Thursday, September 22, 2016

Leon Cooperman IS NOT a Cheat! What The Heck Is The SEC Thinking?

What is going on? The SEC's going after Cooperman? Dear God what are they thinking?  Cooperman  is one of the good guys. He would never chance ruining his life's work and reputation for a chump change trade! Out of the question. This move by the SEC is wrong, and will diminish the credibility of the SEC for a years!

Analysts put pieces of a puzzle together to make patterns. These patterns are not based on inside information but a deep understanding of companies' industry prospects, competitors, customers and management. Cooperman is one of the best at this! One of the very best. And  ideas are infinitely more powerful than non public information. Period!

Monday, August 29, 2016

Quick Note to Tom Dooley on His Accession to Interim CEO at Viacom

I hope you are well.  Congrats or condolences depending on how you feel about your new appointment. I know you will do very well. And the company is in the best hands it could be.  

However, can I humbly offer a couple of words of advice?
1. Take a pay cut. Executive pay at Viacom is outrageous. Also end the share buybacks. 
2. Work with Tom Rutledge of Charter and Dexter Goei of Optimum to convince them of the value of Viacom's network offerings. 

And congrats. 

Rich MacDonald.

Wednesday, July 20, 2016

We Would Buy NFLX At Much Lower Levels in Anticipation of a Takeover.

It is still seems possible that Netflix (NFLX) has considerable downside left in the shares. We think the company is burning through its cash position rapidly and will need to raise capital or find a strategic partner in the next two years.

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 Center Does Not Hold

When I was an analyst (media) at a white shoe firm, now subsumed into a failing Swiss Bank, Tom Monahan was the best institutional salesman on the Street in his day – the early 80s to 90s.  Portfolio managers liked his blue collar work ethic, his energy and his optimism. And he listened. Perhaps, his best attribute. 

We met in Grand Central at the information booth with the four-sided clock on top.  I hadn't seen him in several months and almost didn’t recognize him. At first, he didn’t recognize me either. We are older. We laugh about that. Then, we go for drinks at the oyster bar located several flights below in a cavern at track level. 

We talk first about our eyesight (getting worse), his health getting better, about our families and then we got into what we always get into which is the future of the US and the markets.

"The S&P is at all-time highs, unemployment is nearing zero, house prices are soaring, but it all feels bad doesn't it?" He asked me.

Tom is a Republican and a conservative and will probably vote for Trump. As a Democrat and as a person, I am unhappy about the possibility that DJT may become President.  But I respect Tom choice.

As a Democrat and as a person, I should add, I am equally concerned that Hillary Clinton will be President.

Tom's politics are deeply held, no doubt, but his politics in no way define him. In that I believe, he is like most Americans. They largely think for themselves and do not wish to be defined by their politics either. (Or, another way to say it: would like to be seen as citizens not as members of a block to be cynically moved around a political chess board by political sharpies. But I digress.) 

What Tom wants from government is the best outcome for his family and his country. That’s the bottom line. So do I. So do many on both sides of the political divide. But for all and for Tom (if I may speak for him)– optimism and hope--seem like total luxuries in this current environment.

I said to him,“it feels like one of those moments when history goes wrong for a while; when events are likely to turn for the worst not for the better, when Life becomes more difficult rather than easier. 

“You just have to live through it”, he said. 

“Yeah, I guess.” I agreed. 

I don't believe that this turn in history has happened because of the actions of evil men or women (though there are some really bad people out there) No, I think because large forces have come to bear and to create very difficult challenges globally. . 

Here are a few that consensus seems to have identified.  
  1. The collision of new people with strong cultural identities moving into places with entrenched incumbent populations with equally strong identities; 
  2. The failure of even the strongest economies around the globe to fairly meet the aspirations of their own citizens--whether native born or naturalized.
  3. 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. . 
  4. The growing notion for most people that they will not be treated fairly in the workplace, in education or before the law 
  5. 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.
  6. 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) 
  7. That government cannot protect the governed from murderous or dangerous forces on the outside— like diseases,  rogue criminal dictatorships and murderous terrorist organizations. 
  8. 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. 

Tom said, “ This is still the greatest country.” We parted. We had spent a little longer than we usually do. Tom was always respectful of time—another reason why PM’s liked him. 

