Friday, August 15, 2014

Media Industry Musical Chairs: Is It Over Yet?

With somewhat predictable frequency, the media, telecom and communications industries go through waves of consolidation every few years. Typically, such seismic events occur when interest rates are low, technology is changing rapidly (or even discontinuously) and valuations reach historic highs. Recently, a new wave has begun; a wave, however, unlike any in the past. The current wave involves the very biggest companies in the communications industries; and the logic behind the transactions ranges far afield from the strategic considerations of the past. This time around the landscape is also unrecognizable from prior consolidations. Broadband subscriptions are racing past video subscriptions. Advertisers will soon spend more on social media outlets than over the air broadcasters and cable networks. At the same time, video streaming services will compete on equal terms with the best programming offerings of any legacy programmer. The demand for streaming services has already out stripped the capacity of existing wired and wireless networks. The fencing matches among big players involve a great deal of thrust and parry. While we list eight deals, two have already been withdrawn: Murdoch’s offer to acquire Time Warner Inc. and Sprint’s offer to merge with T-Mobile US. In the former case, financing and resistance from TWX’s management stymied the Murdoch offer, while in the latter case, the poor prospects for passing required regulatory approval seems to have been decisive. (Whether these offers are permanently withdrawn isn’t clear, in the former case, it is possible that Time Warner could attract other bidders, while T-Mobile already has an underbid from Iliad of France.) Why all the strategic maneuvering among media players? Is this not some kind of chair shuffle on a sinking ship or is there more to it? Most importantly when will it end? Below, we lay out a table of the current media deals that have been publicly announced:

Pitcher

Batter

Story

Motivation

Comcast Corp

Time Warner Cable

Aggregate Cable Subscribers

Video subscriber losses in both MSOs: TWC lost almost 400K video subscriber over the last twelve months. Comcast has been losing between 130K and 150K per quarter.

21 Century Fox

Time Warner Inc

Buttress to basic cable Sports and Entertainment, Consolidate Cable News

Add to Mr. Murdoch’s empire

Charter Communication

Time Warner Cable

Aggregate Cable Subscribers

Had wanted all of TWC, had to settled for subs unwanted by Comcast

Sprint

T-Mobile US

Consolidate Third and Fourth Carriers to achieve cost savings and bolster the subscriber base and acquire more spectrum.

Enforce price discipline in unstable oligopolistic market. T-Mobile has aggressively lowered contract pricing and switching costs to subscribers

Iliad, S.A

T-Mobile US

4th Place French Wireless Competitor looks for growth outside France: “US large and attractive Market”

4th Place French Wireless Competitor looks for growth outside France: “US is a  large and attractive Market” Also, a possible cost-effective way to gain a minority interest in a combined Sprint-T-Mobile US

EW Scripps Broadcast

The Journal Companies

Combine Newspaper/Group Broadcasters, then spin out Newspapers into a Newco.  Near-term cost savings will total about $35 million, as Scripps newspapers in 13 markets are combined with the Milwaukee Journal Sentinel, and Scripps, while remaining controlled by its founding family, operates television and radio stations in 27 markets, up from 21.

Both local Newspapers and Broadcasters face withering revenue streams.

AMC Networks

BBC America

Take 50% Equity Investment in Standalone Network to give it more marketing clout with cable operators.

BBC under financial pressure at home. BBC America needs additional support which home BBC can’t provide

As usual, the publicly stated rationale for each deal seems to center on bromides (disputed heavily by bloggers) proposing to serve better subscribers’ or viewers’ interests; or, for the investment community, to enhance growth. By and large, however, it is clear that this round of consolidation is motivated either by a need to eliminate cost and/or to gain scale. It is an all-out race for dominance and for ever greater negotiating power. So, the question remains, why? Are we seeing further value being created or an industry cannibalizing itself?What are the common themes? In prior waves of consolidation, shareholders of both buyers and sellers tended to benefit (particularly in stock deals) as demand by advertisers and consumers for greater media choice fueled growth in fundamental measures-(e.g. subscriptions, advertising and revenue). Consolidation often, though not always, was further accompanied by increased efficiency and pushed higher margins in merged companies. This time, it seems, we don’t see significant growth opportunities, merely attempts to gain margin. Here are a few of the common themes we see in the current round: Seeking scale to combat fading growth or declines. Virtually every segment in the media industry faces declines in viewers, subscriptions, and advertising (arguably HBO is an exception). For some while, players have attempted to extract greater revenue per subscriber with rate or price increases. Cord cutting (either of cable TV services or landline telephone services) suggests that such strategies won’t work forever in the newly competitive media world. So, many of the above deals suggest a limit to further growth in penetration or usage and reflect an impulse to extract margin gains from more effective bargaining with suppliers or distributors. After both sides consolidate, however, everyone is back to point A and all face the prospect of further value erosion. A new round of capital expenditures on the horizon in both wireless and wired communications. Most existing cable and wireless infrastructure is obsolete. The set top box is evolving into a home gateway device. Network speeds average 15 megabytes down and 5 up on most systems but plant network speeds have already reached 1 gigabyte in markets like Austin. ATT, Time Warner, Verizon and Comcast are boosting networks speeds both upstream and downstream to well over 300 megabytes. Capital expense is rising rapidly to meet the new build requirements. A new escalation in programming expenditures will also siphon cash flow from programmers and content providers. Netflix, Amazon and Hulu video streaming services have had terrific early success in in creating and launching new programming, such as House of Cards and Orange is the New Black. As has been the case with every expansion in media choices, programming cost should rise as actors, producers and writers see their bargaining positions strengthen. Increasing demands by investors for dividends or incumbent entrepreneurial families looking to cash out through dividends or other financial structures. ATT and Verizon are dividend payers, which retirees or pension managers rely on, while Viacom, Cablevision and Comcast have incumbent entrepreneurs who need to cash out for state or other purposes. Where is the cash going to come from to pay out the legacy holders while competitive pressures demand higher cape ex and program investments? A willingness to try new tax reduction strategies. The Windstream Proposal shook the telecom and financial community when it announced that it is spinning off some of its network assets into an independent Real Estate Investment Trust (REIT), then leasing them back to remove a layer of federal tax liability. Partnerships to reduce tax liability have been used in the media industry before: Metromedia and the original Time Warner were good examples, but these vehicles tend to have a short shelf life as the IRS typically moves quickly to shut such loop holes. Like Master Limited Partnerships in other industries, such tax strategies are best employed in mature or declining industries. In the Windstream proposal we see an umbrella vehicle that can be used to liberate cash in future acquisitions, simply by bringing targets under the Windstream umbrella. Is there an urgent investment recommendation here? Not urgent, but cautionary. While scale and tax reduction may improve cash flow (or at least stem declines) in the short term for many of the proposed combinations, we doubt shareholders will benefit in the long term. Shareholders in a newly consolidated industry may have to look for other value creating vehicles outside traditional media players. When that happens, some player will be lift standing with no where to sit.

