Was I too strong in calling this series, “Debunking the M&A Tidal Wave in Media and Entertainment?” I don’t think so. I want emphasize the “think” in that previous sentences. I’ve thought about this a lot. I mean, asked myself ...
One of the challenges of “big data” is that it is so…big. For any given subject, we have so many ways to measure things. I can pull one set of data to prove my point; you can take the same ...
It never ceases to amaze me how much more there is to learn about this crazy industry. I call myself the “entertainment strategy guy” and things still surprise me. Take M&A (mergers and acquisitions) in entertainment & media. For years, ...
(This is Part VI of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here: Part I: Introduction & “The Time Value of Money Explained” Appendix: Feature Film Finances Explained! ...
Was I too strong in calling this series, “Debunking the M&A Tidal Wave in Media and Entertainment?”
I don’t think so.
I want emphasize the “think” in that previous sentences. I’ve thought about this a lot. I mean, asked myself many, many, many times, “Wait, are you sure there won’t be a tidal wave surge in M&A now that the Justice Department lost in its AT&T battle? Even if M&A has been high the last few years, couldn’t it get higher? Are you implying you think M&A could go down in the future?”
Upon reflection—all that thinking, hat tip to iFanboy—and yes, I think I am appropriate in calling this a debunking. Certain narratives catch hold—coincidentally, like a tidal wave—and most everyone tends to repeat that narrative. The internet started this phenomena, but social media like Facebook and Twitter and Reddit amplify it.
To sum up all I’ve learned, here’s the brief history of M&A in media and entertainment:
– Media and entertainment (and communications/internet) has been consolidating since the 1980s, like all industry.
– After the recovery from the Great Recession, media and entertainment companies began consolidating again.
– By my numbers, the growth in M&A was somewhere between 8%-25% per year in total deal value (depending on the years you pick) and mega-deals (deals over $1 billion in value) increased from 8 in 2011 to 18 in 2017.
– These deals included both horizontal mergers (within the same industry), conglomerations expanding (conglomerates continuing to acquire new businesses) and vertical mergers (within different industries, including distributors such as cable or internet firms acquiring media and entertainment companies).
– Consolidation likely would have continued even if the Justice Department had won their lawsuit preventing the giant and horizontal AT&T-Time Warner Merger.
Phew. Sorry, I had to get that out.
Knowing what we know above, we can use that as our baseline. For any new information on M&A, we can update our priors, to use Nate Silver speak. Basically, if a new deal is announced or a current deal opposed by the government, we have a solid context to understand its impact on the larger M&A in media and entertainment (and communication/distributors/tech/social media) landscape.
For today, any time I dive super deep into a topic, I end up with a bunch of stray thoughts that don’t quite fit in any of my other articles. Today is the catch all round up of those pieces.
Other Thought 1: The Chaos of the Trump Administration
Ignoring the politics of the current administration—and how can you?—what does President Trump and Gary Cohn/Ajit Pai/Wilbur Ross mean for how entertainment companies conduct business? Really, the daily tweets and outrages for liberals or the perceived economic boom times for conservatives matter much less for how he had changed the regulatory environment for business.
But some of those Trump tweets matter. Like how he tweeted opposing the AT&T merger, praising the Disney-21st Century Fox merger and supporting Sinclair/Tribune. In each case, either base political calculations or personal relationships determined his support, not larger idealistic concerns (either free market or pro-consumer). In AT&T’s case, he hates CNN. In Disney’s case, he loves Rupert Murdoch, whose Fox News also supports him. In Sinclair, I think he knows he has a friendly voice supporting his policies.
Uncertainty is the key, along with the certainty that the key is winning Trump by pledging allegiance to him. That’s how companies can win in the short term, while America’s economy moves towards a rent-seeking/crony capitalist future that curtails economic growth. In the mean time, M&A will proceed apace as the key to execution means wooing Trumps favor. Before you decide to do a deal, think, how do we spin this to make Trump look good, while crossing our fingers Democrats don’t punish us for that?
Speaking of decisions…
Other Thought 2: What decisions can we make off this information?
Imagine you’re a major executive at a major studio, communications provider (cable, satellite or telco) or production company. Maybe you’re the boss or the head of his/her corporate strategy or business development team. The key question following a judge’s approval of the AT&T-Time Warner merger is: how should this influence our decision-making going forward?
Now, if you build it, they will come. In business, this means if you build a team with a mission, that team will recommend decisions in its interest. If you have a team devoted to assessing and executing mergers & acquisitions, they’ll probably recommend that you make a lot of mergers & acquisitions. That team—and its likely influential leader—would therefore recommend most CEOs be aggressive in their deal making. Hence, they probably read a lot into the AT&T merger decision as the green light for future mergers.
Ignore that team/leader.
If a merger with a competitor or supplier or other company makes sense economically, it probably made sense no matter which way this decision went. Now, it likely would change the probability on one line of the economic model—the line one the costs if the merger fails—but I would argue that would only apply to deals that almost exactly mimic Comcast-NBCU/AT&T-Time Warner style deals, meaning it would mainly apply to Comcast. And I don’t think Comcast CEO Brian Roberts has any desire to slow down his deal-making.
What about the information I’ve provided showing the huge surge in deal-making going on? Should this influence executives? Maybe.
The case would be strategic. If everyone around you is getting larger, then to continue to be able to negotiate with suppliers or be able to gain a presence in the marketplace, you may need size to compete. If you’re Discovery and Scripps, facing a world with shrinking cable subscribers, doubling the number of channels under negotiations may help keep your affiliate fees higher. Same with movie studios: Disney will be able to negotiate great revenue shares with theaters if they own 50% of the box office, so maybe you need size to compete with that.
But for that strategic case, I could trot out an early version of my “Theme 3: Strategy is Numbers!” At the end of the day, you don’t win in entertainment by simply being the largest player in the world. This isn’t a board game like Risk or Settlers of Cataan where simply being the biggest or lasting the longest means you win. You win by generating cash for your shareholders.
