Changing Channels: Media’s New Direction | Capital Group


Investment Insights

September 2015

Changing Channels: Media’s New Direction

Media analyst Brad Barrett discusses changes in the media landscape being brought about by changes in technology and innovative new business models.



Brad Barrett


Matt Miller: Hello again, and welcome to The Long View, American Funds regularly looks at the tectonic shifts shaping business, society and world of investments. I’m Matt Miller, policy and communications advisor at Capital Group. Today’s theme, Changing Channels – Media’s New Direction.

We’re living in an age of disruptive innovation that is upending many industries, perhaps none more than media. Whether we’re downloading a 15-hour TV series to binge view it, reading books on our phones or texting with our kids even when we’re sitting upstairs, the point is the same. In just a few years we’ve seen incredible changes in the way we consume information, transmit data and communicate with each other.

Today we’ll be talking with investment analyst Brad Barrett about some of the remarkable transformations we see happening around the world and the opportunities and risks these changes pose for companies and investors. Brad Barrett is an equity investment analyst at Capital Group with research responsibility for U.S. media companies. He has 14 years of investment experience, all with our firm, and is based in our Los Angeles headquarters.

Welcome, Brad. Great to have you on The Long View.

Brad Barrett: Thank you.

Matt Miller: So, so much is going on in media now, and I know you’ve talked about these amazing forces at work. Set the stage. What, what are these big forces at work? How do you see the media landscape evolving today?

Brad Barrett: I generally think there are three big sets of forces. There is technological change, and, in general, technological change allows for new and different business models, which then results in changes in consumer behavior based on consumer preferences. So those big three forces, technology, business models and consumer preferences, is kind of the basic lens I use to analyze the media business.

And I think it’s important to note that the media business has always gone through massive change driven by technology. You know, in fact, peak movie ticket sales by volume were in the mid-1940s, believe it or not, and are down, you know, to one-third the level they were then, because, of course, the introduction of TV resulted in a dramatic change in consumer behavior, and then, you know, a couple decades later you had the introduction of cable and satellite TV. And this is a constant in media.

So analyzing media is really about analyzing how technology is going to impact business models and how that’s going to impact consumer behavior.

Matt Miller: And so what are the big technological breakthroughs, or what’s, what’s the latest frontier? Is it the video on demand? Is it — Talk a little bit about what those things are and the new business models they’re enabling.

Brad Barrett: Well, I think the most interesting changes going on right now really revolve around the TV ecosystem and kind of the mobile ecosystem, and they’re, they’re related. There’s lots of interesting stuff that is going on in the newspaper business and the music business and the book publishing business, but from a public market perspective the companies are really dominated by TV companies, essentially, companies that derive the vast majority of their profits from the TV business. In fact, when you look at the public equities that I take a look at, 90 percent of them are dominated by TV, excluding kind of new media, which, even including that’d be 50 percent.

So let’s start with TV. I mean, I think the three big forces going on are the Internet delivery of video, is a large one, and mobile, the mobile ecosystem in the fact that virtually everyone now in developed markets has a mobile device that’s powerful, that they’ve proven to enjoy watching content on, that is always on and always connected.

And the third I would say would be big data or the application of algorithms to more quickly get us to the content that we want to view. And the media business, the TV business, in particular, has not really been a business that has had this capability before. It had been all about scheduled programming. So Internet delivery of video is, is probably the biggest.

And that’s really, it’s really a bunch of things that have coalesced over the last few years that have allowed essentially a video stream to come into your home that is nearing comparable quality to the traditional cable and satellite video stream, and this is because broadband has improved tremendously, compression technology has improved tremendously and the in-home infrastructure required to get a video stream from the Internet to TV where you want to watch it has come together with things like Apple TV and Roku and Amazon Fire TV. So it’s, it’s those things that really resulted just in the last couple of years of streaming technology kind of coming of age really.

Matt Miller: And so you’ve got these new businesses. This is like the rise of Netflix and the way that Amazon does video and others, and talk, talk about the, the way that those new, new entrants that are growing very quickly, how does that relate to the incumbents and how they’re thinking about their own businesses? How do you look at that as a, as an investor?

Brad Barrett: Well, I think if you stepped back, you know, the biggest change is Internet delivery of video, and this has allowed new business models. And I think you can kind of think about the new business models in four big buckets. One would be subscription video on demand, which is dominated by Netflix right now. Another is iTunes, which would be the equivalent of going to the video store or Best Buy and buying a DVD or renting one. You no longer need to do that. You do it a la carte. Another business model is YouTube, which is free, ad supported and dominated by essentially free user-generated content.

