Earlier this week, Amazon.com (NASDAQ:AMZN) unveiled its cable store, the latest expansion of products and services offered by the e-commerce leader. While streaming services like Prime Video contribute to cord-cutting and slimming for the cable industry, Amazon is now playing both sides of the trend as it partners with Comcast (NASDAQ:CMCSA) to offer Xfinity cable, Internet, and phone packages . . . with the company's signature customer-centric touch.
In this week's episode of Industry Focus: Consumer Goods, Sean O'Reilly and Vincent Shen discuss the offering, how it may affect customers of both Amazon and Comcast, and what each company has to gain from the partnership. The team also dives into the latest news around Under Armour's (NYSE:UAA) long-overdue stock split, from the class action lawsuit to what will change for shareholders when the new shares finally come through.
A full transcript follows the video.
This podcast was recorded on March 22, 2016.
Sean O'Reilly: Amazon.com wants to sell you a Comcast cable package. We want to know what we've done to deserve this, on this consumer-goods edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Tuesday, March 22, 2016, and joining me in studio is the incomparable Vincent Shen. How was your weekend?
Vincent Shen: Pretty good, pretty good. I was actually, again, at one of those cabins out in Shenandoah, enjoying nature with a little snow, actually.
O'Reilly: I'm surprised you're this much of a camper. Because this isn't the first time.
Shen: No, actually not. I like going out there, chop some firewood, enjoy the very nice views, wake up to see the sunrise, probably for the first time ...
O'Reilly: Wear flannel shirts, which, for those of you that are listening that can't see Vincent right now, he is wearing a flannel shirt.
Shen: A very comfortable one at that.
O'Reilly: All right, fine. Well, I'm glad you had a good weekend.
Shen: How about you?
O'Reilly: What did I do? I just kind of read, and hung out, and ... I'm all caught up on House of Cards. I didn't watch much TV, and I was kind of planning on it. Because it wasn't the nicest weekend, so ...
Shen: Well, I guess it was normal, as cold as it should be, but it seemed kind of out of place because of the warm weather we've had.
O'Reilly: We had the tease there.
O'Reilly: All right, so, diving in to the consumer-goods news of the week, I don't want to call them shenanigans, but what's going on with Under Armour and this here stock split?
Shen: Sure. This news has been going through development, so to speak, for the past six months or so. So keep in mind that Under Armour originally announced plans for a stock split, it was last June. The delay happened due to a class action lawsuit that was filed by some shareholders, due to the way that they had structured the split. To give you more of that background, currently there exist two classes of shares, Class A and Class B. There's about 183 million shares outstanding for Class A, and about 34.45 million of the Class B.
What makes them different? Class A shares, you get one vote per share, Class B you get 10 votes per share. The Class B shares, not surprisingly, are all owned by CEO and founder Kevin Plank and his family. A big part of that, in the way it is set up that way, is because Plank wants to maintain control of the company he started, and it is understandable. This is not uncommon among companies where you had this one guy really leading the vision, and who has undoubtedly taken this company to a level of success that is truly incredible.
The company has gone through previous stock splits, so I think it was, let me find the dates here, in July 2012 and April 2014, they actually did a traditional split where for every share, Class A share, Class B share you had, you were getting one additional. Standard 2-for-1 stock split.
This one's unique in that, for every Class A and B share you own, you're getting a new class, Class C shares. One share of Class C, and these Class C shares have no voting rights. The idea behind this, and the reason why it was controversial, and why there was a class action suit filed, is just because it kind of solidifies control that Plank has, in terms of those voting rights. It allows him to sell some of his holdings without diluting them.
O'Reilly: I'm kind of surprised he's that paranoid about losing control. To my knowledge, there's never been an assault on his leadership. The company's doing extremely well, so ...
Shen: Just to give you an idea, based on those numbers right now, those voting rights were a core issue, and the thing is he controls about two-thirds, I think it's about 66% of the voting rights due to his Class B shares, and that gives him the power to elect the board of directors, and a lot of other ... like the governance issues. That's obviously important to him. As I mentioned, Plank can sell some of his holdings now, through those Class C shares that he receives, and not worry about losing some of that control.
O'Reilly: Voting rights, Yeah.
Shen: The class action suit was filed, and they've gone through some iterations, and basically come to this agreement to allow the split to still take place with key terms...
O'Reilly: So he won. I mean, bottom line.
Shen: Yes, but there were some stipulations that came out. For example, there's a special dividend that's going to Class C shareholders, because the fact is, you have your Class A shares trading under the ticker symbol UA. These Class C shares are going to trade separately under UA-C. It's expected that, because they don't have voting rights, that some of that value ...
O'Reilly: Little bit of a discount. Yeah.