Don't get me wrong. This is still a great country. I totally agree with Tom about that. And, it isn't the 30s, but it will be a challenging time for most people – especially for those people who have little time left. Neither am I not whining for baby boomers – they are the richest generation in history according to Bloomberg. But for people, even privileged people like Tom and I – Republican or Democrat— the only workable theory is that the center has given way and a cold and eye on events, people and indeed the future will serve us and our families best.

Friday, April 22, 2016

Taking A Mulligan on Disney Succession Plan Good Governance According To Yale's Jeffery Sonnenfeld? Please!

Jeffery Sonnefeld, Associate Dean of the Yale School of Management, claims that shredding the succession plan at Disney is "good governance".

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

Plagiarism at Seeking Alpha, By Chris deMuth Jr.

It annoys the crap out of me that as soon as I allow Seeking Alpha editors to monitor my blog with a view to publishing an article, I see that what they are doing is monitoring to plagiarise. In my post of (04/06/2016) arguing that Tom Staggs departure from Disney could lead ultimately to a sale of Disney I also argued that Disney should buy Netflix.

"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

Bob Wright, A Former NBC Chairman, Doesn't Get The Staggs Demotion Either

Bob Wright, a very astute observer of the media business, is as perplexed as the rest of the world about Tom Staggs departure as Disney COO. However, he points to conflict at the Board level (as we also do) as the source which scuttled Staggs succession.

In our view, we think that the turmoil over succession and conflicting ideas about the company's future direction will lead to

  1. a further extension of Iger's mandate
  2. further strategic acquisitions--principally content based, like Netflix, 
  3. ultimately the sale of Disney to a well capitalized social media company.

Wednesday, April 6, 2016

Staggs Departure Suggests Internal Strategic Turmoil But Ultimately Will Lead To the Sale of Disney

Tom Staggs represented Disney exceptionally well to many constituencies but mostly to the investment community.  However, his departure suggests a internal strategic conflict that will roil the company for sometime. 

Years ago,  we recommended an out-of-favor Disney because Tom inspired confidence as CFO. Now as a shareholder, we see his leaving as a real loss at a time when the legacy networks, especially ESPN, are facing tremendous structural challenges. Some reporting (WSJ) has focused on the Board's desire to expand the succession search beyond Staggs, which explains his departure. Staggs experience wasn't creative enough (supposedly) but financial and strategic. Sheryl Sandberg, COO of Facebook (and a Disney Board member)  and other unnamed outside executives are mentioned as successors.  We doubt whether there is an outsider--presumably, from the social media world who would give up the bright prospects of a Facebook, Google, Amazon, or even WhatsApp, to take on the challenges of Disney's legacy business. Certainly, there isn't anyone from the cable or entertainment business either as qualified as Tom. So, what is the expanded search all about? 

The move to expand the search suggests that the board has conflicting ideas of Disney's direction. 
  • 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.  
We think Disney will continue to be a mid-single digit top line grower as it has been recently. It will also continue to be a reliable dividend payer with an excellent balance sheet and good interest and dividend coverage. But, the enterprise value of Disney is likely not to grow as fast as earnings or EBITDA. It seems to us that, strategic buyers will likely continue to mark down the multiple of the media networks segment particularly the multiple for ESPN.

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. 

A built up Disney which was then sold to a strategic buyer would ensure Iger's legacy and reward long term investors handsomely.  Ultimately that's the end game. 

Tuesday, November 24, 2015

Malone on the Movie Business.

Words of wisdom from Dr. John Malone, 
"one of the biggest sins of commission in my career was to get into the movie business with Starz. I lost money both times." 
 “ a couple of years ago I tried to get Direct to buy Netflix, but we had Starz and it would have upset our cable partners so they talked me out of it.  As it was,  I should have flushed Starz.”
Liberty Media Analyst Conference 11/12/15

And, now he controls 25% of the shares of Lionsgate. This time it is different, right? 

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. 
If our thesis is to invest in world wide, wireless and wired data demand created by growth in smartphone and mobile technologies, how can a studio be a Firehose Media Investment? 

Basically all movie studios are firehose companies. By their very nature, they spew out content to a hoped for worldwide audience : nevertheless, being a fire hose movie company does not ensure value creation for investors. All motion picture studios run hot and cold with a disheartening lack of predictability. All. Tens of millions in production and marketing costs can be poured into a film which audiences shun. The hard truth about the movie business is that nobody can predict how much income a film will generate until it reaches the theater.  This all sounds bad, right? 

