Monday, August 29, 2016
Wednesday, July 20, 2016
We had been owners of the shares particularly after Netflix made a deal with Disney for rights to stream all of its films-- including the product of Lucasfilm Studios. With NFLX down almost 30% in a year we would normally be buyers of such an appealing, fast growing consumer business.
But, we don't see NFLX as a standalone business. We see it as potentially an effective distribution arm for a major content company--Disney being the primary candidate to buy Netflix. And, so we are waiting to buy NFLX at much lower levels in anticipation of a takeout. We also have no good way to value the company. We couldn't realistically estimate net free cash flow numbers for NFLX on a standalone basis. And any estimate based on membership count would be beyond speculative.
In NFLX 10-Q of July 18th, the dilemma which the company faces is starkly apparent. The company is burning through cash -- $454 million in the first six months of 2016, up from $301 million in the prior year six months-an amount equal to 25% of its existing cash position. At the same time, domestic memberships stalled with net additions falling to 162K from 901K an 82% decline. Domestic revenues rose 18% to $1.209 billion, with costs up almost as much 15% to $754 million. Even international net additions to the streaming service stalled with growth falling by 36% to 1.5 million additions. Rates were raised pretty much across the board--with the end of grandfathered pricing of $7.99 to almost 50% of its members. The price increases helped to boost revenue, but increases in program spending --both on an accounting basis and a cash basis rose faster. The consequences are laid out succinctly in language under liquidity and capital resources.
"Although we currently anticipate that cash flows from operations, together with our available funds, will continue to be sufficient to meet our cash needs for at least the next twelve months, to fund our continued content investments, we are likely to raise additional capital in future periods."
We worry that the current roll-off of grandfathered memberships and resulting price increases will result in additional cancellations of memberships. We anticipate continued increases in program expenses and obligations though we these may moderate as the company seems to understand the critical liquidity juncture which fast approaches.
Currently, we anticipate cash burn will rise to over $500 million for the next six months and move potential higher in the six months following. Without much hope of generating free cash flow, Netflix will need financing in 2017. Will the market be receptive to additional equity financing? We don't know. Equity financing may temporarily allow the company to expand its subscriptions and to create and or acquire new rights, but not forever.
Saturday, July 16, 2016
- The collision of new people with strong cultural identities moving into places with entrenched incumbent populations with equally strong identities;
- The failure of even the strongest economies around the globe to fairly meet the aspirations of their own citizens--whether native born or naturalized.
- The growth of a brutal cancer inside one of the worlds great religions leading some adherents to inchoate and mindless acts of destruction in the name of God. .
- The growing notion for most people that they will not be treated fairly in the workplace, in education or before the law
- The nagging ache in the gut that the usual path to prosperity—hard work and disciplined forbearance of consumption, i.e. savings—will not pay off in a satisfactory standard of material comfort, health, or security in old-age.
- That the powerful have an ever tighter grip on power. That the government serves to re-inforce that power and operates at the pleasure of the powerful. (See Times series about private equity)
- That government cannot protect the governed from murderous or dangerous forces on the outside— like diseases, rogue criminal dictatorships and murderous terrorist organizations.
- That democracy itself seems to be descending into a kind of inebriated state where illusion becomes reality, innuendo becomes accepted wisdom, truth and goodness are discarded while the hateful, the untrue and ignorance are twice valued.
Friday, April 22, 2016
Taking A Mulligan on Disney Succession Plan Good Governance According To Yale's Jeffery Sonnenfeld? Please!
This is the kind of nonsense that gets tossed around in a "best practices" business school class. (Don't get me started on "best practices". In my view best practices most often encompass the most mindless behaviors of crowds.)
Taking a "mulligan" in succession planning is not without penalty. There are costs to expanding the search after narrowing it not a year earlier to Staggs. So for the moment the "ball-in-the-water-tee-up-another"" approach means there is no plan, and no guarantee that a new plan will emerge that makes strategic sense. Even more critically, time and disruption in the media business will move inexorably forward, while employees, customers, distributors and investors are scratching their heads, wondering how the company so misjudged its leadership needs a year ago when Staggs was picked.