Tuesday, March 11, 2014

Sen Al Franken Takes Initial Strong Negative Position on Comcast TWC Merger

Sen Al Franken's position in this video suggests that approval of the CMCSA/ TWC is many months away, if ever. He says in the interview that CMCSA did not live up to the conditions upon which regulators approved the NBC Universal acquisition. Clearly, Franken is a part of one regulatory entity only--but he's an influential public voice.


Wednesday, February 19, 2014

Google is Attacking CMCSA, TWC Merger on the Bandwidth Front Before The Deal Closes. Expect Higher than Anticipated Capex by New CMCSA and Pressure on the Stock.

While many vaporous strategic initiatives float market ward shortly after major strategic deals announcements, this one deserves watching and has plausibility. We suggest investors watch for a possible a Comcast commitment to a 2 gigabit system wide (including Time Warner Cable) upgrade during regulatory scrutiny. It would be hard for investors to calculate the increased capital spending needed for the upgrade. The stock could come under pressure. http://www.multichannel.com/distribution/google-fiber-eyes-34-market-expansion/148393

Media Executives Sound Off on TWC/ Comcast Deal

We're old school media institutionally ranked analysts. We want to know what you think about the TWC/CMCSA deal. Is it good or bad for the industry? Is it good or bad for your company? Do you think it will pass regulatory scrutiny? What do you think the regulators will want? What is the upside for consumers if any? What did you think of our proposal to require the new company to boost band width system width to 3 gigs in 5 years? Comment! Sound off! Let's hear from you!

Tuesday, February 18, 2014

How to Give Comcast What It Wants, Save the Consumer Some Money and Turbocharge Our Communications Infrastructure.

“Dare to be great.” A phrase which connoted both vision and hubris gained currency in the eighties and nineties but seemed to fade in the early 21st century. Well, not really as it turns out. Comcast’s recent agreement to acquire time Warner-- one that took most industry observers by surprise-- suggests that size is still a goal. Yet, the speech, however quietly whispered in corridors and cubicles of Comcasts new gleaming headquarters, still inspires fear among consumer advocates and regulators. They rightly demand to know what benefit there will be to society in concentrating thirty percent of the cable industry in one pair of corporate hands. With the concentration of wealth in even fewer hands, common sense suggests that the benefits of greater media industry concentration must be all the clearer and all the more compelling. Owners of property may, indeed, should dispose of their property as they see fit. In typical anti-trust policy, the argument against bigness comes down to: how high will prices rise and how much will supplies contract and investment be stifled. The argument for bigness is that innovation is spurred by concentration and that creative destruction of the old and replacement by the new occurs fastest in large enterprises. In media industries, however, the choice is all the more complex. These companies control what we hear and see through ownership of the news and information networks,the airwaves and the wires. In balancing the aspirations of owners, consumers and society as a whole and, it is not clear that bigness will produce a result that will benefit all. Time Warner Cable will have new owners soon. Nobody disputes the notion that Time Warner Cable needs change. Badly. Subscribers pay too much for services they don’t want. Customer service is weak. Outages plague the system. Internet speeds slow to a crawl late in the day. System infrastructure needs upgrading urgently. The stock has lagged. The same can be said for the entire industry. Average cable monthly bills before broadband have breached the $100 mark. Bundling of sports packages into consumers bills diverts too much of the consumer’s payment to the sports rights holders. There are too many cable networks, often with minute audiences, charging exorbitant fees. Subscribers continue to cut the cord. Internet broadband capacity has improved but at a snails pace. In an editorial in the NY Times, Paul Krugman points out that Comcast’s takeover of Time Warner Cable will give it even more power to increase susbscription rates to consumers, squeeze suppliers of programming and system equipment. Brian Roberts, Comcast’s CEO, on the other hand argues that Comcast market power will not further increase because Time Warner and Comcast do not overlap in any zip code. (Of course that is not the point, as Klugman argues, because municipalities license local monopolies-but never mind that.) Behind Krugman’s argument is that bigness-no matter who controls-should not be trusted. In our view Mr. Roberts can be trusted not to behave as an old time robber baron. In fact, his track record for over 30 years indicates that he and his company have always demonstrated the greatest allegiance to good corporate citizenship. But we recognize that the temptation towards monopolistic behavior is high with control of 30 percent of the national cable market. Frankly, the same can be said for Charter Communications, as guided by John Malone, who also has offered to merge with Time Warner Cable. So how about a new idea for whoever acquires Time Warner? How about transforming the media and communications industry completely with this deal? Here’s what we suggest: 1. Let Comcast or Charter or whomever acquire Time Warner Cable with the following two conditions. a) that buyer agree to eliminate the practice bundling of programming packages at the basic and enhanced basic level on his whole system. Instead, allow consumers to create their own packages and pay for the programming they actually want. This will shift subscriber demand for future communications services to be delivered through cable’s system. Even without a voluntary move by the industry to unbundle its services, unbundling will proceed in any event through expanded Netflix, YouTube or Amazon services. Cable could in our view possibly retain customers who would otherwise move to competitve services. b) that the new company agree to rebuild system architecture to 2 gigabits in download load capacity in 50% of their systems within 3 years and 100% in five years. Two gigabits is 133 times standard 15 megabits that Time Warner currently offers. With that much capacity converted to ultra high speed service, the acquisition potentially would engender a conversion to ultra high bandwidth service throughout the industry. The explosion in new capacity would benefit all: subscribers, shareholders and society in general. You say that’s crazy: that it will cost billions! We say maybe not. We believe that the capital cost-while high-is manageable, and could be driven far lower with a expansion on this scale than many would expect. Another major benefit is that new businesses would emerge in a tsunami of innovation that would follow and boosting growth right here in the USA. So we say to regulators, Brian Roberts, John Malone and the industry as a whole, let the industry “Dare to be great”, again. Light up your glass fiber with more speed, more services and new and innovative offerings consumers want. Take back your position in the communications industry and your destiny into your own hands.

