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March 6, 2013

Money Talk: 5 Trends in Cable from the Investment Community

Big money investors identified trends and hotspots in the cable landscape at Digital Hollywood’s Media Summit in New York on Tuesday. Here are five areas of interest from the perspective of the investment community.
 
Mega deals. “Mega deals are gradually coming back,” according toTuna N. Amobi, Director, Standard & Poor's. Rather than achieving growth through buying other companies, executives at cable companies have been “very amenable to talking deals” in the last 12-15 months, especially in the gaming and social media sectors. Share buybacks are a more common way of deploying excess cash flow, he added. As far as the size of the deals, they’re more in the hundreds of millions of dollars as opposed to billions of former years. 
 
TVE/IP Investment. Cable companies see a huge opportunity in TV Everywhere, cloud-based architecture and IP investments, Amobi said. “That’s an area where we expect a lot going forward.” Comcast and Time Warner Cable, for instance, are “coming up with features that’s making it a lot more seamless for viewers,” and they’re “not spending billions of dollars.” The changes made on top of existing networks are “basically incremental.” “So far these investments have proved very, very fortuitous” for these companies, he said. “Churn is having a positive impact” and “RPU has been benefiting from that,” he added. “I have my hopes very high on how the cloud can revolutionize the entire experience.”
 
Distribution as Commodity. Ian Loring, Managing Director, Bain Capital, which invests in The Weather Channel, said that distribution is becoming “more and more a commodity… You have to have some element of content across you business,” he said. There is huge value having “unique proprietary content.” At The Weather Channel, for instance, the network is investing in more primetime programming. “We need to have a draw,” he said. The net is unlikely to get a hit like “Mad Men,” he noted, but something weather-related will help the network continue to monetize over time and create value. Amobi said that companies such as Netflix, referring to its popular new original “House of Cards,” are seeing opportunities to revolutionize television practices, specifically appointment viewing. The caveat is that “it’s still a hit-driven business” and there’s no assurance of winners. Nonetheless, this represents a move to differentiate its programming.
 
The Rise of Data-Driven Programming. Eric Hippeau, Managing Director, Lerer Ventures, said the “new order” of programming—from companies like Netflix, Amazon and possibly even LinkedIn in the future—will be driven by technology and data. For instance, a company like Netflix has perfect data on its consumers—when its subs watch programs, on what devices, etc. “The amount of information they have is huge. They keep it and analyze it,” he said. Case in point: In the case of “House of Cards,” Netflix correlated data on Kevin Spacey’s popularity and made the decision that there was very little downside to buying the series. “The data showed them that it was going to be well received,” he said. This contrasts—and threatens—the traditional TV model, which requires executives to make decisions using qualitative data. Additionally, Hippeau said that less expensive, digitally-produced content is on the rise. “We will be able to create shows that are very attractive and you won’t see a difference in quality,” he said. “The whole structure of producing content completely overblown,” he said. Too much money is spent on programming simply because it’s there—and he believes that’s going to change.
 
The Future of Unbundling. While unbundling cable networks would “decimate the economics of television ecosystem,” in dealing with cable companies Standard & Poor’s Amobi sees more posturing than a real industry-wide move for change. He has witnessed executives “trying to get an upper hand for next deal they’re going to negotiate.” However, he said he does not currently see sufficient momentum in Washington and the FCC for reform. “I don’t think linear is going away any time soon, frankly,” he said. “But in some international markets, we’re seeing the direct-to-consumer model evolve more quickly.” On the other hand, Blair Faulstich, Managing Director, Providence Equity, took a different view, saying that unbundling of content is inevitable. “I think there’s a saturation of content,” he said. “Let’s take cable networks. We’re paying too much for them. No one’s watching them.” Citing the recent Viacom/Cablevision lawsuit, he predicted that “the value proposition for cable networks is going to change a lot," and that we'll see "a shakedown around some of the content that we’re not utilizing.”







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