Weighing strategy in an asset-light world

Senior Equity Specialist Urs Raebsamen spotlights the asset owners and physical infrastructure providers that are increasingly overlooked in our asset-light world.

07 Dec 2018

There's seemingly an asset-light business for everything these days: Uber for taxis, AirBnB for rooms, and Spotify for your music needs.

And investors love them, mainly because companies like Uber and AirBnB run businesses with minimal assets and bring services to customers without owning the infrastructure needed for the service.

In this environment, asset owners and infrastructure providers can be overlooked.

Urs Raebsamen

Senior Equity Specialist

What now for broadband and media companies?

Though it is seemingly becoming an asset-light world, in some industries it makes sense to own assets, and we believe that the entertainment and media industry is one such example.

Owning content and infrastructure is crucial for broadband suppliers and media companies, such as Comcast, and instead of applying an asset-light approach many have been entangled in a fight for content. 

The original purpose of video streaming services such as Amazon Prime video or Netflix was to give customers access to video-on-demand at reasonable cost which from a provider's perspective could be produced and owned by anyone.

This has changed as more streaming services offer their own unique content and compete with entertainment companies that have a long history of producing movies and series such as Walt Disney or Warner Brothers.

The escalating fight for content

The fight for content intensified recently when Walt Disney and Comcast competed for Fox and Sky. Disney targeted Fox and Comcast focused on Sky, but the matter was complicated by the fact that Fox owns 39% of Sky1.

Regulatory approval in the US and in Europe were uncertain, but as the AT&T-Time Warner merger got approved, chances increased that the regulators were not viewing the structure as too oligopolistic and eventually approved.

Comcast considered a bid for Fox as well, but has now shifted its focus on Sky which they finally won in September as Disney instructed Fox to tender its stake in Sky to Comcast.

Comcast: positioning for growth in an asset-light world

Comcast sees continued growth in professional video content consumption, and that's why it is looking to acquire more high-quality content production assets.

They also expect audiences to be more global as well as technology agnostic, which explains their interest in acquiring international distribution (through Sky) and the need to be available over multiple distribution channels (including Over the Top, such as Hulu)2.

Sky creates its own original content and has rights to big-name sports events such as Premier League and Bundesliga football. Combined, Comcast and Sky would become the biggest private sector provider of pay TV with an estimated 52 million customers3.

Comcast's asset advantage

Comcast originally was a cable operator in Tulepo, Mississippi. When merging with AT&T Broadband in 2001, Comcast became the largest cable company in the US.

Given the surge in popularity of asset-light business models, one would expect Comcast's physical cable infrastructure to be a potential drag.

However, we do not believe this is the case – on the contrary, growth has been strong. E.g. their second quarter earnings results were strong, especially in the broadband business where Comcast added 363k subscribers in the third quarter 2018 versus a 260k the previous quarter and beating consensus expectations1. Comcast invested in their network over a number of years and as a result is now winning market share in the broadband space.

Strong structural drivers make for good prospects

We also believe there are positive structural drivers for success in Comcast's business4: That's because we see growing demand for video consumption and internet access, and constrained supply in what are largely duopoly markets in both broadband and video.

When narrowed down to delivery mechanisms to households (over the air via satellites or over wires), offerings from the cable networks are superior. This is particularly the case for Comcast who has made significant investments in its network, product offering and customer service over a number of years. Additionally, unlike in Europe, a long tradition of limited regulatory intervention helps the industry. We see this continuing, particularly under the current administration.

In conclusion, even if there seems to be a mega-trend towards shared economy and asset-light business models, someone has to provide the assets or infrastructure. As investors' focus may be turned away from those businesses, investment opportunities emerge to benefit for solid businesses at reasonable share prices. Comcast is well positioned to provide and distribute content and capitalise on its advantageous position in the broadband and entertainment space.

 

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