Wednesday, January 2, 2013

When will the cable industry realize that its main business is in the provision of high speed internet access-not cable television?

Speedier Internet Rivals Push Past Cable - WSJ.com

Very, very important article: the substance of which is that the cable television industry feels no urgency to upgrade its distribution networks despite a clear threat from credible competitors.

What? The dismissal of demand for high-speed access makes no sense at all. Glenn Britt, President of Time Warner Cable, who I know and like very much, sounded foolish when he said there was no demand for higher-speed access. He's not alone. By 4 o'clock on a weekday afternoon Time Warner's Internet service slows to Manhattan like traffic speeds. Who does not want more bandwidth? More speed? Quicker access to social network sites, cloud storage, and video and audio services? While a 1 GB high-speed access service that Google provides in some markets seems like too much for most internet usage, it really reflects a huge threat to the bloated and over priced subscription based business model of the cable television industry.

Consumers are going to choose the highest possible Internet speed that is available-everything else being equal. Choice is better than no choice. Responsiveness is better than not. Consumers do not want to limit themselves to what is currently available. They will always want more. I understand why the industry does not want to be only a land-line high-speed access provider. The threat of becoming a common carrier exists. But the future lies in providing land-line ultra high speed digital service. It is really simple. So build it cable industry and clients will come.

The cable industry fears, rightly so, that the upgrade to their systems will cost billions. But what is involved in that upgrade? With fiber to the home already installed, systems can be upgraded by installing electronic encoders and decoders at required nodes (nodes are the points at which light pulses are converted to electrical signals). I am not saying that this will not cost money. It will, but not as much pulling out existing copper based coaxial cable. This type of cable is limited to handling 450 MHZ or .45 gigahertz signals.

At the same time, the cable industry is overpricing it's television service. The subscription model which requires basic subscribers to take many channels which they do not want at $70 per month or more is broken. My guess is that the many channels under the ESPN brand probably account for $30 per month in most cable bills. That's crazy. Similarly, for the MTV networks, the per month subscription fees buried in consumer bills are also larger than many know or would want. Many consumers would drop the "bundles" of services-especially those driven by sports rights costs-if they had the choice.

The best way to think about it it is to ask yourself what services do I use regularly? I use the news (take your pick), PBS once or twice a week, TCM a couple of nights a week and rarely HBO. I was interested in Homeland (Showtime) but my wife can't sleep after watching--ex asst district attorney. I will watch the NFL every couple of weeks during the regular season and some of the play-offs. But I also use networks, watch old series on DVD and occasionally, sleep. Also, I am on the internet all day long. In one form or another. I want ultra high speed now, but my two providers are Verizon and Optimum forcing me to spend over $100 a month on television services to get the fastest level of internet service. The notion that ESPN should be included in so called "basic" is insanely outmoded. Now is the time for, at minimum, broadly based a la carte programming offerings. The hit to the cable company and to the programmers might be significant, but a day will come when subscribers say enough. A day will come when Google has the muscle to go to the sports leagues and demand exclusivity and get it. When will it come? My guess within the decade.

The implications of vast expansion in internet access speed are enormous. It seems as if Google has already made a decision to become a major player in broadband, or at least, to so deeply scare existing operators into spending billions to upgrade to ultra high speed cable. Cable television companies, (Time Warner: TWX, Time Warner Cable: (TWC), Cablevision (CVC), Charter (CHTR), Comcast (CMCSA) face the decision to upgrade or to be over built by new competitors like Google. Netflix (NFLX) will try to stay in the game but very likely will need to sell itself to some larger entity. Vast new amounts of capital need to be spent. Vast new amounts to be raised. Hardware suppliers will compete for huge new contracts. Investment banks will exploit a renewed revenue stream from Cable industries upgrade or competitor fiber overbuilds. Cities will demand upgrades or revoke franchises and charge higher franchise fees. Satelitte providers will lose customers--certainly at the high end. It's disruptive--very disruptive.

Here's the article.
Speedier Internet Rivals Push Past Cable - WSJ.com:

Tuesday, November 27, 2012

Apple Shares (APPL: NASDAQ: $586) Attractively Priced at Current Levels

Since early October, Apple Inc.'s (APPL) retrenchment from $705 per share to a current $586 has shaken the faith of many enthusiasts, and in some cases, shaken the enthusiasm for many participants for the market as a whole.

We think the shares are very attractive at current levels. We think the shares offer substantial upside without unrealistic projections of future growth. No doubt, the level of enthusiasm for the shares cooled for good reasons. To name three-- first, the prospect of higher capital gains tax rates provoked investor selling among those with substantial built in gains; two, Apple's "miss" in its latest quarter caused concern among investors accustomed to "beats"; and , three, weaker demand Europe and Asia for Apple products could lead to softer growth.

Based on current consensus estimates, we believe Apple is trading at the low end of its historic range. As you can see from the chart below, Apple P/E ratio on current earnings has declined asymptotically to about 11.6 times.

At current prices the shares are trading below their mid point p/e for the last two years. They are also trading below the SP 500 market multiple.

