« Exchanges at Goldman Sachs

The Changing Media Landscape: Disrupting Distribution

2016-08-26

Technology companies are entering areas traditionally dominated by the media and telecom industries, forcing legacy players to adapt. Michael Ronen and Dave Dase of the Investment Banking Division discuss the emerging partnerships, developing rivalries and most promising opportunities in the new media landscape.

This episode was recorded on August 8, 2016.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2016 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges Goldman Sachs, where people from our firm share their incites on developments currently shaping markets industries in the global economy, on Jake, seaward, global head of corporate communications here at the firm over the past. For years, we ve seen a dramatic evolution in the media and telecom industries. Leaned partnerships never before imagine to discuss the rise of everything from guinea bundles just streaming media, I'm drawn by Michael Ronan and David ass. He had the investment bank invasion. Haired Goldman Sachs Michael Dave, welcome to the programme and I reject their service. So you talk to. Declines in space Yos ceos. What are you hearing from your clients today? Given it's happening, where we ve had a mix start for the year after a very, very strong, two thousand and fifteen, where we ve seen a lot of consolidation, a lot of them and activity of the year started slow and.
With a lot of risk averse near by clients that has Asia. Last several months as our clients realise that, with car environment, the current interest rates and the ability to transact in size. Despite the volatility and despite the political uncertainty, there's a lot of appetite for risk, so our clients are focused on continued growth on finding ways to offset secular declines in some of their businesses on taking advantage of incredibly attractive CASA cap, and trying to continue to grow and transact as long as a music keeps playing and sore
and around the world are incredibly engaged in active and are looking for opportunities completely growth. Added to the other thing, I think more strategically terms what they think about its Nunez personalization of distribution, media, the ability to have a very customized product offering increasingly to the individuals out there. Certainly digital mobile are certainly top of mind and areas where there are focused whether to telecom companies, media company infrastructure company, they all come at it from different ways. Many trying to be disrupted many trying to disrupt themselves and many try not to be disrupted, and so it's an interesting point time. I think clearly come through. All that that's it's great tend to be a consumer, your ability to get access to content, differentiated content on different platforms, the platform you want in the way you want it in the context you want at the time you want it's absolutely traffic
going to see more more of that. The pressure that puts on the larger at least media companies is disrupting your existing business model. Are you trying to disrupt your existing business bottle? But how do you monetize those kind of new distribution avenues or potential revenue demographic, that's, a custom to getting things for free or the shipowner. The tech companies Althea playing a much bigger on the space and they ve been a lot about the traditional media companies have done for years. What are some of the tensions that were seen between the larger players, both in the tax base in the telecom, space and enemies so where some of the more interesting partnerships that are emerging go yeah, it's Very very large, secular change, the last ten years, and if you measure the market caps and the transition market caps from the tradition tell goes and cable companies towards the apples and Google's of the world has been my blowing and tension is there. So the media companies are saying here
using our media using our content that we pay the lot of might develop and your monetizing it with advertising dollars that we see a very small portion of. So that should national model for a media talk company to monetize, a big risks that they're taking on content has been disrupted and attention around that. The second axis of tension is the net neutrality part, which is as the distributors of content fighting to continue, be able to invest and get paid for that investment. Candy throttle up or down candy monetize the bandwidth in different ways for different types of content, or do consumers get to have the same type of access to everything, effective II for free or for four flat fees? If you well, and so those different points of tension will continue to be there for the foreseeable future. The interesting things that are evolving are around that, so Youtube is On eighty billion dollar company inside Google, its building
a in house content, Powerhouse Amazon becoming a very large media company, obviously Netflix is already there listening. Lots of money and production went from project or two, but now there there really becoming major players in the space the up and Not yet at the stage of there's a partnership of sorts between them in some of the studio, so their production deals and distribution deal and investment, but by and large there's more competition, then operation between them and the traditional ones. The interesting thing, too, Large is Titans are gonna clash in different parts of the ecosystem and try to build, as Dave said, really come. Lying consumer Frank. There will give you what you want where you want it and the pieces they care about the most quickly and whoever is able to do that. a cost effective way will be the winner. She mentioned some of them. Consolidation we solve horizon pickup Yahoo. We saw the Moscow by a well. What does it say?
what's going on in the industry, mean that last time, there's a big push for content was in the late nine these and that cycle ended very quickly in early two thousand, we're back at it again were people throwing pretty big amounts of money at content providers. I think women throughout Europe back in the nineties were more content was good content and there is a view that if you have the content, I would give you a leverage against the distribution. I think we're a world today, and this is in part way province in as much consolidation among the contact. I will come back and talk about some examples, but absent, really differentiated, unique content. Sports content, your movie content content that you can leverage across multiple distribution platform. You just haven't seen that consolidation and sell what you are seeing is people are really trying to focus on what is that different shity content? Cuz, I tell you, can really drive value creation, that's how you contrived audience than expected, some of Michael, it's just around what the tech
are doing their inability to aggregate just enormous audience is large cable company, with twenty or twenty five million subscribers to date, that kind of redress for market right there very high penetration, whereas you have a facebook and twitter Snapchat or any of these others, their ability to not only domestically aggregate enormous audience, but it's a global sincerely that another go along. You have a global distribution platform, not to say too easy to deal but assure a lot easier to do than building infrastructure on a global basis for some of the legacy players, and so
that inherent tension between how to utilise the distribution channels. Michael's point how'd you get paid for it. Can you get paid for it? Verses doing continues, put enormous amounts of capital and broadband speed enormously helpful to the traditional telecom providers and it's been enormously powerful captive and I will talk about wireless and somebody advancements there as we go forward. I can your media company it's. How do we and we see this in publishing for quite some time, had he keep their relationship with the consumer? How do you keep from losing the value that relationship to Facebook or snapchat whatever that social media platforms? And so that's part of the real tension, that's why you finally seen a lot of nutrition media companies trying to push out more more content, realising that they gotta have a real role, but at the same time, is getting away just sitting Yet the eyeballs that the tech companies of aggregated well, you know Jake to some extent yes, but to echo what David saying you asked: what is the value of all content? Today there giving away stuff that has become commodities. There
the tens lands Americans at sit in front of me for three or four hours a day, but the numbers, the car on increasing and the interesting now is the one that is increasing exponentially and that's the young generation that is attractive to short lie. celebrity driven sports, driven use, driven content. That content is becoming clear We valuable and if it can become proprietary through specific sports rights, specific news ride specific issues of content that become more and more valuable and is Dave alluded to be covered by not just the traditional media companies, but by the I am players as well as the wireless guys we ve had a ten year run of differentiating the wireless offering by megabits per second in a number of voice. Minutes were coming into here the time in the next five to ten years, we differentiate a wireless service by the content you get bundled into that, while a service people want to see it as it happens,
and in short form and- something that is edited for this small screen where they can consume it on the girl. and that is incredibly valuable was Dave, said to aggregate tens intends the hundreds of millions of people around the So the value of that content, whether it's the Olympics or things, are bit as grand as that will continue to grow very quickly, I think, are increasingly dishonesty. Customize content get developed for these alternative distribution sets not just taking the bottom half of our content, which we have that we really can monetize them. Turn up there until you're, starting to see more and more of that Nike their twenty plus large traditional media companies that are doing much more, that customized content. You need size and needs scale. You need real personalities and certainly unique different shade content.