And then a fourth, which we’re just now seeing would be what Sony is in the marketplace within a beta and what Apple is rumored to be coming out with, which is essentially replicating your current cable bundle but delivered fully over the Internet.

And the ones that have roiled the business most recently, over the last few years, has been the subscription video on demand, typified by Netflix. And really the, the business model from a lot of perspectives is resulting in big changes in consumer behavior, and consumers are voting with their feet in how they prefer to watch TV, and it’s not surprising. I mean, we all watch TV and we all have our own preferences. I mean, consumers prefer things on demand, so, because it’s convenient and it can be personalized to you. They prefer no commercials. They prefer full-season stacks so you can watch one episode after another. They prefer having that content on every device available, inside and outside the home, seamlessly. And they prefer it to be cheap. And these new business models are delivering and satisfying those consumer preferences. And what you’re seeing is —

Matt Miller: And they’re really preferences we didn’t even know existed, right? It kind of — Who knew you could watch a, you know, download all of House of Cards or whatever series you like and, and consume it all in, you know, at your own pace?

Brad Barrett: Yeah. Well, up until a few years ago it wasn’t really practical. I mean, even as recently as three or four years ago, the reliability of a stream into most people’s homes was just not high. And I think it’s worth noting that TV is really central to the lives of people, you know? Nielsen says the average person watches something like five hours of TV a day. So —

Matt Miller: As investors maybe we like that. As —

Brad Barrett: Absolutely.

Matt Miller: - as citizens, it could be an issue. [LAUGHTER]

Brad Barrett: Absolutely. And so these are very engrained habits in people’s lives. You know, you might have CNBC on as you get ready in the morning. Your children might be watching the TV as they have their snack after school. You, you know, sit down with your wife on a Friday night to watch a movie. These are engrained habits that consume a lot of our lives and that are, are pretty important to us, and we have high demands on them. So it takes a high quality service to start changing this behavior.

Matt Miller: And so say more - I didn’t mean to interrupt – on the, the, the way that Netflix, as an example, and, again, these aren’t investment recommendations, I should always say, as we discuss these different businesses. They don’t amount to investment recommendations, and, but they are illustrative of the trends that you’re -

Brad Barrett: Yeah.

Matt Miller: - you’re seeing and studying. It’s the subscription model, it’s the ability to do things on demand, and then there’s also the, as you said, does Netflix encapital-, encapsulate that big data dynamic that you also talk about?

Brad Barrett: Yes. Absolutely. I mean, at any given time there’s kind of tens of thousands of choices of what one could watch on a subscription video on demand or on Netflix, and it takes a lot of data and algorithms and software to put the pieces of content in front of you that you’re most likely to enjoy, and this has not been a skillset that the traditional ecosystem has had because the business evolved in a completely different way, where there were a set number of channels and it was scheduled programming and the typical user behavior was you either knew when something was going to be on and you planned on watching at that time, or you channel surfed until you found something enjoyable. So it is a, it’s a completely new world from that perspective.

Matt Miller: And is one aspect, when you mentioned YouTube, is one aspect of what technology is enabling now is there’s this kind of instant global scale for these new things, because YouTube has, anything on the Internet has global reach? Is that a factor in how we think about the, I guess the potential scale of, of companies today?

Brad Barrett: Yes. I would say that’s one of the pretty big changes going on. Historically, I think the, the TV business, in particular, has been pretty regional and national, and the reason is that it’s, historically it’s been very much tied to the physical infrastructure of the distributors, cable and satellite operators primarily, but telecom operators as well. So those guys would go out and they would license network feeds from, you know, the typical big media companies, and they would put together a bundle of programming and sell it to you for a subscription fee. And that depended on them having a physical infrastructure to do that.

And in the new world, they don’t require the physical infrastructure. So they’re able to offer the product globally to the extent that the content they have on the service has rights to be shown globally. So in the case of YouTube, given that most of it is user generated, it, you know, almost as a requirement of uploading something, it has to be allowed globally, for the most part. There’s always exceptions.

For Netflix it’s quite a bit trickier, because the way the media business works is things are historically licensed on a territory-by-territory basis. So, but still, the fact that they have said that they want to be global by the end of next year, by 2016, is pretty remarkable, considering most media companies still generate the vast, vast majority of their revenues in, you know, the US.