For those who know Tom, the move is even more misguided. He is a Disney lifer, he knows the two most important businesses (Parks and Media) inside and out, and is/was well liked and respected among employees and investors. What happened here is that Bob Iger, who was an unknown when he took over from Eisener, and who blossomed into a terrific CEO, sided with the big personalities (Perlmutter and Lucas) Studio group on his Board, and made a strategic call about the company. That call is to dive even more deeply into the movie and TV business, where risks abound.
In our view Disney is today and will/should be an integrated creative and distribution enterprise. The company leverages intellectual property across a wide and deep set of platforms. Not all content works across all platforms, and not all content nor platforms should be valued by investors in similar ways. We still believe that the film business is a hit business, not terribly predictable and should be valued at lower multiples than Media or streaming business, which are more predictable.
The notion that Tom is not creative enough or not able to respond to the reality of multi-dimensional disruption in the media universe is foolish. And what was the result? The company is without a succession plan. It has lost a terrific executive. It has signaled to existing executives that they have no future either at the company and should look elsewhere, soon, as well.
So how is this "Good Governance"?
Friday, April 15, 2016
"In our view, the ultimate way for Disney forward is to continue down the path of consolidation in the media business and then to sell itself to one of the social media companies--whose market caps are by the way are several times larger than Disney's. We believe that the purchase of Netflix, in particular, would add strategic strength to Disney's media and content businesses. Some of Viacom's troubled networks, or the other smaller cable networks (all of which are in play) could also fit, but are not going to move the investment needle dramatically."
My idea was based on my own understanding of Disney and the strategic logic of such a buy...Frankly I think it is inevitable, but the operative word is I think. I don't know. Two days later I see that Chris deMuth Jr., a favored author at Seeking Alpha, published a note and podcast suggesting that Disney would buy Netflix. Not that he was in favor, but there it is in the tag line and as a point without attribution. I don't mind being quoted--actually, I encourage it, but I sure don't like others claiming my ideas for their own.
The episode pissed me off. Hope you're monitoring this note Seeking Alpha. Next time, I expect you to cite where ideas come from.
Thursday, April 7, 2016
In our view, we think that the turmoil over succession and conflicting ideas about the company's future direction will lead to
- a further extension of Iger's mandate
- further strategic acquisitions--principally content based, like Netflix,
- ultimately the sale of Disney to a well capitalized social media company.
Wednesday, April 6, 2016
- Some reporting has Perlmutter (Disney's largest shareholder and formerly of Marvel) promoting more creative projects to buttress the studio and consumer products.
- We also believe that Media Networks, and particularly, ESPN management is arguing for more resources to defend that business in a period of turmoil.
- The parks also require massive amounts of capital to continuously refresh the offering.
- We don't think that Iger was able to persuade the Board that the company is an integrated creative/financial construct.
In our view, the ultimate way for Disney forward is to continue down the path of consolidation in the media business and then to sell itself to one of the social media companies--whose market caps are by the way are several times larger than Disney's. We believe that the purchase of Netflix, in particular, would add strategic strength to Disney's media and content businesses. Some of Viacom's troubled networks, or the other smaller cable networks (all of which are in play) could also fit, but are not going to move the investment needle dramatically.
Tuesday, November 24, 2015
Tuesday, September 22, 2015
Lionsgate Entertainment: A Strong Firehose Candidate on Is Own, but Stronger Still With Malone Liberty Involvement
- Lionsgate is a high growth company in the film and television businesses, a mini studio close to becoming a major - all the while adding fresh tent pole franchises like“The Hunger Games”, the “Twilight Saga” which have generated billions of dollars in theatrical income while building a major television platform.
- LGF owns attractive positions in a number of affiliates- in particular a 31.4% interest in EPIX a fast growing profitable premium TV channel.
- Having built a very strong financial footing with roughly $200 million in library operating cash flow annually, LGF management expects to be able to make cash accretive acquisitions, possibly taking advantage of lower Canadian tax rates. At the same time, John Malone has invested in Lionsgate possibly to make LGF the lead content provider to his over 60 video cable subscribers worldwide.
Thursday, September 17, 2015
- Lower risk: through large recently privatized telecoms national telecoms offering substantial market advantages and high dividend pay outs. We see 8-10% capital appreciation plus 4-5% dividend payouts for several years at least and possibly longer with modest financial and operating risk. At the same time, a reversal in monetary policy and a move to quantitative easing: a bond buying program along with sustained policy of short term rates will make the relatively high dividends offered by these companies attractive to investors seeking yield.