If the shares were to trade at the midpoint of both historic multiples 14.2 times (17.10 median) and median consensus estimates $49.75 upcoming year and and $57.95 for the following, then the shares should trade at between $800 and $850, and offer a +40% return, even before the current $2.65 dividend. So yes the shares look cheap.

What the multiple decline also suggests is that investors are assuming is a tremendous slow down in growth for revenues, contraction of margins and flat cash flow production: one which the earnings miss would seem to bear out. We have two thoughts. First, the shares have become such a large component of the Index (both price indices and market capitalization) that it is going to be difficult to establish much of a premium to the market because Apple has become the market. Secondly, it would be next to impossible to sustain the company's historic 5 year sales growth rate of 33.08% over the next five years. Of course it is ridiculous to projected growth of 33% going forward for Apple, isn't it? Yes, probably, but growth has y-o-y has seemed accelerate over the past five years. If it could, and it could also sustain its 40% gross margin and 30% operating margin then the shares are hugely undervalued.

Apple Year On Year Growth

2012 v 2011 44.58% 2011 v 2010 65.96% 2010 v 2009 52.02% 2009 v 2008 14.44%

Do we think Apple still has opportunities for growth? We are not technology experts. But yes it does clearly; the iPhone 5 is still a growth product; the company has shortened delievery delays sharply; and the product has yet to be introduced in many markets in Asia. Despite a toughening competitive landscape from many quarters in both the smart phone and table space (Samsung, Google, Motorola and possibly, Microsoft and RIM) Other Apple hardware products are still dominant and in early take-up in many markets. New Media products from the iTunes, music, movies, books, podcasts and apps. are still disrupting legacy media markets. Brand strength through strong design, reliability and m(mostly) virus free software continues to attract buyers while cash balances continue to build. (When these cash balances--now $30 per share net--a substantial amount of which is held by foreign subsidiaries, will be repatriated is going to be determined by upcoming changes in tax law and rates.) Under any tax regime Apple is building cash rapidly.

Apple shares are trading at under ten times projected year ahead earnings. If Apple share were to trade at their median PE ratio next year, the shares would have substantial upside.

Copyright Media Strategic Advisors, Inc. Not to be relied on for investing, trading, anything! How the model works is described on the You should read this page!

Monday, November 26, 2012

The MacDonald Media Model, is a very simplistic model that relies on data from MSN Investing, Yahoo Finance and Google Finance. They get their data from company reports and SEC filings and from the financial exchanges. We/I have been developing this model over the past two years. It uses tools and formulas from google docs sheets.

No-one should rely on this model for anything! It is the work of one person trying to create an investing framework for himself! I am sharing the analysis to get feedback and to see how far one can model future financial results for free!

I have no position in the shares discussed and may or may not initiate any position in the shares, at least until 5 business days have passed from the date of posting.

This is an overly simplistic approach because it is built around a given and arbitrary projection for sales. In Apple's case, the first I have published, I have slashed the historical growth in sales from a CAGR of 41% by 75% to slightly under 9%. As you can see Apple still has substantial value upside based on these projections of future growth in sales.

In another table, we compare projected earnings from the brokerage houses who write on the shares, against estimates based on our model and its simplistic extrapolation of prior five year results (modified) into the future. (For interest we added another type of projection based of the results of the prior quarter into the future. The latter is really a tangential point estimate and can be skewed by transitory factors: seasonality in results, weather, new product introductions. Etc.)

What is interesting in Apple's case is that the estimates from the brokerage houses and the extrapolation of five year results agree. Agreement means that one of two things: either that the future is predictable and consistent with the past and that could and should lead to higher earnings multiples or that the brokerages houses are not adding value and that their estimates are as mechanical as the projections my simplistic model has produced.

Here are the others:

Operating margins remain what they have been in the last two years. Uses of capital for inventory, receivables (net), plant and equipment are projected at the same ratio to sales as in the prior five years; in other words, days turnover for inventory remains the same as do average days for accounts payable and accounts receivables. Plant and equipment are added to support increased sales in the same ratio as the prior year.

Weighted average cost of capital is calculated on the daily rate of the two year treasury, the ratio of debt to total capital, beta as provided by Yahoo and projected growth in the market is the current year growth estimates provided by Standard's and Poors. I have made no provision for reinvestment of cash or acquisition activity by the company and presumed dilutive or accretive effect on results.

There will be errors in my work from time to time--I am just one person and do not hold out the quality of my proofreading for anyone to rely on.

Tuesday, November 13, 2012

Media Upside Down-Google the most powerful polling method, TV Land Reruns, a force among undecideds.

There were two (at least) fascinating articles about the decline in media effectiveness in the last election and  the titanic implications not just for electoral spending but for all media buyers.

In the first article, Nate Silver (gotta love him) highlights that Pollsters who relied on traditional landline telephone polling overestimated support for Romney and Republicans. Polls which relied on cellphones and/or online questionnaires seemed to favor Obama and the Democrats. During the course of the campaign these were dismissed as biased especially by the right. Silver argues that cellphone polls--which some firms are legally restricted from conducting, captured younger voters who often do have landlines by and large favored the President.  He noted that Gallup was particularly wrong and has been in the last three elections. Google which conducted on line questionnaires seemed to have the most accurate sample of likely voters and to reflect the final outcome. No doubt, many online respondents were more comfortable with the method and perhaps more truthful.

The second piece is even more fascinating: the Obama Campaign basically threw out the collective wisdom of decades of media ratings and buying. Gross ratings points, even traditional demographic measures were to the Obama campaign dumb and blind in reaching undecided voters. In a world of undecided voters, the key buys were Jimmy Fallon (NBC), Jimmy Kimmel (ABC) and reruns on TV Land network VIA.b), which apparently had no traditional ratings research to offer the campaign--maybe the lack there of made it more user friendly for non traditional users and viewers. Imagine if media buyers for consumer products, cars, electronics etc began to think the same way, the television grid would be upside down.

Oh wow.  Let me know your thoughts!

Thanks for Reading.

Which Polls Fared Best (and Worst) in the 2012 Presidential Race - NYTimes.com:

O Campaign Targeted Late Night, TV Rerun Undecideds

'via Blog this'

Thursday, November 8, 2012

A letter to my Republican friends.

