Five years ago the share market was attributing a value of almost $2bn to Channel Ten. Today that number, including outstanding debt, is $700m. You don’t need me to tell you where the difference went.
The culprit is called the internet. It had been making inroads into television’s monopoly over our eyeballs prior to 2010, but in the last five years faster internet speeds, better video delivery platforms and a generation of consumers who don’t know what it’s like to not have a mobile phone have accelerated the process. Increased competition reduces Channel Ten’s bargaining power with both advertisers and content creators, and we all know what falling revenue and rising costs does to the value of a business.
Bypassing old media at Forager
Matt’s post on Dick Smith being the greatest private equity heist of all time has been read by 41,212 people (a typical Bristlemouth blog has less than 1,000 readers). It got a mention in the Business Day section of various Fairfax mastheads around the country, and featured in the Australian Financial Review. But, as sources of readers, these media sites paled in comparison with Reddit, Facebook, Twitter and people forwarding the article around to friends. We spend money building new websites and we spend time writing blog posts, but the marginal cost of all this publicity was nothing.
What would it have cost to get that sort of exposure in the pre-internet days? Given a single newspaper ad used to cost $10k, you would have to think hundreds of thousands of dollars, or more.
We’re building a business in a way that simply wasn’t possible 10 years ago. And it’s bad news for the old media companies (it’s also bad news for platforms, financial planners and other middlemen who charge a toll for allowing funds management companies access to potential customers, but that’s a blog post for another day).
All of that is now fairly obvious. Identifying the losers in this new world is relatively straight forward. What I want to address in this post is the winners. Or, more importantly, the fact that the winners might not win anywhere near as much as the losers lose.
To understand why you need to understand how absurdly profitable the old media companies were. In 2010, Channel Ten earned $180m of earnings before interest and tax (EBIT). Take a guess at the value of the assets required to generate that level of profit?
You might think it costs a fair bit to beam those pictures around the country, but it’s actually a remarkably simple business. I spend one Friday morning a month out at the Foxtel studios in Sydney’s North Ryde, and it never ceases to amaze me how little equipment is required to create television.
In 2010, Channel Ten had just $80m worth of property plant and equipment another $20m of net working capital (cash plus receivables less payables). Throw in another $160m for programming rights and you could recreate the Channel 10 of five years ago with just $260m. Not bad for a business generating $180m of EBIT.
In a normally functioning market, excess returns like this encourage competition. By restricting the number of licences, governments have historically stopped this from happening in television and guaranteed these companies absurd profitability. Today, the internet has broken that government sanctioned oligopoly and competition is flooding in from all sides.
Revenue is going to flow to the competition. New, valuable businesses are being created. But it’s highly unlikely this is going to be a straight transfer of value. With more competition, why shouldn’t the profitability of the whole sector decline?
Any why shouldn’t the value accrue elsewhere in the supply chain? Owning a distribution platform is not going to be any sort of competitive advantage in a decade’s time. Being able to create high quality content that is capable of attracting and engaging consumers is going to be worth a fortune.
Oh to be a creative
I was watching a series called Bosch on a plane a few months back. It’s no The Bridge, but it’s an enjoyable series. When the credits rolled up I noticed it’s an Amazon Studios show.
With Netflix, Google, Amazon and all of the traditional media players now competing to create high quality content, imagine what your services are worth if you are Eric Overmyer (writer and/or author of The Wire, Law and Order and Bosch). Or Kevin Spacey (House of Cards). Back in the day, creatives didn’t have much choice. You worked for the likes of HBO and they made most of the money out of your content. Today, platforms are a dime a dozen and high quality content is in short supply. Its cost is presumably going through the roof.
What is true of media is true of other industries apparently ripe for disruption. Australia’s banking sector generates excess returns and I would love to see new technologies disrupting the cosy oligopoly of the big four. But new competitors aren’t likely to steal the incumbents’ excess profit. They are going to destroy it.
Unless Kevin Spacey lists himself on the stock market, we will be watching the disrupters for sport rather than buying them as an investment.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.