Matt Miller: And so what does this mean for all the legacy companies? Can you walk us through how to think about, or how you’re thinking about it as you look at investments and the different segments of the traditional media industry as this evolves? We spent a little time on the, the kind of more futuristic firms. What does it mean for the, the kind of industry structure today and where opportunities may be?

Brad Barrett: Well, it, it’s different for the different players. That’s the first caveat, that there’s essentially seven big TV content companies, if you will, and now there’s about four big distributors and all of them will evolve quite differently.

Matt Miller: That means the, that means the cable systems?

Brad Barrett: Cable and satellite. Yeah.

Matt Miller: Right.

Brad Barrett: And telecom. And the, the major trends, the trend towards subscription video on demand, the preference for no commercials impacts these different companies differently.

The companies that — But the ecosystem as a whole, let’s start with. So right now there’s a hundred million video subscriptions in the US out of roughly 120 million occupied households.

Matt Miller: That means a hundred million cable homes or satellite homes?

Brad Barrett: Exactly. Exactly. And they pay about $90 a month, and that, that adds up to about $105 billion per year in subscription fees for multichannel video. That ecosystem also generates about 80 billion in TV advertising revenue. So that’s the basic, say, 200 billion. They have some other ancillary revenue streams as well, is a basic pie they’re starting with. And there is this emerging market that is actually still quite small of Netflix and Hulu and Amazon and YouTube that is maybe generating five or six billion from subscription fees. So it’s, it’s quite small in comparison.

But the user behavior has shifted much more quickly. Subscription video on demand, Internet streaming, whatever you want to refer to it as, is probably about ten percent of total viewing now. Netflix actually reported that among their subscribers they watch almost two hours per day of Netflix, which is pretty —

Matt Miller: That seems extraordinary.

Brad Barrett: - pretty extraordinary number. So you clearly have a shift to this new Internet streaming, low commercial load, much lower price. So then the question that I’m getting to is, what do the incumbents do about that.

Now what they don’t want to do is just lower their price and show fewer commercials, because obviously that would result in dramatically declining profitability. So what they’re trying to do is lower the commercials, lower the commercial load, but make them more targeted so that they’re more effective for advertisers so hopefully they can charge a higher price, and they’re trying to make the value proposition, what you get for your $90 a month, better, and they’re trying to do that by replicating lots of the things that the new entrants like Netflix have done, making it seamless for you to have your content inside and outside the home on every device, making much more of it on demand. It’s certain —

Matt Miller: Is HBO, is HBO GO an example of that, or -

Brad Barrett: Yes. Absolutely. Now HBO doesn’t have commercials. So they don’t have to struggle with that -

Matt Miller: Tradeoff.

Brad Barrett: - quite a big issue in the ecosystem. So that’s how they’re evolving into this.

Now price is still a huge factor, and these are very high-priced products competing against very low-priced products. So I think that will be an ever-present pressure. And the preference to watch on demand with lower commercial loads is a pretty intense pressure.

So there’s certain sorts of programming that are naturally watched live. Sports is the biggest example, by far, but also news and certain sorts of kind of live events and variety shows, things like American Idol. Those have I think an easier time dealing with some of these shifts because they’re not naturally made to be viewed in on-demand experience. But those people who make traditional comedies and dramas, they’re going to probably have a more difficult time.

Matt Miller: Now in the, the, when you mention sports, is sports one of the things that’s like the anchor of the traditional distribution thing and something that, because people want their live sports they kind of have to have the cable or the satellite thing or -

Brad Barrett: Yes.

Matt Miller: - they, they perceive that and that’s a piece of that monthly value that is hard for Netflix or the other disruptors to dislodge?

Brad Barrett: Yes. Absolutely. I mean, sports is I think the greatest example of a unique feature of the video marketplace, which is that one piece of video content very rarely acts as a good substitute for another piece of video content.

So one interesting question is, wow, there is a $90 bundle of programming -

Matt Miller: Per month.

Brad Barrett: - traditional, per month, with a whole bunch of commercials, and then there is a $9 per month in Netflix with no commercials. Why would anyone take the 90 instead of the nine? And we all intuitively know why we do this, because it’s not just about video, it’s about the specific video you want to watch.

