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Google, the US DOJ And The Consequences of a Break-Up. Plus: RTL, Streaming and the Importance of Global Focus for Media Companies

Welcome to Madison and Wall, which is both the name of my new strategic advisory firm (learn more at www.madisonandwall.com) as well as this newsletter.  The name refers to the work I have done for many years, which typically sits at the proverbial intersection of Madison Avenue and Wall Street.  I hope you enjoy this newsletter.   Please stay in touch with me at brian@madisonandwall.com

Google, the US DOJ And The Consequences of a Break-Up.  Plus: RTL, Streaming and the Importance of Global Focus for Media Companies

Last week’s filing of a complaint by the US Department of Justice and several states against Google “for monopolizing multiple digital advertising technology products” was the latest in a series of efforts by governments and regulators around the world to curtail the world’s biggest technology companies, who also happen to be the world’s biggest sellers of advertising.  The legal merits and considerations of any one case can be difficult for a non-lawyer to properly assess, but for a very long time it has seemed a break-up of some part of Google’s advertising business was inevitable, if only because unrelenting efforts to cause it would lead to so much distraction and so many commercial limitations that the company would probably choose to divest itself of the problem voluntarily if needed.  

For Alphabet and its shareholders, at least the financial merits of such a separation could very well be positive.   This is because one key challenge that corporate units of all types and sizes face is that they must compete for access to capital with other divisions.   Resources may be allocated from the parent company level for a range of considerations beyond strictly commercial or immediate ones, often reflecting the personal preferences or long-term vision of its management.   Based on Alphabet’s founders’ areas of focus and recent efforts to expand businesses such as Cloud and Play, one could assume that over the years non-advertising businesses have been prioritized over advertising businesses in terms of capital allocation or budgeting flexibility.  It’s worth noting that at this stage of the company’s maturity, such choices could be viewed positively for Alphabet if we presume that because of the company’s massive share of the industry, advertising growth must inevitably slow towards industry-level rates in the mid-single digits.  By contrast, other areas of the business may have better growth prospects.

If true, Google’s ad tech business may have been operating with proverbial hands tied behind backs, and a divestiture could actually unleash a more aggressively competitive player in the industry.  Of course, this all depends on what parts of the business were spun out, its managerial preferences, the time horizons of the shareholders it chooses to focus on and thus its access to capital.   It’s far from certain how everything plays out, but those rooting for a break-up in order to reduce market concentration in the technology industry could unwittingly be supporting an increase instead.

Assessing Media Concentration: Think Global, Not Local

On the related topic of media concentration, other news this week highlighted one of the key trends I have been focused on in recent years, which is that concentration of the media industry is best assessed in global terms rather than in single country or local terms, because media industries – or at least the companies who are investing the most in the industry – are themselves primarily global.   This has many implications which we’ll explore regularly in these posts.

One reason concentration is playing out as it is at a global level is because of the choices individual companies are making.  In short, US-based media companies are typically pursuing global strategies while others are generally not.

Consider what’s been happening with European broadcasting.  RTL, the Luxembourg-based controlling shareholder of many of the largest broadcasters in individual European countries has been attempting to build what could be called “national champions” in many of its markets by agreeing to significant mergers of its assets and those of its most notable competitors in each of France and the Netherlands.   Unfortunately for RTL, the French competition authority successfully blocked the combination of TF1 and M6 in September, and this week the Dutch regulator said it “will not grant a license for the transaction” proposed there. 

By contrast, many of the largest American owners of television-related properties have been building out their businesses across borders, primarily through streaming services.   Although some US-based companies such as Warner Discovery have been public in conveying a pull-back in such investments, most of its direct competitors (as well as indirect ones such as Amazon and Apple) have continued to proceed with these initiatives.  

When Media Companies Focus On Single Countries, They Create Conditions For Global Players to Concentrate The Industry

Companies who would pursue “national champion” strategies by way of the creation of a monopoly might expect to benefit if they can successfully lobby governments to make life difficult for foreign competitors with targeted taxes, excessive local obligations or other means.   They might believe they will be better able to avoid investing in innovative products and postpone the time when new business models might be needed.  However, in the short-term it may be that cost reductions are a more likely benefit than revenue growth opportunities, at least so long as total pools of spending are relatively fixed as they are in advertising and consumer households.  

To point, as it was, European broadcasters have been generally reluctant to invest a significant share of their capital or operating expenses into home-grown streaming operations (services such as Britbox in the UK, Salto in France or Joyn in Germany), likely in large part because these ventures lead to margin erosion for the overall business if sufficiently scaled.   Arguably the only significant exception has been Sweden’s Viaplay which spun out of broadcaster Modern Times Group, and which is primarily focused on expanding outside of its home market.  Despite the narrow focus most of these businesses have (and contrary to the relatively easier capital allocation decisions for businesses which are more narrowly focused than a company such as Alphabet), factors preventing more significant investment choices may include a strong preference to avoid immediately deploying capital without a near-term payback, a lack of conviction around how to invest in the future, willful optimism that a status quo can persist, or an incorrect interpretation of investor preferences favoring short-term results over long-term ones.

The weaker economics of streaming relative to traditional broadcasting and cable have always been evident, but one thing I didn’t fully appreciate in the early days (i.e. in the 2010s) was that global scale can go a long way towards making up for softer margins at an individual country level.  This is not only because good content can actually play well globally (in terms of providing a deeper library to consumers, in terms of discovering new content formats and being able to promote a break-out hit in one market into others quickly) but also because there is skill-based scale from technology development, marketing and overall product development.   Recruiting talent is made easier with scale, too.  At least this is how many of the US-based streaming services are seeing it, especially those which already have a strong foothold in international markets. 

So while falling margins are generally bad, no profit or cashflow is usually a worse outcome.   This is a potential fate for media companies who choose not to invest in the long-term direction of their industry because so long as there are scaled players pursuing global streaming business models and investing disproportionately into content while they do it, those who are not doing so will inevitably lose share of consumer (and advertiser) time and money before finding themselves in a weak position.  

To the extent it is the largest companies that are making these investments – despite the fact that as Viaplay is proving, it’s not necessary to be large to do so – an inevitable outcome is that concentration is likely to increase at a global level.  Regulation at a single-country level won’t change this reality.