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Walt Disney (NYSE: DIS) recently announced plans to invest $1 billion in the video and technology company BAMTech, which already powers the streaming services for the MLB, NHL, WWE, and even HBO. Disney has the option to eventually acquire majority ownership of BAMTech, and with this deal, the House of Mouse is making its plans for the future of content delivery loud and clear to investors.
On this episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Dan Kline discuss the short and long-term implications of the BAMTech announcement. They also look at T-Mobile's (TMUS +1.22%) latest Un-carrier initiative and revisit the drama at Viacom (NASDAQ: VIA) (VIAB +0.00%) as the Redstone family successfully asserts its control over the company.
A full transcript follows the video.
This podcast was recorded on Aug. 23, 2016.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. I am your host, Vincent Shen, it is Tuesday, August 23rd, here to discuss the latest in the consumer and retail sectors. Joining me from West Palm Beach via Skype is Fool.com contributor, Mr. Dan Kline. Hey Dan, how's it going?
Dan Kline: I'm happy to not be travelling at the moment.
Shen: You and I were just talking about your move. How many times will you have made the drive from Florida to Connecticut? Because that's absurd.
Kline: Five, maybe? I brought our stuff down in a U-Haul, I had to bring my wife's car down, and now I have to go back and get the rest of our stuff in a rented SUV. I'm just about done, and I've pretty much done the podcast from anywhere on the East Coast you could do it.
Shen: I hope that, at least during part of your drive, you'll be entertaining yourself with our wonderful slate of Motley Fool podcasts.
Kline: I'm letting them keep me company the whole way.
Shen: For this episode of Industry Focus, Dan, I wanted to start our conversation by playing a short clip of you, actually. This clip was taken from the May 31st episode of IF, when Dan and I covered the controversy and some of the intrigue surrounding the entertainment giant, Viacom, its management team, board of directors, and the Redstone family, primarily, which holds a majority control of the company. For listeners who missed that episode, definitely check it out if you want to get an example of an ongoing case study in corporate politics and power grabs. That's the best way I can describe it. Basically, Sumner Redstone, now 93 years old, he led Viacom for many years, but recently his health has declined, and it's resulted in his previously estranged daughter, Shari, calling the shots, publicly, at least, as she essentially wrangled control of the company from CEO Philippe Dauman. So, here's Dan making his prediction, at the time, of what would ultimately happen at Viacom.
[Audio clip plays]
So Dan, three months later, the dust seems to have settled. How close was your prediction?
Kline: Well, it's dead-on, but I wish I could claim to be some kind of prognosticator or seer. But the reality was, Shari Redstone is going to control her father's stake. And whether Sumner has died or isn't with us any more in terms of his mental capacity, it was an inevitability. So, I predicted something that pretty much had to happen. Shari Redstone does not want Philippe Dauman in charge of Viacom. So, eventually, he was not going to be in charge of Viacom. I'm surprised that it happened this quickly, but I'm not surprised at all that it happened.
Shen: So, Philippe is out. For a little bit more background for listeners who may not be as familiar with the story. Was there any particular catalyst or driver that you felt led to the falling out between Shari and Philippe? Because Philippe was previously Sumner's protégé, very close to the family, I feel.
Kline: Sure. There's two things. There's the general stock performance. Viacom has not done well. I don't remember the exact numbers, but it's down significantly over the past few years. And second, he wanted to sell a stake in Paramount, which even Sumner Redstone, who had been his biggest supporter, was pretty widely known to not be in favor of. So it was really a case of, if you have the results, if Dauman had been killing it, if all the movies had been hits and everything had been going great, well then there's not much Shari Redstone can say, even if her and her dad actually wanted to wrest control away.
But the reality is, when it's not performing well, and he's trying to do something, basically, as the majority owner, they control the majority of the stock through National Amusements. If he's trying to do something you don't want done, you have every right to step in and stop it. And that's what she did. It just gets all the more palace intrigue, because we don't know if her father is aware of what's going on, or really if he's aware of anything at this point.
Shen: Yeah. Like I mentioned, he's 93 years old, his health has been declining. And he hasn't made a public appearance in at least a year, and basically all these statements that come out are essentially interpreted through Shari. So, there's definitely a bit of room there for her to control what goes out to the public and what's going on behind the scenes, as well.