If the deals to get bigger end up costing you more in interest payments than they return in cash, then shareholders will lose money, even with the size. This is usually exacerbated by vertical deals, but all deals risk costing shareholders money. If anything, the frothier the M&A environment, the higher the prices paid, which increase the likelihood that deals don’t make economic sense.
In all, M&A in the larger sphere is interesting, but not determinative on the decisions you need to make as a decision-maker.
Other Thought 3: I’m even more skeptical of conclusions from the M&A data than I was before.
I can’t get over how noisy M&A data is. So noisy.
When you read sweeping conclusions in breathless reports about M&A, remember this. The biggest deals have a huge impact, but are really small in number, while the timing can fluctuate a lot over a given year, which can drastically change the conclusions. a lot, impacting any quarterly or yearly analysis.
The first impact of this uncertainty is to really hinder drawing trends underneath the data. Like say, “Oh look, the majority of deals are about developing innovation” or “achieving economics of scale” or that deals tend to be horizontal or vertical in nature. I’m also hesitant to point to explanations for why M&A is happening, besides that M&A is the natural state of industry in America.
Take the explanation that executives are fearful of the rise of Netflix, Youtube, and Amazon and disruptive business models. That’s a great narrative. But consider that Comcast tried to buy Disney in 2004, did buy NBC-Universal in 2010 and Disney has been buying big new businesses such as Pixar, Marvel, Lucasfilm and Maker Studios. If we tried to quantify this trend, we just couldn’t do it.
The second impact is I tend to look skeptically at any explanation that M&A is increasing year over year based on the most recent data. Again, it just won’t hold up to analytic scrutiny if you can move one or two deals and change the whole picture.
Other Thought 4: Explaining the M&A total number of deals in 2007/2008
In Part IV of this series, I pointed out that in 2007, the number of M&A deals exceeded 1,000. That’s huge, compared to the 800 or so deals we’ve averaged in most of the 2010s. Even though I dismissed this number when making my prediction, it doesn’t mean it doesn’t beg for an explanation.
I have two theories.
Theory 1: 2007 to 2008 was the peak of consolidation of bigger players of smaller mom and pop shops. Basically, this theory says in the 2000s small groups of cable providers, radio stations and independent broadcasters were swallowed up by larger groups. While we focus on the giants of cable, we forget that in the 2000s there were hundreds of cable companies, maybe even thousands. Yet a lot have been swallowed up by the larger players. Now, these deals were sometimes for cable providers as small as a few hundred thousand people, so they just didn’t rate a huge value. Now that they are gone, the number of deals has gone down, but the total value has gone up.
Theory 2: In the 2007 financial crisis, some businesses were divesting not merging. This makes more sense, and I believe one article mentioned this was happening, but honestly I don’t have the data to prove it. If I had Thomson-Reuters data, this is what I would definitely explore.
So I can’t prove either theory above, but they would make for interesting future study.
Other Thought 5: Horizontal versus vertical merger discussions were overblown.
One of the legal hot takes was that the Justice Department had typically ignored vertical mergers and this is what made the move against AT&T so bold. I have two counters.
First, the Justice Department didn’t do a great job of stopping horizontal mergers either.
In my data set, I see a ton of horizontal mergers that went through without scrutiny. In just 2016 and 2017, we saw announced horizontal mergers in broadcast (Sinclair and Tribune), theaters (Cineworld and Regal; Dalian Wanda with two theater chains), radio (Entercom and CBS Radio), conglomerate (Disney and 21st Century Fox), networks (Discovery and Scripps), and other cable/cellular companies, most of which passed scrutiny. So the Justice Department hasn’t done a great job stopping horizontal mergers, which makes the focus on vertical mergers…strange.
Second, the Justice Department has looked skeptical at vertical mergers. Namely, the Comcast-NBCUniversal deal, that it ultimately blessed with many conditions.
Overall, this is one of those data problems where we shouldn’t rely on the sparse data too much. There just aren’t a ton of examples and other factors may explain the conclusions better. Like say size. Many vertical deals just involve really small companies being acquired.
Honestly, just because this vertical deal was successful at trial doesn’t mean future deals will be as well. If cable and satellite companies keep increasing prices after deals clear approval—as both Comcast and AT&T have done—well a future government many decide that these deals aren’t great for consumers.
And wouldn’t that be something.
I love it when the “most important story” ties directly into the topic I’ve been writing about a lot since July: “mergers & acquisitions in media and entertainment”. Call this the “Updating Your Priors” edition of my most important story.
Most Important Story of the Week: An M&A Tidal Wave…Stalled
The great thing about the analogy of the tidal wave is the unstoppable nature of it. If you want a real life version of the “immovable object versus unstoppable force” it’s a tsunami heading towards land. Unstoppable force hits immovable object.
So how could the AT&T decision have unleashed a tsunami if it’s already been stopped? Hardly an unstoppable force, I’d say.
First, the FCC came out opposing the Sinclair/Tribune merger. Or more specifically, it sent the deal to an administrative hearing, which ended up killing the deal. By Thursday of this week, Tribune withdrew from the deal. Then the Justice Department decided to appeal the AT&T-Time Warner merger decision, even after the judge strongly discouraged the DoJ from filing an appeal. (Though, consider the logic of that, shouldn’t every judge insist you don’t appeal their decision?)
Imagine a world where the DC Circuit appeals court overturns Judge Leon’s ruling. Imagine if Sinclair abandons it’s Tribune merger. Does the narrative suddenly shift that M&A is doomed in America?
Nope.
Back to my admonition above to “update your priors”. No single news story should swing the narrative from “M&A will be a flood” to “M&A will ground to a halt”. Instead, all these moves and counter-moves are just a part of the regular ebb and flow of M&A. The largest force in M&A is the general trend towards consolidation in general. The current tax and regulatory environment are just the current drivers.
Moreover, the overriding “tsunami” changing all regulatory agencies in America is still Donald Trump. He and his administration are enforcing the law haphazardly and primarily due to whoever courts his or his party’s favor.
Added Thought: This is Sinclair’s Fault
This quick summary of the legal issues by Eric Gardner was the best summary/history/legal read I saw on the Tribune-Sinclair issue. The issue for me seems like one of over-reach by Sinclair. They, in my opinion, over-estimated the value of the Trump nomination and how easy it would make to flount or skirt the laws related to media ownership. And it backfired.
