Weekend Investor: The Week That Was

Your 5 minute market recap.

Author

Travis Hoium
September 03, 2023

I hope you had a wonderful week!

Start of the school year chaos has hit Asymmetric Investing this week and there was a delay in the final spotlight of August. As a result, Asymmetric Portfolio buys will be made on Tuesday. I apologize for the delay.

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In case you missed it

Here’s some of the content I put out this week. Enjoy!

  • MGM Resorts Spotlight: Gambling stocks aren’t for everyone, but if you like companies with great cash flow that are buying back shares like crazy, MGM Resorts may be worth a look.

  • Back to 1st Principles: Why do companies outperform the market? Breaking down their strategy is key to understanding what’s repeatable in the future.

  • 1 Million Robotaxis: One company is expanding robotaxi operations like crazy. Hint: It’s an Asymmetric Portfolio stock.

  • Buyback Kings: If these companies keep buying back shares there may not be any left!

  • Are AT&T and Verizon Great Dividends?: 7% yields are great if they continue forever, but the market doesn’t seem to think the payouts are sustainable. I make a case that these companies are in better shape than the market thinks.

Cable companies go nuclear

For now, ESPN is no not available to Charter customers. The dispute comes down to Disney’s financial demands to allow Charter to distribute Disney’s channels (known as retransmission and carriage fees). Charter finds the current economics of video untenable and may just walk away.

Disney has long commanded increasing fees because it bundles ESPN, ABC, Disney Channel, and many others into one package that it sells to cable companies. Pricing isn’t a la carte, they pay for everything or nothing.

The quote below from Charter’s CEO on a special call is dire.

I'd like to start with a message for those of you on this call who are also our video customers. I'm sorry that Disney has removed its programming from new lineup.

And for the majority who don't actively watch Disney content, I'm sorry, Disney has made you pay for channels you don't watch. We've almost always avoided these kind of disputes and disruption to your service, but we had to draw a line in the sand on your behalf. We haven't been able to stop programmers from increasing the cost of their channels and your packages. But we think that making sure you get value and flexibility in the programming you pay for, well, that's worth fighting for. So thanks for your patience.

For our shareholders, analysts and other constituencies, let me say first how disappointed we are to be in this position. We've generally been able to manage relationships with our programming partners behind the scenes. We respect the quality product that Disney produces and its management team of the video ecosystem is broken. Over the last 5 years alone, the linear video industry, including both traditional and virtual MVPDs has lost nearly 25 million customers, almost 25% of total industry customers. It's staggering.

I'm disappointed that Disney so far has insisted on higher prices, forcing customers to take their products when they don't want them or can't afford them and asking us to require customers to pay for direct-to-consumer apps, their linear fees already pay for.

We know there's a better path. We also believe that Disney and Charter are uniquely capable to lead the way. So we're on the edge of a precipice. We're either moving forward with a new collaborative video model or we're moving on. This is not a typical carriage dispute.

It's significant for Charter, and we think it's even more significant for programmers and the broader video ecosystem. We've proposed a model to Disney that we believe creates better alignment for the industry and better products for customers. A model that could both stabilize linear video and create a clear growth path for direct-to-consumer video with a more customer-friendly and financially attractive end state for programmers. Given how much of the expense is tied up in sports, Disney has to lead instead of pursuing the same playbook, which drives a vicious cycle of video customer declines. Ultimately, Disney gave us a choice to either carry on with a bad path for consumers, or to look to complete the new video models for our customers.

Because we've reached the point of indifference under the current industry model, we have a unique ability to stand firm for a deal where Disney and Charter cooperate to create video products that are valuable and relevant to consumers.

Christopher Winfrey, CEO

This is all very dramatic, but it’s also what happens when companies start fighting over a shrinking pie. Disney has negotiating power through its ownership of ESPN so it wants more money for the content it sells. Charter has gone along to get along but has seen its ability to pass on higher costs erode over time, leading to lower margins and fewer subs. That’s why it’s pushing back now.

I think ultimately this will get worked out with a new agreement, but cable’s decline looks like it’s going to be painful for everyone involved. Ironically, the best answer may be Charter becoming a distribution partner for Disney’s streaming services, taking a percentage of subscription fees at a very high margin.

Broadband is where Charter sees a future anyway. That’s something Disney can agree on as well.

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Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.

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