The “Technologization” of Media Is Making It the Stock Market’s Hottest Sector: And You Can Double Your Money with These Three Plays
Big-time college football last year experienced its biggest drop in game attendance in 34 years – and its second largest drop ever – CBS Sports reported in February of 2018 in a detailed analysis.
Teams in the top-level NCAA Division I Football Bowl Subdivision (FBS) averaged 42,203 fans per game last year. That’s a drop of 1,409 fans per game and the lowest attendance since 1997.
If that were a single “data point,” it wouldn’t be a big deal. But this was the second-steepest decline since the NCAA started tracking college football attendance back in 1948. And, for the first time ever, average attendance declined nationally for four straight years, CBS Sports reported.
“It’s a technology issue,” Football Bowl Association Executive Director Wright Waters, and a former Sun Belt Conference commissioner, told CBS Sports. “The public is ahead of us every day in what they can get from technology. We have not been able to keep up.”
When I read that quote, it was like an alerting tone sounded in my brain.
I’ve been talking about the “technologization” of the media sector” for ages now.
And this was the latest manifestation.
I’ve also been talking about the “Amazonation” of retailing for several years now – and my readers profited heavily as Amazon.com Inc. (NasdaqGS:AMZN) cut through traditional retailing like titanium scythe.
My subscribers cashed in big playing the “short side” of the technology-driven decline in Big Retail.
And I’m predicting that this technology-driven “makeover” of the global media business will have an equally hefty impact – while at the same time creating the same big-time profit opportunities.
From Retailing to Media
This declining football attendance is a “proof point” of my media thesis.
Yes, the whole ‘take-a-knee’ protests in the NFL have clearly angered fans and contributed to the attendance decline there – and spilled over into college sports. And there’s the whole concussion hangover, which is having a bigger impact in football fandom than the powers that be would have us believe.
But technology may be an even bigger factor here.
The CBS Sports report said as much in this illuminating passage:
“College sports has long been at odds with how to manage the time/value relationship,” the report said. “In other words, how to make attendance at a live event more valuable than the alternatives, which range from remaining at a tailgate outside the venue to viewing on a smartphone while on the go to watching in the comfort of one’s living room.”
Plus, there are linkages between retailing and media.
In retailing, companies are grappling with how to capture consumers. They’re trying to stay abreast of changing tastes, changing lifestyle trends, changing spending habits. It’s largely because of technology, and the “Amazonation” of retailing.
The same thing is happening now with sports and media. Trends are changing, people’s lifestyles are changing, sports are changing. It all has an impact.
This will show itself in the media sector in specific, predictable ways.
You’re going to see lots of deal-making, as smaller players with needed specialties or content-creating abilities get snapped up by Big Media players that have holes in their game, that are looking to build, and that are seeking growth.
A lot of this focuses on two things: content creation and content delivery.
I have a good friend who represents some big acts, especially in the area of comedy. And the numbers he tells me about are staggering.
Some of his clients are getting $20 million, even $30 million for doing a two-hour cable special that airs on cable. But for the broadcasters, it’s worth it. They can capitalize this content as an asset.
They can air it – making money on the initial broadcast. Then they can rebroadcast it through some of the other pipes they own. They can slice it up, into smaller pieces or different programs, which can be used again, in other areas, or repackaged into different formats – like DVDs or for premium streaming.
The Big Media players own the pipes – and have to have content to push through those pipes.
This is going to ignite a big round of deal making. Investors will be able to profit from the buyout “targets” – and from the “Last Media Companies Standing.”
Let’s Make a Deal
When I look at the stock market’s backdrop right now, I see the ingredients in place for the bull market to continue.
Interest rates are low, meaning the money needed for growth investments and deal making remain cheap. Earnings are on the march. Regulations are easing. And a hefty tax cut just went on the books.
And like we’ve been discussing here, the media sector particularly figures to benefit.
There are just too many factors working for it not to.
- There are the basic subscriber elements, which set up a kind of annuity-stream allure.
