Content is King (and Undervalued)

Source: Lightshed Partners

“Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting.” - Bill Gates, 1996

Last week we included in our Sunday Reading Newsletter the above chart from Lightshed Partners, which illustrated just how much smaller the media giants of the past are compared to big tech. It’s as if Goliath went up against a tea lady. ViacomCBS is so small on the chart that you could be forgiven for mistaking it as a pixel on your screen – whilst Lionsgate is barely visible at all. 

Consider for a second just how remarkable this is. In the 50s and 60s CBS was a giant among corporations – CEO Bill Paley had transformed a former radio station into a powerhouse; in 1961 CBS was the 16th largest listed US company by revenue. Even more extraordinary is AT&T - which in 1961 was the 10th largest corporation by revenue, yet is all but dwarfed by a handful of firms which were decades away from existing in the 60s (this is made all the more remarkable consider that, as of writing, AT&T still includes media assets like Warner Media and CNBC – so AT&T is dwarfed by big tech despite having two streams of revenue – telecommunications and media). 

There is good reason for the size of big tech. Others have written eloquently about it; yet in this market where pundits now talk breathlessly of pivoting to so-called “cyclicals” and “tech stock sell-off” it’s perhaps worth remembering that these companies generate enormous amounts of cash (Apple’s net profit after tax last year was c.$US94 billion, whilst Microsoft’s was c.$US67 billion*). We can think of few credible alternatives to Google (Alphabet), or to Instagram (Facebook/Meta), or to the comprehensive suite of products Microsoft offers. These companies are proverbial cash generating machines. 

Consider, then, the relatively small size of legacy media. Investors in the Elevation Capital Global Shares Fund currently own shares in a number of legacy media companies: AT&T, AMC Networks, Comcast, Discovery Communications, Disney and ViacomCBS.

AT&T is currently spinning off its media assets and merging them with Discovery to create WarnerDiscovery. In December 2019, Viacom merged back with CBS after a 13 year separation (the original incarnation of Viacom included CBS, but in 2006 the two companies split into two). In our view further mergers and acquisitions will ensue.

Why?

Simply put, more people are watching original content on a screen than ever before. This is evident by ever-growing subscriber numbers to streaming services, detailed in the chart below from AdWeek. The content is being watched by a lot of people as the basic tenets that drive humans has not changed: as Bill Gates wrote in 1996 paraphrasing Sumner Redstone from 1974 in Magazine Editing and Production, and from where the title of this blog post derives: “Content is King”. Gates proposed that the winners of the internet will be those who create the best content. He then proposed what is still the basic structure for making money from content on the internet: either via subscription or advertising. 

What Gates prophesied has come to pass; “anyone with an internet modem” can create content and they have; the success of TikTok, YouTube and Instagram is due to user-generated content. The value of content applies on a larger scale, too: as streaming has become commonplace the money spent on content has increased dramatically. Global content spending in 2021 was +US$220 billion (+14% YoY); this is consummate with the number of subscribers to the various streaming platforms (which have all increased in the last year). Demand for content drives spend. Partially the extraordinary spend on content by media (legacy and otherwise) can be explained by a shift in monetisation strategies: legacy media can benefit directly from SaaS-like recurring revenues in the form of streaming subscriptions which generates substantial cash flow at scale.

Consider, then, the relative size of big tech to legacy media and the comparatively outsized impact legacy media has on popular culture and the zeitgeist (AT&T subsidiary HBO produced the show of last year, Succession; whilst ViacomCBS owned subsidiary Paramount produces arguably the second most important television show, Yellowstone; also consider the sheer amount of IP legacy media owns – everything from Mickey Mouse (Disney) to Star Trek (ViacomCBS) to The Wire (AT&T). We have previously talked extensively about the lasting and often under-appreciated value of a library; an example of this outside of media is our 2015 presentation on a previous investment, Adidas, which can be viewed here.

Today, we hypothesise that the highly valuable content libraries legacy media owns alongside the growing demand for content renders legacy media a very attractive acquisition or merger target; Content remains King.

The value of content libraries and IP is significant. A new platform may have very deep pockets (Apple TV) yet without a library and IP the endeavour is fraught with risk: the marked failure of ex-Disney, ex-Dreamworks executive Jeffery Katzenberg’s Quibi is testament to that. A cheaper and more tenable solution to building a content library may be to purchase a legacy operation. The resulting company from AT&T and Discovery’s spinoff/merger, WarnerDiscovery, will have a value of c.US$100 billion. This is a mere fraction of Amazon’s market capitalisation (US$1.64 trillion) or Apple’s (US$3 trillion). Owners of these companies are well aware of the size disconnect between deep-pocketed tech and the size of their own company: they are small fish in the face of a proverbial whale; and they have structured accordingly – John Malone is giving up his supervoting-class shares in Discovery to effect the WarnerDiscovery merger and, in our view, render a potential acquisition/merger of WarnerDiscovery more palatable in the future**.

The bottom line is: Content is King; legacy media is dwarfed by big tech; to big tech, content is cheap - Game On!

*Source: Capital IQ

**”Malone agreed to turn in those shares for common equity because he wanted to give a combined WarnerDiscovery flexibility to sell itself in the future -- most likely to a deep-pocketed technology company like Amazon or Apple or another media behemoth like Disney, according to a person familiar with the matter.” Source: CNBC