One of America’s lowest-rated cable companies and an industry legend labeled by consumer advocates as the “Darth Vader of cable” may be joining forces to buy Time Warner Cable, according to Bloomberg News.

The blockbuster buyout would leap Charter Cable from fourth largest cable operator to second place, although still behind Comcast in terms of revenue and number of subscribers.

The spectacular return of Malone to the top echelon of the American cable industry was the talk of the industry’s Cable Show, ongoing this week in Washington, D.C. Those attending are reportedly buzzing Malone’s imminent return is likely to spark a massive consolidation of the U.S. cable industry to as few as three major cable operators serving more than 95 percent of the American cable marketplace.

Malone

Driving momentum to merge, in Malone’s view, is increasing cable video programming costs, which are cutting into profits. Having a fewer number of cable operators could hand the industry more leverage over broadcasters and unaffiliated cable programmers, but could also cut costs through marketplace efficiencies and volume discounts.

“If you’re John Malone, you’re thinking: we’ve got to get bigger,” Jim Boyle, managing director of SQAD and formerly a cable equity analyst for more than 19 years, said in a telephone interview with Bloomberg News. “The bigger Charter can get, the more economies of scale discounts it can get,” he said. “If everyone else is playing checkers, Malone is playing three-dimensional chess.”

For many on Wall Street, the only thing left to do is plan the funeral for the country’s second largest cable company.

“If you’re going to do a transformational deal, your choices are Time Warner Cable, Time Warner Cable and Time Warner Cable,” Craig Moffett, a veteran industry observer told Bloomberg. “You can roll up all the little guys if you want to, but even if you did, you haven’t built something that’s truly large-scale.”

“Time Warner Cable is gone,” Chris Marangi, a money manager at Gamco Investors Inc., said. “I think Charter will buy them eventually, whether it’s Liberty facilitating that or Charter doing it directly or the two companies doing it in partnership.”

Industry observers predict Malone will signal his dream deal by initially launching smaller mergers and acquisitions before attempting a buyout of a cable company considerably larger than Charter itself.

The first target: perennially bottom rated Mediacom, where any buyer is likely to be hailed as a rescuer by beleaguered subscribers who have regularly dismissed the cable operator as incompetent. Next, the Washington Post’s Cable ONE, which may already be plumping itself up as at attractive takeover target through investment in improving its network infrastructure.

But the most obvious foreshadowing of a big deal with Time Warner would most likely come if Charter first successfully acquires always-rumored-for-sale Cablevision, where the controlling Dolan family is rumored to be holding out for an exceptionally attractive buyout package other cable companies aren’t willing to offer. Time Warner itself has been rumored as a buyer, but current management has repeatedly stressed it will not pay a premium price for acquisition targets.

Malone may not be able to help himself. His long history in the cable industry includes a voracious appetite for merger and acquisition deals. For more than two decades, Malone led Tele-Communications, Inc. (TCI). When he arrived in 1972, TCI was a rural Texas and western states cable operation with 100,000 subscribers. By 1981, through mergers and acquisitions, he built TCI into America’s largest cable operator. In 1998, AT&T bought out TCI Cable. The phone company later exited the cable business and sold most of the operation to present owner Comcast.

The level of consolidation proposed by Malone is unheard of in the United States, but is familiar in Canada where two major cable operators — Rogers and Shaw — control the majority of cable subscriptions. Third largest Vidéotron leads in Québec and Cogeco serves pockets of Ontario and Québec bypassed by Rogers and Vidéotron, respectively.

When Industry Canada announced it was planning to boost competition by setting aside certain spectrum for new competitors entering the wireless marketplace, the Conservative government promised Canadians they would see a new era of robust competition and lower prices as a result.

Today, it turns out the only competition around is watching which of the three largest wireless carriers snap up their newest competitors first.

