The popularity of online content providers, including Netflix and Hulu, is weighing on the stock prices of U.S. media giants, says Craig Jerusalim.
But the five biggest Canadian broadcasters have remained strong, he adds. Jerusalim is a portfolio manager of Canadian equities at CIBC Asset Management, and he co-manages the Renaissance Diversified Income Fund.
Still, “the big themes right now in media seem to be centred around how [people] are consuming content. There are a whole host of premium offerings such as Netflix, YouTube, Hulu and Amazon Prime, and this is leading to customers choosing to either cut back on traditional cable packages, known as cord shaving, or to cut them off completely, known as cord cutting.”
Consider that, in the U.S., “the big media stocks, such as CBS and Fox and, to a lesser extent, Disney, all experienced a large drop in stock prices following second-quarter reporting,” says Jerusalim. And, there was an increase in the rate of subscriber losses.
Luckily, the big five Canadian broadcasters and television providers—Bell, Quebecor, Rogers, Shaw and Telus—are more insulated than their U.S. counterparts. There are three main reasons, says Jerusalim.
1. Limited exposure to media and television ad revenue. Jerusalim says, “Telus, for example, has no exposure, while Quebecor, Bell and Rogers generate about 2% to 4% of their cash flow from media and TV ad revenue. Shaw is the outlier at about 10%.”
2. Proprietary offerings and sports ownership. Except for Telus, Canada’s media companies have benefited from “their vertical integration and sports ownership rights,” he adds. He’s referring to “vertical integration of content creation, distribution and broadcasting through traditional channels,” as well as to proprietary offerings such as Crave TV and Shomi, which help prevent independent players like Netflix from acquiring key Canadian content.
Regarding sports ownership rights, Jerusalim says, “Rogers owns and controls the Toronto Blue Jays, and it shares ownership of the Toronto Raptors, Toronto Maple Leafs and Toronto FC with BCE, or Bell.” For its part, Bell has partial ownership of the Montreal Canadiens and Toronto Argonauts.
3. Strong broadband Internet offerings. “If a subscriber chooses not to consume traditional TV, chances are he or she is utilizing more bandwidth to get content online in a different form,” says Jerusalim.
And, he notes, “Broadband margins almost double those of TV margins. So, an $80 Internet package is actually more profitable for these companies than a $50 Internet package [that’s] combined with a $60 TV package. It almost seems like the oligopoly can’t lose.”
So, Canadian media companies just need to manage the decline of television subscribers across the country, as well as their broadband capital spending. If they succeed, says Jerusalim, “their dividend growth models should continue for the next couple of years, keeping investors happy.
“It’s one of those examples of buying companies you hate sending your cheques to every month, but you keep doing so. If you can’t beat them, you might as well join them.”
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