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July 21, 2006 4:00 pm

Cody Willard: Cable could win the battle but lose the war

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My investing is based on a central thesis about the “content revolution” – the inexorable process by which the distribution of content, such as songs, books or films, is being taken from traditional distributors and democratised through online technology.

Not everyone in the content business will be a winner, but owning and distributing content that people find entertaining has been a great business. Even the companies that lose out because of the revolution are not doomed to death.

Mere survival is not an investment thesis, however, which is why those who have most to lose should be sold. I will focus in particular in cable networks, as they might appear to have a lifeline from new technology.

We are not about to stop watching those antiquated broadcast television stations just because we can download shows on to our iPods, nor will we stop reading print newspapers and magazines just because we can access them online. Rather, we will all consume more content, in more different ways, than ever before.

Then there is the distribution side of the equation. Distributors who hit critical mass and remain agnostic on content have condemned traditional forms of distribution to secular decline. This means Google and Apple, but not Yahoo, which foolishly creates its own content to push on its users. All the cable networks, the newspapers, the cinemas and the radio stations have lost secular growth. All these models are dying.

But they are not dead. For example, high definition (HD) broadcasting is undergoing exciting secular growth, and as consumers adopt the technology and upgrade television sets and set-top boxes they will also increase the fees paid to cable providers. Consuming broadcast content may be in decline as the accessing of content through the internet continues its secular growth trend but the two are decidedly not zero sum.

In considering the possibilities for profitable business models, ask yourself in how many different places, at how many different times and using how many different devices you watched video this week?

If you are a business traveller, you have probably seen something, dictated by the broadcaster, at the airport, in a bar, in your hotel room and at home. If you have been in a sports bar or if you are an early adopter, you probably watched some of that content in HD quality. And, painful as it is to watch non-HD programming after seeing the alternative, you have probably also been exposed to those old fashioned signals.

If you are one of the millions of people who own a video iPod you might have pulled some content and watched an even lower quality version. And you were happy about it, if only because of how flexible and easy to access that content has proved to be.

Tens of billions of dollars are being invested in all kinds of new means of distributing, accessing and displaying this content. And there is no one technology that renders all others obsolete.

Will the internet ever be able to deliver real-time, live HD events, such as the World Cup, to your 102” HD projector in 5.1 surround sound? Probably, but not for another 20 years or so. In the meantime, when you want to watch a live event in HD you will find someone pushing it out and you will “tune in” to that delivery. That will keep the purveyors of such technologies, such as Comcast and CableVision, in business. It may well even see their share prices rise in the short-term.

But it will not help them overcome the secular decline in viewership as we grow accustomed to grabbing content from the net – content that will soon include non-live HD content that will indeed play on your 102” HD projector in 5.1 surround sound.

So, in spite of the noise created by the growth in HD, it is wise to buy content owners such as Disney and Lion’s Gate and sell content pushers such as Comcast and CableVision.

Cody Willard is a hedge fund manager at CL Willard Capital

cody@clwillard.com

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