Racing and Rockstars: Investing in the Rapidly Changing Media Industry
At Diamond Hill, our long-term time horizon and intrinsic-value framework position us well to invest in industries that are changing rapidly. In the media space, we do so by attempting to own businesses with valuable content, advantaged distribution, and attractive business models.
The internet’s unlimited shelf space and the frictionless experience it provides to both consuming and creating content has driven substantial fragmentation of consumer attention. This is troublesome for media businesses who are paid in one way or another for their ability to aggregate engaged audiences at scale. However, intense competition for consumers’ leisure time amplifies the value of content that consumers will pay for and engage with on a consistent schedule. Two types of content that fall into this bucket are sports and live music. Both are well positioned to leverage distribution opportunities enabled by the internet to increase the value of and be compensated for their content. Our view is expressed through our investments in Liberty Formula One and Live Nation.
Liberty Formula One
Liberty Formula One owns Formula One (F1), a global motorsport racing league. Prior to 2017, F1’s ownership prioritized short-term financial outcomes over the long-term health of the sport. This led to a significant deterioration in viewership and lack of resources necessary to monetize its fans. Liberty Media acquired F1 in January 2017 and installed a skilled management team that was empowered with a long-term time horizon and a fan-first focus.
Despite the decline in viewership and lack of digital presence, F1 still possessed hundreds of millions of fans across the globe. This gave us confidence that F1’s content was unique and could not be replicated. Moreover, we found that F1 earned significantly less revenue per fan relative to other sports properties. In combination with F1’s cash-generative business model and the new management team’s appropriate focus on building the long-term value of the sport, we believed F1 had the necessary components to unlock its intrinsic value.
Over 2017 and 2018, new management correctly sacrificed short-term profitability to invest in the long term. This included broadcast deals with greater reach, significantly enhancing the sport’s digital presence, starting a direct-to-consumer streaming service, and building sponsorship, research, and sporting departments. The fruits of these efforts started to materialize in 2019 via financial and viewership growth, but we believe the best is yet to come. In its negotiations with racing teams for its new governance agreement in 2021, F1 is seeking to deliver changes geared toward increasing parity. This includes more equitable prize money distribution, aerodynamic improvements that allow closer racing, and implementing the sport’s first cost cap. If successful, these changes will deliver greater excitement on the racetrack, driving an increase in the size and engagement of its fanbase. This yields greater value to the teams and business partners, leading to increased cash flows for F1 that are then reinvested into growth initiatives to attract more fans, supporting the continuation of this cycle. We expect secular trends will feed this cycle, as traditional broadcasters need live sports to remain relevant, new broadcasters (Amazon, Facebook, YouTube, etc.) can use sports to take audience share from television, and brands seek to sponsor sports like F1 due to the rare brand awareness it generates.
We monitor risks, such as the new governance agreement, high leverage, and execution, vigilantly to determine if our thesis is still intact. Thus far, we are pleased with F1’s progress and expect its content and distribution improvements, cash flow generative business model, and secular tailwinds to continue. This will allow the business to unlock and grow its intrinsic value over the long term. If we are wrong, an adequate margin of safety is provided by Liberty Formula One’s investments, including a 33 percent stake in Live Nation and a 15 percent stake in the Atlanta Braves.
Live Nation is a global live events business. Its primary content, live music, cannot be replicated online and benefits from consumers’ growing preference to spend discretionary income on experiences. Due to the fragmented nature of the industry and music artists’ dependence on touring for income, Live Nation’s global network of venue relationships allows them to procure content at scale.
The value of this content is validated by strong attendance and pricing power. In 2019, management expects nearly 100 million fans will attend their concerts. Additionally, despite consistently increasing ticket prices over the last decade, the secondary market charges a 70 percent average premium to what Live Nation sells its tickets for on the primary market.¹ This gap will gradually close over the long term, as artists have a strong say in how their tickets are priced on the primary market and seek to avoid alienating fans.
While concerts have low margins, they bring fans in the door who generate profits across the rest of the business. For venues Live Nation operates, it keeps ancillary revenues like concession sales and VIP experiences, which have a 55 percent profit margin. The company also earns 60% profit margins by offering brands access to its fans via sponsorship and advertising. Additionally, Live Nation owns Ticketmaster, which provides a compelling value proposition to venue owners: industry-leading ticketing solutions combined with access to the best content. Finally, ubiquitous mobile use and the direct relationship with customers enabled by the internet allows Ticketmaster to offer digital ticketing. This provides customer data, which Live Nation can leverage to attract fans more efficiently, sell targeted solutions to its sponsors, and increase Ticketmaster adoption.
Like F1, Live Nation benefits from a virtuous cycle. Global scale in venue relationships attracts high-quality artists, which attracts more fans, who then generate profits across the rest of the business. This cash flow funds global expansion and the cycle repeats. Secular tailwinds spin the cycle faster as consumers continue spending on experiences that cannot be replicated online and the internet enables digital ticketing. While Live Nation is not statistically cheap and risks exist, such as regulation and increased prices potentially leading to lower attendance, we believe the business’s ability to grow its intrinsic value over the long term is underappreciated.
Investing in disrupted industries that are changing quickly is difficult, but we believe our long-term, intrinsic-value philosophy enables us to navigate these waters. In media, this is reflected by our preference to own businesses with valuable content, advantaged distribution, and strong business models. To mitigate the risk of our theses being wrong, we diligently monitor company-specific risks, cultivate an open mind regarding how the industry is changing, and preserve price discipline by investing in businesses trading at discounts to our estimates of intrinsic value. Liberty Formula One and Live Nation represent two examples of this framework in action, though it is also applied across existing media holdings and in the evaluation of new opportunities.
¹Source: Live Nation 2019 Investor Day.
As of November 30, 2019, Diamond Hill owned Liberty Media Corp. Series C Liberty Formula One (equity) and Live Nation Entertainment, Inc. (equity).
Originally published on December 12, 2019.
The views expressed are those of the research analyst as of December 2019, are subject to change, and may differ from the views of other research analysts, portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.