Schindler Financial Newsletter Q4 2019

Aaron Schindler

Aaron Schindler

Investing in Streaming Wars & 5G:
Making Gigabytes Vs. Megabytes

By Robert Lovenheim. Edited by Aaron D. Schindler, CFP ®

Copyright 2019 Robert Lovenheim & Aaron D. Schindler, All Rights Reserved

December 2019 – Pay attention to the terms, “water cooler” and “5G cellular network technology.” In the years going forward, the success of a company and its equity shareholders in the telecom and new media entertainment industry is going to be determined by both.

“Water cooler” refers to a phrase widely used in linear TV (network and cable) to describe hit shows that people talk about around the office water cooler. Word of mouth is always the best advertising, especially in the social media era. The clout that content producers will have with  telecom distribution companies is by producing both hit and niche shows that people around the world want to view.

What is 5G?  Simply, a name for “5th Generation” wireless that will use speeds so fast that a 2-hour movie might be delivered in minutes. But to achieve these speeds requires billions of dollars of investment in a totally new system featuring fiber optic cable and sophisticated repeaters and routers unlike anything today. The principle owners of 5G networks are or will be AT&T, Comcast, Sprint, T-Mobile, and Verizon. DISH may also be a significant competitor with satellite distribution at very fast speeds.

Much press has been lavished on the “streaming wars” between Netflix, Disney, ViacomCBS, Apple, Hulu, Time Warner, Comcast (NBC Universal) and others. This is only a distraction for those who can’t see the forest. The real competition is not against each other, but for space on the 5G cellular networks that will be the pipelines of the future. This is underscored by AT&T’s purchase of Time-Warner and Comcast’s purchase of NBC/Universal. Both are telecom distributors who are hedging their bets by also owning content producers.
I select the securities in which many of my clients are invested.  In technology and new media, my method is to first differentiate between “water cooler” content producers and “telecom distribution” companies that are or will be rolling out 5G networks.

There will be winners in both arenas. The content provider that can successfully predict public taste and generate enough viewer loyalty will be in the best position to negotiate with the telecom distributors for better prices and favored bandwidth. Much has been written about “network neutrality” on the present-day Internet. The “open” Internet that has served us for some thirty years is now clogged, gridlocked, and slow.

The replacement: 5G wireless depending on a world-wide fiber-optic network as its backbone. It will not be free. You can’t get on the Acela with a subway ticket, and you won’t get on the high-speed 5G pipes either. The “free” Internet will become the lightening-fast, high quality path for data and entertainment. It will also run everything from our refrigerators to our cars. And everyone will pay a price.

How will we pick the winners in the race to create popular content and the concurrent race to roll out 5G?

The traditional wisdom of content production is to create hit shows. These get the most “water cooler talk.”  Or do they?  We live in an era of big data, where the major players in every industry are guarding the data trove they gather from their customers. Amazon, Netflix, and Apple TV+ are far ahead of the others like Disney and HBO MAX in already having vast knowledge of the tastes of their subscribers.

“Water cooler talk” is no longer only about the hit show everyone saw on NBC last Tuesday. It can be about the obscure documentary on food that millions saw, or the series on a Colombian drug lord. These are hits because they have loyal followings and viewers stick with the service hoping for more. How does this data relate to telecom consumer subscriptions? What is the subscriber revenue certain programs represent? How will viewer demographic and preference data make a content producer more attractive to the telecom distribution company and pump leverage to cut a better distribution deal?

Just like Apple’s enormous success taking 1/3 of the revenue generated by its sales of other companies’ technology (the Apple App Store), the telecoms will likely take a large slice of revenue from content producers (source: Telco Review 10-23-19). After all, they will argue, we have spent vast sums providing the network to distribute your programing.

Capital investment is the key on the telecom distribution side. Each of the established US telecoms has been spending billions buying spectrum at periodic auctions held by the government. Spectrum is the name given to the frequencies on which radio, TV, and satellite signals must travel. Low-band frequencies travel farther, high-band frequencies carry more data faster. Each telecom has different stockpiles of frequencies. But to transmit these signals takes high-speed, fiber-optic cables across cities and across the country. When the cables surface, the data must be sent by wireless antenna or via router to the customer’s location.

Here, Verizon appears to be the leader (source: Digital Trends 11-20-19). Since 2005, the company has been wiring major cities with its fiber optic system (much of it to support its FIOS consumer broadband). AT&T must create a fiber-optic and wireless repeater system focused on consumers. T-Mobile and Sprint, awaiting merger approval, have acquired a vast trove of frequencies, but are far behind Verizon and AT&T in deployment (source: Digital Trends 7-26-19). Comcast is still a cable TV company dependent on a broad swath of revenue from traditional cable operations (source: Forbes 9-9-19). Comcast also wants to be a player in the 5G era, but its plans for its xFinity 5G service are still vague. DISH has announced its own 5G network, based largely on spectrum acquired from Sprint. But details of how it will work and how the satellite company will deploy it are still to be made clear.

One prediction is that the telecoms will either pool resources or rent space to competitors other than each building its own delivery system or 5G network.

Delivery of signals for any of these telecom companies relies on another tier of companies that specialize in the equipment necessary to send and route 5G data around the world.  Datang Telecom, Ericsson, Huawei, Nokia, Qualcomm, Samsung, ZTE, Cisco and Altiostar are some. If 5G was a railroad, these companies would be making the ties.

As investors, should we bet on cellular technology stocks with the fastest network technology to deliver content like Verizon, hybrid telecom-media content stocks like AT&T-Time Warner, or media content stocks like ViacomCBS?

In making a decision, we might also consider a stock’s price, forward valuation, and dividend. Does a higher estimated future valuation and higher dividend reduce the influence of luck and increase the chances to profit? As an advisor, I always think about delivering gigabytes versus megabytes.

For comments and questions, please contact Aaron D. Schindler, CFP

Aschindler@wagllc.com, 917-715-2233

Copyright 2019 Robert Lovenheim and Aaron D. Schindler CFP, All Rights Reserved

Not for reproduction without permission and consent by Lovenheim and Schindler

The above may contain general information about investment products. The information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any particular investment product. The opinions are solely of the representative/financial advisor and not of Guardian/Park Avenue Securities/Wealth Advisory Group or its affiliates, subsidiaries or other representatives/advisors. Such information is directed solely to individuals who reside in jurisdictions in which a representative is registered. Any subsequent direct communication with a consumer and/or prospective client shall only be conducted by a representative that is registered in the state where the consumer and/or prospective client resides.

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Aaron D. Schindler is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Ave, 9th Floor, New York, NY 10017, (212) 541-8800. Securities products/services and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Wealth Advisory Group LLC and Robert Lovenheim are not affiliates or subsidiaries of PAS or Guardian.

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