Actually, all one can expect from a “good” studio is that management will grow the film library prudently from self produced and acquired films, reduce debt with proceeds from library sales and tilt the studios film release to the plus side of the ledger. Not a great business model right? 
In general no. So why invest in Lions Gate? 

One main reason: Lionsgate isn’t really a studio.  It is a growth company in the film and television businesses. Management thinks growth, seeking to expand both organically and through acquisition. It uses leverage in a disciplined way to enter businesses with leading edge franchises and to acquire free cash flow in order to pay down debt associated with the acquisitions. And, it is extraordinarily well positioned to capitalize on growth in demand for media content across all device platforms. 

Ok how? 

Lionsgate has built a very strong financial footing with roughly $200 million in library operating cash flow annually.  This cash flow, from acquired libraries like Summit and Artisan Pictures, offers very predictable revenue from home video sales, domestic and international television sales, and from new digital avenues like Electronic Sell Through (iTunes, Amazon) as well as over-the-top digital platforms like Netflix, Amazon Prime and Germany’s Max Dome.

LGF  is 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.  Big successful franchises provide leveraged upside beyond high profitability from theatrical receipts.Sales to home video, electronic sell through or digital streaming bear a direct relation to theatrical success, and can predictably generate multiples of income over various release windows extending 30 to 40 months in the future At the same time, there’s the opportunity to add sequels to the franchise -predictably profitable (though often not as much as the the original)- but still able to add annuity like income and cash flow to the library far into the future.. Other studios have had success with franchises in the past but have have difficulty moving beyond yesterday’s franchise series. What is attractive about the Hunger Games and Twilight Saga is that they appeal to young people especially teenage girls, an under served demographic segment.  Finally, success breads success as writers, directors and actors will want to associate their projects with a hot studio. This last doesn’t guarantee success but it has been a model that worked for Warner’s and Paramount in the past. 

Lionsgate has acquired or developed a number of successful television franchises: Orange Is The New Black on Netflix is now in its fourth season and commanding ever higher license fees.  In the current year, LGF will have 30 TV series on 20 networks. Will they all survive? No. But TV is a game of numbers and typically the game goes to the bold creatively and cautious financially.  

LGF owns equity positions in a number of interesting companies- in particular a 31.4% interest in EPIX a premium pay TV, which contributed almost $32 million to after tax earnings last year and is growing rapidly. We think that EPIX's very low cost structure, ownership by three major studios and management promises that the network will be very competitive even against the major OTT players. LGF also owns a 41% interest in Roadside Productions, an independent film production company, which helps fill Lionsgate’s distribution pipeline -THE most profitable of all studio activities on a risk adjusted basis. 

The company is adding to its cash position and liquidity through internal growth. Over the last two years, LGF has paid down almost $500 million in debt related to its acquisition of Summit Pictures and has $200 million in cash as of the first quarter up from $90 million last year.  LGF also has another $1.0 billion available under its current credit agreements.

In virtually all of its public statements about growth through acquisition, LGF management expects to be able to make cash accretive acquisitions. Importantly, Lionsgate is domiciled in Canada and can take advantage of lower Canadian corporate tax rates (35% vs 15%) when acquiring assets. A number of companies have taken advantage of tax inversions between the US and Canada. In fact, Lionsgate can absorb companies up to four times its size without triggering inversion prohibitions. We believe tax driven inversion deals are a tremendous opportunity for Lionsgate to add significantly to add assets and to create discontinuous increases in cash flow and value.

To that point, John Malone has invested in Lionsgate (taking a 3.4% position) and has gone on the board; thus, bringing LGF into proximity with his Liberty Media / Broadband/Global Plc empire. We expect Malone to increase his holdings of Lionsgate, at some point in the near future, possibly in conjunction with a Lionsgate acquisition of other Studio assets. It makes sense to us that Malone would like to leverage his position Lionsgate to make LGF the lead content provider to his worldwide cable holdings,which will total over 64 million households after the Charter/Time Warner Cable transactions. Doubtless, Malone would not make any additional investments in LGF until the deal closes -expected in the fourth calendar quarter of 2015. But, we are sure he sees the investment opportunity, as well as the strategic and tax advantages offered by LGF in a technological and global media landscape which is transforming very rapidly.  

Thursday, September 17, 2015

Euro Telecom Investment Thesis: A Huge Firehose Opportunity

We see a huge opportunity to play highly favorable long term trends in Euro wireless communications. 