So sports is the greatest example of this. I mean, clearly, a sports fan wants to watch sports, not just any generic piece of video, but it’s usually much more specific than that. It’s not just a sports game. It’s a, for instance, a football game. And really it’s not just a football game. It’s an NFL game. And it’s not just an NFL game, it’s the Steelers game.

Matt Miller: Your team. Right. Right.

Brad Barrett: Yeah. So it’s, having exclusive access to specific pieces of video content, sports being the greatest example, are the ways in which these products remain very, very sticky to American consumers because they just can’t get most of the stuff in that $90 bundle outside of the bundle. And sports is the biggest example, which represents about half of the content cost of media companies that make, you know, make up that bundle.

Matt Miller: And is that why the rights to those — And so the rights go to the leagues or etc. who own that and put on the networks, etc.? Is that how the economics work, or is that —

Brad Barrett: Well, networks license it from the leagues and they do very long-term deals, and these are extraordinarily expensive deals. So, you know, a company like ESPN will spend, round numbers, mid-single digit billions licensing these rights. So for YouTube, which might have mid-single digit billions of revenue total, or for Netflix the same thing, going out and buying sports rights is not realistic right now, nor would they be able to differentiate their service or, I would say, apply their strengths in that marketplace, because their strengths are, are on demand, that’s a huge strength, and where no commercials, and sports doesn’t lend itself to those as much.

So both for those reasons and the fact that it just costs an incredible amount of money, and they’re in very long-term contracts. Lots of these contracts run into the 2020s.

Matt Miller: Fascinating. So they lock that up for the long term.

So, so as you think about the traditional ecosystem with like the studios and you’ve got the networks and the, the distributors, I guess, the cable and satellite guys, what are still attractive businesses from an investment point of view, or how do you see the economics of those business evolving, ‘cause some of those businesses are still attractive businesses, but some are facing these pressures in ways that may get harder?

Brad Barrett: Well, I think in general the businesses that will do better — Let’s start with the three basic levels of the traditional video business. You have studios, and they finance and create the actual content and then they sell it or license it really to networks, and networks play the role of bundling up a bunch of content, negotiating for distribution over cable, satellite and telcos, putting it inside of a branded environment to make it easier for consumers to find, scheduling it with other like-minded programming and marketing it. Those are important functions that need to be played kind of no matter what the business model is.

And then you have the distributors who license from networks. You know, this is like a Comcast licensing from, say, Viacom or Disney, and they bundle up a whole bunch of network groups, get a critical mass of networks and then they market that to consumers and they do the billing and the customer service and then obviously the physical infrastructure. So they build that.

So those are the three basic levels, and there’s various different degrees of vertical integration in different companies. Most networks also have a studio, but also buy from third-party studios. Comcast owns NBC, etc. But they are three distinct layers.

So if you look at studios, the studio business is not necessarily the greatest business in the world. It is, tends to be somewhat volatile, particularly if you don’t have a great amount of diversification in terms of the movies or TV shows you’re creating. It’s lower margin, it’s a little bit lower return. You have a little bit lower barriers to entry. There’s often new studios coming in and out of the business.

Networks that kind of aggregate up content from studios, those historically have been great businesses, very high ROCs, margins oftentimes 40 —

Matt Miller: Big return on invested capital, you’re saying?

Brad Barrett: Yes. Margins oftentimes 40 plus percent. But it’s there because of those high returns that there’s probably the most vulnerability. And then you’d have to look at what sorts of networks are vulnerable, right? And it goes back to my— Well, let’s talk about which ones are least vulnerable.

The least vulnerable ones are likely the sports networks, news networks, networks that focus on live programming —

Matt Miller: For which there’s not a substitute like comedy and drama.

Brad Barrett: For which there’s not a substitute. And, and then you have the distributors. Now if you’re just in the video distribution business, you’re facing some headwinds, because that business of a hundred million US subscribers to the traditional bundle is now in decline, slow decline, but most of the guys in the video business have other businesses. I mean, DirecTV is now within AT&T, for instance. And then the cable industry is heavily diversified into broadband. And no matter what happens in the video ecosystem, broadband is an absolutely necessary part of the equation for consumers, and that business is growing very, very well to both consumers and to businesses.

So while the video business is likely to see some pressure, it is largely offset by growth in some of their other divisions, particularly broadband.

Matt Miller: Now how do you think — Just stepping back a little bit and thinking about how you think as an investor and how Capital and the American Funds take this long perspective, so much change going on, you’ve watched this industry for a long time, even this summer, this past summer, lot of noise in the press about, oh, my goodness, subscribers were down, our viewership was down, things shaking up. When we see kind of short-term ripples like that but we have this long-term outlook, how do, how do, how do you in your own investment thinking process those news flurries as they impact the longer term outlook?

