Introduction
The media, telecom, and gaming industries are often viewed as separate entities, but in reality, they are deeply interconnected. Collectively, these sectors are valued at an astounding $5 trillion, making them a significant part of the global economy. This blog post aims to delve into the intricacies of these industries, exploring their interrelations and the driving forces behind their evolution.
The Media-Telecom Nexus
The Role of Telecom Companies
Telecommunications companies, commonly known as telcos, serve as the backbone of modern communication. These companies are bifurcated into two categories: infrastructure companies, which are responsible for developing the technology, and service providers, who lease this technology to offer services to the end-users. For instance, American Tower specializes in owning and operating cellular towers, while Verizon leases these towers to provide cellular services to its customers.
The Media Sector
Media corporations utilize the communication channels established by telecom companies to publish content. These organizations span a wide range of categories, from film production companies to news outlets. For example, Comcast is the parent company of NBCUniversal, and AT&T owns WarnerMedia.
A Mutually Beneficial Relationship
Telecom and media companies often engage in a mutually beneficial relationship. Telecom companies require content to make their services more appealing, while media companies need robust infrastructure to publish their content to a wide audience.
Valuing Telecom Stocks
Telecom companies have a penchant for debt, often using it to fund their expansion. This strategy serves dual purposes: it lowers taxable income due to high-interest payments and provides a stable, recurring revenue stream that makes lenders more willing to extend credit. Investors, therefore, focus less on net profits and more on "free cash flow to the firm" minus capital expenditure (capex). These are the figures that telecom companies aim to optimize and from which they generate dividends for shareholders.
Telecom capex tends to be "lumpy," occurring in waves rather than consistently each year. This makes it challenging to compare one telecom company to another solely based on free cash flow minus capex. As an alternative, investors often use EBITDA multiples for comparison. For example, Sprint's stock trades at a multiple of 5.1x compared to Verizon's 7.8x, which could indicate that Sprint is undervalued or that Verizon has better growth prospects.
The sector also offers an attractive average dividend yield of 4.53%, compared to the broader U.S. stock market's 1.68%. For income-focused investors, this could make stocks like AT&T, with its 5.3% yield, more appealing than Verizon's 4%.
The Takeaway
High-interest payments make net profit a less useful metric for evaluating telecom companies. Instead, investors rely on EBITDA multiples for stock comparisons.
The Horizon: 5G and Its Implications
The advent of 5G technology is poised to bring transformative changes to both the media and telecom sectors. This technology promises unparalleled speeds and the capability to connect a multitude of devices, paving the way for advancements in the Internet of Things (IoT). However, the shift to 5G is not without its challenges, as it necessitates an estimated investment of $872 billion over the coming decade.
The Evolving Television Ecosystem
Conventional TV Networks
Traditional television networks like NBC and ABC generate revenue through advertising and affiliate retransmission fees. However, the growing trend of cord-cutting is compelling these networks to transition to direct-to-consumer models.
The Streaming Revolution
Streaming platforms such as Netflix and Disney+ are radically altering the way we consume content. These services are increasingly being used as loss leaders to attract customers, who can then be monetized through various other channels.
The Lucrative World of Gaming
The video gaming industry is a goldmine, with blockbuster titles like Grand Theft Auto V raking in over $6 billion in revenue. The sector is gradually moving towards a subscription-based model, and the emergence of esports provides an additional avenue for revenue generation.
Video Games
The highest-grossing movie of all time, Avengers: Endgame, made $2.8 billion. In contrast, the highest-grossing video game of all time, Grand Theft Auto V, made a staggering $6 billion. Despite being less discussed in mainstream finance, the video game industry is a highly lucrative business.
The industry is undergoing a significant shift from one-time purchase models to free-to-play and subscription-based models. Games like Fortnite have made billions through in-game microtransactions. However, regulatory actions, especially in countries like China, are starting to impact this revenue stream.
Subscriptions are becoming the new norm, with services like Apple's Arcade and Xbox Game Pass offering a multitude of games for a single price. The advent of cloud gaming will further revolutionize the industry, allowing players to game from any device without needing expensive hardware.
This shift poses both opportunities and challenges for the industry. While hardware sales might decline, subscription revenues could more than makeup for it. Investment bank Morgan Stanley estimates that the cloud will increase the number of gamers by 10%, potentially boosting publishers' profits by $11 billion by 2025.
Investors are also increasingly interested in esports, which generated around $1 billion in 2019. Major game publishers and console manufacturers are publicly listed, making it easier for investors to enter this booming market.
The Takeaway
The video game industry is a rapidly evolving, highly profitable sector that is increasingly attracting investor interest. New business models like microtransactions and subscriptions are driving this growth, and the rise of esports offers yet another lucrative avenue.
Success In Succession
The media and telecom industries are dominated by a few large conglomerates such as Comcast, AT&T, Disney, and ViacomCBS. Valuing these behemoths can be a complex task. The "sum of the parts" method is often the most effective approach, breaking down the conglomerate into its core business segments and applying multiples to each.
For example, Comcast's key business lines include internet services, cable networks, broadcast TV, films, and Universal theme parks. By comparing the profit multiples of similar "pure-play" companies in each sector, one can arrive at a more accurate valuation for Comcast. This method revealed that Comcast had a total enterprise value of $332 billion, significantly higher than its stock value at the beginning of 2019.
However, conglomerates often trade at a discount due to their operational complexity and the challenges they pose for investors interested in specific sectors. Despite these challenges, the scale and diversity of these conglomerates can also be their strength, as they can execute grand strategies that smaller, more focused companies cannot.
The Takeaway
Investors need to consider both the challenges and opportunities presented by media and telecom conglomerates. A holistic approach to analyzing these companies can offer valuable insights into their potential for success or failure.
Investment Strategies for These Sectors
Investing in these interconnected sectors can be a complex undertaking due to their intricate relationships and the presence of large conglomerates that dominate the market. A "sum of the parts" valuation approach, which involves assessing the value of each individual business segment, can offer a more accurate investment perspective.
Conclusion
Understanding the intricate relationships between the media, telecom, and gaming industries is crucial for both investors and consumers. As these sectors continue to evolve, staying abreast of technological innovations like 5G and emerging trends such as streaming and esports is essential for long-term success.