- Moderate risk: through non dividend paying entrepreneurial aggregators looking to create value through size and improved managed practice and perhaps more highly leveraged balance sheet. The risk is greater than the large telecoms because of deal risk, leveraged balance sheets and the lack of a dividend.
- Highest risk: through smaller undervalued targets for large consolidators looking to exploit unrealized economies of scale. The risks in this strategy are high because European M&A is far more arcane and less predictable than NorthAmerican M&A
- The company’s products command increasing consumer attention.
- iPhone Unit average prices have surged to record levels,
- Mac’s sales are expanding in a shrinking pc market, increasing numbers of Android based phone users are switching to iPhone (iOS),
- bringing even more users to the iOS ecosystem.
- Apple Pay has found increasing acceptance among large retailers and banks, while an alternative offered by a consortium of retailers has no bank partners and has yet to exit trial stage.
- while many techies and investors have yet to find a killer use for the Watch, Wristly reports that non techies users have embraced the watch. At the same time, the company has released beta versions of the WatchOS2 which supports third party developed apps—and could generate the killer app the techies and gurus are demanding.
Wednesday, September 16, 2015
Altice and Drahi, one of the Main Actors Driving Disruptive Change in European Telecom and Elsewhere.
Friday, August 21, 2015
- All VIA nets are down and the declines are not simply a measurement issue as management claims. MTV has totally lost its way and even stalwart Kids programmer, Nickelodeon, has not had a hit show in 15 years- since Sponge Bob and Dora the Explorer. Comedy Central has managed to lose its two biggest names, Stephen Colbert and John Stewart in six months. Really? How do you let that happen if you are a major league content provider?
- Viacom management, like other cable content producers (vis TWX) doesn’t get the fundamental nature of the industry change. Stock buy backs, really? Revenue growth by jacking up affiliate fees (approx 1/2 media network revenues), when cable affiliates Cable One and Suddenlink (amounting to 2 million) have dropped the company’s services? Really? This is not an option anymore. (BTW, higher basic rates also damage premium services because subscribers have to buy through basic services to get them. Isn’t this the missing argument for HBO GO?)
- With the loss of two million net subscribers from affiliate rolls, BOTH advertising and affiliate fees will take a hit-even if the ad market improves! By our estimate a 10% decline in advertising revenue will lead to a 13% decline in EBITDA- assuming no increase in program spending to stem the tide of viewer losses. A loss of two million subscribers from affiliate rolls will harm EBITDA by $20 million, which, though not as big as blow as continued advertising erosion will reduce affiliate fee growth to flat. And of course eliminate 2 million potential viewers.
- In this quarter as in past quarters, Viacom EBITDA was flat down and free cash flow declined by (30%) to $380 million while debt to over $13bn from $12.7bn and cash declined by $600 million.
- One the plus side, MTV, Nick, and Comedy Central still have strong brand identification (even if management has milked them dry). And, in current quarter, big ratings for Jon Stewart’s last appearances on the Daily Show, could offset some ratings declines but these are likely to re-accelerate, once he leaves the anchor chair. At the same time, Paramount has two big releases this quarter- MI 5 and Minority Report which will boost moribund Entertainment revenues.
- Conclusion: Somebody Please Put VIA OUT of Its Misery. While Viacom’s assets and brands still have appeal to target audiences they are being wasted. Management is the problem and yet management has been paying itself -exorbitantly- with so called equity compensation, (Dauman $37 million !! and Dooley $34 million respectively last year!) The stock had stabilized in the high sixties on financially unsupportable share repurchases. But these are not an option given the declines in EBITDA and increases in debt. Redstone can’t provide adult oversight any more and, besides, has been selling shares for estate tax purposes. Somebody has to put Viacom out of its misery.
- CBS, which was supposed to be the slow growth, cash cow in the Viacom break-up plan, has capitalized on retransmission fees and Showtime’s strength to outpace the sleeker growth oriented Viacom and embarrass the Dauman/Dooley team. Clearly, as a Redstone owned business, CBS's CEO LEs Moonves would likely get the first call from Redstone family to rescue Viacom. But who knows whether Moonves/CBS has the appetite and whether Dauman would demand too much if Moonves were to take over.