Brad Barrett: Well, I think the volatility of the industry, the uncertainty that surrounds all the change kind of plays to our strengths, because we focus on long-term investment results. So even if there’s short-term volatility, we can I think take advantage of those where we see great opportunities and we can also position ourselves to benefit from some of the winners and be patient and let some of these trends play out, ‘cause it’s not necessarily the end point that is the most difficult to predict, although in this business it is quite difficult, but it’s the pace of change that is very difficult to predict.

So particularly around the media stocks in general and their volatility, I really do feel like it plays to our strengths.

Matt Miller: And is it, is, is one of the questions we need to think about, is we understand the pace of change, you have some sense of where, from your own research and industry study of what the end point might be, but what’s the right entry points in terms of valuations or how to think about what that shift’s going to be from that $200 billion kind of revenue pool being shifted somehow with the profit pool and earnings over time? Is that, is that something you wrestle with to try and figure out when it’s attractive to enter some, some different investments?

Brad Barrett: Yes. Absolutely. And there’s been, I kind of think of it as a pendulum of fears about technology disruption in the media business, or in, in the TV business, and, you know, fears are often very well founded, right, because media investors have a couple of dramatic examples where the business was completely disrupted by technology. And I’m talking about the music business, which is down by over half of its peak revenue, and the newspaper business, which is also down by over half its peak revenue, which has resulted in lots of those stocks being down much more than half, obviously, or not being around at all any more.

So when people are thinking about disruption of the TV business or the video business, I think the music and the newspaper business is kind of the backdrop. So they are particularly paranoid, and I think rightfully so. So there’s periods of time when that paranoia kind of rears up and us as investors, as long-term investors can say, you know what, I think it’s a little bit overdone.

Matt Miller: Premature paranoia.

Brad Barrett: Premature. Right. There have been a couple of these in the past. When YouTube first emerged, there was a period of intense paranoia around cable stocks. This is like in 2005, 2006 when Netflix first got into the streaming business and started seeing some traction maybe 2010, 2011. There was intense paranoia around lots of media stocks. And even though you might say, yes, you know, on a very long-term basis I see that a lot of these things are going to change, oftentimes it can be overdone on the downside and you can really take advantage of that.

Now there’s other periods where fears about disruption have been very low, and in those periods, you know, I think the wise move is to probably pay more attention to the disruptive factors and, you know, probably, you know, hold less of the people who are going to be disruptive to the companies.

Matt Miller: Now, now it seems like, and I’ve heard you say before, that there’s a, you know, our relationship with management over long periods of times is one of the, one of the things that can help you and our colleagues develop the kind of insights that let us navigate this intelligently. The media business is kind of a sexy business with a lot of outsized figures and personalities. There’s a, this kind of famous annual conference I think at Sun Valley that Allen & Company holds. You’re someone who goes to those things. Tell us a little bit about, can you offer a little color on what it’s like and what the, do you get some extra insight from that kind of close contact over a drink or over a, a guy that does the karaoke that takes place on there sometimes as well, too?

Brad Barrett: Yeah. I mean —

Matt Miller: Have you been singing actively with any — That’s our, that’s part of our active management, right?

Brad Barrett: Yeah. Well, that’s proprietary. I think that is definitely one of our strengths, and I do think you gain insight into how these managers think, where their strengths lie, what their motivations are, because they’re faced with a lot of tough choices. You know, do I invest heavily and take down near-term profitability to perhaps give me a better shot years down the line, or do I, you know, buy back stock heavily and maximize near-term profits.

And I think getting to know these management teams over time gives one a sense as to how they’re going to approach some of these tough choices, and I think it also is an advantage when you talk to all of them all the time, which I do. You start to build kind of a mosaic of how things are working and you pick up little data points that might be unimportant for one company that are incredibly important for another company.

And I would also note it’s, it’s nice — One of the advantages of investing at Capital, which is really the only place where I’ve professionally invested, our scale gives us this incredible access, but it also gives us access to companies where we are not a current investor, and I think this is really important. For instance, you know, I started calling on Netflix in about 2005, and I would see them once or twice or sometimes more per year and I didn’t buy and recommend the stock for our shareholders until 2012. So I was meeting with them on a very regular basis for seven years –

Matt Miller: Fascinating.