Telus, Canada’s third largest wireless carrier, today announced it was acquiring Mobilicity for $380 million — almost exactly the amount of outstanding debt owed by the Data & Audio Visual Enterprises Holdings’ venture. That means Telus will pick up its competitor just by agreeing to pay its bills.

Mobilicity said it was burning through cash at an alarming rate and simply could not attract enough customers in its home service cities Toronto, Ottawa, Calgary, Edmonton and Vancouver, to become profitable. It also reportedly lacked financial resources to take part in a forthcoming spectrum auction that would have been critical to the company’s long-term survival.

Informal merger talks among the three largest independent carriers — Wind Mobile, Public Mobile, and Mobilicity — reportedly went nowhere.

“Mobilicity has been losing a significant amount of money every month,” Mobilicity’s chief restructuring officer, William Aziz, said today. “The financial strength of Telus will allow the business to be continued in a way that will benefit customers and employees. An acquisition by Telus is the best alternative for Mobilicity.”

But that may not be the best alternative for Canadians. Regulators are expected to scrutinize the merger and current rules do not allow Telus to acquire the spectrum Mobilicity holds until next year. But with few other expected buyers, regulators may have no choice but to allow the deal to go through.

If approved, Telus will pick up Mobilicity’s 250,000 customers and likely switch them to Koodo Mobile, its prepaid division.

Minister Paradis

Mobilicity customers could do worse. Koodo Mobile, given a “C” grade by Canadian consumers, was Canada’s highest rated wireless carrier. That disparity hints at how much Canadians loathe their current wireless options.

Bay Street investors were not surprised by the announced merger, believing competition has its limits in a marketplace dominated by three enormous telecom companies — Bell (BCE), Rogers, and Telus — all collectively holding more than a 90% share of the Canadian wireless market. Many expect the remaining independent providers to also jettison their businesses or combine them in a last stand.

Industry Minister Christian Paradis, the Conservative government’s point man on independent competition in the wireless market, was caught off guard by the apparent faltering of the new carriers.

Paradis said he remains committed to making sure Canadians have a fourth choice for wireless service in every regional market in the country. But his only assured success is in Québec, where Vidéotron — the provincial cable company — competes with the big three providers. That competition has worked in that province to hold pricing down. According to The Globe & Mail, the average monthly bill in Québec dropped to $50.36 a month in 2011 from its peak in 2009 and is on par with where it stood in 2007. In comparison, according to CBC News, the average monthly wireless bill across Canada was $77 in 2013, up from $68 in last year’s survey.

Paradis is now pondering new regulations that would prevent the three largest carriers from buying out the remaining two independent providers just for their spectrum assets.

The merger will need regulatory approval from The Competition Bureau, Industry Canada, and the Canadian Radio-television and Telecommunications Commission.

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BNN reported back in April that Telus and Mobilicity were in acquisition talks. The news channel speaks with Maher Yaghi from Desjardins Securities about the implications the merger would have on the Canadian cell phone market and the prices consumers pay. (5 minutes)

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BNN this morning reported the ball is back in Ottawa’s hands as the government tries to decide how it can salvage its wireless competition agenda. (6 minutes)

Time Warner Cable and Cablevision customers: Is Charter Cable in your future?

The best way the cable industry can grow revenue in the lucrative broadband business is to bring back the same type of collusion and control cable companies maintained over video programming 20 years ago.

Dr. John Malone did not want to sound nefarious in his recent interview with CNBC’s David Faber, but the new part-owner of Charter Communications has built a reputation as cable’s Darth Vader over the last 30 years. His detractors consider his way of doing business akin to a nationwide cable mafia, complete with exclusive, non-competitive territories that assure operators can charge sky-is-the-limit prices.

Malone is now back in the cable business in a big way, and analysts expect he will quickly amass influence in an industry he once led as CEO of the nation’s then-largest cable operator — Tele-Communications, Inc. (TCI).