a position to try to do some of that. Customization talk about a little bit about what investors and looking for right now. Last year this time, there's a big blue. How the traditional media companies you saw little slippage little evidence of cord cutting their wants it. Reporting. Second quarter results. Those concerned seems to be debated in the short term What should we be looking for as the big to empty companies report into the second half of the year? I think the court The argument is not gone away. I they invest, has continued to read the tea, leaves and try and understand. Not just court cut but secular, wins whether their blowing the right way or the wrong way, and each media conglomerates is exposed to those in different ways: the cable Companies have their own secular issues, which obviously feed into that, which is what we just talked about. Sex in time at all or screen time on the go on the ability to price content, and I get disconnected are the consumer that still out there then
masters- are looking for the mix of those SEC. Our Trans verses, who has the exposure the growth areas that we're talking and we ve seen this in the music space, alas, ten years, because music was the first one to gonna, get collectively disrupted, it's always music inbox exam clay- and it's always ok, I got a secular trend down of minus five or minus ten or minus fifteen percent. Your tongue, You also have a secular up up a hundred percent, but it's really when do the lines into sect, and when can I buy at the end of the day at a multiple and attractive investment that, through it all, is actually growing, and I think that's what investors are going to continue to look for and basically price effectively relative value and my buying something in a casual, multiple that on balance a better secular story, then the other guy, the same. Multiple, the other than supply, more micro in terms of what they're looking for one understand
This advertising set an enormous sustainable rebound here last year is it just goes on me. Wiping people turn it s transfer Iraq as you have these double digit decline in ratings on traditional broadcasters, cable television. quarter recorder euro per year, pretty consistently now last for five quarters and you have advertising which is continuing to grow up front this year. Some like it was originally strong companies of good numbers coming out of that
and selling. It does show the power. What some of their content is by businesses. Don't tender sustain that kind of double digit, negative growth and then double digit potential toppling advertising growth offsets. So I think that's a more micro point that there clearly focusing on radiance rightward a radiance kind of bottom out their bottom, or is this just gonna, be the newspaper industry? Workers has come a slow lied down. People start a wicked some of the lower value content so channels and enough its twenty five through five hundred and fifty three five hundred. But where does that content ultimately end because it's tied into this bundle concept which has been trafficked for everybody, but any of you started out today the certainly windy, the dozens of different models that you have in terms of gone forward. I wanna make
one more comment that I do think people are ignoring the fact that working here, five six, seven other economic recovery fuelled by unprecedented liquid negative interest rate environment. It hopes a lot that that's the context for people making capital decisions on how much to spend on advertising and where to allocate the advertising. When money is quoted, quote free, you can spend foreigners nine dollars on ten games and it's not in the framework that they admit to, but it's the framework that they refer to we will likely see a different economic environment just by there's, not a prediction. This is just Jellia statement, of the obvious at some point we will have a negative cycle and money will be less free and growth will be more anemic even than we have today. That will force a faster move from tradition, mass advertising that war,
happen much faster when advertising budgets get pool by twenty percent or thirty percent, because money is not is as free as it used to be and work. Not there yet by now, so they we hear lot about the skinny bundle. What is it, what does it matter? Well, I think matters because it provides a price point, different opportunity for consumers and we'll talk a little bit about they're saying I just want my life to relieve my life sports in my news and I don't want, five hundred channels, yet it its interests. We should talk about sports and is that included? Or is it not because I think you make an argument. If you didn't have life sports, the entire bundle would probably unravel,
much much faster, and so the sports has been thoroughly my my household fight sports content live sports content has been held back from being included in the vast majority of these, at least in scale. There may be select individual channels that have been in it, but that's been holding the broader bundled together, but it's really an opportunity for somebody who wants just core channels very limited choice to subscribe and pay a much lower rate, and so it really been drawn by consumer choice and with the opportunity is around that now it's creating some axed among traditional content providers who are used to getting paid for channels that may be ranked fifty year. Seventy five and the broader ecosystem of cash. How do we get our continent, the skinny Manon? So I think there's a lot of focus on that. It's not clerks better rules.
CS, but there are many in the millions subscribers who are least trial in that some go in, come back out, try to front package's. What is interesting, though, and I think this is in defence- of the broader bundle where we talk about corn cutting work at a year or so ago. There was this concern. Gosh wishes, can it completely accelerators, there's little value and the bundle, and I think we are starting to see that as we take the skinny bundle and tried to layer and other content choices. You can start to get a prize points that get very expensive very quickly and I think we are probably now for not doing ourselves were yo situation. Reaction, probably pain for the same content, two or three different times through different applications, and so I think all that needs to get worked out. But I think it is broadly it's more experimentation, the ability to get more Taking us maintain that consumer relationship and provide consumers with more choice in Michael you mentioned one industry. The truly been through a lot of this already is the music industry So what have we learned since we ve seen actually more
