J. Armand Musey Cfa


[ 00:00:19 ] Get some that rich group. And I found it does valuation work throughout the communications sector. So that means the evaluations before companies do deals to help them determine what a fair price would be. Oftentimes the deal goes bad and there’s litigation. We do litigation support and when things go very bad we do get restructuring work. In between all that we also advise investors on investments in the sector. Exactly DCF comparables may parts of the communications sector are fairly unique in the comparables are not exactly comparable to a lot of work needs to be done to adjust them. For example a wireless spectrum is a perfect example and different countries are different rules about how it can be used how long the licenses are for what the build requirements are and so forth. And so those are the kind of things we take into consideration in developing valuations of different assets in the sector. The media industry is going through so much change right now. And the broadcasters are looking 8 USC 3.0. There’s new entrants over the top. The cable industry is finding competition from wireless companies some traditional over the top companies and they will be more competition coming in.

[ 00:01:41 ] So the one hand you have competition from other distributors and which is causing pressure on content pricing going up at the same time. Most of these companies have additional spectrum. So cable companies get more channels through broadcasters to get more channels through also have more data things that they can additional things they can sell. And one of the things you have going on in the media sector I think one of the biggest challenges is that on one hand you have more competition. They also have more opportunities to sell more content get more channels. But sometimes there’s a mismatch in timing. The competition is driving up content price and today and many times their plans for how they’re going to monetize additional spectrum additional ability to send more contact customers is a couple of years behind him to bridging that gap I think is the biggest challenge facing most media companies today. In that capacity that they can actually monetize and that’s I think where the big gap is really from everybody in the media sector whether it’s the satellite company or a cable company it’s one thing to have more capacity. It’s also important to have some way to actually be able to monetize it. It height and metrics in terms of valuation is really a tangible plan that a company might have to monetize additional spectrum additional bandwidth additional ways to serve customers. Some broadcasters for example have detailed plans of how they’re going to sell ads with NTSC 3.0 based on zip code so they can clearly target different zip codes and sell ads. It’s one ad to one zip code a different add another zip code at the same time within the same general coverage footprint. You know that gets credit. So one has to figure that out. And they’re just looking at their content pricing going out and they haven’t figured out a way to increase their advertising revenue. That’s that’s a problem. They actually have a plan. If a company has a plan actually to use the new technology you know that’s worth something. The new technology is just creating additional capacity for everybody including their competitors. You know that say it’s a challenge. That’s that’s only going to hurt them.

[ 00:04:14 ] It’s hard to know that which technology is going to work and which ones are going to be accepted in the market. That’s always a risk. It’s important to go to conferences like this one try to learn as much as possible. There’s always going to be variety of opinions. Oftentimes the winners are really chosen by consensus as opposed to say what the best technology is. So if a large number of companies in certain sector go down one development path. That’s most likely to be the winner of course you can always always be wrong. But you know we’ve got to conferences like this one to try to be a little bit smarter and try to understand what the risks are. You know in this industry oftentimes contrarians are the winners the ones who buy things that everyone else is running away from. To be a good contrary no you really have to be smarter than everybody else. Some people are. I try to be smart but I don’t think I’m smarter than everybody else. That’s a little that’s asking too much of myself. So I generally I go with more of a consensus and where it’s pretty clear or most likely that guy is going to end up you know management is very important in this industry. Very important for evaluation and it’s significant and important part of valuation to interview management to talk to them to understand their plans and really the easiest way to include management is to essentially consider what their business plan is for leveraging new technology. They don’t have one. You can create a discount for that. And that reflects management’s inability to create a business plan to leverage new technology in the face of increasing increasing costs. Let’s why the best way to do that. Another important area in these companies is regulation. And I did go to law school and spent a lot of time in D.C. talking to regulators and other attorneys who are close to the regulatory process. So for TSC 3.0 for example. We don’t really know what limits might be put on the broadcasters in terms of what they can do with that technology. We don’t know to what extent some of the wireless companies are going to lobby against them being able to search handsets in certain ways. And you will see you’re right this is a very creative industry and sometimes creativity and business go at opposite ends. Generally speaking the larger the business the more important business is the smaller the business the more important. Creativity is usually opportunities to insert yourself as a small company are possible.

[ 00:07:06 ] Through creativity. If you don’t have capital you don’t have economies of scale and have a small company can be more creative. A big company be more creative a little more dangerous. You have a model that’s working efficiently. It’s hard to simply be creative and turn on a dime. It’s also hard to get an entire organization to be creative. It’s easy to have a couple of entrepreneurs who are creative to come up with a new idea a new strategy.

[ 00:07:31 ] It’s very hard to get 10000 people on the same page with something that the rest of the world is not thinking that you go companies all along different stages of development from early stage companies to late stage development companies and companies do move very rapidly from one stage to the next. And part of the challenge when valuing a small company is understanding their plan for managing the growth. And suddenly they have to grow very rapidly How are they going to handle that. What kind of plans they have to achieve economies of scale to get the right people and to grow without blowing up. It’s very.

[ 00:08:12 ] Easy for a small company to be effective and then suddenly they are ten times the size and they don’t have the capacity to handle that.

[ 00:08:26 ] This is a fast growing industry media sector broadly communications sector and broader is very fast moving and that means it’s a dangerous place to to play the same time because it’s moving fast it also creates enormous opportunities. It’s. A. Area that if someone wants to invest they really have to know it well it’s not like investing in say an auto company or an oil company that’s going to do the same thing five years from now. As it’s doing today do make a smart investment in the sector. You really have to get deep into it and understand it well. I think the biggest challenge in this industry is that there are a lot of companies that have been around for 20 30 years.

[ 00:09:15 ] But on the distribution side whether it’s a satellite operator whether it’s a cable operator or a television broadcaster and they many of them haven’t really woken up to the rate of change. And if they don’t do that they don’t get a business plan in place get ready for a TSC 3.0 watch the new compression technologies and pay for it and so forth. They’re going to really be in trouble. And there just seems to be companies at least on the surface that haven’t yet put plans in place for an industry that’s changing far more rapidly over the next five years than it probably has in the last 15. NTSC 3.0. I mean represents a significant opportunity for the broadcast industry be able to get perhaps you know 90 percent more capacity out of their current spectrum but not only that it will allow broadcasters to target by zip code or different different geographical areas within their one footprint allow them to broadcast to handsets and different types of mobile devices offer data services in parallel with the existing video channels that they’re offering. And so it allows them to really expand the scope of what they’re doing the same time every broadcast will have this enormous expansion of capacity. And as a result you’ll may see ads for traditional television slots going down. Obviously there’s there’s more channels to fill so to speak. So content pricing is likely to go up and they’re going to have to have a plan to monetize this additional capacity or they’re going to start to see their earnings go down very quickly and very significantly.

[ 00:10:59 ] It seems that the competition for content is likely to go up. Ultimately it’s going be bounded by how much people will pay for it for content. I think there is an argument that top content premium content pricing will go up. That there’s enough new distribution channels that need it badly that will go up. You’re also seeing pressure on the cable companies to offer smaller channel packages which means that people will probably spend more for the top content and second tier content pricing is likely to go down. It’s interesting that Netflix has kind of a distribution company and one hand is also moving into content. Those are two very hard animals to manage. At the same time being a distributor as well as being a content producer I hope that Netflix can do it. That’s a real challenge doing both of those at the same time.

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