You don’t get points for bravery in investing. You get points for being brave in real life. Everyone admires and celebrates the true heroes—the firefighter that rushes into a burning building to save a family, the police officer that responds to a “shots fired” call, the soldier that risks his life running through enemy fire to rescue a wounded comrade, or the medical professionals that travel to disaster or war-ravaged areas to treat those in need. When it comes to investing, you do not get the Medal of Honor for being the brave soul still buying Viacom or Twenty-First Century Fox stock.
Bravery In Investing
As you may have guessed from the last sentence, we decided to sell two of our media investments: Twenty-First Century Fox (FOXA) and Viacom (VIAB). While there are some issues specific to each company that factored in to our decision to sell, the main issues are that cord-cutting seems to be accelerating, we are starting to see a content glut, and programming costs are increasing.
Let’s start with cord cutting. Traditional cable bundle subscribers have been falling for the past few years, but the pace was generally slow with a few big blips here and there. (Some quarters had big drops and some had surprise subscriber gains.) This wasn’t much to worry about so long as the decline was slow and steady. Look at tobacco stocks as an illustration of why a slowly declining market isn’t necessarily a death blow to an industry. The problem is that cord cutting now appears to be accelerating with this past quarter setting (or tying) a record for cable subscriber losses. Total household formation rates are actually rising slightly (or at least stable), so the current acceleration in cable subscriber losses is even more troubling.
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If we are seeing people move on from the traditional cable bundle, it isn’t the end of the world. Many companies have their own streaming services. For example, this past quarter Time Warner saw enough growth from its HBO unit to make up for slowing growth in its cable segment. The problem is that we believe we are beginning to see the start of a content glut.
Right now, the average American watches about 5 hours of TV (live plus time-shifted, such as Netflix or DVR) per day. Teenagers and 20 something’s watch about 16 hours per week, while those ages 50-64 watch 44 hours per week! We think that people are pretty much at the limit of the amount of content they can consume. There just aren’t enough hours in the day for people to start consuming substantially more media content. The more content, the thinner it is spread around. That is, imagine a world with two people and one TV show. The show would have two viewers because it is the only choice. Now imagine a new company emerges and produces a second TV show. Now each TV show will have one viewer. The more content that is produced, the smaller the audiences become.
We believe we are starting to see this now. In addition to the traditional media companies producing original content, we now have a host of new entrants. Netflix is the largest and the most well known. We also have companies like Google that recently announced they are going to develop 40 original series for YouTube. Amazon also announced it was going to triple its spending on originals this year (up to $260M).
It seems like every large media or technology company is trying to get into the content game, especially when it comes to sports. Traditionally, there were only five large media companies: NBC (Comcast), CBS, ABC/ESPN (part of Disney), Turner Networks (Time Warner), and Fox. These five in the past were bidding for the major league American sports rights. Now, those bidders have been joined by Twitter, Google, Facebook, and Amazon, all seeking broadcast and streaming rights. All this is driving up the price of the broadcasts rights and reducing profit margins for the media (or tech) companies that ultimately win the rights. For example, content production costs for all major media companies grew 6.56% last year, while revenues only increased 5.38%.
When we first bought Fox, we bought it during the media meltdown in 2015. We bought it mostly because we believed the meltdown was overdone and the stock was cheap. Fast forward to today. The media sector has all the problems we outlined above, plus Fox now has some unique developing issues. Its cash cow is Fox News, but over the past few months Fox News has been embroiled in sexual harassment suits and investigations. The CEO of Fox News was forced out. Then the new CEO (and former President) of Fox News was forced out. Oh, and the star of their highest rated show was fired as well. The company is also trying to complete a $15B acquisition of Sky plc, a European media company with worse economics than US media companies. We made money on our investment in Fox and decided discretion is the better part of valor and sold.
With Viacom, our thesis was that the terrible previous CEO would be forced out and Viacom would return to some of its former glory. It took much longer for Phillipe Dauman to be fired than we thought, and the company’s business deteriorated much faster than we thought. We believe it will be extremely difficult to execute a turnaround for the company while its core cable video market is declining.
At the end of the day, we could be right or wrong to sell. Only time will tell. What we want to do is manage risk intelligently. In real life, there are certainly good reasons for a firefighter to run into a burning building. In investing, there really are none. There are plenty of good investments out there. Although we don’t have any replacements right now, we are confident we will eventually find a worthy investment. Meanwhile, your hard-earned money is safe and you can feel at peace.
No Company Profiled
No Company Profiled This Month.
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Article by Ben Strubel, Strubel Investment Management