Brad Barrett: - before I bought the stock. As a, you know, a small anecdote that part of our process is to get to know these companies intimately, you know, even when we’re not shareholders and they give us that access because of our size so that we can be kind of ready when the opportunity arises.

Matt Miller: And, and you’ve seen, and you saw a business like that go through many changes over seven years before you decided at that time, and I should say again, that that doesn’t represent a current investment –

Brad Barrett: Right.

Matt Miller: - recommendation, but it’s a, it’s an example of how these kind of long-term relationships and study of a business. I imagine, too, that, that knowing executives as they move through their careers, you must meet people when they’re younger and then rise into positions of seniority who -

Brad Barrett: Yeah.

Matt Miller: - you know, people who are more the day to day and then become CFOs and CEOs and you have some sense of the trajectory of their own thinking about an industry. That, that must be part of what, a kind of American Funds advantage, as well.

Brad Barrett: Yeah. And you build personal relationships with these executives. I think when I started calling on media companies, probably the only CEO of the big ones that has remained the same — Well, there’s been a couple. You know, Rupert Murdoch at what is it now Fox. Brian Roberts at what is now Comcast. But the vast majority have new CEOs, and a lot of those new CEOs were previously, you know, somewhat lower level executives, and almost all the CFOs have turned over. Previously, they were lower level executives that — You know, former CFO of Time Warner I got to know when he was head of investor relations, for instance. And as you build these relationships when the executives are at a lower level, I think it gives you better insight into their decision-making when they, you know, are kind of running the show.

Matt Miller: Talk a little bit about — There’s one question I wanted to ask you, ‘cause often you’ll hear people use the slogan that even though all the stuff is changing in media, that content is king. Is content king?

Brad Barrett: No. It’s —

Matt Miller: That’s why I wanted to ask you.

Brad Barrett: Yeah. It, it is a, it’s, it’s too imprecise of a term, content, right? So if you go back to that three-tier framework for thinking about the traditional video business, you know, studios, networks and distributors, cable, satellite, you can just measure the return on invested capital of those businesses, the margins, the volatility, and without a doubt the guys in the middle are the best business. And the studios, arguably, are, which are the most pure content owners, are probably the worst business of those three.

Now —

Matt Miller: And why is that?

Brad Barrett: And the, I think the reason is the barriers to entry and the moats in the studio business tend to be a lot lower. That’s the primary reason.

So you have people coming in and out of the movie and TV business, the production of it, quite easily. You know, essentially everyone in the TV business is a free agent. So even for big studios, there’s relatively few people that end up making a movie that are full-time employees of that studio, right? They are all, almost all contracted with, which makes it easy for a new studio to get up and running, because they go and contract with some of those exact same people.

So it’s really that middle section, the networks that have ended up being the places where there’s the best return, and lots of those networks are really not owners of content. I mean, ESPN is the most dramatic example of this, where — Obviously, ESPN does not own the NFL, they don’t own the NBA or college basketball, but they dominate the economics of that business, and it’s because they’re the scale player in a very specific and popular rights category and no one can bid what they bid on those sports contracts. So they just have an incredible scale advantage.

The other nuance of the pure content business, studio business that makes it less than a fantastic business, is that oftentimes the talent ends up reaping, you know, the vast majority of kind of the excess economic rents, or the excess margin or returns on a piece of content.

Matt Miller: Because the star is the one who puts the –

Brad Barrett: Yeah.

Matt Miller: - chairs in the, the [INAUDIBLE].

Brad Barrett: My guess is — Yeah. My guess is —

Matt Miller: I don’t want to use a crude term, but whatever the -

Brad Barrett: Yes.

Matt Miller: - whatever, whatever they say, they’re the ones who deliver the audience.

Brad Barrett: I have it on good authority that Tom Cruise is going to do a lot better on Mission Impossible than Paramount, who’s the one, you know, who’s making the movie, right? So —

Matt Miller: So Tom Cruise is a good business model –

Brad Barrett: Yeah.

Matt Miller: - himself. Right.

Brad Barrett: Right. And content is king, you know, there’s, there’s dramatic examples of where a particular piece of content has proved to be incredibly valuable. You know, Star Wars is an incredibly valuable piece of content, but George Lucas did not create a factory that creates Star Wars-like IP. He just created Star Wars. Creating that factory has proven to be extremely difficult, particularly at scale. And I think Pixar created an incredible kind of factory for making great animated movies, but they couldn’t really make more than one every year or 18 months, which gives you an idea as to how hard it is to have both a high return studio and a studio that can scale to large, you know, amounts of people.

