Events: Exiting the “Terminal Value Tunnel”
August 9, 2017
In the 2Q17/SNI deal call, DISCK CEO David Zaslav hit on precisely what I believe is taking place right now for high quality content companies: They are in a “terminal value tunnel” as they transition from a traditional cable bundle-dominated world, to one dominated by direct-to-consumer (DTC). As long as a company such as pro forma DISCK/SNI is in possession of undervalued, quality content, over time they should be able to exit the terminal value tunnel by “pulling an Adobe” (i.e. the strategy pushed by ValueAct where the market rewarded Adobe, handsomely, for an earnings-dilutive transition from upfront license sales to recurring monthly subscriptions). In other words, even if earnings are lower in a DTC-dominated world, the market will re-rate the terminal value upward if it deems the earnings power stream more sustainable (i.e. “growthy”).
But Zaslav went a step further, outlining precisely the operational catalyst that could drive the re-rating: Bundling standalone DTC packages with existing distributors’ billing and marketing infrastructure. Or as Zaslav said John Malone calls it: “Checking the box.”
At present, a $100/month cable bundle is say $70 for broad band and $30 for video. In a DTC world, broad band climbs to perhaps $80, then the remaining $20 is broken up among the various DTC packages: $5 Viacom, $5 Discovery and $10 ESPN. Using rough figures. By bundling with the existing distributors, the end user receives one single bill; and going off of Malone’s “check the box” framework, my guess is there will be a “menu” of sorts, off of which subscribers can choose from the various DTC packages, rather than the current tiered video packages offered by the cable companies. Obviously there are losers in this transition, but it really boils down to a technology-driven transition to a different bundle form.
The relevant quotes from the call: