As a long time media pundit who hung up his spurs a few years ago, I am flattered that Todd and the folks at Minyanville have asked me to come out of hiding, talk about the world of media and to help investors keep things in perspective. So with a nod to my pal Stevie VanZandt
, here goes.
In the next couple of months I’ll try to put events and announcements into some historical context, because although history doesn’t repeat itself, it does have a way of rhyming -- and one of the interesting things about the media industry is that no industry (perhaps other than the oil industry) is better at trying to reinvent itself and spin the same story to a different tune. Consider for example, Google’s
(GOOG) announcement to play around in cable television in Kansas City.
For media investors it sounded like someone yelling, “Fire!” in the middle of the NCTA cable convention. Even the Wall Street Journal
got suckered into running the lede, “Google is attempting to
expand a high-speed Internet project to offer paid cable-television services to consumers, a move that could unleash a new wave of competition within the traditional TV business.”
Oh dear, oh dear. Time to short cable and broadcasters! Run for the exits!
The story makes it sound like Google is going to compete and take share from cable operators, broadcasters, and last year’s "over the top" darling, Netflix
(NFLX). It’s simple: If Google could harness the Web with search, why shouldn’t Google become the new Internet protocol enabled network for television and films available at all times wherever whenever you want on your Google/Android enabled device? Just think what it will do to those nasty cable operators, to say nothing of the obsolete broadcasting industry.
I don’t think so.
Film and TV production and distribution require enormous amounts of capital. In 2011, total production spending is expected to exceed $75 billion and generate at best an industry return of between 10% and 12%. Although populated by hits and flops, old media tends to generate stable, mid-teen margins and pretty good leveraged returns on capital. Compared to Google’s estimated return on capital of over 50%, however, old media is a piker. Even cable, where firms can achieve 40% EBITDA, margins starts to look less exciting when you factor in all that nasty stuff like running customer service centers, dealing with local municipalities and start to look to scaling issues in the face of consumer sticker shock.
Is the Kansas effort a reasonable laboratory for Google to test the water for a consumer product and learn a little bit about how television across the 'net might work? Absolutely. Is it a way to demonstrate to the FCC that Google and the Internet will require more bandwidth in coming years? You bet. It's also a way to start to test the overall model of how consumers consume media, whether it be information through search, music on mobile devices or television and video in homes on different display systems. In fact the Kansas program sounds just like Time Warner’s
(TWX) Full Service Network
program in Orlando in 1994.
But what’s different is that the guys who did those tests are still around, have learned a lot and have now adapted and evolved to create programs like TV Anywhere at Time Warner Cable
(TWC), or the Xfinity apps from Comcast
(CMCSA) on your Apple
(AAPL) iPad. Today the experience is pretty close to seamless if you have sufficient bandwidth through your cable system. So I’m not quite sure what a Google-enabled cable TV system really is. As an application that rides across the installed cable infrastructure with some cool navigation system, it could be very interesting and in fact revitalize the way we all watch TV. Just as Google mapping has become an important part of all kinds of location-based businesses, it would be terrific if Goggle could clean up the messy navigation of television. But as a standalone overbuild, I don’t get it. And as much as I get angry with my cable guy, it still looks like a necessary evil.
So all things considered -- with decent third quarter results coming out of Time Warner, Comcast, Cablevision
(CVC) and DirectTV
(DTV), improving balance sheets and next generation plant -- I'm quite comfy owning cable, and am looking to add to positions when the anxiety about the death of cable reaches a crescendo.
Dixon owns stocks mentioned: TW,TWC,APPL,CMCSA,CMCSK, DTV.
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