Lots of News with No News: The Oscars Is Adding a Category Called “Popular Film”
Listen, I loved this story. As a fan of the Oscars. But is this an “important” story in that it will impact how entertainment studios do business? Barely. There might be more of a push by the big studios to get popular films some Oscar buzz, but the size of that buzz is already baked into these films. In most cases, blockbuster films have been out on DVD since Christmas by the time the Oscars get nominated. Also, arguably only the Best Picture category really generates buzz. Add on top none of this may happen, and you have a story with a lot of fun news, but not a lot of news.
(I will still try to dig into the economics of it next week.)
Data of the Week: “Open” Offices aren’t effective
One of my favorite types of news stories to debunk is the one that leaves out the most obvious example. Take the fun story of the last few weeks about the study showing that open offices may not actually help foster collaboration. Most of the takes on this study tried to explain why “open” office floor plans have proliferated, offering these explanations:
– They foster collaboration.
– They look better than cubicle farms.
– They’re less dehumanizing than cubicle farms.
I have a simpler take: They take up less square footage than cubicles, which were already cheaper than offices. This is why most people moved to open offices, and the above reasons were just the window dressing.
Still, I have one giant caution. So Harvard Business School–or professors associated with it–conducted a study showing open offices don’t work. Could another group of professors do a study showing the opposite? Sure, and they probably will. This doesn’t mean the new study isn’t useful and research we need, but it doesn’t end the discussion, which is how the article sounded.
So this post was supposed to go up last Friday, like usual. Then all that stuff happened. All of it with Les Moonves. So I took the weekend to think about it, waited to read some takes, and then decided how I felt about it.
It isn’t the most important story of the week…though it could be. So enjoy the “Most Important Story” of last week, two days into this week, with some other good reads.
Most Important Story of the Week: MAUs, user growth and metrics impact Social Media
I write a lot of “zero drafts” of post ideas, many of which don’t come together into a coherent whole. The ones that do become drafts, and then I try to get them scheduled on the calendar. The problem is that bigger articles like my series on Lucasfilm and M&A in media and entertainment can suck up a ton of time and posting space. So I don’t finish those other articles.
All of which is to say I have a few great ideas on metrics and how we measure the consumers of digital video on the internet. Posts that have been written and rewritten, but not published yet on this site. So I feel like I’ve told you, the reader, those ideas, but I haven’t.
I have a lot of ideas on metrics, especially those ideas on video and social media viewing, but I haven’t told you them yet. And this little post isn’t enough to do that.
So the news before Les Moonves was dominated by the Facebook stock dive, and some people saw the Twitter stock decline too. I’d also pair them with the ongoing user growth struggles of SnapChat. To put those two stories in context, I should really post my larger thoughts on metrics and how unreliable they are.
The media may finally be tamping the breaks on the metrics reported by large social media companies. This is a great thing. As long as we don’t have consistent ways to measure user behavior (do we care about members? Active users? Subscribers?), then a lot of Wall Street, Silicon Valley and Hollywood will be seduced by misleading press releases and public comments into thinking social media is doing better than it really is. This can really easily lead to bad decision-making.
Do I think big social media companies are disappearing? Heavens no. But this may be the beginning of the hype getting closer to the reality.
Other Contenders for Most Important Story: The Three Firings Related to “Me Too” and Behavior
If I had to put the three firings in order, I would do it like this: Les Moonves, Amy Powell and then James Gunn, with about ten five slots between the second and third entry. The only reason any creator ever gets a high ranking is when they are in charge of a billion dollar movie franchise, which Gunn is. If the cast decides not to do Guardians 3 without Gunn (a maybe), then that’s important.
But Powell and Moonves are obviously bigger stories. The only reason they aren’t more important than the stories above is that they are unsettled. Moonves has an investigation to go and Powell is suing Paramount. I want to see how those play out before I make the call on most important event.
Good Read – App Game Giants Crushing Independent Games
This Engadget article by Jessica Condit is just fabulous journalism. A great personal story about how a clever and fun looking game hasn’t even launched but has already been ripped off. Reading to the end I think capture the challenge of this from a regulatory perspective: there aren’t good solutions to this injustice (besides buying the games of indie developers and not paying for ripoffs). If you allow game designers to own in-game elements, arguably first person shooters and platformers would be owned by Nintendo or EA. That would make a less rich gaming landscape.
Any business or strategy implications? Maybe for Apple and Google and other app websites. The key should be customer experience and my gut is that as large as some of the casual gaming companies, they don’t generate as much value as you would hope.
Good Read – On the battle between Iger and Roberts (with Murdoch as the prize)
Yes, the titanic battle between entertainment and distribution giants will probably end sometime this year, but it will be fun to watch it play out. This Variety article has the best description of the players involved. In all, I found Roberts came across the least flattering. The descriptions of him focusing on making the deal but avoiding the details just seemed…odd. That said, it’s hard to argue against his deal-making except for the huge debt load his firm would own if it wins the 21st Century Fox deal. Also, the idea that Disney could walk away if necessary is instructive.
(Though I will mention, this really extended description of the battle between the two waited until the very end to describe the supposed enmity between Iger and Roberts.)
Update to an Old Idea
A few updates back, I called out the “six month summary” of the 2018 theatrical box office as the most important story of the week. That analysis came from Variety, but The Hollywood Reporter has followed up with their own survey with a few unique insights. The headline is that the non-Disney/Universal studios are avoiding releasing in the summer months because of the Disney behemoth. As a result, studios try to launch summer blockbusters year round, even as that strategy gets increasingly crowded. They also have a nice chart on the “seven major studios”, which shows the incredible concentration if Disney or Comcast successfully acquires 21st Century Fox. (But the chart numbers are for summer.)
One of the challenges of “big data” is that it is so…big. For any given subject, we have so many ways to measure things. I can pull one set of data to prove my point; you can take the same set of data and pull a different metric to prove your point.