- There’s a pro-business/anti-regulation environment in place inside the Beltway.
- There’s the growing importance of social media, which provides both another venue for content as well as a need for media companies to find new supplies to feed that new funnel.
- And there’s a need to get bigger for the players involved – a need that will be aided by the cheap-money environment that will make it easier to get those deals done.
Mix in some intriguing regulatory factors and you’ve got all the ingredients for a focused, media-sector M&A boom that will lift the values of the best names.
Deal making is a funny animal where big public companies are concerned, because of a “musical chairs” mentality that takes hold once one of the big companies in any given sector shifts into deal-making mode.
In other words, the contestants don’t march forth focused on conquest; they’re more worried about “having no place to sit” when the music stops.
And so it goes for big public companies – at least where mergers and acquisitions are concerned. Once one of the leaders dials up a bid for a rival, the other players start worrying that they’ll have “no place to sit” when the deal-making craze in their sector finally subsides.
By that, I mean these companies fear that the wheeling and dealing will create sector giants – companies so big that the other players end up being dwarfed and noncompetitive. Because there’s no one left that these small companies can buy to keep pace (no place to sit), they’re forced to sell out and retire to the sidelines.
That’s not an appealing outcome for most CEOs, who don’t view corporate stewardship as a spectator sport.
The bottom line is that once one big company plays “Let’s Make a Deal,” the other firms follow suit.
And two big players in the media sector are playing “Let’s Make a Deal” right now.
In early December 2017, we learned that Twenty-First Century Fox Inc. (NasdaqGS:FOX) had restarted talks with Walt Disney Co. (NYSE:DIS) over the sale of Fox’s entertainment and international assets. And in June, Fox accepted Disney’s massive $71.3 billion offer in cash and stock to buy the company.
This buyout will reshape the global media map. In addition to Fox’s movie studio and sports network, Disney is getting cable channels FX and National Geographic. The deal gives Disney Fox’s stake in Hulu and in Star India. Fox News, Fox Business, Fox Sports, and its TV stations are not part of the link-up.
It’s a hefty deal – and just one of two right now that are reshaping the global media map.
The Deals so Far – and the Catalysts for More
Also in June, AT&T Inc. (NYSE:T), the No. 2 U.S. wireless carrier, closed an $85.4 billion deal to acquire Time Warner Inc. (NYSE:TWX), one of the biggest entertainment companies in the world.
The U.S. Justice Department has challenged the deal, saying it would lead to higher prices for consumers and was illegal under antitrust law. As I write this, AT&T is fighting the DoJ’s challenge in court.
Even so, those are two deals in place – and that leads us to the first of four catalysts that promise to move certain media stocks even higher. Let’s take a look at each of those catalysts in detail:
- Media Stocks Trigger No. 1 – The “Let’s Make a Deal” Mindset: Once one big player makes a deal-making move, others will follow in fear of being left behind. With Fox alone, U.S. cable operator (and owner of NBC Universal) Comcast Corp. (NasdaqGS:CMCSA) had expressed interest in the Fox assets that took Murdoch decades to amass. So, too, had telecom giant Verizon Communications Inc. (NYSE:VZ).
- Media Stocks Trigger No. 2 – The Changing Battlefield: With Fox, the decision to be a seller instead of a buyer is being driven by an unusual example of corporate candor: That company’s execs know that Fox lacks the size, distribution networks or content to compete with globe-spanning entertainment “streamers.” Thanks to new technologies and the emergence of Amazon.com Inc. (NasdaqGS:AMZN) and Netflix Inc. (NasdaqGS:NFLX), conventional broadcasters and even tied-to-their-networks cable firms risk being outflanked by the “on-demand” upstarts. The legacy firms are fighting back via deal-making and internal innovation. Verizon wants to triple sales from its media businesses to $20 billion over the next two years to three years – and has bought AOL Inc. and Yahoo Inc. to help it do so. Disney is striking back by creating two new “streaming” services of its own. One will target sports fans – capitalizing on programming from ESPN to do so. The second will target families by using films and other content created by its Lucasfilm, Pixar, and Marvel business units. Deal making would supercharge Disney’s push: Landing Fox gives it movie studio content and new cable channels and distribution in Europe and Asia – two hefty markets.