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Why is John Malone back in the cable business and why buy a piece of Charter Cable? Malone tells CNBC’s David Faber Charter is a company with enormous growth potential through mergers and acquisitions. CNBC says Malone could be targeting Time Warner Cable and Cablevision for acquisition by Charter as early as next year. “There is consolidation yet to be done,” Malone hints.  (7 minutes)

Malone notes the cable industry is on the cusp of transformative consolidation through collaborative agreements, mergers, and outright acquisitions both here and abroad. CNBC speculated that could begin with efforts to further reduce the number of cable operators in the United States, perhaps beginning with a deal by Charter Communications to acquire both Time Warner Cable and Cablevision, which could combine under Malone’s stewardship and Charter’s executive leadership to “compete” with Comcast.

Dr. John Malone

CNBC reporters note Malone has high praise for Thomas Rutledge, CEO of Charter Communications. Rutledge’s earlier experience working for both Time Warner Cable and Cablevision could be an asset in combining all three companies into one. Analysts speculate such a deal could be pitched as early as 2014 when Time Warner Cable will undergo a management makeover with the departure of CEO Glenn Britt. CNBC also noted Cablevision’s imminent sale has been rumored for years, and current leader and family patriarch Chuck Dolan is 87 years old. With cheap credit and Malone’s business savvy, both companies could find themselves part of a Malone-engineered takeover that would vastly expand Charter Communications into the second largest cable operator in the country.

Malone sees the days of traditional cable television coming to an end as consumers turn to “over the top” online video for an increasing share of their viewing time. As cable television rates continue to increase, customers are cutting the cord. Malone believes today’s bloated cable packages are ripe for an upheaval from a-la-carte pricing or theme-based programming bouquets that break expensive sports programming or movie channels out of the traditional basic cable lineup. Malone even suspects a challenge to the industry’s current price models could surprisingly come from the programmers themselves.

Sports networks will be among the first to notice their affiliate revenue collected from cable and satellite companies (and passed on to customers in the form of higher rates) will stagnate as customers drop cable television. Declining viewer ratings also mean lower ad revenues. Malone believes at some point sports teams and/or programming networks will decide that the biggest barrier to winning new viewers is the $70-80 asking price for basic cable. If sports programmers find they can reach new audiences selling their programming online, direct-to-consumer, for $5-10 a month, the basic cable all-for-one-price model will quickly collapse.

“As the cable guys and the satellite guys start to lose customers to the over-the-top guys, some of those economics will be reflected back on the sports guys,” Malone said. “They’ll start losing advertising revenue. They’ll lose affiliate revenue. And they have to face reality that maybe you need to segregate your market like everybody else.”

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John Malone predicts the demise of the traditional bundle of cable television programming within five years. The future is streamed video online, declares Malone, so it is important the cable industry move to manage that competitive threat by acquiring streaming competitors or launching their own services to assure video programming revenue can be protected.  (5 minutes)

Malone sees the future sustainability of the cable industry dependent on the high revenue broadband business.

“I think it is at a point in history when the most addictive thing in the communications world is high-speed connectivity,” Malone told CNBC. “Everywhere in the world that we operate, we’ve just seen the public want more and more data rate. Whether it’s wireless or wired. There’s a big appetite for it. Cable technology right now is the most cost-effective way to deliver that growth in speed.”

Malone believes there is also plenty of room for revenue growth and cost-cutting, which he said can best be accomplished by getting other cable operators together to “cooperate” and “coordinate” broad scale broadband projects that counter competitive threats from third parties.

Malone helped pioneer the cable industry business practice of “don’t compete in my backyard and I won’t compete in yours,” an informal agreement among operators to stay within their own specific territories, safe and secure from competition. In the 1980s and 1990s, Malone’s TCI was one among many cable operators buying and swapping cable systems to build large, regional system “clusters” where only a single cable company provides service, winning economy of scale and a formidable presence that discouraged other wired competitors from entering the business. In most cities, only the deep pockets of AT&T (U-verse) and Verizon (FiOS) have managed to shake things up.