Take gun violence: gun control advocates have their set of data and analysis showing how guns increase homicides, suicides and violence in general. Pro-second amendment folks have their own data proving their own points.
This applies even for something as innocuous as picking TV shows for a streaming platform. In one recommendation I authored, I counted over 1,400 numbers in one powerpoint presentation. How do we figure these issues out with so much data to choose from?
Well, I have a way. It’s unscientific, as far as I know, but it works for me.
Anytime we come across a significant issue with tons of metrics and variables and data, we can employ this method. I call it the “as many measurements as possible” approach, and I’d love to find out there are other more scientific ways to do this. Here’s how it works:
Take as many measurements as possible and determine if they support or nullify the issue under question. If the majority, super-majority or vast majority support the case, then the phenomena is probably real.
The point isn’t to take just one measurement as our gospel but all the measurements we can. If 9 of our 10 metrics indicate that a phenomena is real, then it probably is.
Take global warming/climate change. If you measure temperature, in 95 percent of measurements or ways to measure it, the climate is heating up. Sure a handful of scientists can find one or two ways to show the world isn’t heating up. Meanwhile, 99% of the rest of scientists measure the data in hundreds of different ways from daily highs increasing to the average temperature averaged over the year from city temperature to countryside to oceans and say, “Man, no matter how you measure this, this impact is real”.
Same with gun violence. Guns lead to increased gun homicides and suicides.
Same with stream video: a show that does well in total viewers probably has the most hours viewed and attracted the most new customers and gets the best customer reviews and so on.
I bring this up to put us in the right mind to do our last dive through the data on mergers & acquisitions. I clearly have a hypothesis that a “tidal wave” of M&A isn’t coming because the tide has been coming in for a while now. Like most of the last decade. But now we need the data to really show us what has been going on. As I can see it, we’ve set the terms, reviewed the narratives, gathered the data and now we need to ask the data what it sets. Since we have so much data on M&A and so many different ways to measure it, we could easily pick one or two metrics and have them change our minds. I’d rather apply the “as many measurements as possible” approach: interrogate the data in as many ways as possible and let the overwhelming conclusions, if they exist, be our guide.
So here are our two final questions to answer:
– What is the historic rate of M&A? (Partly answered in Part I.)
– Is that rate increasing, decreasing or can we tell?
The latter question in particular gets to basically the question at the heart of making this prediction. If M&A activity has been steady for most of the last decade, or if it has been increasing, then we should use that knowledge to make our predictions of future M&A activity.
Fortunately, M&A lends itself well to “as many measurements as possible” analysis. M&A can be measured by total number of deals by the size of deals by the types of industry or by percentage of concentration. So let’s look at as many metrics as we can.
Metrics in Opposition
We should start with evidence that M&A has either been low or decreasing over time. And there is one data point that makes this case:
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It never ceases to amaze me how much more there is to learn about this crazy industry. I call myself the “entertainment strategy guy” and things still surprise me. Take M&A (mergers and acquisitions) in entertainment & media.
For years, I thought I closely followed the trends of mergers and acquisitions and all that jazz.
Then, I started to rigorously answer the question from two weeks ago, “How much, if at all, will M&A activity decrease?”. Naturally, I turned to Google to look for big M&A deals. I tried to build myself a little table with every deal I could find. I kept finding deals I’d forgotten about. “Oh yeah, Lionsgate bought Starz!”
There has been a lot more M&A in entertainment then you’d think. It has been a constant flow since the recovery from the great recession. That’s what my unscientific table showed and what high level summaries from PwC (and others) show. And it genuinely surprised me how many deals I’d forgotten about.
Today, I’m going summarize what I saw in the data and the shape of it.
Gathering the Data: Part 1 – My Own Data
Here’s a snapshot of the table I started filling out and will use a bit today.
Why build a table myself in Excel? Well, it’s the easiest way to click on a few variables and sort the data to discover descriptive details yourself. One of my pet peeves in data analysis is when someone doesn’t actually own the data themselves, so they rely on someone else to draw conclusions. (Also, sorry for the compressed lines. This table violates my “rule of 8”. Usually tables should never have more than six columns, usually 6 is ideal.)
My process for gathering the data was as crude as it was simple: I googled “entertainment and media mergers and acquisition” and the year to find the biggest deals per year. I later used CrunchBase’s data set to find smaller deals. I would sort by company, starting with the studios and moving to distributors and such.
I really recommend at least trying to collect data yourself whenever possible. It’s harder and takes longer, but by doing it yourself, you force yourself to figure out which variables you want/need per data point. In this case, by looking myself, I learned some thing about M&A activity, and the data set in general. Even when I later switched to using PwC’s summarized data, I could use these insights to understand PwC’s conclusions.
For example, I learned how important the timing of a deal is. A lot of the articles covering M&A activity neglect to mention what they are tracking in their coverage. Is it when a deal was announced? (For many articles, yes.) But what if a deal doesn’t close? So you sort M&A activity by closed deals, but that could be skewed by how long deals take to close versus the year they started in. If you are trying to summarize the previous year’s M&A, well you’d leave out a lot of deals if you only track deals that close.
Could this effect the data? Absolutely. The AT&T-Time Warner could swing one year’s data by $85 billion dollars. The Comcast-NBCU merger swung various year by year totals by $35 billion. The failed Comcast-Time Warner Cable inflated a few years totals by $45+ billion before it was abandoned.
I also learned that trying to distinguish between “acquirer” versus “acquired/target” is touhg. Most deals are usually one company buying another. But sometimes two companies agree to merge, and it isn’t really an acquisition, so who is the acquirer versus the acquired/target? Other times a firm is buying a majority stake in a company it has partial ownership. These little distinctions and difference can plague data analysis when you try to capture them as variables.
What about the deal value? Again, this would seem like a relatively straightforward number, but it can change depending on how stock prices move over time. Or if a company has to raise it’s offer due to competitor or shareholder pressure. Sometimes, the numbers differ by billions, swinging the total deal value by 25% or more. I tried to use the higher number whenever possible. In my scan of the data through news reports, deals rarely got less expensive.