Shen: There's going to be a discount, and so that is a, going to be a one-time special dividend to Class C shareholders in the amount of $59 million, to compensate for that initial discount. There's also going to be, there's basically a strengthening of some of the non-compete clause, with the CEO, that he has to devote enough time to his role as a CEO, and this is on top of the fact that if he ever left the company, for example, he can't join any business venture ...
O'Reilly: He can't go work at Nike.
Shen: That wouldn't be for about five years.
Shen: Then, also, if there's any major transactions that may involve the issuance of Class C shares as potential compensation for an M&A deal, for example, the board of directors has to go through a special review to see how that will impact Class A shareholders, and also the company overall. Basically, it's like a watchdog system, to make sure that there's nothing with the issuance of these Class C shares, these other shareholders besides Plank aren't losing out in some way.
O'Reilly: What do you think he's thinking? Because a lot of other big business minds that owned large percentages of the corporations they founded, cough, cough, Bill Gates ... they, he only owned, I think at its peak, he owned 28% -- don't quote me, folks -- of Microsoft.
Shen: In terms of Plank's actual ownership, it's around 15%-16%, but it's the voting rights. He is very concentrated.
O'Reilly: Inordinately large control. It's just, Bill Gates has been selling his stake in Microsoft. He stepped down from a full-time role, in, I think, 2008 or something, but he'd been selling millions of shares every quarter for 10 years before that. He didn't seem to worry about this stuff.
Shen: There's even stipulations here, in terms of Plank's selling of his holdings. There's basically amounts, he set thresholds, where, for example, if he were to sell about 2.5 million Class A or C shares in a single year, then all his Class B shares convert automatically.
O'Reilly: Oh, wow. He's trapped.
Shen: It kind of controls how much he can sell per year, and that keeps him tied, you know?
O'Reilly: Do you think, to the heart of my question, do you think he's being OCD about having voting control? Does he not trust ... you know what I mean?
Shen: I think, on the one hand, a lot of the controversy came about from the fact that the company announced it and basically characterized it as a straight 2-for-1 stock split, like it's done previously, but that's obviously not the case.
These Class C shares have less value without those voting rights. That led to the lawsuit, and the settlement they've come to, or this agreement that they've come to, but I can understand ... I haven't started a company like this, and on the one hand, if you're a shareholder and you're looking at the situation, the split ultimately doesn't really change your thesis on the stock.
O'Reilly: Yeah, so moving on, what does this mean if I'm a shareholder right now?
Shen: Eventually, the Class C shareholders, they should be cognizant of the fact that the company has made its intentions clear, that with stock-based compensation, equity issues, and M&A transactions or in partnership deals, that's going to come from the Class C.
Shen: That potential for dilution is going to be there. Otherwise, if you're a long-term Under Armour investor, you already generally agree with how Plank's been running the business. Keep in mind, this is a company where its revenue, its top-line growth has been unbelievable. It quadrupled from about $1 billion to $4 billion over the past five years. Unbelievable growth. The management, the brain power, overall, if you're buying into a company that's trading at 64 times its expected 2016 earnings, and that's after the stock has fallen 20% from its highs of last year, you basically buy into the vision that Plank's had. This steady expansion, he's guided the company with a pretty steady hand.
The split does little to change that story, whether or not you agree with the way that he's going about the stock split in order to maintain his control over the voting rights, and wanting that ability to sell some of his shares without eroding those rights, that is on you, but in terms of the actual investing thesis, I don't think it changes the story at all. Otherwise, it just kind of closes out the chapter.
For the details here, the Class C stock, I think started trading this week, and the official shares will be issued on April 7, to shareholders on record as of March 28, and, like I mentioned, they'll trade under UA-C.
O'Reilly: Not coming up on Google Finance yet. Anyway. OK, cool.
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All right, so, Vince, moving on to what I teased in the introduction to the show. I come into work this morning, I got my coffee, I got my Cheerios, I walk over to your desk, and you tell me that Amazon is now selling cable packages for Comcast.
O'Reilly: Not on my list of things that I expected today. Came out of the blue, right? I mean, this was just announced days ago, and you're showing me the page, it's a very attractive ...
Shen: I actually didn't hear about this until this morning. I had to scramble myself a little bit to gather all the details, but just to give our listeners a bit more of the background, if you search "Amazon cable store," it'll take you to the landing page and you'll be able to see a lot of the details that cover here, some of the benefits of this partnership. To boil it down for you, in a pretty unlikely tie-up with the cable industry, and considering the fact Amazon could easily consider one of these new content providers, their stream is often viewed as one of the reasons why some cable companies have seen their subscriber losses, and they're having to change their business model.
From a report in The Wall Street Journal, Comcast CEO Brian Roberts and the head of the cable division, Neil Smit, they met with Jeff Bezos during a trip to Silicon Valley in 2015. So this partnership started there, and then over the past year they've ironed it out and now it's launching, officially.
