shean to talk more about our financial results at Liberty Media.

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 Chris Shean,  Liberty Media Corporation - CFO   [4]
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 Thanks, Greg. Tomorrow morning is when we intend to file our third-quarter 10-Q, so you won't be able to access that tonight. Once received, just another highlight, given the fact that we consolidate Sirius in our financial statements, but to get the cleanest view of Sirius' results, we continue to suggest that you look directly at their website and their publicly filed documents.

 At quarter end, Liberty had cash and liquid investments of $673 million and principal amount of debt of $6.1 billion, which includes debt balances of SiriusXM and a margin loan at Liberty. Included in the $673 million of cash and liquid investments at September 30 is $104 million of cash held directly by SiriusXM. Liberty's cash and liquid investments, excluding that cash at Sirius, was $569 million, although pro forma the cash that Liberty Broadband is going to be sending back to Liberty, the cash balance would be $300 million higher than that.

 Now with that, I'll turn the call back over to Greg for Q&A.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [5]
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 Thanks, Chris. To the audience, we appreciate your continued interest in Liberty Media. And I'd now like to open the call for questions. Operator, would you take the first question?

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Questions and Answers
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Operator   [1]
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 (Operator Instructions)

 Ben Swinburne, Morgan Stanley.

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 Ben Swinburne,  Morgan Stanley - Analyst   [2]
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 Good afternoon. Greg, can you talk about your buyback plans? Which typically Liberty doesn't give us visibility into the timing of the buyback and you did this time, so interested in why and what the rationale was there. And then for you or for John if he's on the line, any thoughts on Title II and whether that becomes a real threat? There's been some news on that and it obviously affects your Charter investment. Do you think that's something that's likely coming out of the FCC?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [3]
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 On the fact that we dividend that money across from Broadband to Media, there is effectively a requirement that it be used for buy back. And that is why we took the relatively unusual step of doing that. We effectively have done the same thing. For those who are acute listeners of Liberty calls, we are doing the same thing with the ventures money that's coming across and repurchases at Liberty Interactive, formerly Liberty Interactive now QVC stock. It's exactly the same.

 On the second question of what's going to come out of the FCC -- I think that's your general gist?

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 Ben Swinburne,  Morgan Stanley - Analyst   [4]
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 Yes. It sounds like they're thinking about a hybrid approach perhaps.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [5]
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 I think they are. We have no greater insights, and probably less than many. My personal perspective is that you're clearly hearing pressure out of the White House for something, and that Wheeler is probably trying to find a compromise that will meet all. And there's been talk, obviously, of doing it around peering and the like rather than on the front end. We'll see where this all shows up. I don't know, John -- John has joined us -- do you have a view on this?

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 John Malone,  Liberty Media Corporation - Chairman   [6]
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 Just that Tom Wheeler is a very rational guy. He's probably the right guy to be chairman at this time, with a long history in common carrier affairs. My guess is it will be a hybrid approach where there will be, let's say, stronger regulation in terms of the carrier relationship with the content provider, and perhaps more freedom when it comes to the relationship with the consumer.

 I think that ultimately we will end up with some kind of volume-based billing where consumers essentially, in some form or other, pay for the capacity that they utilize. But we're also going to have to have a tariff, either formal or informal, that prevents one provider from hogging all of our capacity to the detriment of all of the users and all of the suppliers.

 This is particularly important when you get into very high-definition video where the transport of large amounts of 4K content would pretty well swamp the capacity of all existing systems. There has to be some kind of allocation mechanism or tariff that precludes those heavy suppliers from squeezing mom and dad out of the quality of their Internet connection.

 So, it's complicated but I think it will sort itself out. And, once again, I'd reiterate that Wheeler is a very good fellow to be trying to figure this out right now.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [7]
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 Thank you both.

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Operator   [8]
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 James Ratcliffe, Buckingham Research Group.

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 Denis Kelleher,  Buckingham Research Group - Analyst   [9]
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 Denis Kelleher, subbing in for James. Just two questions, if I could. First on Sirius, just touching on their buyback performance last quarter, do you think 4 times is still the right leverage for the Company? And if so, any thoughts on how rapidly they should try to approach that level?

 And, secondly, regarding Liberty Broadband, can you discuss how you think about deciding whether to purchase cable assets that will be housed within Broadband versus to fund Charter investments in cable assets? Thanks.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [10]
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 On the first question about Sirius, I think that they publicly stated they're targeting 4 times. And I think that's a good target, certainly for now. They are moving towards that with an aggressive buyback plan. I don't think there is a known or set date by which they'll get there. And they've gone through a series of buyback programs, including some accelerated share repurchases which have driven that higher and we'll see where that goes.