The last five variables were less about the nuts and bolts of the deal (who bought what for how much) and instead about providing some flavor. The pieces I thought would be the most useful for data analysis/business strategy were: the industries involved (network, radio, studio, cable, etc) for both parties, the “direction” (horizontal or vertical) since this came up a lot in the AT&T lawsuit, the status (to account for failed deals), and the stake of ownership. I assumed the last piece was to full ownership unless clarified. Also, in this case industry and direction were my own subjective opinions.
If I could add a piece, I’d add PwC’s description of the business purpose of the deal: consolidation, content, innovation, capabilities extension, or other/stake ownership.
Oh, and in the future I’d include “divestiture” as a final category. Not all deals are accretive and PwC/Thomson Reuter’s database tracks this. In down swings, companies spin off bad business units and ideally a good data set on M&A would tell you when that happens.
Gathering the Data: Part 2 – The PwC Data and Others
As I mentioned above, trying to collect all the information on M&A activity by myself was more time intensive then I thought. Let’s hope I can keep building it through the rest of the year to find additional insights.
In the mean time, I needed a better, quicker look. Fortunately, the good people at PwC using Thomson Reuter’s data were able to compile annual snapshots of M&A activity in the sector they called “media, entertainment, and communications” which I copied in my first post. I found every year’s study I could—in most cases using the articles on it—and compiled it into the table I ran in my last post. Here it is again for this who missed it:
I also found other articles about consolidation or M&A activity in other sub-disciplines in entertainment, again, usually through trade press articles. Take this chart from an article in Variety about M&A in TV production, which produced this table using IHS MarkIt data:
In addition, I found articles about M&A in the Wall Street Journal, Hollywood Reporter and The New York Times. Where possible, I saved the numbers in the article to bolster my data. I’ve tried to provide links where possible, but I have so many I may save them for a future post.
Quality of the Data
So I have essentially two data sets at this point: my own from readings/capturing news articles and the PwC summaries. The question I had to ask myself—and you should be asking me—is how good do we think this data is?
Most people in data analysis miss this key step and it’s worth pausing to emphasize it. Just because you have data doesn’t mean it is any good. Do you see potential flaws that you should acknowledge? Or could cause you to throw out the data set? Do you see quirks in the data that signal bias? Always ask these questions of data (or ask your data scientists/consultants these questions).
From year to year and between data sets, M&A data on media, entertainment and communications (and I assume all industries) is plagued by discrepancies or opinions. The biggest unreliable variable was the timing of M&A deals. Announced deals by definition exceeded the number of deals that invariably closed. So every year’s annual report invariably lowered the previous year’s totals. Sort of like how GDP is invariably adjusted by the Commerce department in future reports. This can make each year seem like it exceeded the previous year’s totals, even if it just means that some announced deals won’t end up closing.
Just because we find flaws or inconsistencies doesn’t mean we have to throw the baby out with the bath water. The question is how much we need precision in this data. Since we’re looking for trends here, being off by a few days on when a deal was announced or closed won’t kill us. Same with being off several hundred million dollars in a price. Given that a few huge deals have the largest swings, being off by a few hundred million dollars won’t effect the larger trends. Even the trends for deals announcing or closing won’t effect the five year average of deals, for the most part. (Though, it helps if you keep you data consistent/apples-to-apples when possible.)
That said, I wouldn’t try to draw too many strong conclusions from the data set, given that it has inconsistencies. And two other issues I’ll discuss in the next section.
My self-made data set has one other HUGE flaw I don’t want to neglect: I made it by trying to find as many deals as possible so I missed a lot of deals. Rigorously reviewing the internet for deals isn’t a super reliable approach, which is why I opted mid-stream to change approaches to focus on high level summaries. I’d also add I mostly focused on US-based M&A, which is a mistake. These are global companies, but our focus naturally falls on places that speak our language. (Many companies had multiple Indian deals, but their total value pales in comparison to US-based deals.)
Initial Thoughts on the Data
So we have all these high level summaries and my table. What do we think of this data? What does it look like?
Summary: This is a noisy data set
Even if I had all of Thomson Reuters data at my disposal—I don’t—I’d still call this a “noisy” data set. Adopting The Signal and The Noise terminology, I mean that trying to draw conclusions about how individual variables impact the data set will be hard. Trying to draw precise predictions will be impossible.
Take years, for example. A year is a long time in business terms. But trying to draw conclusions about any given year’s M&A activity is fraught because deals could be categorized multiple ways. As we’ve seen, you could count the AT&T-Time Warner deal in 2016 or 2018 (or later if the appeal delays the deal further), which drastically impacts the value of the deals done in that year. Since timing could change the data set so much, we have to be careful drawing conclusions about any one year of deal-making. This is why I used the five year average to set our predictions.
Or take mega-deals. There are less than 18 in any given year. That’s a small data set. So trying to draw conclusions about mega-deals with our variables like “direction” or “industry” or “type of deal” is fraught. Or to be more precise, we can’t have statistical confidence in these conclusions.
Warning: Power-Law distribution amplifies the effects of small sample size.
This data set, and a lot of conclusions drawn from it, is power-law distributed. AT&T bought Time-Warner from an entertainment and media deal high of $85 billion dollars. And it was joined in 2016 by 15 other mega-deals of $1 billion or more. But according to PwC there were over 679 deals of any size in 2017. That means that the first two deals (Linked-In purchase by Microsoft being the second biggest deal I found) totaled $111 billion, so more than the other 677 deals that year.
As a side note, I love explaining “power-law distributions” to people. This type of distribution happens throughout entertainment. Power-law distributions mean that a small number of deals can have a huge impact on the data set, especially if you focus on the “average” without accounting for size. So if you’re counting/measuring impact by each deal equally (not weighted by value) you could miss a lot of trends.
Conclusion: We still need a prediction!
I know, I spent today just reviewing the data about M&A. As I’ve been editing this article, I’ve been asking myself a brutal question: is there enough meat on the bones for this article?
And you know what? I think there is. Every few months Deadline or The Hollywood Reporter or Variety publish an article summarizing M&A activity in media and entertainment. And it comes up on their podcasts. But trying to find an explainer or FAQ on where the data comes from? Good luck. It matters whether data sets are imprecise or noisy or flawed. And a lot of the reporting on M&A ignores that crucial context. Hopefully I provided that today.