Kline: The smart thing, though, is Shari Redstone played this well. Instead of putting her own person in, or naming herself CEO, she put Tom Dooley. He was the COO beforehand, and he's someone who has risen his way through the ranks. He's very popular with the rank and file. So, you're ousting Dauman, but you're sort of putting everybody's favorite uncle in the seat. And while Dooley only has the job until September, it's possible, if he shows he can follow directions while also leading the company, that he could keep the job for a longer period of time.
Shen: Jumping back to something you'd mention that was a major point of concern for the Redstone family with Dauman's performance. You said the stock is down. It's actually largely been flat since the last time we talked about it in May. But, obviously, in the previous two years, it's been down well over 40%. I think the share price was previously closer to $90, now it's around $46 per share. Do you think now that this whole episode is resolved, I think the agreement they came to ended all lawsuits among the various parties involved in this?
Kline: Well, it ended the lawsuits between Dauman, the board, Shari, Sumner. But actually, one of the other grandchildren, Keryn Redstone, who's Shari's niece, has also filed a lawsuit saying she's a benefactor of the trust, and she was not in any way consulted on this move. So, I think this is one of those situations that, until maybe 18 months, a year, maybe a little less after Sumner Redstone dies, there's going to be lawsuits flying everywhere, because there's a lot of money involved. It's a very complicated set up with National Amusements controlling not just Viacom but also CBS, and all sorts of different ownership stakes, as well as different people who are benefactors that don't necessarily get a vote but do make some money from this. The principal legislation is over in terms of the ability to run Viacom and where it's going to go in the future, but I would expect lawsuits to keep flying in this case.
Shen: Wow. So, the plot thickens there. Do you feel like shareholders at this point are reassured though that company leadership can return its focus to the business? Or do you feel like the optics around this whole power struggle still have investors concerned that this isn't really necessarily over yet?
Kline: If I was an investor, I'd be very concerned about this management. You've watched two rivals, at least on the Paramount side, Disney and Comcast, snap up guaranteed hits -- Disney with Marvel and Pixar, Comcast to a lesser extent with DreamWorks Animation, where they bought some big name properties. And then you have Paramount, which doesn't have any of those. If you look at their movie slate, there's a few sort of tired sequels in the pipeline, but they don't have Jurassic World or Star Wars or Indiana Jones, or anything that's going to be an obvious billion-dollar franchise. So, as all these deals were getting done, I have to question, where was Viacom management? Where was Paramount? And does this group have the wherewithal going forward? They've done well in the TV side, but maybe it's time to merge that back with CBS.
Shen: Yeah. I should note, on the investor side, with the company, in terms of its business segments, its media networks is the bigger business. Obviously, I think the filmed entertainment with some of the blockbuster releases gets some attention, too, but it's really quite smaller. A recent example of how the company and Paramount struggle -- and I think that was a starting off point for a lot of the debate among what to do with Paramount -- they had a huge misstep again this past weekend, really poor showing for their religious epic Ben-Hur. I think it had something like a $100 million production budget, not even including marketing and advertising. The movie managed to generate about $11 million domestically in its opening weekend, pretty significantly below expectations.
Kline: It's an epic flop. They were marketing it to a religious audience, and that audience has done very well taking a small-budget movie and making it a mild hit. Really, aside from Mel Gibson's The Passion of the Christ, you have not seen a big-budget faith-based movie justify the expense. So you took a film that, nobody was clamoring to have Ben-Hur remade. They failed pretty badly at getting the target audience excited. So it's going to go down to be an epic bomb, and it's also doing very badly on foreign soil, so this is not one of those movies that's going to tank in the U.S. but China or some other foreign market is going to somewhat mitigate it. This is a movie that's going to end up losing maybe over $100 million, which is pretty hard to do these days.
Shen: For 2016 overall, from what I saw, Paramount had about nine or ten films out. Only one of them, the recent Star Trek Beyond, has managed to break $100 million for domestic box office. So, this is obviously part of their trend, where they have been struggling.
Kline: Yeah, and even the Star Trek franchise has been a disappointment. It's sort of like the X-Men movies versus the Marvel movies. They do OK, they're almost hits, they're kind-of hits. But Star Trek especially does not have some of the same foreign appeal as, maybe, a Star Wars or a Jurassic Park. So, once again, this is a company that needs hits. And they'll do Star Trek 4, but there's no guarantee that it's going to do any better than Star Trek 3.
Shen: Last question before we move on -- what do you think should be the first priority on Shari Redstone's to-do list now?