With Europe falling behind North America and Asia in high speed wireless data capacity, the European Community has changed course on Telecommunications policy to emphasize capital investment and efficiency over price competition and universal service in 3G

To encourage new investment in advanced wireless infrastructure, the Commission will allow, over time, a surge in tariffs for wireless service, new Data plans modeled on North American tiered plans, and consolidation among providers. 

At the same time, there is significant unmet demand for new video and data services. New technologies and changing consumer tastes are shifting wireless usage away from voice to data. New phones with bigger screens are driving the use of mobile as an all in one video appliance.

Operators need to invest and are investing billions to expand 4G access, which at 15% of total coverage is about 60% of North America’s coverage. By 2018, coverage is expected to be 80% on both continents. As coverage increases, consumer usage could expand exponentially. 

While fixed line voice and video services have little or no growth to offer, a round of mergers among the Euro telecom players, large and small, has started, designed to capture operating efficiencies from scale economies which will have several years to run. 

Investors can take advantage of these trends through a wide variety of vehicles offering different risk profiles.

  1. 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. 
  2. 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. 
  3. 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

We see a blended portfolio of all three as a highly attractive vehicle to exploit the convergence of tremendous technological change, unmet consumer demand, consolidation of a fragmented industry structure leading to greater efficiencies and more favorable regulatory environment.

Apple Still a Firehose Stock. Trades Like a Garden Hose. Has to be Owned at Current Prices.

With its innovative combination of technology and design, Apple Inc. continues to  create entirely new categories of consumer demand where none existed before.  Along with Netflix, Apple is transforming wired and wireless communication into a consumer necessity, which will become ever more central to daily life. 

Apple is a cash machine and a bank which produces high end consumer products in a highly developed eco system, that can absorb additional offerings on a regular basis.  The iPhone, though 60% of Apple’s sales, is in control of its own strategic destiny as the tech brand which marries innovation in design and engineering. iTunes is a next-generation media distribution entity with good growth and high margins.  As market leader, Apple generates huge cash flow, which it has begun to return to shareholders through dividends and a large share repurchase program. 

For its size Apple’s sales and earnings and cash flow are growing at extraordinary rates. “In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33 percent and earnings per share up 45 percent,” said Luca Maestri, Apple’s CFO. “We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program” 

Yet last month, Apple shocked investors with a “miss” on iPhone unit sales and revenues. iPhone unit revenues were up 59%, 49 million units but somewhat less than the 51 million units that the street was expecting. Make no mistake, however, these numbers are still unbelievable. Repeat unbelievable. 

At the same time, Apple’s balance sheet has over $37 per share in cash despite returning billions in a share repurchase program and in dividends. 

Still, the question for investors (who marked the shares down almost 10% to $122 per share after the release) is a simple one. Is Apple still the same Firehose company they thought it was?  Answer: yes! three reasons:
  1. 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. 
  2. The company continues to innovative.
    • 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. 
  3. Despite supra-normal growth in sales and earnings, the company continues to return cash through its share repurchase program and higher dividend program and to add to its cash and securities pile of over $212 billion. 

This is really unbelievable. But are the shares cheap. Even discounting the off-shore cash (around $190 billion) by 25% to reflect some kind of repatriation deal—twice Apple’s current tax rate—cash amounts to $28 per share. Dividing the remaining non cash portion-$96 per share—on  Fiscal Year 2016 estimated eps of $9.75 yields a pe of 9.85 times. If the non cash portion of the share were to trade at 14 times (a 10% discount to the market) the share price could rise to ($28 cash portion plus $136 operating portion)  $164 per share, a 32% increase. In other words a trillion dollar market cap is both feasible and likely. 

This estimate does not reflect potential growth in earnings or cash or increases in the dividend. Yeah, truly a virtuous circle in biz school language. 

Could the stock get cheaper? Sure. First, there is no suggestion that cash in the company’s off-shore accounts will be repatriated any time soon—arguing for a deeper discount on the cash portion. Second, maybe the miss in third quarter earnings will recur in the fourth quarter, ending September 30; though by then, the company will have five days worth of sales from the 6s series of iPhones and its other innovative products will have begun to gain traction in the marketplace. Lowest I see the shares is somewhere close to $115. But, I am a buyer at current prices. 