 On the Liberty Broadband question, I think if I were to reframe your question it is, would we consider buying other cable assets other than Charter. You could certainly imagine us looking at those, particularly when the prohibitions are off, the potential to invest in great land, though there are prohibitions against that for the first two years. But I would expect that most of the cases where were looking at cable assets, we've made our bet with Charter that that's a great horse, that it has many advantages as an acquisition vehicle as an acquirer.

 And given if you take the presupposition that Comcast will largely be out of the market because of their hitting caps, we will now at Charter be the most efficient, most effective acquirer going forward. Not of every cable system you could imagine, because something was contiguous for somebody else, or there was a crazy bidder. But in general the synergies are going to reside with Charter. So it's going to be very hard for people to bid against them.

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 Denis Kelleher,  Buckingham Research Group - Analyst   [11]
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 Great, thanks very much.

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Operator   [12]
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 James Wlodarczak, Pivotal Research Group.

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 James Wlodarczak,  Pivotal Research Group - Analyst   [13]
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 Hello guys. It's James Wlodarczak. Hope everybody's doing well. Two quick questions. Hypothetically speaking, if you were to do an RMT between Broadband and Charter, is it reasonable for tax purposes that Charter will want to wait at least 12 to 18 months after the spin tomorrow? And then as it pertains to a potential SIRI LMCA RMT are there any material tax constraints, or restraints rather, about doing that deal immediately after the Broadband spin tomorrow, assuming, of course, Siri is interested. And than I had a follow up.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [14]
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 On the first question, the RMT Broadband, we've had no discussions or anything that would taint us, but safety and reasonableness might suggest at least a 12-month period for conservatism, if one were to discuss an RMT. Which, obviously, as I said, we've had no discussions and certainly have no plan or intent.

 On a SiriusXM RMT, assuming one were able to have an ATB, an active trader business, on both sides of what the rump of Liberty Media post the Charter Liberty Broadband spin, and post a Sirius RMT, as long as there was one that you could send with Sirius and one that you could keep, I don't know why you wouldn't be able to effect an RMT immediately. Again, we certainly have no plan or intent, and haven't announced that. I'm just talking about the mechanics.

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 James Wlodarczak,  Pivotal Research Group - Analyst   [15]
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 Yes, hypothetically, of course. And then the follow-up -- you all sit at the nexus of content and distribution. Could you give us your thoughts on concerns that have arisen recently regarding the effects of OTT and cord shaving on the traditional pay TV bundle?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [16]
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 I think that is an interesting and complicated question. I don't know if we sit at the nexus of anything, but we look across a bunch of industries and see that OTT, whether it be in video or radio, is separating out the traditional, in many cases, integration of content distribution, and it becomes its own force. We certainly see that happening with Netflix.

 And when you look at some of the declines in cable ratings, you can make your own judgment about how much of that is being impacted by OTT. Whether that is really turning around -- OTT video -- whether that is turning around today and really massive cord shaving or cord cutting is less clear to me how much of that is the economy, how much of that is millennial and household formation delay. I think that's the second part.

 The first part of seemingly clear to me, the second part is less clear to me. And I think there's still open questions about that. And I think the Chairman has a few thoughts.

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 John Malone,  Liberty Media Corporation - Chairman   [17]
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 I think it's important to differentiate terminology because random access seems to be what the public wants on all platforms, all technologies. And that doesn't necessarily mean over the top. If you look at what most operators are doing now, they're evolving essentially a free VOD, if you want to call it that, which is effectively random access on all technologies, but it's not necessarily over the top. So, to some degree there is a migration of viewing from pure linear to DVD viewing, which many people --.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [18]
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 DVR.

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 John Malone,  Liberty Media Corporation - Chairman   [19]
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 DVR, sorry, -- to ultimately -- Netflix came in with a pure Internet over-the-top approach. But an awful lot of viewing is basically now off of servers operated by the distributor. And I think what you'll find is the cable industry was pretty slow in implementing TV Everywhere, but it's gaining momentum. And so it's going to be a mixed bag here.

 You also have a bit of migration, frankly, from linear viewing with advertising to some of the Internet advertising services. So, you're probably seeing a little bit of advertising flowing from the traditional linear network video viewing over to the new social networks and other similar services.

 So, it's a complicated phenomenon. And, unfortunately, the measurement technologies aren't very good to differentiate finely between one impact and the other. But the nice thing about it is you need a high-speed connection in order to participate in any of this. So, to the degree that it impacts linear video viewing, it probably also creates a much greater demand for high-speed connectivity, both terrestrial and Wi-Fi or wireless. So, there is opportunity and there's this challenges as these technologies evolve.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [20]
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 And if I could just add onto John's point, I think seeing innovation among the traditional players and among the MSOs where different formulas are tried, where the stack is inverted, for example, and the opportunity to have high-speed access and premiums, the opportunity to try different services, is important. Customers want the product and the services in different ways, and not necessarily only in the traditional bundle. And I think all of the players in the industry need to be responsive.