- As an alternative, Malone could-should form a coalition of the willing-which would include Charter, Lions Gate, Starz/ Encore and Liberty Broadband. Paramount-LionsGate is a perfect fit. Both companies know reach other well. Lionsgate/Paramount would be a killer combination of studio and library, (which would also benefit from a shift to lower Canadian tax rates, while STARZ/Encore would add the MTV Networks, Nickelodeon, Comedy Central and ePix.
Friday, January 16, 2015
Hmmmm. Probably an impulse buy, which means probably a mistake. I bought the stock because it is cheap at 12 times consensus estimates of $5.85 p.s. in 2015, though negative revisions would not surprise me.
And, it seems to me that it should be part of another company. Except for Paramount Pictures, Viacom is almost exclusively in the cable network business. As such, it is vulnerable to continuing ratings and ad revenues declines. In addition, it is strategically too small to defend itself from strategic choices that its cable operator affiliates are going to make.
Cable networking was supposed to grow at double digit rates ad infinitum. It hasn’t. And Viacom’s networks skewed to teens and younger and were supposed to grow even faster. They haven't. In fact, MTV Networks has been a ratings disaster.
Ok, so why are you buying? It is my hypothesis, (hope-fantasy?) that the Redstone family will decide, soon, that Viacom and CBS need to be consolidated. If an all stock deal - for arguments sake - were executed at say a 50% premium to the current price, the combined company would have the scale, scope, and capitalization that it needs to compete with the other players in the media industry.
The Way It Was Supposed To Work
The way it was supposed to work when CBS was acquired by Viacom and then was subsequently spun off (after some reshuffling of assets ) is that remaining Viacom-composed principally of cable networks and Paramount-was supposed to be the growth story and CBS was supposed to be the mature cash cow. Well that's not how it worked out. As it turned out the growth story turned out to be the cow and the cow the growth story. Over the last four years, CBS comparisons with VIA dramatically favor CBS:
Operating Cash Flow
None of this makes any sense. Starting from the bottom up: even a year ago Viacom traded at a premium to the S&P and to CBS. Now it trades almost 10 full multiple turns below CBS. Not the way it should trade. Both companies have share buy backs programs but VIA has reduced share count more. Not what was expected for a growth story. CBS's operating cash flow has grown at an impressive 12.16% over the last four years while growth at Viacom has been a modest 2.44%. Sales are up modestly at CBS-to be expected, right; after all it is supposedly the mature business but VIA sales are down? Not expected. VIA were supposed to grow at double digit rates long into the future. Cable net ratings were supposed to take additional share away from Broadcast dealing a crushing blow and affiliate fees were supposed to be a consistent stream that never went into reverse. What happened is that the cable networks relied too heavily on a continuous upward trajectory in affiliate fees. Ratings have collapsed and cable operator affiliates have begun bailing out.
As the Journal wrote recently:
- "Viacom is known for its aggressive bundling of two dozen channels, including little-watched spinoffs of MTV, VH1, Nickelodeon and CMT.
- A group of 60 cable operators representing about 900,000 subscribers dropped Viacom channels entirely this summer. In September, carriage negotiations broke off with Suddenlink, the nation’s seventh-largest operator, representing 1.4 million customers.
There seems to be a revolt breaking out all over the cable business. Cable operators are taking up arms against ever increasing network affiate fees. It is noteworthy that the worst offender/culprit is not the Viacom group of networks but rather ESPN, which charges operators almost $8 per month. Add on the Broadcast networks, whose retransmission fees have risen in the mid single digit range consistently, and smaller programming "bouquets" like Viacom will be squeezed out. Still, as Matt Harrigan points out (Wunderlich Securities Nov 14, 2014) over 70% of Viacom's households are covered by 3 year contracts. And, further that Viacom's affiliate fee growth is not much higher than the double digit increases that are the norm. And again as Matt points out the MTV networks are important to new and old entrants in the content world. It's just that Viacom seems to have lost it's creative energy and is being surpassed by other networks in commitment to exciting original programming. And it is easy to drop networks like those owned by Viacom if they are perceived as losing energy.