Dear Republican friends.
Obama won. Ahhhh, a surprise, right? No need for panic. Your candidate was decent. He was not a McGovern. But party positions were wrong headed.  Really screwy even given the make-up of the voting population. The party needs to stop fighting history. If it can, then there is hope for the GOP. A return to a GOP which is moderate, in tune with history and responsible fiscally would be an attractive home to many Democrats and independents.  What would it take? Simply traditional republican values--frankly the positions Romney took towards the end of the debates.
I wish I could celebrate the victory of the party I voted for. It says extraordinary things about the country we live that we look past the color of a man's skin in electing leaders. But, it feels bad to vote for an administration which has done ok, barely, to vote for four years of modest improvements, but not enough and to wish for something more. Much more. And to have no option.
And I know that you, my Republican friends, are equally if not more frustrated, and desperately want to disengage from ball and chain positions: the evangelical movement, immigration, women's reproductive health rights, gay marriage, even the tea party mantra's of the slash and burn deregulatory cut backs and the repeal of Obamacare. A Republican party which does not move to embrace the social issues that propelled Obama to victory is a running against the tide of history in this country and is a disenfranchised and irrelevant party--and who wants to be irrelevant?
So, I would love to vote Republican. But I can't for the moment.
Anyway, let us hope that the failed Romney Ryan effort will lead to a political choice that voters in the center can embrace.
How about Susan Collins for President!
Your friend,
Rich.

The 2012 Campaign A Highwater Mark in Media Spending Which Clearly Illustrates The Limits of Media Effectiveness.

Despite the threat of the fiscal cliff, the economy will continue to strengthen over the next year. That should help boost spending on advertising and other messaging for commercial products and services.  But the absence of the spending gusher from  political and pac reserves means that comparisons for media companies ((NWS, VIA, CBS, TWX, CMCSA, DIS, DISCA) will weaken, beginning now. After gorging at the political trough all year,  media companies are likely to report weaker financial comparisons beginning in the fourth calendar quarter. Disney has already indicated such an outlook on their quarterly conference call.

In media terms, the campaign of 2012 was a highwater campaign. Some $3 billion was spent all in media, $1 billion alone by the presidential campaigns according to the Washington Post (data from October 21.)  Pac Money was also exceptional at all levels.

This is an all time high, and does not include spending by individuals or organisations who were not required to disclose.  With this tremendous gusher of spending, the return on investment was basically zero--certainly for Republicans. While three presidential debates harvested enormous audiences (upwards of 60 viewers each across all covering networks), and probably influenced voting thinking for some days after they aired -- particularly the first debate-- the vast flood of negative advertising spending proved to be a fruitless investment for both PACs and candidates. For Democrats spending might be considered highly productive because it countered the Republican onslaught but was essentially defensive.

Arguably, spending on most negative ads boomeranged as well; the speaker/sponsor of the message being damaged more than its target. To point to one example, it seems to us that messages from the National Rifle Association picturing Romney/Ryan as strong supporters of second amendment rights may have energized the white male base and terrified everyone else. But in some sense, negative ads by Democrats to define Romney harshly also hurt Obama when Romney countered the picture painted by Democrats in the debate.

Despite fears of Democrats and others who believed elections could be bought, the benefits of such feral message making clearly did not materialize. We acknowledge, as Karl Rove said, that this election would not have been as close as it was without those messages from PACs and outsiders. But the PACs and other outsider groups ultimately made this election unwinnable.  With their many agendas, they locked Romney into losing positions and defined him in a worse light than the democrats could ever have. The ideology of the messages derailed Romney's candidacy precisely because ideology was more important to the message makers. Even worse, the external messaging will continue to antagonize blocs of voters critical to GOP fortunes  unless GOP leaders and campaigns get control of ideological entrepreneurs like Rove and his outside "allies".

Equally misplaced and distracting, was the confidence which message makers displayed in high level advertising. The bullying tone of many advertisements especially in swing states like Florida and Ohio antagonized and alienated audiences and had a counterproductive effect even among a supporters. Policy choices made by Obama in Ohio--especially to save the auto industry--outweighed and negated the messaging even to traditional Republican voters. Policy choices in other areas, like the Dream act, not to enforce deportation against people brought to the US by parents were galvanizing among immigrant voting blocks, could not be overcome by marketing or messaging and resulted in a decisive margin for Obama.

The amount money raised for and spent on media, also blinded the Romney campaign to the Obama emphasis on the ground game, organizing voter registration and turn out drives. Future democratic candidates will benefit from the vast supply of email addresses and names which were generated by this campaign. The Republicans are a long way behind in this area and losing ground. Both Republican and Democratic campaigns in the future will likely reallocate resources away from national advertising campaigns and towards highly targeted, precision messaging.

With poor comparisons, high multiples and few other catalysts on the horizon media companies should underperform the market.


Wednesday, October 31, 2012

Disney Buys Lucas Film: Good Deal, Dilutive Until 2015.

