Most Important Story of the Week and Other Good Reads – 13 July 2018

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.

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