Ok, you argue the cable network business has not performed as expected. Ratings and ad rates have been down. Across the board! Yes, some networks are down. But others are up, Here are fourth quarter numbers from MediaPost.
"Fox networks grew 5% to 858,000, with virtually all other cable network groups sinking — the worst coming with A&E down 20% to 887,000. Also in double-digit declines was Viacom, off 18% to 2.18 million; NBCU, losing 15% to 1.3 million; and AMC Networks, down 11% to 438,000".
Here below full year rankings. While Nick leads all networks in total day, and Comedy and MTV are 24th and 25th in primetime, it is hard to find other Viacom Networks on the list.
TOP 25 AD-SUPPORTED CABLE NETWORKS
Ranked on Total Viewers
|* Network broadcasts less than 51% of minutes in a 24-hour day.|
Source: Turner Research from Nielsen data
By contrast, CBS is having a terrifiic ratings year. Last week its on-going series captured 16 of the top 25 rated shows. NCIS, Mom, Big Bang, Madam Secretary, The Good Wife, Scorpion-all shows are a mix of new and returning as well. Improvements are happening across the board. At the same time they are all owned shows whose current success on the network will translate into significant future revenues.
WEEKLY PRIMETIME AVERAGES BY NETWORK
Ranked on Households
Week Jan. 4
|Network||Households||People 2+||Adults 18-49|
|*Each rating point is equivalent to 1 percent or 1.164 million homes|
Note: Viewing estimates include same day (3 a.m.-3 a.m.) DVR playback.
What Can Viacom Do?
Viacom's fourth quarter conference call was almost exclusively devoted to why the significant declines in ratings do not reflect the real value to consumers of Viacom Networks. Yet, in my view, owners of the shares need to accept that the only ratings issues at work here are those that come from a lack of viewers and a lack of interest.
The company is currently talking to Neilsen and other ratings companies abouut ratings issues. Secondly, the company is attemptng to create an industry wide standard for capturing viewing on non cable outlets - digital, OTT- whatever. Dauman has been talking to Rentrak and others about alternatives to Neilsen. Some day soon, I believe, the ratings measurement companies will add capability although I don't have a clue how that might be done. My concern is that Viacom's numbers will be less than Dauman hopes as online takes an ever larger share of the ad market.
Recognizing the need to untether itself from ratings measurement, Viacom says that 30% of its ad revenues do not originate from Neilson rated shows. Still, there will be no real way to immunize ad sales from a lack of excitment and creativity in the product itself, which is where I believe the real problem lies.
In my view, the only way to revitalize these networks is to bring in new management and to bolt them on to a sizable company with far more market clout. Pounding away at ever higher affiliate fees in the face of lower interest on the part of viewers and subscribers is bad for everybody in the cable industry. At the moment, networks can get away with it. But there will come a day...
There is a better way. The Way It Was Supposed to Be.
Here’s what the combined entity would have looked if merged last year with a 50% premium. It will have sales of almost $30 billion. The compound growth rate in sales is not impressive and reflects weak conditions (particularly in auto co advertising) this year and last year projected into the future.
Combined Enterprise Value of
EV Mulitple of
|$29 billion||3.03 times||.060%|
|Operating Cash Flow||$7.33 billion||12.01||7.59%|
Operating Cash Flow
Net Debt to OCF
Still, there is good reason for optimism. It seems likely the Broadcast and Cable network ad market will strength. A reasonable upside would be somewhere around 5% reflecting a return to modest growth for the Viacom Netowrks and an acceleration in sales at the CBS TV network. In future years, retrans fees (and reverse comp affiate fees are schduled for sharp increase in 2016. Even without any cross platform benefits, EDITDA should grow at mid to high single digits. Most of this growth will come from CBS. If Dauman is successful in piquing interest in non traditional measurement then the number would be even higher.
- Increased scale and scope for the entire CBS Entertainment complex. MTV and CBS would enhance each others offering to both advertisers and affiliates. Today Viacom Networks/Paramount (and to a much lesser degree CBS) do not have the leverage with advertisers up that Comcast, 21st Century Fox and Disney enjoy. Viacom/CBS would have scale that would be hard to ignore.
- MTV would certainly gain from CBS success with advertisers and CBS would gain from MTV’s brand as a youth oriented programmer.