The purchase of LucasFilm, which includes Copyrights for Stars Wars, some (modest) producer share for the Indiana Jones series and the CGI, post production service businesses created by Lucas is a classic and sound strategic move in the media and entertainment world. Under the $2.0 billion in cash and 40 million shares deal, (currently$49.05 per share intraday), "Disney will acquire ownership of Lucasfilm, a leader in entertainment, innovation and technology, including its massively popular and "evergreen" Star Wars franchise and its operating businesses in live action film production, consumer products, animation, visual effects, and audio post production. Disney will also acquire the substantial portfolio of cutting-edge entertainment technologies. Lucasfilm, operates under the names Lucasfilm Ltd., LucasArts, Industrial Light & Magic, and Skywalker Sound." Why now? Frankly, Lucas Film is something that deal makers in the media world have had on their to do lists for decades. Presumably, there were two buyers for this property, Fox because it owns distribution for the Stars Wars franchise and Disney for its strong and increasing commitment to CGI production, and so-called Fantasy Films. For decades Lucas has kept the business under the tightest possible control, but presumably access to capital and estate planning concerns were best resolved by a sale to Disney now. Does the deal make sense? Did Disney over pay? Should Fox have stepped up. The usual investor questions right? Yes, yes and yes. Why did Disney walk away with the prize? Disney is a great company; management is highly regarded in the media and entertainment world; perhaps, only Comcast is as highly regarded these days as both Time Warner and Fox have had missteps. Time Warner's long term agony (AOL) would have certainly been an issue if there were strategic elements to support the sale to Time Warner. But, there were none. Fox has a strategic relationship with Lucas Film as distributor of the existing Stars Wars Films, but presumably, nothing else to warrant a deeper involvement. And, for someone like Lucas who wished to hand off his life work to a new generation of filmmakers the wiretapping scandal and criminal investigations in the UK was an additional negative. Disney also has the lowest cost of capital in the entertainment business--assuring Lucas that future films would get made. Disney was also prepared to create the most tax efficient structure for Lucas and to allow him to participate in some of the future upside of his new partnership with Disney. Is this an exciting acquisition for Disney? Yes, but long term. The good news is that Lucas Film is the real deal with properties which will produce income either in the form of (highly predictable) cash flow from existing properties (virtually existing Star Wars) or from (only slightly less predictable) new Star Wars productions. And seriously, New Stars Wars Films? These are going to be huge as long as the franchise is both managed and energized. At the same time income from merchandising is going to be bigger than from Disney's most Pixar and Marvel Acquisitions because they skew older and more male. Is there bad news: no, just less good news, according to the company's press release the acquisition will not be additive to earnings until 2015--meaning it will be dilutive to earnings until 2015-- when a new Star Wars is released. Does that mean that Disney overpaid for the property? Yes and no. It means that Disney paid more than anybody else was willing to pay--one must presumably. Is the purchase price of $4 billion too much compared to Marvel and Pixar? Hell, no! On a cash on cash return, the purchase price probably reflects some $300 million annual return to Disney before the benefits of new productions. That is just our guess but figure Lucas expects Disney to earn potential future profitability from the franchise. But those future pictures could each return what--$300 to $500 million in future cash proceeds? Maybe more, right? At the same time, the existing distribution deal with Fox is likely to be strained and to be less lucrative than it might have been without the sale as Fox has less incentive to spend money on marketing the films in existing distribution windows. We certainly expect Fox to window dress its ongoing relationship with Lucas Film but to leave most of the franchise building to the future beneficiary--Disney. One final point, does the acquisition of Lucas Film change the management balance at the company? Maybe. Kathleen Kennedy who is joining the company, is a very strong producer and could be a candidate for a wider role at the company as Iger is leaving in 2015, even though there is plenty of management depth at the company--in the Parks Division, Espn, ABC and so on. All in all an interesting, sound acquisition. I do not have a current position in Disney (DIS), but have had in the past and will likely do so in the future. I have no plans to acquire shares until the big macro questions--like the direction of monetary and fiscal policy--are resolved.

Thursday, October 25, 2012

Possible Implications of a Romney Presidency for Media Companies

You might figure that I have gotten off track with my last two posts. These seem no doubt less about media economics and more about politics. Well, fair point. Having said that, the potential for further secular weakening in the US economic environment is likely under a Romney Administration under our view and that could have the most important and long lasting impact on media companies.  Since that is our view we believe that a Romney administration could have a significantly negative impact on aggregate demand we think that media earnings are headed down. To some degree that is the most important investment determination of all.

In addition, however, we think there are three areas where a new administration would change policy with significant impacts on values.

Advertising and marketing expense.
While both campaigns and Super pacs spent unconscionable amounts of money on the campaign this year, the main beneficiaries were the national networks and local stations in swing states. Every four years,  a surge in political advertising expense tends to push advertising prices up for other marketers, but we expect this year was a whopper. We think there are two negatives and one positive that will accompany a Romney administration:
  • Elimination or reduction of marketing expense deductibility.
  • Withdrawal and auctioning of UHF and other broadcast spectrum and repurposing these to wireless and mobile uses. 
  • Elimination of all cross ownership rules of any kind. Frankly, we think this is inevitable under either administration as the media industry landscape goes through further tumult and upheaval. 
On the net, 
  • Net Neutrality elimination will benefit cable companies. The idea behind net neutrality is prevent local access providers--presumably your local cable company or ATT or Verizon from charging usage fees for specific websites. As you can imagine consumer groups and websites are opposed to the elimination of network neutrality while cable companies and telecom companies are for elimination. The Obama administration opposes net neutrality elimination and the current FCC ruled in its favor. We expect that a Romney Administration will choose FCC Commissioners in favor of eliminating net neutrality.While huge levels of spending from the campaigns seems like an unstoppable trend, incumbent politicians seem to newly fear unrestrained spending by anonymous interest groups. We expect  that this year's multi billion orgy of spending will mark a historic peak -- unlikely ever to be repeated.  Fourth quarter comparisons will be commensurately exceptional; to be followed by commensurately weak earnings in 2013. 


Wednesday, October 24, 2012

A Chicagoan Dangerously Infatuated with Say's Law.


Posted this in response to Casey Mulligan's Piece in the Times :
The Problem with the Stimulus. 

Clearly, Professor Mulligan is mixing up his multipliers. In periods of cyclical slack, when businesses are afraid to invest and governments to spend, transfer payments to very low income earners bolster aggregate spending with very little leakage to savings. Government spending has a lower impact on aggregate demand  because payments are distributed (presumably normally) through all levels of income and some beneficiaries would not increase consumption. If tax policy skews the distributions to higher income levels than the benefit of government spending is even further reduced. The impact therefore of a $1 transfer in redistributive efforts from high earners who save more( and presumably in the current market have a high preference to hoard cash (liquidity)) to low earners can have substantially more than a $1 impact if the economy is operating less than full capacity. 

