Friday, April 17, 2015

Stop asking for cable TV unbundling

Every now and again, usually around some FCC hearing or cable system merger - I see a lot of articles or statements highlighting the fact that consumers should be able to pick and choose which channels they get through their cable providers.

Today, you don't have much choice in who your TV provider might be (because cable companies have area monopolies, and there are only a few satellite/phone company providers of video service), and within those choices you don't have a ton of flexibility as to what channels you can get.

Every provider will have a basic package (which is almost nothing), and a couple tiers of preferred packages that include all the channels you want and many that you don't.

Some consumers argue that this is unfair, and that they shouldn't be forced to buy a bundle of 50 channels when they only want a few. So these customers argue that unbundling will be good for them - because then they can pick and choose what to buy.

Unfortunately, for most consumers, this is dumb. It's dumb because consumers think this will lead to them paying less for cable - when I think it's the exact opposite that's the case.

While I don't doubt that there are some consumers out there who only watch one or two cable channels - I think the vast majority of subscribers casually watch a lot more TV networks than they think they do (surveys say consumers watch about 17 channels, but this is likely self-reported and I would guess, pretty low).

So these customers - to get the same experience they get today, would have to buy more channels than they expect.

In addition, cable companies would absolutely charge more for the channels everyone wants. It seems like there's this notion out there that once you unbundle TV packages cable companies are all of a sudden say, 'well - we'll just have to accept the fact that we'll make less money, because there's no way we can figure out how to price these channels'.

They'd figure it out. Hell, they've probably already done the analysis to figure out what they'd do to extract as much revenue as possible from an unbundled scenario.

I think you'd end up paying the same, only instead of 180+ channels (the current average), you'd only have ~20.

I think there's a very small subset of folks who actually watch almost nothing on TV - they might save some money. But for everyone else, they'd be far worse off.

The reason why this even came up today was that Verizon announced some bundling options that are closer to an unbundled world, and guess what, I think they'd make customers worse off while paying about the same as they do today.

Verizon would offer you a set of basic channels, including:

Local affiliates
AMC (at least you get Walking Dead)
Food Network
and some others

That's not exactly a murderer's row. Especially when you consider you can get your local feeds with an antenna for free.

But you also get two 'channel packs' with that. Each channel pack is basically a category pack. These include:

Lifestyle (e.g., Bravo, TLC, History)
Entertainment (e.g., TNT, TBS, USA, FX)
News/Info (e.g., Fox, MSNBC, CNBC)
Pop Culture (E!, MTV, Comedy Central)
Kids (e.g., Nickelodeon, Disney)
Sports (e.g., ESPN, Big Ten)
Sports PLUS (e.g., Regional Sports Network - so local teams, NFL Network)

The entry price for this unbundled option giving you more 'choice' of two channel packs - is $55 a month. Oh, and if you want the Sports Plus, you have to take the Sports and Sports Plus packs as your two choices (so god help you if you like sports AND have kids or an interest in News or anything else). Oh, and these prices probably don't include HD fees, and I'm sure it probably doesn't include DVR fees either.

If you want FOUR channel packs - again, without HD or DVR, it costs $75 a month.

So for $75 a month, you'll get about 80 channels. But today you probably pay around $75 a month for cable and get 180+ channels.

But now you get to choose! So it's good? Or something.

Long story short - people need to stop positioning 'unbundling' as a win for consumers. It's a win for a very select set of consumers - those that watch very little TV, but enough to want cable at some minimal level.

I'd love to actually meet one of these people - but frankly I doubt they really exist in any big magnitude.

What unbundling will do - is allow the cable companies to better price discriminate, and make more money off big consumers, while offering a minimal solution to hold onto cord-cutters.

But we all get to choose our channels - so I guess freedom from tyranny yay?

Thursday, April 2, 2015

Tech Bubble 2: Valuation Boogaloo

There's so much media attention on a technology boom. Maybe it's because I read Business Insider, but the amount of focus and VC investment in technology companies seems like we've passed over into 'Ludicrous Speed'

I checked some numbers real quick and there was over $48 billion invested in VC deals in 2014. That's a 61% increase in dollars from the previous year, with only a 4% increase in number of transactions.

So there aren't that many more companies raising money, there are mostly companies raising much MORE money than previously. These are headlined by your 'Unicorn' startups, a term that's emerged for companies with over $1 billion dollar valuations. Companies like Uber, which continuously raise tons of capital and increasing valuations to fund more and more growth.

But at some point the music stops, no? Many of the companies that raise increasing amounts of funding aren't profitable, and while they appear to have better business models than the startups of the first dot-com bubble, it's unclear whether many of these business are truly sustainable without increasing valuations and more VC dollars.

The companies are aided by the fact that it's pretty freaking hard to find good returns these days, with extremely low interest rates and an increasingly generalized consensus that equities are highly priced. That means there's lots of investors looking to put dollars to work and try and get big returns. I'll come back to that in a second.

It also concerns me when I read articles like this one

...more elite college graduates and MBAs are foregoing pinstripes and moving West.

Only 10% of MIT undergraduates went into finance last year, according to a recent New York Times article — a startlingly drop from the 31% who took Wall Street jobs in 2006. "Software companies, meanwhile, hired 28% of graduates in 2014, compared with 10% in 2006," it reports.

Similarly, in 2014 San Francisco and the Bay Area drew slightly more Harvard Business School graduates than New York.

Now I'm no advocate for banking jobs as the one and true calling - but if there's one thing I feel pretty comfortable in, it's that when you see MBAs crowding into an industry, it's time to get the hell out (and I feel comfortable saying this as a member of the club).

I've read a couple other pieces of news, and had some more conversations, with people at buzz-worthy startups, and frankly, what they are saying terrifies me.

They basically say that it's extremely easy to get money. People are offering them dollars with almost no questions asked, just trying to get into a deal. It makes it all the easier to see why valuations keep climbing if that's the environment we're living in.

But as valuations get higher and higher - one thing I'm really struggling with is what the hell are the exit opportunities? Once valuation reaches a certain degree - corporate acquisition from a strategic buyer becomes a tougher option. So an IPO then? There haven't been that many that have gone that route - and going there requires much more financial transparency and disclosure than these companies are used to. I don't know what the answer will be for these companies, but as long as valuations keep going up and the money is easy, I'm not sure anyone is asking.

Then I read this today

Silicon Valley insiders are taking advantage of soaring values for technology startups by creating a potentially lucrative side business.

Venture-capital firms such as Andreessen Horowitz and FirstMark Capital, along with a cast of prominent entrepreneurs and executives, have each raised tens of millions of dollars for impromptu funds that take a direct stake in a single startup.

These funds, which often come together in a matter of days, give institutional investors, friends and business associates exclusive access to highflying companies. The funds also let the venture capitalists invest far more money in a company than they otherwise could. In many cases, the funds are blessed by the startups, which see them as a way to raise big sums quickly.

If you don't want to read the article - I'll summarize. VCs are creating side vehicles to their funds to raise additional capital for specific startups. Their existing funds are too small for such increasing valuations - so they go to existing LPs or other investors directly - to raise capital for a company they've already put money behind. For potential investors - there's very little information shared about the startup, and they still have to pay similar carried interest to the VC (even though the work of sourcing the deal was already done). And investors are literally throwing money at these vehicles.

It boils down to the chance to 'get in' at a super-high valuation startup, with no real data on company performance, and a similarly rich VC fee structure - and the things are oversubscribed in a matter of hours.

Stop this thing, I want to get off.