Kline: I think she has to figure out what they're going to do with Paramount. And that probably means overhauling it top to bottom. Is Tom Dooley they guy who could lead that? Maybe he is. He has good relationships, he has a lot of capital within the company. But clearly they need to be more aggressive, and they need to be smarter.
When you're spending $100 million on a movie that does not have the religious audience pre-sales and all the things you would need to guarantee you're going to get some of your money back, then you really have to look at everything from the marketing department to who's green lighting these movies.
Shen: Okay. Moving on to our next topic here, I think we're going to talk about somebody else who's often in the headlines, usually for more positive reasons. This is our favorite "underdog" in the wireless carrier space. That's T-Mobile and their recent push to move all of their plans to unlimited, right?
Kline: When I watched this press conference, I went, "Oh my god, this is another move where T-Mobile is just slapping AT&T and Verizon in the face and saying, 'I dare you.' You want to charge overages? You want to charge all this money? You want to not offer unlimited plans? Here we go." What was interesting is, during the press conference, John Legere, the CEO of T-Mobile, he took a swipe at Sprint, and said, "I can tell you what Sprint's going to do. Six months from now, they're going to copy us." The reality is, Sprint almost immediately came out with a pretty similar offer
Basically, both companies are offering unlimited plans where a family of four can each get a line, unlimited data with some caveats, for $160. How they bill that $160 varies. Sprint is cheaper if you're just getting two or three lines. T-Mobile becomes cheaper after four lines. But, essentially, they're both pushing family plans with $160 for four lines, unlimited data.
Shen: You mentioned some caveats. This is something we were talking about previously, because essentially, there are some people who are such large consumers of data, they put a cap on that.
Kline: T-Mobile spells it out the most clearly, but both companies have policies in place. T-Mobile basically says, "To our top 3% of users, people that use over 26GB in a billing period, when needed, we will slow your service down," meaning they're not going to cut them off, they're not going to say, "You can't use it, you can't buy in." But at times that you or I, regular users, are looking to have high-speed data and the network is being stressed out, the absolute top tier of data hogs will get throttled. So, it does put an asterisk on "unlimited", but the reality is, for most people, this is not a factor.
Shen: So, your view, in the next year or two -- we've seen some of their other uncarrier initiatives from T-Mobile push the leaders here, Verizon and AT&T, to emulate them, or at least do something to respond.
Kline: I think eventually, they're going to get there kicking and screaming. Verizon has started advertising a four-line family plan for $150, where maybe you get 3G of data each, or something like that. But if I can get unlimited, and the networks are pretty close -- Verizon is a little bit better on most surveys, but T-Mobile is very close, and Sprint is not that far behind -- why am I going to pay more money for a tiny bit better network with big limitations and overages or having to buy a bigger plan than I need just so I don't go over?
So, you've seen AT&T and Verizon slowly inch their way toward the T-Mobile model. And it might take another year, it might even take two. But eventually, just like it happened with minutes, and just like it happened with text messages, the default plan is going to be unlimited. And then, of course, AT&T and Verizon will find some other way to charge overages for something else. Maybe it'll be virtual reality content, or holograms. Who knows? I remain confident that however this spells out, AT&T and Verizon are going to find a way to charge more money.
Shen: I want to end this segment, just to give our listeners a little bit of perspective here. T-Mobile right now definitely still has quite a bit of runway. T-Mobile and Sprint are No. 3 and No. 4, respectively, they're at about 60 to 65 million subscribers, as of the second quarter of this year. Verizon and AT&T double those numbers -- Verizon has 143 million, almost, AT&T, almost 132 million. And for the second quarter, actually, Verizon, AT&T, and T-Mobile all managed to generate net subscriber additions with T-Mobile leading that pack with almost 1.9 million additions. Sprint was the one loser, they had about 360,000 net losses.
But, to give you an idea, again, T-Mobile has shown a lot of momentum, I think, in the last couple years, eventually passing Sprint and continuing to widen that gap.
Kline: Yeah. It's also worth noting that T-Mobile, in moving into No. 3, has been adding phone customers, traditional postpaid phone customers, while AT&T and Verizon have been adding connections, people who already have an account, or maybe don't, adding an iPad or some other tablet. So, it's a huge gulf between T-Mobile and AT&T and Verizon. But they're gaining faster than you would expect. And I think it's nine, maybe ten quarters where they've added over a million subscribers. So, it's going to take a long time for consumer habit.
