by Lawrence Meyers | March 11, 2013 8:15 am
So, I’ve been rolling this thought in my mind lately concerning three interesting media plays — two of which are directly traded, and one of which is private but can be purchased indirectly.
There’s Hulu, the joint venture among Comcast‘s (NASDAQ:CMCSA[1]) NBC/Universal, News Corp‘s (NASDAQ:NWSA[2]) Fox Broadcasting and Walt Disney (NYSE:DIS[3]). There’s Netflix (NASDAQ:NFLX[4]), with its roller-coaster stock and an epic bull-bear war opining on the future of the service. And then there’s AMC Networks (NASDAQ:AMCX[5]), which continues to provide outstanding original content, yet relies on an unreliable advertising revenue stream and is controlled by the Dolan family — alternatively seen as brilliant or meddling.
The future for each of these entities is cloudy, which made me wonder if a mega-merger of all three might occur one day.
There are many considerations here, and many wild cards, but there’s an underlying logic to this theory:
Hulu’s growth metrics[6] are impressive and include 2012 revenues that grew 65% to $695 million. I think it’s a mistake to spend all its profit on original content at this point, although that’s a great idea down the line.
However, the problems Hulu faces still have been significant enough for its visionary CEO, Jaosn Kilar, to leave the company, along with the chief technology officer. No doubt he got sick of the egos at these three large media companies squabbling (and probably telling him what to do). A planned IPO went sour because none of the media companies wanted to guarantee content licenses.
The companies also are concerned about cannibalizing advertising revenue for the programming that airs on television each week. Network viewership has eroded over the years, so advertising revenue is more important than ever before. On the other hand, the media titans know they need to generate revenue from ancillary markets, so that content has to get sold and viewed somewhere.
What is apparent is that Hulu has a subscription base, it makes money and, with careful attenuation, it can continue to generate significant revenue as long as its partners feed it content. That, however, is the big question: Will they? If the likes of Disney and Fox pulled contemporary content, would Hulu survive? My guess is that the networks will continue to provide that content, and if Hulu is seen as cannibalizing revenue, they’ll just boost subscription fees or ad in more advertisements.
In short, I think Hulu remains viable and probably profitable, as long as it scales back original programming expenditures.
I won’t belabor readers with another long bearish commentary on Netflix. In short, I’m in the camp that believes Netflix’s DVD business will be dead within two years and it will rely entirely on streaming; NFLX then will have to raise its subscription price for that streaming.
Also, the company still needs more than a billion dollars before September to meet its content obligations. One industry source told me that if Netflix can’t afford to meet those obligations, it will merely renegotiate, perhaps lower the price or perhaps set up a payment plan. If other providers have already passed on that content, he theorized, they won’t bid for it.
I think, however, it is possible that Amazon (NASDAQ:AMZN[7]) or Apple (NASDAQ:AAPL[8]) — or, heck, even Hulu — might come back for that content. The original deals with Netflix were made before the other players really established a foothold. If they want to choke off content from getting to Netflix, they could bid for it. The first two have billions of dollars in cash, and Netflix doesn’t.
What Netflix has is a huge subscriber base, and streaming infrastructure. So maybe it loses the content war, but it has the eyeballs and technology.
AMC’s business model is pretty simple. It produces original programming like the big hit The Walking Dead, and makes more money by selling advertising for the shows and selling the shows internationally than it does to produce the shows. It also generates hundreds of millions in free cash flow every year.
The key to AMC is simple: Keep producing great content. So far, it has a pretty solid track record, but there’s no guarantee that this will continue. Even great content can sometimes not find its audience, and that will affect advertising revenue. The problem with Hollywood content is that success is literally random and unpredictable.
So given the strengths and weaknesses of each, what do I think might one day happen? I’m going to go out on a limb and make a bold prediction.
One company mentioned here has shown great foresight, has made brilliant acquisitions of great brands and is the dominant player in media today. I predict all three entities, either in combination or individually, will one day be purchased by that same company. That company can augment each entity’s strengths, and wipe out each’s weaknesses.
It would benefit by having Netflix’s streaming technology and platform from which to deliver its enormous volume of content. It would benefit by having AMC Networks’ premium pedigree programming, which it currently lacks. It would benefit by using the content of other providers to deliver across its captured Hulu platform.
It has the experience to digest large acquisitions. It could use the $6 billion in cash it has, or issue its very attractive stock.
It is the company that purchased ABC, Marvel, Pixar and LucasFilm.
That company is Walt Disney.
As of this writing, Lawrence Meyers[9] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[10], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[11] and blogs about public policy, journalistic integrity, popular culture, and world affairs[12]. Contact him at pdlcapital66@gmail.com[13] and follow his tweets @ichabodscranium.
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