I swear I’ll make a prediction tomorrow.
Hope you enjoyed a lot of discussion on M&A in entertainment & media, with more to come next week. Here’s my weekly call for the “most important story of the week” and some other good reads or listens.
Most Important Story of the Last Two Weeks – Comcast/Disney/Fox battle for Sky in UK/EU
Listen, I don’t want the most important story of the week to be an “M&A update of the week”. I’ve done AT&T. I’ve done Comcast bidding on 21st Century Fox. I’m sure more will come. So here is another round in the titanic battle between Comcast and Disney. In this round, the prize is Sky TV, which is Europe’s largest pay TV provider. As I follow the latest news, Comcast has been cleared by the UK to bid, and Disney is backing Fox in increasing their bid. More here, here or here. (After I returned from 10 days out of the loop, Comcast dropped their 21st Century Fox bid, but is still bidding on Sky.)
Three thoughts that make this unique or fun for this time around:
We’re going international.
As I collected my data/thoughts on M&A, I found it hard to really look beyond the US shores. I forget that T-Mobile is owned by a German company and Sprint is owned by a Japanese company. But deals do happen where US firms acquire foreign businesses to expand internationally, they just usually have price tags well below the $1 billion mark. This deal definitely surpasses that and signals that as firms look to grow, they may not just consolidate but expand overseas, underscoring how much the international Pay TV assets, like 21st Century Fox’s, are driving the merger frenzy.
It’s not business, it’s personal
To quote George Oscar Bluth. Or technically Michael Bluth. Apparently, Bob Iger and Brian Roberts don’t get along personally. Or as CNN called them, “bitter enemies”. This dates back to the 2004 attempted hostile acquisition of Disney by Comcast, shortly after Roberts took over as CEO. (Disney beat back an attempted takeover in the 1980s by Carl Icahn that resulted in Eisner taking over as CEO.)
Whoever wins will lose?
I mentioned this after Comcast forced Disney to raise their offer on 21st Century Fox by nearly $20 billion dollars: in bidding wars, the winners usually lose. In a lot of ways, this reminds me of NBA restricted free agency or high stakes poker. In restricted free agency–as Bill Simmons frequently mentions–teams can inflate the price of role players, hurting their opponents. Essentially, even if he loses out on the Fox deal, Comcast’s Brian Roberts wants Disney to pay too much for the assets.
Big Data of the Week – PwC Forecast on Entertainment Revenue via THR
Actually, this isn’t big data. Quite the opposite, it’s just a few numbers. From early June. It’s PwC’s annual report on the state of the media & entertainment business and I had been putting off sitting down and reading it.
Now I have. So first the caveat: ignore the headline. Yes, Netflix is changing things, but that’s not the only, or even most important, part of story of this study. Take the total size of the market at $2.5 trillion with a T by 2022. Honestly, I didn’t know that number before I read this story. And it puts a lot of other moves and discussions into context. What sticks out is that the US will own $836 billion of that market. So is growth overseas? Absolutely, but you can see why US performance is still the straw that stirs a lot of the drink.
And even with Netflix, they’re part of a pie in the United States that will grow to $30 billion by 2022…while traditional cable and pay TV will make up $96 billion. Now one of those numbers is growing (SVOD) and one shrinking (Pay TV) and the trend lines could accelerate. But that’s a huge could and meanwhile Pay TV remains huge.
I’d also add the growth in SVOD isn’t all Netflix or Amazon. It could be HBO, CBS All-Access or Disney’s platform. The key challenge, it seems to me is costs. According to these projections–more on that next paragraph–the US OTT bundle is growing by $7 billion through 2022. Will US content costs grow by that same amount or less? Same question for the global growth of another $10 billion. Every year Netflix and Amazon and Hulu have announced larger and larger content spends. I know Netflix says they will soon be positive in cash and revenue, but if they aren’t…how much money will they have lost by 2022?
Finally, it is fun to see how well the authors (PwC) of this report have done in their past predictions. And I’d say pretty well. PwC plays the media game pretty well for a consulting firm and it feeds these report’s top line summaries to the press every year. In 2015, they forecast that total revenue would be $2.36 trillion…and they’re currently forecasting $2.2 trillion. So only off by $160 million (or 8%).
Listen of the Week
Listen to Ezra Klein’s discussion with Jaron Lanier on his podcast a few weeks back about social media. In Lanier’s opinion (and Klein’s too) getting rid of social media can make you more productive and happier. I would marry this discussion with Ezra Klein’s talk with Deep Work author Cal Newport. I’m a huge proponent of Deep Work and huge skeptic of social media, even as I try to leverage it to launch this website. If I opened my day with email and social media, the deep analysis put into the Disney-Lucasfilm deal and M&A analysis wouldn’t be possible. I couldn’t imagine trying to write with those distractions, so I try to rigorously cut those distractions out of my day.
My favorite line in the podcast–which may have sold me on buying it–was when Lanier mentioned distributions. Distributions!!! Do I have several thousand words explaining distributions? Absolutely, but they won’t be ready for a few weeks. Basically, averages suck compared to distributions. Always look for the distribution, not the average.
(Check out my first post analyzing the M&A landscape here.)
If you think we’re about to ride a wave of deal making, then grab your corporate strategy surfboard and let’s hit the entertainment and media waters!
Tortured analogy aside, if you saw the chart from yesterday, you know one thing…
…if you want to do M&A you should already be in the water.
If anything, the tide has been rising on M&A for years now. Deal making went from around $33 billion in 2009 (one report had it as low as $6 billion in 2008 in the depths of the Great Recession) to a frothy $200 billion in 2016. Since deal making takes time, if you waited until a judge in D.C. approved the AT&T-Time Warner merger, you’re probably too late. (And I don’t think most executives were waiting.)
Yet, the narrative after the decision was one courtroom decision will “unleash a torrent of deal-making”. Why does everyone think that?