Wednesday, September 16, 2015

Altice and Drahi, one of the Main Actors Driving Disruptive Change in European Telecom and Elsewhere.

Investment thesis:   The Firehose Portfolio.

My broad investment strategy is to invest in world wide, wireless and wired data communications businesses to capture growth in advanced smartphone and mobile technologies.

I use the firehose analogy because the data flowing in and out of smartphones resembles some overpowering gusher from a high pressure firehose.  Demand for data and internet video is surging, telecom operators world wide are consolidating, while, at the same time upgrading wired and wireless infrastructure and capacity. Profitability is likely to surge. 

One of the main market players in Europe driving disruptive change is Altice SA. Lead by Board President, Patrick Drahi, Altice SA is a highly entrepreneurial, disciplined, operationally focused, acquirer of wireless and fixed line broadband businesses. From an initial base in the Dominican Republic, Altice has added wireless and fixed wire systems in Israel, Portugal, and France. A protege and former employee of John Malone, Drahi’s view, like Malone's, is that there are significant economies of scale, technology and scope in the broadband and wireless industries, which are best exploited by huge size.

At the same time, we think another side to Altice's story is that operating management lead by Dexter Goei can impose new discipline and improve profitability on larger and larger operations, and it is this discipline and the implied value to be captured that makes Altice such a disruptive force and interesting investment.  The plan is to improve the technological backbone of the systems, the penetration of subscribers on the systems, and the profitability of each subscriber. At the same time, acquisitions are made with relatively aggressive leverage, which the company then pays down equally aggressively from cash flow. 

Each of Altice’s recent acquisitions still offers significant upside, particularly, in France-but the company continues on an aggressive acquisitions path. In the first half Altice closed two very large deals. Portugal Telecom and Numericable-SFR. In both instances, the strategy is to be able to offer quad play wired and wireless services through the leading national platform. 

In France this required the merger of the largest cable and wireless services and will require significant investment in fiber to the home networks and in LTE/ 4G wireless capacity. 

In Portugal, the systems were advanced but subscriber profitability poor.  Though it has only been two months the signs of improvement in subscriber quality are clearly positive. In both markets, improvements have lead to higher than expected EBITDA. 

Altice interest is not confined to Europe. Recently, Altice made its largest offer to date for 70% of  Suddenlink,  the 7th largest US cable operator with 1.5 million residential and 90,000 business customers. With operations primarily focused in Texas, West Virginia, Louisiana, Arkansas and Arizona, Suddenlink is present in attractive growth markets for both residential and business services. In 2014, Suddenlink generated $2.3 billion in revenue and over $900 million in EBITDA. The transaction is to be financed with $6.7 billion of new and existing debt at Suddenlink, a $500 million vendor loan note from BC Partners and Canada Pension Plan Investment Board, $1.2 billion of cash from Altice with the remainder representing the roll over by BC Partners and CPP Investment Board. With current financing the deal values sudden link at around 11 times EBITDA. The deal should close in the first quarter of 2016, but that will be only a first step into the US market. 

 It is also his view that the US broadband industry is consolidating at every level below Comcast and Charter/TWC slash Liberty Broadband. 

Cablevision seems to be Altice’s next US target. CVC has 5.5 million passings, 2.6 million video subs, 2.7 million broadband subs. The rumored deal is for $34.5 per share (last trade $28.50) or $9.5 billion in equity plus assumption of $8.2 billion of net debt, or $17.7 billion. CVC currently generates $1.8 billion of EBITDA, so the deal appears to be worth around 10 times cash flow pre synergy with Sudden Link, pre cost savings.  Recently, Altice shifted the company domicile to Amsterdam from Luxembourg and following the lead of many acquisitive media entrepreneurs, created a two class share structure.  On August 12, 2015, current Altice shareholders received 3 shares of a new A share (with 1 vote) and and 1 share of a class B share (with 25 votes).  We expect the company to finance the majority of the transaction with its own non-voting shares and the assumption of debt, as the two class structure allows current managements to preserve control while growing aggressively through acquisitions.  We wonder however if a share exchange of voting for in essence non voting shares wiill be attractive to CVC non Dolan family shareholders. If more inducement is needed to finaalize the transaction then we presume Altice's Canada pension and BC Partners will provide the funding.  