- Internationally, MTV Networks could help CBS with local identities (MTV is local in many countries) and sales organizations. CBS could help MTV (and Paramount) with strong product offerings from its television production studio.
- Increased scope and scale for Paramount. Instead of being an after thought, Paramount would be bolted onto to a very strong network TV production arm and be back in the syndication business. While it would not necessary have access to more capital, it would benefit from increased scale and scope and probably gain creative energy from the association with CBS Production.
- CBS management has more creative energy than Viacom and its transformation from an agent and buyer of programming to a creator and owner is both impressive and likely to continue. While the creator-owner strategy is the Viacom business model, it has seeded its creator position to younger, online competitors like Vice Media as it focused on share repurchase and returning capital to shareholders.
- With Paramount in the mix as well the company could create a killer digital strategy as well. Both companies are developing a portfolio of sites, though MTV managed to let Vice Media-charge ahead in a niche that should have been dominated by Viacom.
- Finally, a lower risk profile in the portfolio of businesses owned by National Amusements. Without the expected benefit from shining a light on NAI’s supposedly fast growing Cable Networks, it seems inefficient to have two management teams working in two separate public silos when only one-CBS's management-is needed.
Friday, November 21, 2014
An Open Letter To Chet Kanojia
Your being forced into taking the inevitable step of filing for Chapter 11 is a true loss to the media industry. The average consumer- average american (!) will not lose the robust choice which Aereo had created. A shame.
Though we have never met, I have followed you and your colleagues and been impressed with the grace and thoughtfulness which you have carried yourselves at every step of the way. As a media analyst, I feel the loss of Aereo even more acutely because enterpreneurism is desperately need in our industry!
All the best in whatever you do next.
Thursday, November 20, 2014
Friday, November 14, 2014
MY friend, Michael Waring, a very smart guy who runs Gallileo Equity copied me an interview of Jimmy Rogers by Henry Blodgett, also two very smart guys. Basically, Rogers blames the State Department (and, therefore, Edward Snowden-a pawn in somebody's geo-political economic game) for provoking Putin's aggressive stance. (Sort of falls into the category of if the guy can't take a joke f**k him.
Here's my response to Michael to a portion of the interview.
"He’s a thinker and Putin’’s a stinker! Not to be glib. I beginning to sound like my brother! I like Jimmy-he mostly makes a lot of sense. Still, I’m not quite as sure that punishing Putin with an oil shock and its attendant collateral damage to Canada and Australia and some of the friendlier Arab states at a time of intense foment, does. I agree that the oil shock offers a strategic silver lining-sanctioning Russia where it hurts most. And yet, you wonder, why Putin is forging ahead with an invasion of the Ukraine where he is bound to drain his treasury and when old revenues are weakening. Seems like a mistake. It also seems weird that Jimmy would consider Putin deranged if he invaded Germany. Wouldn't he have to invade Poland first? What does that make Poland, chopped liver? There’s a whole lot about this crack in oil that does not add up. It does NOT seem like ECONOMICS at work, but I can’t see WHAT is at work. Am I nuts. I bought some oils today. Probably way too early. Way, Way too early!"
Here's the relevant portion of the interview from Business Insider, November 14, 2014.
HB: Could the recent move in oil prices indicate a fundamental positive for the economy?
JR: It's a fundamental positive for anybody who uses oil, who uses energy. It's not a positive for places like Canada, Russia, or Australia. It seems to me that this is a bit of an artificial move. The Saudis, from what I can gather, are dumping oil because the US has told them to in order to put pressure on Russia and Iran. And it's probably not a real move. I read about shale oil like you do. But at the same time, North Sea production is declining. Russian production will start declining next year. All the major oil fields that we know about — all the production is static or declining. So it doesn't quite add up on any kind of medium-term basis I can see.
HB: You've been bullish in the last year or two on Russia, which is now going through something of a crisis. Has your view changed?
JR: No, no. I've been traveling a lot lately. I should probably try to sit down and figure out what to buy in Russia again. It has had a collapse, as you know, but I suspect if you look at things like Russian ETFs, they are down at previous lows, but not making new lows. And a lot of that is because of the ruble. To Russia's credit, Russia has not been sitting around supporting the ruble in any big way. My view of markets is you let them clean themselves out, let the system find a clearing price. To my astonishment, the Russians are being more capitalist than the Western capitalists. They are letting the currency find its own bottom. That will change soon. It will find its own bottom, and then Russia will be a good place to invest.