The generation of people go through the considerations that the music industry, winter yeah Jake. It's interesting. learn from meadow. The odyssey. Video on audio are different and consume differently, but by and large, the music industry started being disrupted in late nineties. Sure a thirty or forty billion industry, starred declining fast and was still a to g, were no Iphone world, but now stir in online etc. The industry couldn't find way to navigate itself out of that and just generally experienced ten or fifteen years of declines, as hunger generations were beginning to be accustomed to consuming music for free, and if you talk to industry, insiders, five ten years ago, a ten or fifteen years ago, privately, not publicly the fear, what Are we just now growing into a free music world where artists will never get paid for the content will never see, therefore, the same started, the Michael Jackson's in
princess of the world, etc. How can we really create that mega talent if the dollars are not there? Yet we have tellers? we have the swift and the sir, is well. Content continues to be developed, whether it gets monetize or not, and as the industry and technology has shifted worthy to see a for the first time this year, two thousand fifty to sixty in a levelling off of decline of dollars attributed to music and the beginning, potentially of a growth cycle again of that industry, and it, give people confidence that, and if you now analogies this to what we talked about in video on the decline court cutting declines are spending on tv at home, etc, etc. You haven't you racial. Now that is growing in our households are kids that are probably, ever pay. What we used to pay for some of these services, but then they mature into consumers that pay for their own content they'll find way of consuming what they need to consume and a jail
will be law abiding citizens. It will find their way into the new services and by and large, across multiple services, and finding their way around them, the get, what they need and what they want in music or, in this case, and video and out of their overall dispose Blinkem they'll probably spent about the same amount of money that we did, though, suspended differently to get one they need where they needed and how they need to get it which are seen on the content. Creation side from a video content is right before your ability to develop, take enormous dollars and investment, and you still have the biggest spending tens of billions of dollars on original content. But what you see now is some kid with their website and an interesting idea can become an international sensation almost overnight
and the ability to become that star, nurture it curate it expand it and then ultimately monetize it. It's never been better opportunity out there. So it's enormously empowering. I think a lot of people talked about if we get rid of the bundle or gets rid of some of these oligopoly. Distribution channels is there can be that investment content. I think what we are saying is that its spurred more and more innovation, more investment anymore dollars that are going into trying to find some of these individuals, be it. People are doing eight second clips or eight minute clips, or any minute documentaries. It's out there, and so it's incredibly fertile opportunity for content creators and creative people who are out there have appointed the on something that may work in terms of entertaining the broader public. So in the telecoms sector, Our companies thinking about their cutbacks, people are demanding more more ban with how they thinking about new technologies, merging what pressures their income and businesses face its exists
and shall issue for the telecom companies- and we ve talked a lot about the beginning about regulation and the ability to get what they view as fair pricing for the capital. They put and each one of the large telecoms, whether to eighteen, tease, horizons or team mobiles. Cable guys for their cable business, put. many many billions of dollars to the ground or to the air, buying spectrum or investing in infrastructure, and they do that five years ten years had of what will be the psycho, then it's gonna be consumed, so they make predictions and their ability to price and service customers the ice on introduction about ten years ago was one of the best things that happen to the wireless industry. It enabled a whole new wave of price rising, but also demanded an incredible wave of capital investment, Steve jobs. We had the honour and that will be working with, as he entered the industry was talking about whether the industry will be ready and was thinking about how
He could help the industry get ready for what he knew is gonna, be the outcome of that innovation and it turned out to be even more than predicted and they ended up being able to sustain it frankly, partially also because we ve had this very accommodating capital availability appear. The time again changing and die. Has been commodities. Most people problem don't even know what their data plan is They just know that they're getting just enough and the differentiation between you know the large players is- minimum all these days and ability to sell a competitive service at a premium has diminished. next cycle and we ve just touched on it from a couple. Different directions is all going to be about not the physics of the service, but the content of the service and the ability for a family or a couple were individual in the: U S: to customize now
just the number of minutes which are going away. There's no more. The concept is gone, but and not just the gigabytes or a megabytes, but the content that they'll be getting across physical or wireless at home out of home from their service provider. Tackle a bit about funky. Has that plane the dynamic, and how could that change the picture for g is still yet to be defined. Just as forty as several years ago? Some bore remember that there was content mercy and who had real for gene verses, not real. Forty were entering that for the time popular next year or two Five g will do is yet again disrupt the current landscape and enabling what I just talked about. So the ability to watch high definition content and do that on the girl. Without thinking what is my mobile planned for this month? It's included because five g and was it to be included because five g makes broadband cheap. That is the promise for five g.