The notion that transfer payments can have a negative effect on incentives in the labor market is nothing more than a restatement of Say's Law that supply creates its own demand. In times of slack the confusion here is not just weak minded but positively perfidious to society's benefit as a whole.

here's a link to the piece.The Trouble With the Stimulus

Why The Market (And Other Financial Assets) Should Be Shorted If Romney Wins.


Since 2008, medium term Investors in public shares have emphasized large cap, dividend paying stocks and have benefitted from a search for yield by fixed income investors unable to capture sufficient income with a bond strategy. Gains in the Equity markets alone are enough to have made one take a break from the market but there are other reasons as well.


The S and P 500 is trading at historic highs of 19 times current earnings and 17 times leading twelve month earnings. 

A Romney Administration would have a highly negative impact on Equity and debt prices for the following reasons.

The Equity markets and investors seem uniformly complacent--certainly I was; and valuations seem high. The market has run, short interest is small; dividend stocks seems to have been picked over by an increasing large crowd of income scavengers; and the likelihood of a Romney win suggests that he means what he says and will impose highly contractionary monetary and fiscal policies. This would hurt all financial assets before any benefit (which could be small) is gained. And a newly conservative Federal Reserve, if Bernake is fired, could also make the ECB even more risk adverse and result in more social unrest.  

A Romney administration could (indeed is likely) to aggressively address the debt and deficit issues with major moves which would likely result in worsening government balances and higher price growth:
  • encourage contractionary monetary policy as well as fiscal with reverse QE policies which would withdraw liquidity from the system while driving rates higher. 
  • With higher rates, debt markets will be under pressure especially at the far end of the yield curve; while equity multiples are likely to contract and the market along with other financial assets are likely to fall.
  • of almost equal importance, the cost of existing debt is likely to ballon from historic low rates putting further upward pressure on deficits. Contractionary fiscal policy will almost certainly not be able to keep pace.
  • Oddly housing purchases are likely to accelerate in the short term as home buyers seek to lock in attractive interest rates. This could be moderated by an elimination of favorable tax policies like mortgage interest deductibility. Over time, house prices are likely to fall again as mortgage money becomes more expensive.
  • Without support from accommodating monetary policy in the US, the ECB is likely to be even more cautious than it has been in support of the troubled southern European  economies. As noted in a Times article yesterday, fiscal austerity conditions are leading to higher rather than lower government balances as a % of GDP in a number of southern Euro Economies. With increased preference for liquidity by the ECB in 2013 and 2014, social unrest could intensify in societies which have made draconian fiscal bargains with the IMF and ECB.  
Well, you might argue that Romney won't change much once he enters the Oval Office, because he can't as the Senate will remain democratic, but he will be under pressure from the party core to make sharp turns in fiscal policy on his first day. 

Besides one can eliminate political risk by investing in safe stocks with high dividend yields. However, yields on dividend paying stocks have contracted sharply and there is no way dividend increases can match the appreciation of the dividend payer share prices without increasing payout ratios beyond secular trend levels. 
Equity mutual funds may already reflect the probability of a Romney win as they have seen net redemptions over the last eighteen months while the stock market continued to rise. I don’t think this is an aberration in any sense but rather beginning of a wave of dissaving--equity withdrawals by baby boomers entering their retirement years. The redemptions we are seeing could reflect a shift into fixed income assets as a way to protect capital, a move fraught with danger if inflation were to accelerate or interest rates were to increase sharply. As indeed they are very likely to do if Romney/Ryan form the next administration. 

      Thursday, June 7, 2012

      The Rewards to Getting Fired

      One of the best things about getting fired typically is that you have no ties and no obligations left to the employer who canned you. But, recent trading losses at JP Morgan and trading gains--on the opposite side, at Saba Capital Management, suggest that public policy require employees who lose big, to stay on the hook for trading losses to former employers.


      In the first half of 2012, the JP Morgan Chief Investment Office, established short positions in credit derivatives--the Investment Grade Series 9 10-year Index CDS--that were hedges to credit swaps--themselves hedges to JPM's huge loan portfolio. These positions were so large that the trading community interested in such things began calling the anonymous trader behind the trade, Bruno Iksil in the JPM London office, the Whale. The trade was presumably legal (though there are ongoing investigations), but was highly illiquid, and because it was on the short side, vulnerable to limitless loss on the upside.

      From offices on the 58th floor of the Chrysler Building in Midtown Manhattan, Boaz Weinstein runs a $5.5 billion hedge fund firm called Saba Capital Management. Before starting Saba, he was responsible for a team at Deutsche Bank that lost nearly $2 billion, in the depths of the financial crisis, in 2008 almost causing the Bank's collapse. He founded Saba with 14 other members of the team at he supervised at the Bank. Assuming the trading loss was the result of completely legal acts, then SABA has no legal liability. But, the optics were terrible.
      As Bruno Iksil was diving deep into the Series 9 10-year Index CDS, Weinstein detected the size and vulnerability of the JPM position. At a conference earlier this year, he recommended going long the Series 9 10-year Index CDS. It was, as the Times, wrote, specific and direct and aroused attention in the hedge fund community. From then on, it was whale against whale and also a massive short squeeze.

      In April, the trade moved against JPM and, at first, the bank minimized any potential losses, but by early May JPM indicated that the losses would in the $2 billion range, even though the trade had not been closed out. Because it was not, losses could be larger still. Presumably, that meant that Saba and Weinstein, with others, were huge winners on the long side of the short squeeze. So, Saba Capital and Weinstein, who had a reputation for beating casinos by counting cards, won big and JPM lost big.

      Normally, public interest over the distribution of any trade would seem unusual--one guy wins, the other loses, so what? But as the size of the loss suggests that the implications are bigger than a battle between whales. It has become clear that if the trade had been large enough, losses from it could have imperiled the solvency of JPM and possibly required a taxpayer bailout. Now, perhaps this trade could never have gotten so big before the JPM risk management apparatus kicked into gear, but perhaps not--the Long Term Capital Management fiasco clearly demonstrates that a highly capitalized firm full of brilliant analysts and traders could squander its entire equity very rapidly-- in LTCM's case less than a week.