My theory: because it is hard to look back and observe trends, as opposed to respond to events. Court cases make for exciting events. Single events get a lot of coverage. Long term trends get one or two articles a year, maybe.
So as I collected my thoughts around M&A in entertainment & media, I reviewed a lot of the articles on M&A in Hollywood. Frankly, the idea that one court case cleared the way for M&A activity isn’t the only bad narrative in this story. The idea that “disruption” is “forcing” large cable companies to merge also doesn’t hold up, to me. And that narrative even influenced the judge in the AT&T-Time Warner case.
Today, I’m going to review all the potential causes for the rise in M&A activity we see in the chart above. Then I’ll put those explanations in context of the AT&T decision. Then next week I’ll review the data to make my final prediction.
Reviewing the Traditional Narrative
Let’s start by making the case of why mergers are more frequent after the AT&T decision. From what I read, it would go something like this:
1. The entrance of tech giants (Netflix, Amazon, Apple, Google, Facebook) is disrupting traditional business models.
2. This increases the need for industry consolidation to survive.
3. But anti-trust regulators have looked skeptically at past mergers.
4. With this deal approved, companies can merge as much as they want!
I saw two major pieces of evidence marshaled for the conclusions above. First, people would use the “Disney – 21st Century Fox – Comcast” love triangle as evidence. But if anything, all the decision did was allow Comcast to bid, which it could have done anyways, and raise the price. The rate of mergers would have stayed the same. Same thing with using Shari Redstone trying to merge Viacom-CBS, which is a deal already in progress.
Second, people love to just throw out names of companies and say, “Could they merge?” If the proposed deals don’t have sources, they’re just blind speculation. Even with sources, they’re mostly talk.
Separating the Good Reasons for the Bad
Instead of crafting a narrative to suit our prediction, let’s look at all the possible reasons for M&A activity, from the broadest reason to the most minute and ask some questions to assess their impact:
– Was this factor present in the past 10 years? 20 years? 40 years?
– Would this factor have continued regardless of the ruling?
– How important is this factor?
Industry consolidation
As I’ve mentioned before, industry has been consolidating for forty years under a lax anti-trust regime in the Justice department and in the courts. I don’t mean the media and entertainment industry, I mean all industry from healthcare to finance to retail to beverages to airlines to you name it. If every industry is consolidating (sometimes massively) then predicting future consolidation in entertainment is less bold.
I did, though, get sucked down a rabbit hole looking at consolidation in entertainment and media specifically. Consolidation is happening in every single part of entertainment from broadcast channels to cable channels to movie studios to radio stations. Even technology. So…
– Was this factor present in the past 10 years? 20 years? 40 years?
Yes, going back 40 years.
– Would this factor have continued regardless of the ruling?
Yes, the Justice Department easily blessed the Disney-21st Century Fox deal. Donald Trump’s administration and FCC chairman Ajit Pai love industry consolidation.
– How important is this factor?
Very important. As a Hollywood Reporter article said, entertainment companies have been merging since the 1940s, going through waves in the 1940s, 1980s, 1990s and the current one.
It’s a good business environment for mergers and acquisitions.
The evidence for this explanation—which specifically refutes an argument later about “tech disruption”—is that the entire M&A market is looking good right now across the economy. Indeed this is true, as this New York Times article pointed out (using Thomson Reuters data!) and Kevin Drum clarified with inflation adjusted numbers. This differs from the above explanation in that it is really about the consolidation numbers for the current economic climate.
It boils down to a few things, summarized in the New York Times piece: the tax break provides higher profits, interest rates have stayed low and the stock market is booming so firms need other ways to drive growth (and high share prices can increase capital available for M&A). So our questions:
– Was this factor present in the past 10 years? 20 years? 40 years?
It is cyclical, but has been building since the recession in 2008.
– Would this factor have continued regardless of the ruling?
Yes, that tax break isn’t going anywhere…unless a recession hits. But the ruling didn’t effect that either way.
– How important is this factor?
In my mind, nearly as big as the industry consolidation.
Technology firms are entering the media and entertainment business.
Notice, I’m not saying that tech firms are “disrupting” traditional business models. This explanation is simpler: technology firms like the FAANGs have huge amounts of cash on hand and/or huge market capitalization’s, so they are on a buying spree. This increases the likelihood of mergers not because entertainment companies need mergers to survive (they consolidate because of the above reasons), but because entertainment firms want to avoid being acquired.
– Was this factor present in the past 10 years? 20 years? 40 years?
Yes, going back 10 years.
– Would this factor have continued regardless of the ruling?
Yes, the Justice Department isn’t taking on tech giants either. Except for Jeff Bezos.
– How important is this factor?
It depends. So far, the major tech companies haven’t actually saddled themselves with a legacy content company, but built their own platforms (Netflix, Youtube and Amazon) or bought other technology companies (SnapChat, Twitch, What’sApp, Instagram). So we’ll see.
Tech companies are disrupting traditional business models.
This is the ever pervasive idea that streaming is disrupting pay and broadcast TV and music buying and radio and everything else. Oh and advertising is being disrupted too.
I look most skeptically at this explanation. The fairest way to describe this—and I’m trying to be fair—is that the new business models are cutting profit margins of traditional firms, so companies need to bulk up to maintain their profit margins. And it really is true that new entrants like Netflix offer much cheaper alternatives then traditional models, though, Netflix is less profitable in cash terms.
Like I said above, this is the explanation I value the least. Not that it doesn’t have an impact, but it has the biggest “hype to reality” ratio. Industry consolidation allows firms to increase their profit margins, which they do regardless of new entrants. Since this is happening across all industries, it seems like an explanation fitted to the data, not the true driver.
– Was this factor present in the past 10 years? 20 years? 40 years?
It is the one new factor of the last ten years.
– Would this factor have continued regardless of the ruling?
Yes. Netflix is still scary.
– How important is this factor?
It is mainly important for the mentality. It scares executives so they want to bulk up to ward it off.
Anti-trust regulators and the FCC plan to prevent further consolidation.
If you think the Trump administration had/has a plan to prevent consolidation in industry, could you please point it out to me?