Along with Liberty Global, it seems to me that the combination of scale economies and good operating habits developed by Altice will lead to significant equity creation over the long term in all of the company’s related equities. These include Numericable – SFR, Altice, and any other that may be created. As usual with the entrepreneurial breed of management, it may be a rough ride on occasion, but it will be long and fruitful. Equally important, these two companies propel change across the telecom landscape in Europe (and, elsewhere). I own both A and B shares.

Friday, August 21, 2015

Viacom (VIA) : The Terrible Truth: Management IS the Problem

Hasn't the plot thickened with this collapse in the Viacom’s share price? The terrible truth at the heart of this story is that management is the problem-not the cable industry nor the company’s beleaguered brands. 

Large declines in revenues are based on fundamental declines in viewing and advertising. Is there one single reason? No, audiences are fragmenting, time shifting, using a variety of devices. What is interesting is that only about $140 million of the national TV $1.1 bn decline is drawn from cable TV,  the Viacom nets seem to be underperforming even within this secular trend. 
  •  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

Put Viacom and CBS Back Together, The Way They Were Supposed To Be.

Why In God's Name Did I Buy Viacom? 

Recently, I bought some Viacom. Not a lot, some. 
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.

It has other problems-not a few of which could sink the shares. But, the optimist in me says, hold on this is Viacom, the flagship that Sumner Redstone used to build a great media empire. It's a great cash machine and it is buying back between $2 and $3 billion of shares and cutting dividend checks for $500 million.

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:

CBS vs Viacom: Comparison of 4yr Compound Average Growth rates
bp Advantage
Operating Cash Flow
Dividend Growth
Shares O/S
10 turns
Source, company financial reports

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. 
Viacom’s standoff in the sticks is seen as an example of operators starting to push back at the channel bouquets that top programmers were able to develop in more advantageous times."

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.


Ranked on Total Viewers

Rank Primetime Total Day
Net (000) Net (000)
1 ESPN 2276 NICK 1606
2 USA 2179 DSNY 1396
3 TNT 2039 ADSM* 1238
4 DSNY 1943 USA 1150
5 TBSC 1869 TOON 1067
6 HIST 1857 FOXN 1055
7 FOXN 1732 TNT 1049
8 FX 1447 ESPN 1016
9 DISC 1414 NAN * 968
10 AMC 1355 HIST 863
11 HGTV 1343 HGTV 761
12 ADSM 1341 TBSC 712
13 NAN 1313 AEN 709
14 AEN 1269 FX 675
15 FAM 1259 ID 632
16 LIF 1132 DISC 628
17 SYFY 1131 AMC 626
18 FOOD 1087 FOOD 595
19 TLC 1079 FAM 579
20 BRAV 991 LIF 529
21 HALL 909 HALL 525
22 SPK 903 SPK 503
23 ID 811 TVLD 500
24 MTV 783 TLC 496
25 CMDY 705 DSJR 480
* 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.

Ranked on Households

Week Jan. 4
NetworkHouseholdsPeople 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.
Source: Nielsen

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. 

The better way is to put CBS and Viacom back together. The recombined entity will have the cash generating capacity of the two separate entities plus a lot more in my view. 

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.

CBS Exchange Offer For Viacom: 50% Premium
Combined Enterprise Value of
$88 billion
Combined Company
EV Mulitple of 
$29 billion 3.03 times .060%
Operating Cash Flow $7.33 billion 12.01 7.59%
Operating Cash Flow
$8.0 billion 11.0 6.41%
Net Debt
$18.55 billion

Net Debt to OCF

Source, company financial reports, Macdonald estimates

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.

The above are advertising climate considerations but here below are further strategic benefits that are low hanging fruit that I see for the combination.

Here are the eight basic upsides we see for a potential combination.   
  1. 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. 
  2. MTV would certainly gain from CBS success with advertisers and CBS would gain from MTV’s brand as a youth oriented programmer
  3. 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
  4. 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.  
  5. 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.
  6. 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. 
  7. 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

A Loss To Consumers and To The Media Environment

An Open Letter To Chet Kanojia

Dear Chet,


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

A Really Good and "Sensible" Talk on Value

This long talk but worth it. Damodaran addresses how to look at Apple, Twitter and Uber.

Best line is "Harvard Business Review is soft porn for corporate strategists".

Friday, November 14, 2014

Jimmy Rogers, Putin and My Friend Michael Waring

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

Missing the Point on HBO and Streaming: Cable Basic Service Bundles Must Go!

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.