There is a built-in market perception that AT&T and Verizon are better because they've told us they're better for a very long time, and until very recently, they were better. But now that that's not so much the case, you might see a point where consumers just start shopping via price. And when that happens, AT&T has the ability to use DirecTV, to use its broadband service, other things to make packages better, which could ultimately be good for it. Verizon has that to some extent, but it doesn't have a national brand like DirecTV. So. This is going to get interesting, and the pricing is going to come down, which is good for consumers.
Shen: Yeah. When it comes down to it, if you're in a major city, population center, you probably won't notice a big difference. It's really when you get out of those areas that, I think, especially Verizon and AT&T really shine in terms of offering a little bit better coverage.
Kline: I'm a T-Mobile customer, and the only place I've ever noticed a service problem was rural New Hampshire. I could get a Sprint signal, I could get AT&T and Verizon -- or, the people who were with me could -- but I had to use wireless calling. Given that they offer wireless calling, if you have Wi-Fi, you're pretty much covered with T-Mobile, as long as you're not going to spend a ton of time in a rural setting.
Shen: I will make sure to keep that in mind, especially with my fiancée. She has T-Mobile. We'll stay out of rural New Hampshire. Thanks for that tip.
For the last story, and I want to make sure we have enough time to talk about this, because it's really interesting. I wish we had covered it closer to the announcement date, which was earlier this month. Disney and their $1 billion investment in a minority stake in BAMTech, coming from the MLB. Just a little bit of background here -- Disney acquired a 33% stake of BAMTech, which is basically the streaming video arm originally created by MLB, I think in 2000, to help the League with their different team websites. This $1 billion is going to be paid in two installments, one now and one in January 2017, also giving Disney the option to acquire majority ownership in the future.
This obviously plays into a lot of the long-term issues we've seen with Disney, with ESPN. I'm going to let you kick it off from there, Dan.
Kline: Sure. This is a really smart play by Disney. If you look at where BAMTech is, they're the technology behind, most notably, WWE Network. So, they have it down in terms of subscription model, delivering content direct to your house with all sorts of on-demand. I'm a WWE network subscriber. It works really well. What Disney is going to do with this is, first, they've already said, they're going to launch a sports platform. They haven't specified what that's going to mean, but let's assume it's going to rope in a bunch of ESPN content. And the reason for that is, cable subscriptions are going down, and more networks are offering skinny bundles, and some of those skinny bundles do not include ESPN. That means you'll have the ability to get cable and say, "I don't want ESPN."
Given that Disney gets paid about $6.50 a customer for every cable home that gets ESPN, whether they want it or not, they need a venue to charge more than that to the people who desperately want it but don't necessarily want cable. So, the guy who's a huge SEC fan, or a huge Big 10, Big 12, whichever college network, or they love Major League Baseball, or whatever other things Disney has rights to, they might be able to spend $19.95 a month and get a huge sports package from ESPN where Disney will do better than it was doing from the cable company. So, maybe one new customer will make up for the loss of three or four customers. This is very much a future play.
Shen: So, $1 billion. This is probably one of Disney's bigger deals in the string of acquisitions, but I think CEO Bob Iger has a really good track record when it comes to his different deals, be it Lucasfilm, Marvel. Those have obviously proven themselves to be very long-term forward-thinking plays that have worked out very lucratively for the company. With BAMTech now, Disney mentioned the service that they want to release will be out by the end of the year, right?
Kline: It'll be out by the end of the year. And it's going to be the first of many. You already have Disney in Europe and other markets has talked about, or even launched, I don't remember exactly, a service with some of its children's networks. Disney owns so much content, and it's content that people really want. There's a lot of cable networks that people could live or die with. Who cares if you get, I don't know, the cooking network. Maybe it has a small cadre of devoted fans. Or VH1, or MTV ... yeah, people like them, but if you don't have them, it's probably not the end of the world. If you have a young child and you don't have the Disney channels, you will pay anything they charge in order to get them. The same is true when you get to teenagers or tweens with some of that programming. So, Disney's ability to use BAMTech to create all sorts of different packages, without having to make that technology investment, is huge.
And it's also worth noting that they're offsetting some of the purchase price with the fact that this is a company, a private company, but a company that has revenue. So, they're already taking a cut of the WWE network subscriptions, which is around 1.3 million. They're already getting a cut of the different Major League Baseball packages. This was a huge technology buy that also offsets itself.
