Highlights of his comments: On cable in Europe, as opposed to the U.S.: Each market has its own story.
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In Western Europe, cable was essentially a utility. Low rates, very high penetration, the systems have been upgraded, and the triple play --- (cable plus) data and telephony - has really been the driver the last few years of revenue and cash flow growth. Digital video is just now starting to gain momentum.
High definition is just around the corner; (personal video recorders) are just around the corner in terms of mass deployment. As compared to the U.S.
, which I think is more mature when it comes to the video business and probably roughly comparable in the data and telephony business. Eastern Europe is still an analog video business, which is rapidly migrating to the triple play. In (Liberty Global's) case, virtually all their markets will be full triple play, including a digital video offering, this year.
Grow the cash flow, keep the leverage up, shrink the equity, expand with strategic acquisitions that have meaningful synergy with the base. If you can keep that up on a protracted basis, particularly if you can find shelter from the tax leakage of your cash flow, you can build very nice shareholder equity returns over the long haul. Whether the equity market reflects that on a day-to-day basis is really a function of market conditions, I think.
But in the long run, you do build pretty high equity returns following that strategy. That's what we're trying to do is really get all the Liberty assets, whether it's Discovery, Liberty Global, (Liberty Interactive) or (Liberty Capital) back into that model of leveraged cash flow growth, because we think that's the best sustainable pattern for building shareholder value. The telephone companies are deploying digital subscriber line technology over their copper wires.
DSL, depending on how far you are from the switching center, has limited capacity. We don't believe that that limited capacity will be sufficient to satisfy any meaningful percentage of consumer demand for video, particularly as video becomes more and more high definition, requires higher and higher data rates, and so on. So the whole business of high-speed video over DSL is, in my technological judgment, flawed.
Therefore, what you're going to see is the pattern of telephone companies, by and large, offering video by satellite, in conjunction with telephone and data by their terrestrial network. The combination of those service platforms is what will effectively compete with cable in a duopoly kind of setup. Satellite will have certain advantages over cable.
For instance, DirecTV will have a substantial advantage in high-definition firepower, channel capacity, over cable for the next few years as a result of their having launched a fleet of new high-definition satellites. Cable, on the other hand, because it can offer both data and telephony along with video, has an advantage of bundling. Any of these businesses are valued against the future.
So when people look at the value of say a (E.W. Scripps), they're really looking at a sellout kind of valuation.
Either private equity as a stepping stone to a sellout, or the synergies that would exist if you combined. . .
. Unless you're going to sell a business, it's difficult to build those synergies into your economic model. Therefore as an ongoing independent business, you can't justify very high multiples, unless you're thinking there's a takeout sometime down the road.
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Since Discovery has no plans to put itself up for sale, on a steady state basis, it looks reasonably properly valued by the market today. If it were to put itself for sale, I think it could command substantially higher values. Hundreds of millions of dollars of synergies would exist if it were to combine with, say, Disney.
And clearly Disney or Viacom would pay a premium price to realize their share of these synergies.
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