- Media Stocks Trigger No. 3 – The “Cascade Effect”: While the big deals like the Disney-Fox land grab get the biggest headlines, plenty of additional deal-making taking place will reshape the periphery of the media landscape. Take the “rest” of the Fox properties that aren’t going to Disney. Fox will put Fox Broadcasting Co., Fox News, Fox Business, and some national sports networks into a new company that will be spun off to Fox shareholders. In the years to come, the remaining media properties would ideally merge with News Corp. (NasdaqGS:NWSA), from which they split in 2013, Rupert Murdoch told Fox Business. There will be lots of peripheral deals of this type: Private-equity firms are already scouring the landscape for smaller business units, private firms, startups, or superfluous units that can be “rolled up” into ventures they can either sell to big media firms outright or take public via initial public offerings (IPOs).
- Media Stocks Trigger No. 4 – The “Washington Factor”: Politics and the media have always made for strange bedfellows – and never more so than now. The new tax overhaul is almost certain to serve as a trigger for media deals. So, too, will the midterm elections. The surprising resistance to the AT&T-Time Warner deal notwithstanding, the environment for media deals is a lot friendlier now than it might be after the potentially landscape-shifting midterm elections. Then there’s the controversy over “net neutrality.” The Federal Communication Commission (FCC) partially ended that in a ruling late in 2017 – opening the door for internet service providers (ISPs) to charge for faster access to content. Many firms have denied they will do this, but we know better. Those fees – when they come – will be political hot potatoes. So firms intending to do deals that will require regulatory approvals will make those moves before they ratchet up the fees that will incur consumer and political wrath. That, too, creates a “window” for frenetic media deal making.
There are other possible “triggers,” too – but you get the idea.
The Three Plays to Make
I’ve identified three media stocks, in particular, worth looking at. Here are those stocks, and their “stories:”
- AMC Networks Inc. (NasdaqGS:AMCX): AMC has cable TV brands, domestically and internationally, that work well together – but that would work better if split up and parceled out to other media giants. AMC’s direct-broadcast satellite assets are lucrative and are being eyeballed by several companies. As a stock, AMC is cheap – trading at only nine times earnings. The company throws off plenty of free cash – a fact that makes it alluring to private-equity shops. AMCX will continue to rise substantially in 2018 – and in years to come.
- Discovery Inc. (NasdaqGS:DISCA): Discovery is loaded with top-name network brands, too many to list here. It also has a robust set of education businesses that extend beyond network offerings. Discovery is another cheap company. It has good cash flow. And its profit margins – currently around 7.6% – are among the best in the TV networks sector. At a current price of about $32, this stock could still break out up into the $40s. If there’s an offer for Discovery up there, we’ll see a huge return on this stock.
- The Walt Disney Co. (NYSE:DIS): Yeah, I can hear it: “C’mon, Shah, Disney? That is boring.” Except it’s not. I have deep contacts in media, and they’re telling me that you can’t even imagine what these guys have in the works. You’ve heard that phrase “The Smartest Guys in the Room”? Disney is full of those guys. CEO Robert Iger is a genius. And he’s positioning Disney to be the “Last Man Standing.” Iger and his crew will do everything they can to remain as a powerhouse. It’s a blue chip, which will give you safety. And it will be a victor.
And that may be true of the entire sector.
This is going to be a hot sector for deals in 2018 and a few years beyond. There are so many catalysts in place – and so much money between corporate dealmakers and all the private-equity players – that this can’t help but be a place for investors to be.
Another incentive is the fact that asset prices are already on the march, so it’ll be better to do a deal sooner rather than later.
Scale, a size big enough to compete, has become both the watchword and the strategy here.
So it’s a sector that will be fun to watch – and a real moneymaker.