Most Important Story of the Week and Other Good Reads – 17 August 2018

For some reason, last week seemed like it started with a lot of news. But then as the week went on, I saw more popular news stories than impact news stories. And I went so far down an Oscar rabbit hole that this post got delayed until today.

The Most Important Story of the Week – Netflix CEO David Wells Steps Down

Why is this important? Well, CFOs get too little credit. Not “finance people”, mind you. The former get too little credit; the latter way too much (and way too little blame for our current politico-economic situation).

CFOs can do a lot to power a company’s rise, especially when it comes to Wall Street perceptions. And the FAANGs have done a lot to curry Wall Street favor, rightly or wrongly. Time will tell.

That said, Netflix has always struck me as the riskiest of the FAANGs when it comes to money. They lose cash, which makes them unique among those five giants in tech. Again, not profit, which they profess to make every year and quarter. Instead, alone among the FAANGs, Netflix loses tons of cash each year, while it professes to make a profit. Some FAANGs have tons of cash in the bank (Apple and Facebook), some don’t make a profit (Amazon) and some make a lot of profit (Apple and Google). But only Netflix loses lots of cash each year.

Their CFO was very involved in that decision. So him leaving is notable. I’d also say the CFO for Netflix was very influential in deciding how Netflix amortized the costs of its programming. I’d argue their clever, but legal, amortization schedule has convinced the entire world that filmed content is a good business, and the other FAANGs followed their lead. Again, time will tell.

Lots of News with No News – Walmart launching its own subscription service

Sorry, did I say that Netflix convinced the FAANGs to make original video? Well, now they’ve convinced Walmart to do it too!

So what keeps this from being “Lots of news with no news”? Well, it hasn’t officially happened yet, and I tend to wait until it does until I officially react. The previous example that comes to mind for me was when Microsoft launched Microsoft Studios, spent something like a hundred million dollars, and then shuttered with nothing much left to its name.

So let’s react to the Walmart news in the same way, with a healthy dose of skepticism that this ever actually launches. My “blink” analogy would be naturally bearish/negative. Unlike Google or Facebook, people aren’t used to going to Walmart’s website to watch videos, so having a huge website won’t help. (This problem I would argue impacts Amazon Prime/Video/Studios as well.) Unlike Disney or AT&T-Time-Warner-monstrosity or NBC-Universal, Walmart doesn’t have a content library to see the SVOD platform. Unlike Amazon, Google or Apple, Walmart doesn’t have an army of programmers to set lose on this problem. So that’s three strikes off the bat. If this progresses, I’ll try to dig a little deeper.

Long Read of the Week – Time-Warner’s Previous Owner

New owner same as the old owner?

That could be the conclusion of this article from three years ago about AOL’s unsuccessful merger with Time-Warner on the fifteenth anniversary. I found it searching for M&A examples in my database and loved it so much, I decided to make it my long read for the week.

It’s almost impossible not to compare the similarities between the AOL of old with the AT&T of now, both acquiring the same content company (or similar content company) for HUGE sums. Let’s start with the similarities, including some great quotes.

First, what did people at the time think?

“A lot of people thought that the merger was a brilliant move and worried that their own companies would be left behind.”

What about the strategic logic?

“Time Warner, via AOL, would now have a footprint of tens of millions of new subscribers. AOL, in turn, would benefit from access to Time Warner’s cable network as well as to the content, adding its layer of so-called ‘user friendly’ interfaces on top of the pipes. The whole thing was “transformative” (a word that gets really old really fast when reading about this period).”

What about the two cultures combining?

Merging the cultures of the combined companies was problematic from the get go. Certainly the lawyers and professionals involved with the merger did the conventional due diligence on the numbers. What also needed to happen, and evidently didn’t, was due diligence on the culture. The aggressive and, many said, arrogant AOL people “horrified” the more staid and corporate Time Warner side. Cooperation and promised synergies failed to materialize as mutual disrespect came to color their relationships.

So on to the differences to be fair. (And these weren’t really pulled out in the article.) First, the Time-Warner of the past actually had a cable company to their name, and that was spun off after AOL collapsed. Further, the acquirer in this case definitely has a more stable financial position as AT&T has a lot of people paying it huge monthly subscriptions in broadband, wireless or satellite. That alone makes it different. I’d also add the concerns about culture this time seem to be more about the Warner side being concerned about the AT&T people versus the opposite situation in the previous iteration.

That said, the foundational logic just seems so similar, and again, I can’t wait to look back on this deal to see how it all shakes out in 15 or 20 years.

Listen of the Week – HBR Ideacast on “Learning from GE Stumbles”

We’ll keep with the mini-theme on mergers & acquisitions. This HBR Ideacast on General Electric should just serve as a caution that M&A that helps reinforce strategic advantages is good M&A, but M&A isn’t a strategy in and of itself. With all the talk about Disney and Fox and AT&T and Time-Warner and Viacom and CBS, it’s a good lesson. GE went from being a cash machine and M&A beast to being removed/replaced/delisted from the Dow Industrial Average.

Could AT&T or Comcast or other aggressive media & entertainment firms suffer the same fate? Time will tell. (I guess another theme of this week.)

  1. […] your studio isn’t flying high, of course, your strategy can always be “M&A”–reminder M&A isn’t a strategy–and so Lionsgate acquired Starz in 2016. I liked this deal at the time. It gave Lionsgate a […]

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