Qualiport

[ December 6, 1999 ]

Television -- Gateways and Content

By Maynard Paton (TMFMayn)

A quote from Rob Davies (TMFEssex) prompted this feature. After his failure to persuade the TMF Staff Investment Club of the merits of GEC and its rebirth as Marconi (LSE: MNI), his next idea for the club appears to be Carlton Communications (LSE: CCM).

"Being the biggest TV content producer with all these digital channels coming up must be good news [for Carlton]. Emap is just boring old mags," Rob taunts the Qualiport from the TMFSiC board.

Overall, what is Carlton's main attraction to an investor? Do investors consider the content Carlton produces, the quiz shows, film library and documentaries, as the central asset?

Or do investors place the emphasis on its broadcasting franchises in the South East of England? I tend to think it's this "franchise" aspect.

When it comes to advertising to a mass market UK television audience, advertisers traditionally have had to go through ITV. Thus the ITV franchise areas could be described as "gateways" -- with the ITV station franchise owner being the "gatekeeper". Basically, if you want to advertise on television, you have to pay the media gatekeeper for the privilege.

If the hundreds of companies needing to advertise on television didn't like the terms with ITV, then they had little mass market television exposure. There was no other real alternative medium.

Warren Buffett picked up on this sort of media "toll bridge" years ago. As with television, Buffett found the same toll bridge principle applied with newspapers. His purchases of Washington Post (NYSE: WPO), Capital Cities/ABC (now part of Disney (NYSE: DIS)) and Gannett (NYSE : GCI), have all been based around on the aforementioned "franchise" characteristics.

With ever more channels, and electronic advertising alternatives, the "franchise" appeal of the traditional ITV company is diminishing. Will it diminish further? You need to be able to determine the future of UK television.

So, what is the future of UK television then? Will it be a cosy digital duopoly, between British Sky Broadcasting (LSE: BSY) and OnDigital (co-owned by Carlton)? Or will the digital broadcasters fight to the death? And where does cable fit in to all of this? And what about the BBC? And will a foreign-owned broadcaster join the party via other means, say the Internet, to broadcast its programmes? And on the Internet subject, what about advertising money heading towards popular websites instead? With all the contenders and new technology around the corner, the new possibilities are growing for advertisers.

So if you're unsure as to which way the media "gateways" are heading, maybe you should turn to content. Of course, all the broadcasters need content. It is content that attracts the viewers, which in turn attracts the advertisers.

The early 1990s entrance of BSkyB as a domestic broadcaster caused shock waves throughout the television industry. BSkyB needed content to attract viewers quickly. Significantly, BSkyB also gambled that these viewers would pay to watch some of their content. The content BSkyB chose to lead their new service was football.

The price to televise football, and indeed most other sports generally, has rocketed over the last decade. Sporting television rights have risen simply due to supply and demand. Demand has risen due to the explosion in new gateways, all needing content. In the meantime, the supply has remained static -- no new popular sports have been invented.

So why did BSkyB lead its venture into the homes of the UK public with sport? Compare football to bland quiz shows and the same-old-storyline soaps. It's a no-contest. Football will win out every time as a television ratings attraction. It's unpredictable, it's exciting, it's addictive and it's popular. Top live football beats Carlton's film library and its other shows hands down. Even Granada's (LSE: GAA) Coronation Street always makes way for football. And as recent developments have shown, the public are even prepared to pay to watch televised football.

The economics of a football club, by and large, are pretty poor. Increased revenues from the sale of their television rights have dropped into the back pockets of the players, rather than the into clubs' coffers. Player wage hyper-inflation has blighted football club profit and loss accounts. In terms of finances, only Manchester United (LSE: MNU) have any track record of merit. For this profitability reason, I'll only concentrate on the Red Devils. I'm no supporter though!

What are the attractions of Man Utd as an investment? Is it a Buffett-type "franchise"? I would venture that they now have more of the "franchise appeal" than any broadcaster, based on these general assumptions.

• There's a static number of competitors against Man Utd. Unlike the media business, you don't hear about "start up" football teams being created. So, the ever-increasing television revenues get divided among the same number of teams.
  
