After a long, drawn-out battle in the ongoing content wars, cable giant Comcast Corp. (NASDAQ: CMCSA) has finally waved the white flag in what will likely be etched in history as a critical defeat for the firm and its shareholders.
Earlier this week, the company dropped its massive $65 billion bid for 21st Century Fox, effectively ceding rights to Walt Disney (NYSE: DIS) by way of a recently upped $71.3 billion offer.
The failed acquisition attempt means Comcast will not be obtaining rights to a broad range of valuable media assets, including 20th Century Fox Movie and Television Studio, Fox Regional Sports Networks, Hulu, and a long list of domestic and international cable channels.
Just to provide some scope of how influential this acquisition will be, here’s a list of just some of the media sub-assets being acquired by Disney:
|
|
No doubt that’s a long list of valuable movie franchises and shows on its own, but it would take pages to list everything Comcast is losing out on here.
Now, some investors might be quick to assume that this isn’t technically a loss for Comcast. After all, the company never had those assets in the first place, so it’s really net zero, right?
Well, not really.
You see, it helps to ask why Comcast was so hot for Fox in the first place. Its $65 billion bid telegraphed just how important content is to the cable provider right now, as the company’s balance sheet simply didn’t lend itself to that kind of offer in the first place, let alone anything higher.
For perspective, Comcast is currently sitting on $6 billion in cash and equivalents, with $66 billion in long-term debt. As Disney will ultimately be doing with this merger, Comcast would have had to dilute its stock substantially to make the purchase.
The willingness on Comcast’s end to even consider such a maneuver marks a major point of desperation, far more so than it does in Disney’s case. Where Disney has proven its ability to add huge value to movie franchises, Comcast has no such record. There are also considerable synergies to consider for Disney, namely the introduction of the X-Men into the Marvel Cinematic Universe.
While it’s true that Comcast has seen some success at the big screen, the numbers are simply not comparable. Major movie franchises under Comcast’s wing such as Jurassic Park, Pacific Rim, Fast and the Furious, The Mummy, and Minions are all volatile performers at the box office.
We have you covered! Sign up for Tech Investing Daily’s FREE newsletter, Wealth Daily, today and gain first access to actionable stock market commentary, regular IPO updates, and weekly technical analysis. Plus, if you sign up right now, we’ll immediately send you our free report: “The Downfall of Cable, and the Rise of 5G.”
In other words, what Disney is going to do with Fox will be enormously more profitable than whatever Comcast was planning.
Why, then, was Comcast willing to put up $65 billion for those media assets? Well, because, soon enough, content is really all Comcast will have left.
As you might expect, Comcast makes the majority of its revenue on video subscribers. Delivery of that video relies on two main components. The first is Comcast’s cable and internet infrastructure. The second is Comcast’s ability to secure programming rights.
Over the last several years, Comcast’s programming costs have been increasing substantially, as bidding wars between competing media giants are beginning to weigh the company down. Programming costs, in fact, have increased from $36 a user to $49 a user since 2014.
At the root of the bidding wars driving up programming costs is none other than the cable-cutting movement. The long and short of it is that Comcast’s affiliates are gaining increasing amounts of leverage because they’re seeing new offers from rising streaming platforms like Hulu and Netflix.
This week’s failure to obtain Fox represents an even further loss of leverage for Comcast, with threats of Disney flexing its new muscle. That threat will become especially apparent to the market next year, when Disney launches its own dedicated internet streaming service and also takes a controlling stake in Hulu.
In the very best case scenario, Disney will be charging exorbitant fees to Comcast for rights to its now massive library of content. In the very worst, Disney will pull that content entirely to host it exclusively on its own streaming service.
Imagine just how damaging it would be to Comcast should Disney play hardball on content, as it’s already done with Netflix. Imagine cable TV without The Simpsons, Family Guy, Futurama, Modern Family, Bob’s Burgers, How I Met Your Mother, and so on. This would be a brutal blow to Comcast and its ilk.
Of course, you ultimately need to deliver internet for streaming, which leaves Comcast with some leverage, but not for very long. After all, cable’s monopoly over internet is arguably at an even greater risk than its programming rights.
The dire news for Comcast is that it’s being assaulted from both sides of its delivery model. At the same time that internet streaming companies are cornering the market on content, telecom companies are taking steps to squeeze Comcast out of infrastructure.
Specifically, 5G internet, set for early commercial deployments by the end of 2018 in multiple U.S. cities, is threatening to upend the cable ISP model entirely. With speeds as fast as fiber-optic internet, 5G represents an upgrade to not just mobile internet, but residential broadband as well.
Of course, we’re still a few years out before Comcast really begins to feel the pain, but that time is approaching nonetheless. Shorting Comcast seems like a smart long-term bet given all these factors, but it’s also probably not the best option. Investors are poised to do much better taking a bullish position on Comcast’s competition, namely Walt Disney (NYSE: DIS) and 5G stocks.
Taking a position in Disney is straightforward enough, but understanding the 5G market this early is a bit more complicated, as you might expect. For the full details on those opportunities, I recommend reviewing our free 5G presentation and top three stock picks here.
Until next time, Jason Stutman
Check us out on YouTube!