and it requires a tremendous amount of airwaves, which spectrum which you had a big companies are buying a requires, a tremendous amount of innovation and investment in fibre in to the tower. So the wireless companies are essentially an arms race to get as many strands of fibre to the tower to get as many airwaves as possible on the tower so that then they can bundle. Content for free inside their ninety nine or one, oh, nine, or a hundred, fifty nine among so that you can get that as part of you monthly service. Without thinking. Oh, I'm about to finish my plan so the Sissy periodically auctions off spectrum doesn't get a lot of attention outside, usually Washington and this industry, but the debt. You're describing the industry must be paying very close attention. The latest round of auctions, the ring The interesting thing about this option is the government is just an intermediary all the auctions today,
worthy government giving the private sector licence to use its spectrum that belongs to the government. This is an art where the government is brokering the transfer of spectrum between the broadcasts, industry, the rabbit ears doesn't need it and which doesn't needed. Arguably, to the in this rich, as we just said, is running out a room every day, just because of the exponential growth and the governor and in this is to a three: if cc, administrations in a row that have been working on it all the way to the current one which is overseeing it, has engineered a very complex and very sophisticated and never been done before two way: auction system to find the marketplace between the broadcasts industry. There will be getting paid from the wireless industry for Thee position of bandwidth from one to the other and were in an expert we're in the middle of it right now it hasn't been done. Yet it's to be moving along nicely. But it's
done yet, when it's gonna be done, it's gonna enable that five g transition and the new sets of services, which are mostly back United States. Although, as we talked about the social media platforms, truly global. What are some of the big the emerging markets, where we can see some This play out one or technologies that will provide greater access and some of those countries getting in the emerging markets. The benefit is on a third. Do we ve done in this country? Last hundred hundred twenty five years terms of you need the infrastructure, but you have an ability to actually get consumer undeveloped, those consumer relationships which are incredibly powerful relatively more efficiently than you have in this country, and so from a media content perspective. These companies are incredibly bullish on what that opportunity is a key question again is: what's the price point, the cost of distribution or delivery and how much disposable capital is there really and these markets and, as you ve seen in this kind
and this is part of what the pressure is on somebody's distributors in the content companies, which is that consumers pretty much tapped out in terms of beer with their spending on media, is a precise, disposable income and so there's a real cap natural tension point, which is why not in this country, but all the media companies. I spend time with her extraordinarily bullish and terms what they can do globally and international. What that opportunity is into the extent they can leverage and utilise existing ip or content to traffic opportunity? What is interesting, though Jake is that for five years ago, and if there is a view you just take: U S, english language content and pumping around the globe, Newcomb monetize it some! You can still do that, but were increasingly seen that in each individual market you need to customize and there's cost us It is with that for large yours players and there's opportunity associated with that for more local interests in these are the sports leagues had been handed there comes later in terms of thinking about this. We-
about a lot of the trends that are emerging, what over the next four or five years, but we see develop in the space that people are paying enough attention to why than people. Attention, burping attention actually seeing results are two different things: virtual reality and augmented reality. Huge growth areas that I think there is a raging debate on how much hype verses reality to use what are we going to see in that domain, but there's tremendous amount capital going from the venture investment side into very, very interesting and promising start up companies and more than start up companies imagined sitting at the Oscars or be, able to sit in your living rooms and thank you, They are without actually having to go to LOS Angeles and pay thousands of dollars for the privilege, of course, those Can we always do that? But those who can't are they gonna pay it premium for a light event, just like they pay for boxing. If its v are or are it's one thing to see it
Virtually it may be that there are some things you can see in an augmented way can actually see the show. played inside your living. There are very, very exciting things around sports and live content, going back to that category of premium com, then they can happen on that and that clearly an area that last point on that is it touches probably the most the gaming three, the online games? That's it that's a community! There is tension. kinds of people that tend to adopt quickly to technological change, and so on interesting acquisitions in that's base isolate yes, certainly will see that within the next year or to some of these, things will break up where we touched on sports a bit before and the amount of interest in view. When on that, and the ability to aggregated audience is absolutely stagnant, skin monetize today about a dollar, maybe two dollars per consumer who has an interest, whereas the fails it sixty. Seventy dollars per consumer has an interest in the sports, others, just enormous upside down
her global business ethical see that they'd Michael covered a lot of ground here thanks so much for joining. Thank you Jake. That concludes this episode of exchanges of Goldman Sachs Object your thanks for less this spot gassed was recorded on August eighth, two thousand sixty The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information. Can and in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.
Transcript generated on 2021-10-14.