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 James Wlodarczak,  Pivotal Research Group - Analyst   [21]
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 Very helpful, thank you.

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Operator   [22]
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 Amy Yong, Macquarie.

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 Amy Yong,  Macquarie Securities - Analyst   [23]
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 Thanks. Two questions. First, on Live Nation, can you just talk about what led you to increase your stake in Live Nation, what appeals you to that asset, and where you think you can add value at 35% versus 27%? And then my second question is just actually on the Vivendi lawsuit, any updates there. And cash aside, are there any logical swaps or assets that you think would be appealing?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [24]
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 Let's start with why did we invest more -- because we found it attractive and we like where the business is going. And the most recent quarter is only a good example of that. We still think there is continued momentum and opportunities in that business. So, we were happy to increase our stake. And so far that's been rewarded in the marketplace, at least in the short term. But we remain optimistic and invested for the long term there.

 Whether we're adding any value by increasing our stake, I think that's less clear. You'll have to ask the management team about that. I'm not sure we add any value at 25, 30 or 35. But we think it's probably not all negative for them to have us endorsing and stepping up and buying more stock. But you'll have to ask Mr. Rapino whether he agrees.

 And then, I'm sorry the third part of the question?

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 Amy Yong,  Macquarie Securities - Analyst   [25]
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 On Vivendi.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [26]
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 About Vivendi, the law suit -- I think we had a minor victory. Rich Baer is not in the room so we would ask and be more articulate. We had a minor victory in that part of the case was released to go forward on appeal. And that will probably speed the process along. It's still probably years out but there was at least one step in moving that forward recently.

 Whether there's a swap that could be done, I think that is complicated. Vivendi has slimmed themselves down to largely two businesses. The nature of a swap would still be a taxable event to us, the receipt of it. It's not one of these ones where a swap would avoid the tax, is my understanding. So, I'm not sure that's the front and center idea. I suspect this has still got many twists and turns, at least in the slowly meandering judicial system, before we get a result.

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 Amy Yong,  Macquarie Securities - Analyst   [27]
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 Great, thank you.

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Operator   [28]
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 Tom Eagan, Telsey Advisory Group.

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 Tom Eagan,  Telsey Advisory Group - Analyst   [29]
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 Great, thank you. We have several programmer operator battles set up over the next two months, whether it be Dish and Turner, or Dish CBS, SatLink, Viacom. But the cable network ratings and ad revenue have been disappointing. Does that give the operator more leverage? Thanks.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [30]
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 I might frame it another way, which is for several years we've seen a trend towards increased leverage for the content offering. And you've seen the percentage of the video bundle that they capture going up. There has been a continuing second trend, probably, of the strong getting stronger, and the weak being preyed upon and/or reduced. And that has been the only counter that the MSO can offer, is that the less strong programming does not get the same renewals.

 I think you're seeing some of that come to pass where operators whose programming hasn't necessarily been as strong, or are already quite highly priced, not getting the renewals that they would hope for, and distributors feeling they have sufficient muscle and sufficient weight given those reduced ratings to make some counter. And that's what we're seeing come to pass. That's somewhat an effect of what we talked about, lower cable ratings, and a dispersion where some get strong and some are not as strong.

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 Tom Eagan,  Telsey Advisory Group - Analyst   [31]
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 Right, okay. Thank you.

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Operator   [32]
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 Barton Crockett, FBR Capital Markets.

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 Barton Crockett,  FBR Capital Markets - Analyst   [33]
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 Okay, great. Thanks for taking the question. On the topic of big secular questions and such -- John Malone's on the call -- I was wondering if you could address the question of your view of HBO going direct over the top. I know in the past you've positioned HBO as potentially a trendsetter or somebody that could dictate the future for premium networks and their ability to separate from the bundle Netflix's success. Some time has passed, they're doing something now. Do you think this will be a meaningful move? Do you think it will work?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [34]
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 The Chairman and I have had cursory discussions on this. I'm not sure we totally agree. I'll go first. I think this is as much HBO showing that they can do it, and I doubt -- and that they are a modern company in adapting to the ways of the marketplace. I personally doubt there is a huge audience out there of $15 a month HBO over-the-top subscribers who are not willing to buy a cable bundle. I just don't see that as an enormous audience.

 And I don't see it as a huge moneymaker for them given how much they are already extracting from the MSOs. When you net out on that $15 any kind of customer service, carriage, et cetera, I don't think there's a lot of incremental dollars. In fact, it may be less attractive than what they're getting from the vast majority of MSO. John, do you want to add to that?

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 John Malone,  Liberty Media Corporation - Chairman   [35]
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 I don't think it will be a massively disruptive simply because they're ubiquitously available already. I think what they're trying to get to is perhaps a little more control over their pricing to the consumer than they have traditionally. But, as Greg says, they've squeezed a lot of the margin out of the carriage of their service from an operators' point of view.

 I think they are also in a position where they've been trying to encourage the industry, the distributors to provide random access -- HBO Go. And only some operators have really taken seriously the availability of that service. And, so, they feel they're are some disadvantage to people like Netflix or Amazon or even Hulu technologically -- IE, that their programming is not being presented as fully to the consumer as some of the others. So, we'll see.

 And I suspect they're worried about the scale that Netflix is reaching or is trying to reach on a global basis, and their ability to outbid Netflix for content going forward. You really need to talk to Jeff about exactly how he sees this transition. But I don't think you'll see a flood of new customers signing up for HBO. They might get some.

 I know Netflix stock took a little beating about the same time that HBO made the announcement. But I really believe HBO's opportunity tends to be more international than it is domestic. And I think the idea of global scale is something that Jeff is now starting to focus on.

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 Amy Yong,  Macquarie Securities - Analyst   [36]
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 Okay, great. Thank you.

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Operator   [37]
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 Matthew Harrigan, Wunderlich Securities.

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 Matthew Harrigan,  Wunderlich Securities - Analyst   [38]
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 Thank you. There's a lot of incremental complexity that is about to get laid onto the business, as a couple of things you talked about -- TV everywhere, 4K, even these HetNets with Wi-Fi and LTE. The industry's historically had a lot of customer service and perception issues. I know Comcast is trying to do some things there. You're working with them on the HTML5 RDK and all that. But do you see a lot of opportunities and necessity to work even closer as an industry? You referred to Snow White and the Seven Dwarves, and now it's prospectively Comcast, Charter, Cox, Cablevision. But what needs to be done, because it feels like some of these national players do have a big advantage.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [39]
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 I think Charter is -- on the first point about customer service -- it's impressive the way that Charter -- Tom and John Bickham and the team at Charter have dramatically improved customer satisfaction. You can see it in all sorts of metrics about how they're received and how they're perceived by their customers. And you can see it in their ability to move with a better service, with an all-digital service, how they're moving up the percentage that is at basic to expanded basic, and their digital penetration going up and with it their average video revenue going up.

 Now, it's somewhat artificial to decide where the revenue sits there. But how they're taking ARPU up because they're offering a better service and a better product, and attending, is going very well.

 On the larger issue of cooperating, I think initiatives - and we've talked about some of these in the past -- like Wi-Fi services together, initiatives like ultimately home automation or a small business offering, are only going to be enhanced by that cooperation.

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 John Malone,  Liberty Media Corporation - Chairman   [40]
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 I was going to say Tom Rutledge has almost a magical way of simplifying the service offering from the vantage point of the consumers. He sells a very simple bundle of services and tries to focus the consumer on that. It generally focuses on high-speed connectivity, a simple telephone offering that's flat, and then a uniform video offering that's the same all across the country. And not only is that important for the consumer to understand, it's important that it be simple so his employees, his CSRs and service technicians, can understand it.

 So, I think the whole idea of technology is to make things incredibly complex behind the wall and incredibly simple for the consumer. And if you can get there, everything from the billing system to the packaging to the uniformity with which the technology is delivered, would be great. And obviously there's huge opportunities for inter-company cooperation to create ubiquity of offerings, ubiquity of branding, scale. And I think that's going to be a very important future of the industry. Whether there's a lot more consolidation of ownership or not, the consolidation of joint activities, I think, is going to be an important driver for the cable business, really on a global basis.

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 Matthew Harrigan,  Wunderlich Securities - Analyst   [41]
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 Thanks for another stock to fall.

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Operator   [42]
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 John Tinker, Maxim.

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 John Tinker,  Maxim Group - Analyst   [43]
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 Hi. And on that note, if hypothetically you do RMT Siri, where does that leave Liberty Media in that you'll have live baseball teams, couple of investments, and I think Viacom Time Warner, what do you see Liberty Media's role going forward?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [44]
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 I think you've effectively pointed out one of the problems of RMTing Siri, is we're not quite ready to put ourselves out of business yet. If we saw fewer opportunities, if we saw fewer things we could do. But we think there are some things we can do, and I suspect the RMT of Siri is still a ways off because of that.

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 John Tinker,  Maxim Group - Analyst   [45]
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 Thank you.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [46]
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 With that, operator, I think we're done for this afternoon. Thank you very much to everybody for your interest in Liberty Media. And we look forward to seeing many of you at our Investor Day. And we look forward to having many of you on our next call. Thank you.

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Operator   [47]
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 Thank you. Once again, that will conclude our call for today. Thank you all for your participation. You may now disconnect.




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