Let’s be honest, the government under Trump and Republican leadership really doesn’t care about industry consolidation. Trump actually praised his friend Rupert Murdoch for making such a good deal with Bob Iger. He called it “great for job creation”. Under a Democratic President, maybe the FCC and Justice Department look skeptically at consolidation, but for all their efforts, the Obama administration only stopped three mega-mergers (Comcast/Time Warner Cable, Sprint/T-Mobile round 1, and AT&T/T-Mobile), and it only delayed the consolidation not stopped it.
So when it comes to the question, “What if the judge had ruled against AT&T?”, would that have encouraged the Justice Department to go on a spree of trust busting? I doubt it. Would they have stopped additional deals? Probably not. I think most of AT&T law suit was more about CNN then it was about the size of the deal. Consider, T-Mobile and Sprint merged before the final judgement. They weren’t worried about anti-trust. So the questions:
– Was this factor present in the past 10 years? 20 years? 40 years?
No. The government tried to stop the Comcast-NBCU merger and successfully dissuaded Comcast from the Time Warner Cable merger. But in the last 18 months? Yeah it hasn’t been a thing.
– Would this factor have continued regardless of the ruling?
Yes, it would have. Even when Obama tried to stop some mergers, over time the Justice Department was worn down. So AT&T bought DirecTV, Charter bought Time Warner Cable, and now cellular providers are merging. Again, that was all before the decision.
– How important is this factor?
Not important since it really didn’t effect the behavior of companies.
Mergers and Acquisitions are good for CEOs individually
Here’s the simplest, most human, most “economic” (or Freakonomics?) explanation for the frequency of M&A activity.
CEOs make bank off mergers and acquisitions.
In other words, if humans are self-interested, sometimes they pursue goals and outcomes that don’t align with the incentives of their company or firm. Making better products is hard. Cutting costs in painful. Merging with another company? Relatively easier and more profitable.
The trades are reporting that after a successful merger—meaning it goes through, not that it makes money—Jeff Bewkes made $50 million dollars last year, some of which was driven by Time Warner’s merger-inflated stock price. AT&T CEO Randall Stephenson can now demand a higher salary with his larger company to run. In the short term, M&A activity is rewarded by share price increases, even if the deal bombs, as happens about 50% of the time.
– Was this factor present in the past 10 years? 20 years? 40 years?
Yes.
– Would this factor have continued regardless of the ruling?
Yes, it would have. And honestly, the economy is set up to allow it to continue.
– How important is this factor?
Very. These are the self-interested decision-makers running the system. They’ll make deals to make money, and convince themselves it’s a good thing.
Playing Devil’s Advocate: Why could M&A decrease?
To summarize, the traditional narrative says M&A activity—the rate—will increase. I think it will still grow, but at the same historical rates. At worst, I’ve set a floor of “M&A activity will stay flat”, meaning it has zero growth. So at worst it will maintain its value of $140 billion in deal value per year with 16-18 mega-deals.
But could we make arguments in the opposite direction? That M&A activity will actually slow down? Sure. And if we’re building a 90% confidence interval for the future, we absolutely should give this more weight. What could stall M&A activity?
An economic slowdown
This is what stopped the last wave of consolidation. Basically, the 2008 housing crisis and Great Recession. When no one wants to lend, and share prices fall, and you don’t have profits on hand, then it freezes the market. This would slow or stop consolidation temporarily (and as I saw first hand motivate a lot of investment bankers to go to business school).
Tech continues to build not buy.
I actually don’t hate this strategy and the Bloomberg link at the top makes this case too. Amazon, Netflix and Youtube have all created businesses from scratch. Why buy a legacy company with lots of infrastructure when you can build it yourself? You potentially save a lot of money and, in some cases, it’s unclear what value traditional firms bring to the table.
But they do have some value. Disney doesn’t have its tremendous licensing and merchandising and theme parks businesses without some know how. They’ve kept these characters relevant and popular for decades. The question is: do you have to buy that company or buy those people, which is what Netflix is doing? So what tech firms collectively decide will impact the number of deals.
The number of potential partners dwindles.
This is actually the most persuasive reason for me: if everyone keeps consolidating, after a certain point there is no one left to partner with. This would easily impact the number of “mega-deals”. That said, we have a bit to go until we have complete consolidation, especially counting vertical mergers.
The market turns against conglomerates.
When I built a table to help me analyze M&A activity (collecting the data myself), I had to come up with a term for the big six movie studios. Honestly, “movie studio” sells it short and “conglomerate” makes more sense. It’s the best way to describe a company with television networks, a movie studio, TV production, gaming, theme parks and whatever else the “big 6” studios own.
Yet, in the 1980s, it meant companies like General Electric, which bought broadcast networks and made everything from industrial equipment to microwaves to Cheers. Then the market turned against conglomerates because most of the time big companies didn’t run all their different business units that well, and the market assumed that splitting conglomerates into their individual pieces would have better value.
Tech firms defy this logic. Maybe it is because the wise leadership of Jobs/Cook, Bezos, Zuckerberg, Hastings/Sarandos and Brin/Page truly does turn everything they touch to management gold. Or, they have such huge valuations being “tech” that they can enter any industry and it doesn’t matter. I’m not saying they won’t continue to be valued incredibly highly, but this state of affairs could end sooner then you think.
The political winds change
I want to put this out on Twitter, but wouldn’t the best political campaign for Democrats in the fall be to micro-target cities that have seen huge cable bill increases post-Comcast merger and post DirecTV merger? Just hit Republicans on the issue like this:
Republicans like Mitch McConnell and Donald Trump (and his lackey Ajit Pai) want to increase you cable bill to make their billionaire friends rich.
I’m not a pollster, so I don’t know. But does anything make people more angry than cable bills? Democrats use this! Either way, if a Democrat takes power in 2020, they could restart FCC scrutiny on issues related to anti-trust and merger scrutiny. It might slow the rate of mergers, but like Obama probably not stop it altogether.
We still don’t have a prediction yet
And yet we have 2,800 words on top of the words yesterday. But now that we have the explanations, on Monday, we can dig deeper into the numbers, beyond what the top line data said from Tuesday’s post.
