Over The Pond – Cutting the Cable
Last month on their earnings call, Comcast, the 2nd largest Cable operator in the USA hinted at what has now been confirmed; it will proceed with plans to separate its cable networks from the rest of its media businesses as part of a spinoff to shareholders.
While this should be a tremendous piece of business for bankers, it could also unlock value for shareholders since Comcast shares currently suffer from the dreaded ‘conglomerate discount’. For the parent company also happens to own the NBC TV Network, Universal film studios and theme parks, a small but growing wireless broadband business called Xfinity, along with a fledgling Streaming operation called Peacock. In essence, if you strip away the Cable Networks from the remainder, Comcast looks very like Disney; but its stock trades at about a 30% discount to its peer on most valuation measures.
As this breakup will take a year to complete, this is not an urgent recommendation to buy Comcast shares today, but what it most certainly IS – is a clear signal that one of the most experienced management teams in the media sector is telling us that the cable industry is basically finished as an attractive area for investment. From here on, the only way forward is going to be through consolidation of the cable industry and Comcast just needed to check who was going to occupy the White House before pressing ahead with their plans.
When a child wants to be valued as an adult it needs to get away from the stifling parent at home; this separation of a family has always applied equally to businesses in US stock culture. There are many successful examples which include Paypal that spawned from Ebay; more recently Kellanova out of W Kellogg and even IBM (although this time the NewCo kept the name) leaving behind its Mainframe services business, that was rebranded horrendously as Kyndryl. (No, I have no idea where that name came from either!)
But more than anything this action conclusively proves that Netflix has won the argument as to the way in which we will consume media at home. Previously, it was the cable companies who had the advantage of having the only pipe that was large enough to give you sufficient speed for internet access, allowing them to package up some very substandard content with shabby service all sold as a bundle. Now that fibre access has largely been built everywhere in the US, or Musk’s Starlink can cover stragglers, Comcast are suggesting they need to divide into distribution and content.
Once the consumer was handed the ability to determine the time at which they wished to watch a programme, it is impossible to get that back! That only leaves one category that still retains value in being ‘broadcast’ (note the term ‘broad’ implies a large audience watching at the same time) and that is Live Sport. Only something where you need to know the outcome at the same time as anyone else, where delayed viewing reduces its appeal, can now be counted upon to produce an audience of interest to advertisers. Hence the most expensive slots every year are during the Superbowl, which of course has the largest annual TV audience.
Since Netflix now wishes to grow advertising revenue as well, they have naturally been forced to turn here and sure enough, this month saw their first live sporting event – although whether it is considered ‘sporting’ to watch confirmation that an old man of 58 cannot hope to give away a handicap of 30 years in age to an opponent in a boxing ring, is another matter. The mockery aimed at Netflix for their technical shortcomings in handling this event entirely misses the point that they just hosted the largest live stream in history with over 100 million viewers tuning in to watch.
Trump’s return opens to the door to less regulation and consolidation. I predict that only three streaming services will remain by the time the 46th President leaves Office in four years’ time; Netflix, Disney and Amazon. In distribution, there will be Comcast and Charter from Cable plus AT&T and Verizon from Telecom. Everyone else will have been hoovered up in a tsunami of mergers, while broadcast TV continues its long slow decline. Remember that the BBC was a streamer before that existed; a paid for service with no advertising. What is the difference between a licence fee and a monthly subscription?
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Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.