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Bring back the cable mafia? CNBC’s David Faber gets John Malone to admit vertical and horizontal integration — controlling the content and the pipeline — are important factors to protect cable revenue and expand American dominance in cable internationally. Malone is also a big supporter of industry consolidation and believes mergers and acquisitions are necessary to shrink the number of cable operators in the United States. (5 minutes)

The cable mafia?

Malone wants broadband to be carefully managed under the industry’s own control and direction.

Faber asked if Malone wanted to bring back the days of the “cable mafia.”

“Yes, I think we do want to bring back the days of @Home, the days of Ted Turner, the days when we all got together, because together we provided national scale,” Malone said. “Now I think we have the opportunity to create global scale,” he said. “The goal is not to be bigger. The goal is to be more cost-effective.”

Dr. John Malone’s Liberty Media will buy a 27.3 percent interest in Charter Communications with a $2.62 billion investment in America’s fourth largest cable operator.

Liberty will buy the stake from investment firms Apollo Management, Crestview Partners, and Oaktree Capital Management.

“We are pleased with Charter’s market position and growth opportunities and believe that the company’s investments in its high-capacity digital network which provides digital HD and on demand television, high-speed data and voice, will benefit its customers and shareholders alike,” Malone said in a statement.

Malone is no stranger to the cable industry, having been at the helm of Tele-Communications, Inc. (TCI), the largest cable operator in the country in the 1980s and 1990s. TCI systems were sold to AT&T in 1999, which eventually spun them off to Comcast and Charter Communications, which still run them today.

Dr. John Malone

Since Malone’s exit at TCI, he has been in charge of Liberty Global, which owns cable systems overseas and controls several U.S. cable programming interests through his Liberty Media operation. The investment in Charter represents Malone’s return to an American cable industry he helped pioneer.

The agreement requires Liberty to acquire no more than 35 percent of Charter until January 2016, at which point Liberty’s maximum allowable controlling interest rises to 39.99 percent. Liberty also wins four seats on Charter’s board of directors. But many industry analysts predict Malone will not be satisfied with anything less than eventual full control.

Malone often takes an initial minority interest in the companies he later intends to acquire outright. Macquarie analyst Amy Yong told Reuters he employed a similar tactic to gain control of SiriusXM, the satellite radio company.

“He’s probably going to have a pretty big say in the company’s future over the next few years. This will accelerate capital returns and take advantage of Charter’s tax assets to consolidate the cable industry some more,” Yong said.

Malone is attracted to investment opportunities in companies with high marketplace leverage opportunities and exploiting potential revenue from captive customers in the rural, less-competitive markets Charter has traditionally favored.

Here today, gone tomorrow: Bresnan Communications that was Optimum is now Charter Cable.

Malone also has a strong philosophy towards marketplace consolidation, something ongoing in the cable industry, particularly among smaller cable operators serving less-populated areas.

Under the leadership of ex-Cablevision executive Thomas Rutledge, Charter Communications recently acquired the interests of Cablevision West — former Bresnan Cable systems in the mountain west. Malone sees considerable opportunities expanding operations in smaller communities that have either received substandard cable service, or none at all.

Malone has recently been stockpiling available cash for investments, spinning off his former cable programming properties Starz, a premium cable channel, Discovery Communications, which runs the Discovery Networks, and Liberty Interactive, which owns the lucrative home shopping channel QVC.

Charter Communications has had a difficult history. Microsoft co-founder Paul Allen bought a controlling interest in the cable operator in the late 1990s, primarily because he saw cable broadband as a natural fit for his vision of a future wired America. Allen’s weighty investment was used to jump into a cable industry consolidation frenzy still underway more than a decade ago. Cable operators claimed consolidation was necessary to increase efficiency by building up regional clusters of cable systems. Before consolidation, it was not unusual for two or three different cable operators to serve customers in separate parts of a metropolitan area. Often one operator would serve the city with one or two other cable companies offering service in suburban and exurban communities nearby.