Matt Miller: Talk for a minute, we’re in kind of our, as we’re in our waning part of our conversation, and this has been fascinating. There’s still so many more directions we could go, but say a word or two about regulation. Does regulation affect the evolving landscape here? Is that something you keep your eye on as you look at how these industries are intersecting and evolving?

Brad Barrett: Yes. Absolutely. Regulation plays a huge role, and historically it’s played an even bigger role. So you, I think all of the companies are sensitive to that, particularly the cable companies are sensitive to their very strong position in the broadband market, for instance. And this is when we get into some of the issues around net neutrality and what the cable companies should be allowed to and are allowed to do given their very strong market position and the centrality of broadband in people’s lives.

So, yeah, I study it quite closely, and, you know, I think the governments, you know, I think public policymakers have laudable goals, which are to preserve the specialness of the Internet and Internet distribution in terms of allowing new companies to arise, not having a gatekeeper like the Internet service provider be able to essentially stymy innovation and new services by saying, hey, whoever, whoever wants to reach my subscribers has to pay me a big fee. I think that at the end of the day is what public policymakers kind of want to avoid, and I think we’re very likely to avoid that situation because the, you know, Internet service providers, cable, telcos, I think in general have not misbehaved dramatically, and I think there’s market forces that are as strong as the regulatory forces that are keeping them from kind of doing some of these worst-case scenario things.

Matt Miller: Talk a little bit about the, you know, as we, as you think about some of the even newer businesses that aren’t, may not be public yet but there’s this whole new social media thing. Does that impact how you look at the traditional businesses? Twitter, I guess, is now in the public markets, but there’s Snapchat, there’s all this stuff that, you know, my daughter and others are, you know, the kids are using that are increasingly using media as a different way of distribution. It ties into your mobile -

Brad Barrett: Yes.

Matt Miller: - conversation. What’s the way to think about that in terms of how it affects your thinking about investments in this whole ecosystem?

Brad Barrett: Well, there’s a couple angles. The first angle is how good are those businesses in and of themselves as potential investment opportunities, and then how do those businesses impact the traditional ecosystem.

So why don’t we take the second one first. They impact it from kind of three perspectives. The first would be their competition for advertising dollars. I mean, people are using their phones all the time, you know, by some measures, you know, more than TV than now, and it’s always on. It’s a highly personal device. So the mobile advertising market is growing incredibly rapidly. And that over time becomes competitive against all the traditional forms of advertising, TV and print and radio, etc.

The second way is that they just compete for consumer time. There’s only so much time in a day. Now the sorts of things and scenarios that social media companies are good at tend to be quite different from the big media companies. There’s lots of video watched on a lot of these products like Twitter and Facebook, but that video is not really the same sorts of video that are watched typically from the major media companies.

And the third way in which I think these companies are kind of intersecting with the traditional ones is distribution of their content. I think media companies are increasingly finding it worthwhile to market and literally distribute lots of their content through social networks, because it’s a very efficient way at getting to just the consumers that you think are most likely to like your, your stuff.

Matt Miller: All huge issues. Just a last question. How does it — With so much change and the technology driving these changes and business models and consumer preferences, as you say, how does that affect your own research and analysis, your process that you use on behalf of, of American Funds clients? And has that changed over your decade and a half in the business? As the pace of change increases, do you have to change the way you actually analyze and research yourself?

Brad Barrett: I think the pace of change is accelerating, enabled by the Internet and the infrastructure that is now in place to allow new companies to grow incredibly rapidly. I don’t think the basics of what we do have changed all that much, and I actually think having a long-term perspective is one of the greatest advantages during periods of accelerating change, because you can have a high conviction about where we’re going to be in three or four years, and while things might be volatile in the near term, we’re in such a structure that we can afford to kind of come to a high conviction conclusion, invest behind that and, you know, monitor it but wait and, and watch it play out, and I think we’ve done that with a great deal of success.

Matt Miller: We could go on all day, but even The Long View has to end at some point. Brad Barrett, thanks again for talking with us about some of the remarkable transformations that we’re experiencing. They’re certainly changing the way we all live, the way companies do business and the way everyday investors may profit by partnering with them.

Thanks to all of you for joining us.

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