  
• That old footballing tradition of "success breeds success" -- the same old famous, well supported and rich clubs always seem to divide up the trophies between themselves. The big clubs stay big. The small clubs stay small. Man Utd are the largest club in the world. They may not win every trophy on offer, but I'll bet they'll still be huge compared to most other teams in ten years' time. However, I'm slightly less convinced that the television giants of today will still be the powerful advertising media of tommorrow.
• Customer loyalty -- supporters of Man Utd are unlikely to swap allegiance mid-season. Carlton's numerous competitors are only a button away.
• Man Utd also have a historically well known and worldwide brand. The global familiarity of the "name" as such, and the opportunities the brand can lend itself to, is very difficult for another club to develop. Just perhaps half a dozen (if that) top European clubs are in Man Utd's league here. And would you consider Carlton a brand?
• Most significantly, Man Utd's proprietorial ownership of their television rights. Due to football's never ending popularity, there's a long term attraction to the sport from a media gateway's perspective. This all makes Man Utd, the owner of their much-in-demand television content, very valuable.

Overall, people will always want to watch football on television. That's a certainty. In terms of a long term investment, I consider the overall long term predictability of demand for football in general, without any alternative to its popularity on the horizon, to be significant.

So, with all of the above in mind, I would place the long term predictability and sustainability of Man Utd's televisual product above the predictability and sustainability of Carlton's, or any other broadcaster's, gateway.

The ideal solution to this television quandary -- "content or gateway?" -- would be to look for a company that held a key position in both. Unfortunately, it's unlikely there will be one in the near future. BSkyB's bid for Man Utd, valuing the company at £625m or 240p per share, failed on "public interest" grounds.

So what do you think? Have traditional television gateways seen their best days? Instead, should long term investors look to possible franchises based around television "content"? Or is it ridiculous to suggest a serious long term investment can be made in a business where success is based upon grown men kicking a ball into a net? Post your thoughts to the Qualiport board.

Qualiport Numbers
6/12/1999 Close

Company  Change    Bid
DELL(US)+0.30    45.30
EMA     +0.08    11.00
IIG     -0.01     2.73
MSY     -0.58     8.14
PIZ     +0.03     7.65
RTO     +0.02     2.40
ULVR     0.00     4.51
LLOY    -0.09     7.71


Qualiport Stocks

Last Rec'd  Total # Company    Buy  Current Change

 22/04/99   542     Misys      5.57  8.14    46.0%
 17/04/98   301     Emap      10.20 11.00     7.8%
 27/10/98  1133     Indep Ins  2.60  2.73     5.0%
 29/09/99   356     Lloyds TSB 7.56  7.71     2.1%
 27/01/99    74     Dell (US) 44.63 45.30     1.5%
 04/11/98   245     Pizza Exp  7.93  7.65    (3.5%)
 19/12/97   783     Rentokil   2.55  2.40    (5.9%)
 17/07/98   266     Unilever   7.53  4.51   (40.1%)

Last Rec'd  Total # Company     In At  Value   Change

 22/04/99   542     Misys      3065.85 4411.88 1346.04
 17/04/98   301     Emap       3139.85 3311.00  171.16
 27/10/98  1133     Indep Ins  2990.63 3093.09  102.54
 27/01/99    74     Dell (US)  2007.42 2031.64   24.22
 29/09/99   356     Lloyds TSB 2723.20 2744.76   21.56
 04/11/98   245     Pizza Exp  1966.34 1874.25  (92.09)
 19/12/97   783     Rentokil   2046.53 1879.20 (167.33)
 17/07/98   266     Unilever   2052.00 1199.66 (852.34)

Cash:                                          £ 28.46
Current Total :                             £20,573.94

Total Invested:                             £20,184.62
Profit/(Loss) :                               £ 389.32 

Value Per Share

                    Day      Month      Year      
Qualiport         -1.43%     3.30%     -2.58%
FTSE 100          -0.71%     1.47%     13.79%
FTSE All Share    -0.60%     1.57%     17.26%