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2good2betrue (< 20)

The Commodity Pipe

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August 09, 2013 – Comments (1) | RELATED TICKERS: LVLT , AMT , DIS

I've read with interest all the talk about companies fighting for carriage of bits over wireless and the Internet. I think the "misconception" here is that if you own a lot of pipe you are going to make a ton of money. Clearly wall street continually gets this wrong.

It isn't the pipe that makes money, it is the content and the services it delivers that make money. In fact, with the proliferation of providers out there, most of these infrastructure players are lackluster investments with high debt, high costs (they are always upgrading) - all within an ultra competitive marketplace.

A while back LVLT thought it hit the mother load in landing a carriage deal with Netflix (NFLX). Well the deal make the stock shoot up nicely, but the company has yet to make substancial headway because of it. Netflix is no dumby, they go out and find the cheapest CDN they can find. LVLT was dumb enough to drop it drawrs and practically give it away, so why not let them try. It isn't as if NFLX is single sourcing LVLT - they actually have mulitple choices and regularly review these carriage deals to get the best price.

Other businesses follow these same practices - as they have a number of choices which only further contributes to making carriage business one of ultra competitive and only moderate margins.

So, in the end, carriage of bits is a lot like the hardware vs. software battle. While age old IBMers had faith their hardware was more valuable, it just turned out that software (content) was more valuable. Thus firms like AMT, LVLT and other pure play infrastructure companies need to think less about making further infrastrcture acqusitions and more about making content and service acqusitions. Clearly infrastructure paired with services and/or content is a known model that works where as single dimensional infrastructure focused companies have yet to prove they have staying power.

If it were possible, an acqusition of DIS or DISCA would be natural targets for pure play infrastructure players. DIS comes with a near monopy on sports with ESPN, where as discovery has a monoply on science related programming.

I firmly believe these two assets will fall to cable companies if not purchased by some other behemoth within the next few years as carriage of this program (when owned) is a small fraction of what it costs when you don't own it. Multiply that by millions of subscribers, and you have some pretty compelling reasons to buy these companies - there isn't a premium television service (in the US anyway), that doesn't offer at least one of these companies content.

 

1 Comments – Post Your Own

#1) On August 09, 2013 at 2:31 PM, awallejr (28.32) wrote:

I believe AMT converted itself into a REIT so it is unlikely they will change its focus.  As for DIS, not too many companies out there that could even afford taking it over.

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