Comcast's Xfinity service is the only partner that's currently available, but that is likely to change, based on some other reports that I've seen. This cable store allows you to shop these Comcast offerings, assuming it's available in your area. They'll ask for your ZIP code, you can see all the different packages, and there's also some other perks as well. Amazon's known for making the shopping process so simple.
Think about Prime members and the fact that they tend to do a lot more buying from Amazon than non-Prime members, just because it's so easy. I think Comcast definitely sees the benefit there and what they can learn from the partnership, even reducing the number of clicks, for example, to close out the transaction to finalize it. The thing is, for Amazon customers, there's a lot of perks to signing up through Amazon for Comcast service.
O'Reilly: Gift cards, it says?
Shen: The ordering process is similar, right? A lot of people are familiar with Amazon's checkout service, and the reviews, and that's all here. Then also ...
O'Reilly: Amazon itself is extremely customer-centric.
O'Reilly: They're willing to take financial losses in order to make the customer happy, so ...
Shen: There's some tie-ins. Think free Amazon gift cards, that come with certain bundles, you have the full lineup of packages, tips on buying your own modem to save money, so, again, that customer-centric nature, and another big thing that I think will actually be one of the bigger draws to sign up through Amazon is a dedicated customer service team. Comcast is basically setting aside this special staff.
This team will be experts on a lot of the issues you get from billing to technical issues, and so, instead of being transferred all around, which I personally experienced, trying to call Comcast when I have had issues, hopefully this one rep can handle everything and it's a much more streamlined experience when you're contacting them. Also, there's less wait time. Their goals, if you call them, is to answer within 60 seconds or less, which would be pretty impressive, considering the time ...
O'Reilly: That's never happened to me.
Shen: Exactly. A lot more flexibility, just in terms of how they're able to reach out to you via phone, email, chat, social media, which they're really broadening that, and again, some people have experienced, like, absurd, or have had absurd experiences, trying to cancel their service. Whereas here, these reps, I think it's something Amazon mentions, they're not paid by commission, if you call in and you want to cancel within 30 days of signing for contract, done deal.
If you don't have a term, and you want to downsize your plan or you want to cancel because you're on a no-term contract, boom. None of that pushiness. There's definitely some perks in terms of, if you are an Amazon customer, signing up this way. Big picture, though, I think, ever since the Time Warner deal fell apart, Comcast has, their management team's been really vocal about how they're trying to invest more in their customer service.
I think they're spending something along the lines of $300 million, investing in more staff to handle customer service calls, they're doing things like allowing you to track where your technician is, if you have a house call coming, and if they're late they'll credit you, if they're late even a single minute, they'll credit you $20 to your account, for example, trying to encourage better service from the company. Then, in terms of the pros and cons here, better for Amazon, it solidifies its reputation, right, as being this one-stop shop for everything you need.
O'Reilly: Not only that, but when I first saw this, it occurred to me that this is just another value add for my Prime membership. Because now, if and when I move, I'm currently a Comcast customer here in Alexandria, because they have a little mini-monopoly in this little enclave of southern D.C. Metro area, but when I move, it's easy, my Amazon Prime subscription, to get in there and get new Comcast service.
Shen: Again, it should be a more fluid process signing up through the Amazon service. The thing is, If this rollout's successful, it'll only reinforce for customers that Amazon can make even a company with a pretty rough reputation have a very positive experience. It's that Amazon effect, that magic that they have. Of course, they're not doing this for free; they earn a fee for each subscriber that signs up, based on again, the Wall Street report. They mentioned they had a source. How much that is, we're not quite sure. Maybe we'll find out more about that in the future.
Then, on the Comcast side, they can learn a lot from this partnership. They're increasing their outlets for signing up new subscribers, they have some of that cross-promotional activity that we mentioned. They offer security services, for example, that might also get offered through Amazon at some point in the future. I think this is just another step for them to be able to improve some of their public perception, and, pricing-wise, it's the exact same, so you decide to sign up through Comcast, and then you look at Amazon pricing. There's going to be no change there, otherwise.
It's just really interesting. A very unlikely partnership I did not expect to see, and I'm kind of curious if other companies join the flock. Charter, I think, is rumored in that report to also be talking to Amazon about adding their services. If you go to the site, which I highly encourage you to check it out, you can see that they're building in a way that they're preparing to have these other partners in addition to Xfinity. We'll see what the, how many people take to this, and if it's also successful for them.
O'Reilly: Cool. Thanks for your thoughts, Vince!
Shen: Thanks, Sean.
O'Reilly: Have a good day. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Again, that is email@example.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based only on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly, thanks for listening, and Fool on!