In 1999 alone, under Allen’s leadership, Charter Cable acquired 10 cable companies.

By 2005, Charter Cable had amassed millions of new subscribers, but not as many as company executives claimed when they artificially inflated subscriber numbers to protect the value of the company’s stock. Four executives were indicted that year for criminal accounting fraud. By 2009, with $22 billion in debt, the company declared bankruptcy, eventually wiping out shareholders.

The court’s decision to forgive 40 percent of the company’s debt angered creditors but opened an opportunity for private equity firm Apollo Capital Management to gain control by ending up with the majority of shares in the restructured company.

For years, the company has continued to receive some of the worst customer satisfaction ratings in the industry, usually ranking at or near the bottom. But many Charter customers stay because there is little competition from other players, especially telephone companies. AT&T’s U-verse is the most likely triple-play competitor, but AT&T has avoided introducing U-verse in many of Charter’s service areas because they are deemed too small.

Malone sees Charter’s future revenue potential grow as a broadband provider, considered both a money-maker and must-have service. Analysts say that Charter is well-positioned to poach more customers from phone companies, which typically only offer slow DSL service in much of Charter’s rural footprint.

Gore: Malone is the Darth Vader of cable.

But customers may find with Malone’s involvement, that service may come at a price. Malone was criticized heavily in the 1980s and 1990s for leading the charge for customer rate increases. TCI’s captive customers in Tennessee found their cable bills increased between 71-116 percent in just three years during the 1980s.

Former Sen. Al Gore, Jr., at the time called Malone the head of a “Cable Cosa Nostra” and the Darth Vader of big cable. The cable executive was a frequent target of lawmakers flooded with constituent complaints about poor cable service and accelerating prices.

In 1999, The Guardian noted Malone was an admirer of telecom oligopolies:

He is scathing about regulatory attempts to prevent monopolies and mergers. Governments, he says, are “antediluvian” in their approach to the emerging new world economic order. Instead of trying to prevent mergers and collusion between media and communications companies, Malone says governments should actually promote the creation of “super-corporations” (such as his own) with enough capital to exploit the potential of new technology.

That attitude may soon be back in play with the cable industry’s increasing focus on expanding broadband service as their new primary revenue generator.

Stephenson

With a 2011 failed T-Mobile merger well behind him, AT&T CEO Randall Stephenson did well for himself in 2012, walking home with $21 million in compensation.

AT&T customers did less well, facing the imminent termination of AT&T Plus, a customer loyalty rewards program trialed in three states that offered customers waived upgrade and activation fees, gift cards, and 25% off cell phone accessories.

AT&T Mobility’s chief financial officer Pet Ritcher said that customers shifting into its Mobile Share data plans would do a better job of keeping customers in place.

Despite the fact Stephenson’s failure to secure the T-Mobile merger cost the company a $4.2 billion deal termination penalty payable in cash and wireless spectrum, his personal compensation only took a $2.1 million hit in 2011. All was forgiven in 2012, when his compensation hit a new record, up from the $20.2 million earned in 2010 — a four percent pay hike earned in an era of stagnant or declining wages for the middle and working classes.

The breakdown:

• Stephenson’s base salary of $1.55 million was enhanced with a $6.06 million bonus and $12.6 million in additional AT&T shares;
• Stephenson’s personal use of AT&T’s corporate jets cost the company $276,391;
• AT&T paid for Stephenson’s home security as a cost of $101,923;
• Miscellaneous compensation amounted to $803,308.

AT&T’s earnings amounted to $7.3 billion in 2012, up 84 percent from $3.9 billion earned the year before. Revenue increased to $127.4 billion.

AT&T paid no federal taxes in 2011. In fact, the company won a taxpayer-subsidized refund of $420 million.

Wireless plan changes, workforce reductions, rate increases, and other “cost savings” also all helped the company.