HB: And you say that even given Russian President Vladimir Putin and his aggressiveness?
JR: It sounds like you have been reading American propaganda too much. This all started with America, with that diplomat in Washington [Victoria Nuland, the Asst. Secretary of State]; they have her on tape. We were the ones who were very aggressive. We're the ones who said, 'We're going to overthrow this government, we don't like this government, even though it was elected. They are fools and we don't like them, so we're going to get rid of them.' We were the aggressive ones. Crimea has been part of Russia for centuries. If it weren't for [Nikita] Khrushchev getting drunk one night, it would still have been part of Russia. That election was in process, anyway. Everybody would rather be part of Russia than Ukraine. Ukraine is one of the worst-managed countries I've ever seen. Of course people want to get out of Ukraine. You would, too. It's a disaster.
Here's the whole interview.
Friday, October 24, 2014
OUTSIDE THE BUNDLE from the Wall Street Journal Today.
Stand-Alone Streaming Begins to Arrive.
The Journal published a summary of a la carte offerings outside the cable/ satellite eco-system. Arguably, the disintegration of cable package pricing, (inevitable frankly) has begun in earnest.
In our view, this debate has always missed the point. Cable TV is an over priced, bloated, no choive, packaged product. It is a stack of bundled services that many subscribers (and most cord cutters) do not want. The bulk of the cost of cable service is made up of retransmission charges by the major networks, and fees for "basic" cable services like ESPN and its many tentacles, and other channels in the business, family and children's categories. HBO and other premium channels can only be purchased after the subscriber has plunked down around $200 a month.
Why can't subscribers buy HBO and without having to pay for basic services first. It makes no sense (except as a legacy business practice in the early days of cable must carry). Over the last thirty years, consumers have faced a vast and expanding array of channels, but few real choices. With over 1000 channels of service on many high band-width systems, consumers generally are offered four options at most. How many consumers want multiple news services spanning the political spectrum? Most want one, the one which the voice fits best with their political outlook. How many subscribers want 20 or more sports networks? Unless you have kids, how subscribers want seven or eight children's channels? At the same time, subscriber bills have breached the $200 per month level. Put another way, consumers have been forced to pay alot for what they do not want-for years.
Our friend and former colleague Laura Martin, an analyst at Needham & Co., "estimates that unbundling would drain half of the revenue, or $70 billion, out of the television industry. Moreover, today’s hundreds of channels would shrink down to about 20, she wrote. (WSJ)" We don't think the losses will be so great, because consumers are not iirrational to the tune of $35 billion, BUT...
So-called over the top services, offer legitimate choice for far less money. Consumers will be able to express demand for what they want and only what they want.
Comcast's Steve Burke has argued that HBO needs cable because going OTT will canabalize its own subscribers. If consumers can cut out services they really don't want, then going with HBO offers tremendous savings. Taking HULU, HBO and Netflix, probably means somewhere around $100 per month savings for many consumers. That's $1200 a year. Arguably HBO subscriptions would rise if the service was not placed on top of the rest of the cable menu.
An HBO streaming service could ultimately be MORE profitable as the service will no longer have to share subscriber fees with the cable operator middle man.
What does all this mean? Video subscriptions are already falling, and we see declines in viewership of basic cable services followed by substantial shrinkage in the advertising income. We expect the program services to attempt to offset with increased subscriber fees; that will be met by heightened resistance from cable operators and consumers. Viacom services may be hit hardest, and believe that the company will not exist ten years from now. Time Warner's Turner services could also suffer without better branding and positioning online. Discovery and AMC may need to rely on strong presences foreign markets to survive, but also need to strengthen brand identity. ESPN is the tough one to predict but it will surely be vulnerable to further huge cost pressures.
Here's a link to the Journal story.
Wednesday, October 15, 2014
The Correction Is Here, US Media will Benefit from Enhanced Consumer Spending as Oil Price Declines Put Money Into Consumers Pockets.
