Competitive advantage is tricky. In a nutshell, it’s a business’ unique attributes that give it an edge. If you don’t like that definition, here’s the Wikipedia article. I looked in my strategy textbook to find a simple definition—again, I’m standing on the shoulder of giant’s here—but couldn’t find a simple one sentence definition. Here’s the best quote, though it has some jargon:
Businesses have two challenges with this. First, having a “unique” capability is tough. Hence, most entertainment conglomerates for the last thirty years looked and operated mostly the same. (Start with a movie and TV studio, add a broadcast channel, then some cable channels, with failed forays into internet “stuff”.) Since it is tough, most companies don’t know or can’t express what their competitive advantage is.
In fact, one of my favorite “corporate America” stories is about competitive advantage and lack thereof. Fresh out of business school, I was participating in our business unit’s annual planning process. We were setting our plan for the upcoming year. When you learn using the “case study” method in b-school, well, 8 times out of ten it’s basically “competitive advantage” boot camp. You’re always studying the innovative companies who had a competitive advantage. Unless it’s the cautionary “failed business” case study, which meant they didn’t have a competitive advantage, and the company who did have one ran them out of business. (See Walmart and K-Mart.)
During this planning process, I foolishly asked, “Well, should we explain what our competitive advantage is?” The answer, was, “Uh, no. We don’t need to do that. We don’t need to have a competitive advantage to do our annual strategy.”
Fair enough! My boss was right. She didn’t really need a strategy to make an annual plan. We were going to spend lots of money making TV shows and movies regardless. What does strategy have to do with it?
Not to mention, making annual plans is easy; doing strategy is really tough. It takes hard work and sometimes it requires admitting your strategy is either 1. bad or 2. non-existent. Moreover, even if you have a competitive advantage, it may not last, meaning you need to start all over again in a few years. Instead, most companies, leaders and groups just don’t talk about it. Maybe your corporate overlords or investors won’t notice you don’t actually have a strategy.
Keeping in mind most businesses don’t have a strategy, or they have a bad strategy, let’s ask:
What could be ViacomCBS’ competitive advantage?
This was the angle into SuperCBS that got me really excited last week. (Since ViacomCBS hurts my eyes to read, I’ve nicknamed them SuperCBS.) After digging deep into what “size” meant for my weekly column, I started musing on SuperCBS’ potential strategy. Mostly, I was dunking on their lack of a strategy. But as I reread the words, it felt a bit hollow.
It’s really easy to point at a company, find a bunch of different problems with their plans, and point out the flaws. If the company fails, I look smart, and can point at the column with a smug satisfaction. Even if they don’t fail, but merely fail to become the undisputed market leader than the column looks smart.
It’s much harder to look at that same company and imagine them as a beautiful strategic butterfly ready to emerge from the Porter’s Five Forces cocoon and fly into the world with a new competitive strategy that will help them acquire customers, grow marketshare and become an in class leader in entertainment.
If I had to bet, I’d argue that 9 out of 10 entertainment companies–from telecoms to media to entertainment to tech–don’t really have a strategy. (The GAFA’s do, but subordinate business units may not.) This is the best bet to make for SuperCBS. But let’s pretend for the day that they really do have a strategy. I’ll start by listing the potential competitive advantages I see. I ended up with five. I’ll discuss the logic behind them, the potential upside and the skeptical viewpoint. As a bonus, I’ll recommend a merger or acquisition that could be needed to complete the strategy.
(Two cautions before we start. First, this is my “gut” analysis. I haven’t actually stacked all the options up with proposed financials, so I haven’t finished my thinking yet. And to that point since “strategy is numbers”, I’m going to throw a few in for every option, but these are pretty high level numbers. If I were doing an actual strategy, I’d demand a lot more rigor.)
Competitive Advantage: TV Advertising Oligopolist
A fact in Brian Steinberg’s recent article really stuck with me: A combined CBS and Viacom could control up to 20% of TV advertising. This got me thinking that “advertising” could be a capability that lays the basis of a new competitive advantage. This would pair well with Viacom’s recent acquisition of PlutoTV, an ad-supported video service. (Call that either an AVOD or FAST.) The logic here is, if you’re already great at selling advertising, lean into that capability and build it out. Become the ad-supported behemoth of the new TV landscape.