Shen: Yes. Some of BAMTech's other clients, other services that run through their technology -- obviously MLB, the creators, but also NHL, WWE, like you mentioned, even HBO, actually, so ...
Kline: NHL has a small stake in it as well, so they're not going anywhere.
Shen: Annual revenue, from what I could find -- I think this came from the New York Times -- for BAMTech is actually about $900 million. Like you mentioned, that stake has some of that revenue flowing back to Disney now that they have that one-third stake in the company. For BAMTech, the package that Disney is planning to release by the end of the year, they have all this content that you mentioned with sports and ESPN, but they don't even air.
From what I could find, there's not going to be a crossover between what you see on traditional television ESPN and this service that they're planning to release at the end of the year. But it's basically all the things they currently have the rights to but don't air. And I think with college sports, or maybe other sports beyond the major leagues that maybe just aren't as popular, relatively, but do have their audience, this will be a big offering for the viewers that are interested in that.
Kline: Sure. At first, it's a very regional service. They are televising the Rutgers football game, that otherwise going to make it on the air, to a very small percentage of people multiplied over tons and tons of content that works. But eventually, this is going to be ESPN, this is going to be SportsCenter, it's going to be all of the Disney content, because they're going to be very respectful of their cable partners. They're not going to break things off until they absolutely have to. But you've seen, they're part of Sling TV, they're part of the Sony Vue service. Eventually, as cable becomes weaker and doesn't have the leverage to say to Disney, "We're doing great by you, don't take your stuff away,". They're going to have to offer a stand-alone option for their content. And I think, eventually, that will be everything Disney owns, from its movies to its television channels, to all the sports content. And this is really about buying the platform that will let them deliver that.
Shen: You mentioned Sling TV and PlayStation Vue as the skinny bundles. I think during the earnings call, Disney also mentioned that they're part of the AT&T DirecTV Now service that's going to be over-the-top, I'm not sure on all the details around that, but that's another, essentially, offering or package that they will be a part of, and that's important.
Kline: There are so many skinny bundle packages in the works that are essentially variations on Sling TV that, if right now, you stopped the show and announced one, I would not be surprised at all. This is a wild west where once one company negotiates a rights deal -- and originally, from what I've read, I would say the Sling rights deal is not a great one. It has caps on how many they can eventually sell, but now that Sony has come along, you're starting to see parameters for these agreements. And once you see a base price in place, it becomes easier for a small company, a new company, a big company, whoever it is, to go to TBS or CNN or whoever and, obviously, their parent companies, and say, "OK, I want these channels. I'd like to pay based on what Sony's paying, based on what these other parameters are." It becomes a lot like the music streaming space, where once Apple made its deal, you then had the ability for all these other companies to come in and negotiate deals as well.
Shen: Thanks a lot for your thoughts, Dan. I want to end this segment on one final thought, very recent, too. It's the fact that with ESPN and moving some of its content to this service that they'll be announcing soon, it kind of reflects a trend, I think, was seen with the 2016 Olympics, too, in Rio. NBC, which is part of Comcast, saw significant declines in their traditional TV audience, for usually one of the biggest draws of the year, when the Olympics are airing.
On the other hand, their live streaming of events skyrocketed, I think it was triple digits from the 2012 London Olympics, especially among younger demographics. So, while it's not a one-to-one trade-off, the dynamic is certainly one that I think Disney sees, knows is coming, they're thinking long-term. Bob Iger knows -- I don't remember when his tenure runs out, another couple years, but this is setting the company and shareholders up for the long-term.
Kline: It's a trend, and Disney's playing it carefully. Eventually, we're going to be in an all-streaming universe, or a mostly streaming universe. What we don't know is what the time table is. I think you can take some things away from this Olympics, but you can also look at the fact that there were no bad guys. There was no Russia to battle the U.S. for medals, so generally we walked away with the medal count, which maybe made the Olympics less interesting, which probably drove away some of the television audience as well. So, you see signs that streaming is moving forward, but you don't see an end date for cable yet. So this is Iger saying, "I'm going to stay where I am, but I'm also going to go to the future." And it's a very smart play.
Shen: Yeah, essentially hedging his bets. That's a wrap for us today. You can continue the conversation via Twitter @MFIndustryFocus, or send us any questions or comments via email to [email protected]. You can also enjoy the other great podcasts from The Motley Fool by checking out fool.com/podcasts. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!