US Trust saying that EU central banks and ECB will reverse course and expand monetary policy. Also marginal fiscal stimulus-trend of deflation in EU will end.
More important to US economy is the appearance of excess supply in the energy market. The rapid break-down in energy prices is positive because it will put more money into consumer’s pockets-it's basically a tax cut. The question is, will consumers spend the windfall at the historical marginal split of 70% increased consumer and 30% increased savings? If they do, then the economy will expand, and unemployment decline. How does sector allocation change? Presumably, the sectors which are sensitive to energy, autos, airlines and farm equipment and machinery should do well but what about utilities and railroads, where lower fuels costs might be offset by lower demand for oil transport?
Ok, what about media? Clearly, ad supported media should show positive benefits from increased consumer spending. We own Comcast Corp for NBC and its other ad-supported networks. This fits historical patterns, but technical change will disrupt direct pay sectors-like Over The Top services and or cable-even more rapidly. We own cable company shares and shares in wireless companies as an agnostic plays on the shift from fixed entertainment systems to mobile based services. We own them both domestically and internationally and see further penetration and increases in data usage as powerful secular driving forces in these sectors worldwide.
Monday, September 15, 2014
Here's something that may go unremarked, but will affect many lives. While the announcement of Apple Pay may seem big for the Tech World and Apple fans, it will have huge impacts beyond the tech world and could move the needle on on global GDP as a whole. Yup, GLOBAL! And that is not just because there is a cool new way to shop (OK yeah it is cool) but also because it is fast. Here's how fast.
The process of paying by credit or debit card can often take 30 or more seconds. The time involved, between handing over your card, its authorization, approval and signing can seem endless- not to mention sometimes also fraught with uncertainty for both merchants and consumers. You can chat up the clerk, but both they and you would rather get on with the day, right? Even after it is done, the uncertainty remains principally because credit and debit card transactions are highly insecure. With Apple Pay those uncertainties go away and the time required to make and process a payment gets cut dramatically.
All good things. But why is that going to have a global impact? In economics, the oldest of equations or (tautologies really) is that the price level times the number of transactions in any period equals the money supply times the number of times that money supply turns over - i.e the velocity of money. Going back to the invention of a money based economy, the introduction of more efficient ways to exchange money (literally to hand it over) has lead to rapid increases in productivity and wealth. Two great examples are the creation of paper money and credit cards. Both made it easier, more convenient and more secure to pay. Wealth bloomed as money turned over more quickly.
In 2008, the world economy went into a tail spin-the Great Recession. In the run up to the financial crisis, the Fed was cutting the growth of the money supply from around 3.0% to zero, while the velocity of money-the number of times per year consumers spent a dollar-was increasing from around eight and three quarter times to almost ten times. In the period before the crisis, the increasing velocity of money suggests consumer over confidence and speculation, which undermined feeble Fed attempts to restrain the economy. After the crisis began, the Fed reversed course and increased the money supply at ever faster rates hoping to stimulate the economy, but the velocity of money fell-from a turnover of nine times per year to around six and a half times. The economic bounce that the Fed expected did not materialize -at least to the extent the Fed hoped for, because the increase in money landed on a decreasing velocity of money. Here's a comparison of the velocity of money with the growth rates of GDP and Money Supply (M1-demand deposits plus cash in circulation).
So, tell me what is the big connection between Apple Pay and the velocity of money? By making payments more secure and speeding them up, Apple Pay will have a huge positive benefit on the velocity of money and therefore on GDP as a whole. In economist language, it means an increase in the money side of the economy and has the same inflationary effect as an increase in M1. Arguably, a similar increase in velocity in the mid 2000's resulted from an explosive rise in internet purchases. The impact of Apple Pay will could be even more dramatic, as it will speed up and make more secure transactions from all iPhone (and soon Apple Watch) owners. It won't happen all at once, it will require the adoption of iPhone 6 and later phones. Not doubt, Google and Amazon will figure out how to get on board with the new standard (because that is what it is) that the banks and Apple have worked out, so the leadership created by Apple Pay will lead to faster, more secure transactions throughout the economy and the world as a whole. I don't have the statistical tools to predict how much of an increase in the velocity of money will result from the introduction of Apple Pay but it will be substantial and last far into the future. So yes, pretty cool.