Most Important Story of the Week and Other Good Reads – 28 September 2018

I got to work on a fun (and paid) consulting project last week and like all good consultations, it hoovered up a lot of time, eventually going into the weekend and into the nights. But it warmed my heart to know that I’d have a classic story to return to: Comcast buying something.

Ahhh. Good old fashioned M&A news. Truly this feature has returned to its roots. Let’s get into it.

The Most Important Story of the Week – Comcast wins bid over 21st Century Fox for Sky.

The prize? Sky TV in the UK, formerly called BSkyB, which sounds way cooler than just “Sky”. (I know the BSkyB terminology not because I lived in the UK, but because of a Harvard case study on it.) 21st Century Fox owns 39% of Sky, and was bidding to take a majority share. (They continued with merger talks even as the Disney takeover continued.) Instead of going quietly into the night, Comcast stepped into the breach to offer their own bid. This all happened months ago.

Fast forward to recent weeks and since both companies had submitted compelling bids that were approved by regulators, it went to a silent auction…and Comcast won. By paying a huge premium to do so too. It seems like it was only my last update that Comcast CEO Brian Roberts was saying that he didn’t think Comcast “was under pressure” to pursue M&A, they just, you know, keep doing it and wildly overbidding for it.

Let’s talk impact, since many of you knew what happened above. Ironically, the biggest winner may be Disney. Comcast may try to buy the rest of Sky from Disney, which could provide Disney with a huge cash inflow. (Disney would likely insist on the same price as their bid.) So instead of having to take on more debt to run Sky–and Disney doesn’t have MVPD experience–it gets cash. That’s a huge swing. (Comcast may then sell it’s share of Hulu to Disney. Dizzying the deals now.)

Does this invalidate my skepticism about the impending “M&A tidal wave”? Hardly, this negotiation was already in process as the June AT&T decision was being announced. Further, it involves one of the two major forces in M&A activity, which is Comcast. Comcast and AT&T have decided that size (with some content creation) is the key to success in the future, but both companies decided that years ago. I mean, a decade or more ago. With the Trump Administration looking kindly on companies that praise it in public, we can expect these trends to continue.

Size though isn’t a strategy, and we may have seen one of the few brakes on M&A…

M&A Update – Comcast Shares Lose Value in Reaction to Price

In a previous update, I mentioned the “winner’s curse” in auctions. Basically, at $50 billion, 21st Century Fox was probably a great deal for Disney. At $71 billion? Not as much. Comcast forced Disney to go higher in that deal, and Murdoch forced Comcast to likely overbid here. As a result, investors fled Comcast in early trading after the auction weekend. Investors think, initially at least, that this was an overbid.

Apparently, investors have felt the same way about AT&T buying DirecTV, which was likely overpriced. That didn’t stop AT&T from acquiring another large company for size’s sake. This could be one of the few brakes on M&A, thought it hasn’t yet: If investors crush stock prices after large acquisitions, then companies would presumably stop doing it.

Other Contender for Most Important Story: Telltale Games Goes Out of Business

I posted a couple of times on Twitter how interesting I found the fact that Telltale Games went out of business. And I won’t hide the analogy I’m making: I’d apply these lessons to any digital companies with questionable finances, especially for cash flow.

Honestly, as far as I knew, Telltale was a monster. It had games with high sales. It had tremendous critical acclaim. It claimed to have licensees pounding on their door to work with them (Game of Thrones, MineCraft, Walking Dead, Batman…) It had high sell-through of subscriptions. It had high ratings on the games by customers.

Yet, it ran out of cash and fired all its employees.

Some of the digital streaming platforms have the exact same stories: tons of subscribers, tons of critical acclaim, hints that tons of people watch their shows…and yet costs are way above revenue at this point. The difference is one of scale (streaming is mutliples larger) and backing: Hulu is backed by four huge entertainment conglomerates, Amazon is backed by Jeff Bezos’ Prime subscription and Netflix has stock market.

Oh, Another M&A Update – Sirius Buys Pandora for $3 billion

We finally have proof that the tidal wave is washing ashore. One distribution channel just paid $3 billion for a digital streaming company! Yeah, I’m being a bit sarcastic.

Though it is another sign that the scale of M&A has scaled up. As firms have consolidated, the new deals naturally get larger: a $3 billion dollar total price barely moves the news needle. My gut thinking is I see the point of the acquisition by Sirius–have a new way to reach customers using music you’ve already licensed–but this has all the hallmarks of a distribution company buying a digital company, and wondering where all the promised revenue went five years later. Though Pandora does have a lot of monthly active users, to its credit.

EntStratGuy Story Update – Verizon Offering 5G Wireless and impact on Subscriptions

Now that I have a pretty good run of articles, I’m coming across more and more news stories that update my thinking on old ideas. Here’s a perfect one for this week:

Coming to Los Angeles this fall: no more cable company, 5G broadband internet through Verizon, for your home! This story was big enough that it could change my mind on how I view “distribution”, the final piece of the “media, entertainment and communication” industry. If we no longer need “cables” going from house to house, a lot of opportunities are unlocked. It’s also an old story we’ve seen before.

The Power of the Subscription

The first thing I noticed about the descriptions of the 5G plans it he giveaways giveaways to get people to sign up to 5G broadband. This is just an echo of why I explained why companies love subscriptions. Who cares about giving away an Apple TV or Google Chromecast when you’re locked in to however many months as a broadband subscriber? Given the high switching costs, it’s just extremely lucrative. (Even if wireless companies don’t explicitly lock you into a long term contract, there are huge switching costs between broadband services. These are amplified by bundling multiple, multiple services.

The Power of the Consolidation

Are consumers in a better place when you can bundle internet, TV and now wireless phone service, all with one provider? This is one of those questions that just depends on time frame. In the short term? Sure, it’s a good deal.

In the long term, though, I wonder. As prices increase inexorably year after year, will the larger bundles just allow for larger price increases? It doesn’t seem like even with cord cutting prices are really getting that much cheaper, especially in wireless and internet access. (Man, that’s a great topic to research how prices have been increasing and I now have to write that down as a research article.)

The Power of the Competition?

Does this bring competition up in Los Angeles to three providers? Do we have a market now? With AT&T/DirecTV, Spectrum and now Verizon?

Yeah, probably not. Likely LA will be better than other markets, but still overall, this isn’t a “market” if traditional economics defines a market as “a place with many, many sellers and buyers”. This is just three, which is a far cry from “many, many”.

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