      One can argue that Iksil was simply a rogue trader and he will get fired and go to jail; but what if everything was, as it seems to be, entirely legal? How could such a thing happen and could it happen in the future? The point is that there are huge systemic incentives to individual traders (like Bruno Iksil and as there was to Boaz Weinstein) to bet the bank because the penalties to losing are non existent and rewards huge. Indeed if Weinstein's career is an example, the rewards to losing a lot of money --"getting fired" and then establishing a hedge fund--may be greater than the rewards to winning as bank employee. And, equally scary, it is clear that the greater the bet, the greater is the market recognition of the trader--win or lose. Even more disturbing, the larger the trade, in sheer size, not in terms of risk but in size alone, the greater the incentives between bank and trader/employee diverge. The bank's risks increase dramatically with the size of the bet, while the employee value gains in the market. You would think that such a trader would be toxic as toxic as the trade but not so. This sounds perverse--and is.

      So, Boaz Weinstein, who almost buried Deutsche Bank in 2008, benefited tremendously from bringing his employers to the edge. Should Bruno Iksil, who may have buried JPM in 2012, set up his own hedge fund he would be positioned to benefit also? Is this good public policy to allow these incentives to stay in place? Of course not. Why shouldn't shareholders of Deutsche Bank seek to recoup losses that Weinstein generated in 2008 from his profits in 2012? And, why shouldn't Iksil be obligated to pay JP Morgan back from any win fall profits he makes if hedge fund succeeds?

      Finally, why shouldn't there be equal claw back provisions to executives and board members of banks if the losses are so great that a taxpayer bailout is required?
      There are no such provisions in the law and public policy, and there should be or this kind thing can and will happen again and again.

      Anybody say moral hazard?

      Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
      This article is tagged with: Economy

      Monday, April 30, 2012

      As we expected, Murdoch Rejects Sale of Newspapers, Stock remains like the company mired in scandal



      From the NY Times, April 30, 2012
      "Scandal and Scrutiny Hem In Murdoch's Empire
      ....
      Pressure was put on News Corporation, mostly by investment bankers specializing in the media sector, who suggested that the best way to win government approval for the deal would be to sell or spin off its embattled British newspaper unit, News International, to help ease lawmakers' concerns about Mr. Murdoch's company owning the country's largest satellite TV operator.
      Mr. Murdoch rejected those proposals, according to a person involved in the discussions who was not authorized to comment publicly on the conversations."
      As we expected, Rupert Murdoch, rejected the notion of selling the UK Newspapers owned by News. Many investors and analysts thought he was almost surely going to spin off the papers and/or reign.
      This was never going to happen even in the most dire circumstances, so hopes for higher values based on Mr. Murdoch turning the company over to Chase Carey were ridiculous!
      Over the decades, Mr. Murdoch has weathered some pretty violent storms, (including the company's brush with insolvency in 1989) though it seems to me that the phone hacking scandal is among the most severe. The belief that Murdoch could end his commitment to the UK Newspaper properties, which still produce positive cash flow, have no debt, and whose consolidation into "the Docklands" defined his career and his company is to not understand the man at all.
      At the same time, it may be that Murdoch simply felt that spinning off the UK Newspapers would not have assuaged lawmakers concerns about the moral fitness of the company to hold the licence for PayTV in the UK. In the aftermath of reports about collusion between a junior member of the government and a company lobbyist, Murdoch probably concluded that no amount of contrition up to and including the spin idea was going to move the government to approve the Sky deal.
      In terms impact on the value of the stock, however, is the continuing scrutiny that the company faces in the UK and the effect that further revelations would have in other markets where benign government treatment is a requirement of doing business. Several examples were sighted on the Times article. The State of New York disqualified the company from a Department of Education award because of the scandal and opposition is building according to the Times report to a News bid for a Satellite TV franchise.
      Undisclosed behavior in other countries that was more grievous than in the UK--as reported in Russia--could profoundly threaten the equity value of the company even more. We doubt, but cannot rule out, that such acts took place.
      In the US, business is very strong--cash flow from the company's TV and Cable assets are growing powerfully with Chase Carey providing steady and creative strategic management. The Balance Sheet is also well buttressed and the company's announced buy back program is easily digestible. Some analysts have welcomed the buy back and others not--mostly because they want the company to continuing to invest in new businesses. In our view, the company is handcuffed strategically because the scandal and investigations and so the buy back is a modest positive but likely not to result in a higher long term value.
      News is a family company and that family is the Murdoch family. Over sixty years, shareholders have benefitted enormously from the continuity in management, but value creation has never been a straight line process with Murdoch.

      Sunday, March 18, 2012

      Why Apple Is The New Microsoft Investor Caution Warranted

      This morning I hit the seemingly innocuous weekly software update button on an Apple iMac. After disastrous "bad" updates from Apple for Airport and Apple TV devices (rendering them useless) I always read the details on any update. So, today, I clicked "read detail" and saw that the updates were for Safari (Apple's browser) and iTunes. "Restart required". Well, there was no restart. The machine struggle to restart and died.
      Now, why write this complaint to Seeking Alpha? I am an occasional contributor to SA (on) media issues. I have also been Mac Fan from the days I owned an Apple II. Here's the investment issue. The Mac environment has had three attributes which distinguished them from Microsoft: Mac's are easy to learn, easy to use and reliable--both hardware and software. In my humble opinion, I believe that is no longer true. The updates that have killed three devices of mine have clearly been sloppily written and tested and created extraodinary costs in time, lost files and money. Here's the real question: is Apple a mediocre computer company that makes good phones or a phone company that makes poor computers?
      I've read a number of pieces in Seeking Alpha about how everybody loves Apple. It seems to me that investors need to be cautious from here for a couple of reasons. It's sheer size, its deferred tax liability (I will at some point write about thta and company's overseas cash position--when I figure it out.) Most importantly, at a time, when its quality as a maker of easy to use, friendly, reliable computers and devices is deterorating, Apple is in a position of tremendous vulnerability precisely because everybody loves it as an investment vehicle.