Well, if you’ve seen all the news articles where ad executives beg, plead and beseech Netflix to sell ads, you can tell they want to deliver Millennials advertising. Can CBS step into that role instead? Maybe. (Again, it’s a myth that CBS is only old people. It’s really popular with Millennials too. Even on the coasts!) So there is customer demand, and that will translate to advertising. Here are eMarketer’s estimates for digital and traditional TV advertising revenue:
In other words, SuperCBS currently has 20% of a $70 billion pie. (I found other similar estimates to eMarketers too.) But 40% would be even better! (Again, when thinking competitive, the goal isn’t a small slice, but the biggest slice.) And 40% of a $140 billion pie is even better. Of course, you know where this is going…
Is the future of advertising digital or linear? Pretty clearly digital, and Google and Facebook have a tremendous head start, with Amazon as a third. Even if you just wanted digital video, Youtube is much farther ahead. (I’ve seen estimates ranging from Youtube owned $4 billion of digital video market in 2014 to $15 billion now, which is the highest estimate I saw. Though, I’m pretty skeptical they’re $15 billion of an alleged $17 billion pie…)
I’d add even the ad-supported sphere will be extremely crowded and competitive. Roku is a well-placed competitor here. Or Hulu and ESPN+, depending on how many ads they keep selling. Plus, Amazon is getting into the game with IMDb TV and there are a bunch of other FASTs following them.
Not to mention, you don’t start with ads, you start with customers, who you then sell ads against. The advantage of Netflix—and the reason Madison Avenue wants to work with them—is they already have 60 million subscribers in the US watching tons of TV. CBS All-Access hasn’t show it can deliver that yet. (Though PlutoTV is allegedly growing.)
Also, this is is a fairly US-centric approach, which limits the overall upside. Let’s pause on this last point. Does the strategy of entertainment conglomerates have to be global? Clearly Netflix and Amazon see global domination as a competitive advantage, but maybe by focusing on one country/region, smaller distributors can carve their own niches. I don’t know that I’d buy that, but I could see it.
Future M&A Needed?
The regulatory challenges with this proposed merger are considerable. CBS already owns a lot of broadcast channels and so does Univision, and we have rules limiting ownership of broadcast stations in the United States. If SuperCBS did a deal with Univision, they’d have to spin those off, which would be most of the value of the acquisition in the first place. However, in today’s overly lenient FCC environment, rules are made to be broken. If SuperCBS threw a ton of praise at Donald Trump and created a byzantine corporate structure, they could try to make it work. (Say, make a new company to own the broadcast channels, but have SuperCBS or the Redstone family own that new company, and then mandate all the content is SuperCBS content. This is kind of like what Sinclair has done in past acquisitions.)
The upside is considerable though. The future of American ad sales will be diverse. Meaning Spanish language and lots of Latinx selling. This acquisition would help broaden the potential base that CBS could appeal to in the United States. Comcast-NBCUniversal, for comparison, has Telemundo and Disney’s films over index in Latin appeal too. SuperCBS needs to catch up.
Competitive Advantage: Linear TV Oligopolist
Viacom is valuable to the current cable bundle with Comedy Central, BET, MTV and Paramount TV. (Though less valuable than in the past.) CBS is still the number one broadcast channel. Even as the cable bundle decays, they’ll have one of the stronger lineups to help compete in the “carriage wars” and keep demanding their current fees. However, if they could add even more channels to those negotiations, they could insist on even higher carriage fees and/or be one of the last parts of the bundle standing.
This strategy isn’t so much about winning the future as extracting all the potential revenue out of a dying industry as possible. Which isn’t a bad strategy; sometimes you can make lots of money as people move on from an industry before it’s truly died out. (Arguably some private equity sees this advantage in broadcast station ownership. Sure it’s dying, but there is still money to be made, hence private equity buying up broadcast stations.)
While the bundle is shrinking, it won’t disappear overnight.
Well, right now SuperCBS is largely one of the worst positioned cable bundles after the independents. Besides CBS, most of their other channels have slipped dramatically in the ratings. While being youth oriented in the 1990s and 2000s helped them grow, the young folks were the first to abandon the cable bundle. Which means this strategy can’t work without…
Future M&A Needed?
If the goal is to maximize the declining asset of Pay-TV, you need to truly corner the market. In this landscape, that’s Discovery. Since they acquired Scripps last year, they run an impressive 19 channels. Yes, they don’t have a broadcast station anchoring the line and are in general less valuable than NBC-Universal’s group of channels or Disney’s ESPN (with Disney Channel), but those channels aren’t available.
To show this, I pulled out Michael Schneider’s Top 100 channels list from last year. Looking at the top 53 (just to squeeze in Comedy Central), I looked at what this bigger SuperCBS would look like. Here:
This would take SuperCBS ownership from 10 of the top 53 channels (to sneak in Comedy Central) using, and bump them to 18. That’s 34% of the top 50 channels, which are the channels most likely to survive. (And yes, the top channel averages nearly 8 million viewers, whereas the 130th channel on this list get’s 1,000. Log returns anyone?)
Looking at it, that bundle is still a bit back heavy. Lots of catalogue viewing compared to someone like NBC-Universal who has three of the top 10 channels. And ESPN is still a monster when it comes to retransmission fees. But if a cable provider is looking to shave channels, you can push them to the independents like AMC or Game Show Network if you own 34% of the top 50 channels and protect your own channels.
(Tune in tomorrow for the rest of the competitive options and my preferred competitive advantage.)