books about online stock trading, forex, futures, stock investing, market, trading systems
Pick Stock Economic Moats in Media
Back to contents page

Media firms enjoy a number of competitive advantages that help them generate consistent free cash flows, with economies of scale, monopolies, and unique intangible assets being the most prevalent. Economies of scale are especially important in publishing and broadcasting, whereas monopolies come into play in the cable and newspaper industries. Unique intangible assets such as licenses, trademarks, copyrights, and brand names are important across the sector.

Monopolies, Licenses, and Deregulation

Look for companies that hold monopolies in their respective markets. These companies tend to have very strong pricing power and excellent economic profits. One of the bigger risks with monopoly power is running afoul of regulators, but as long as this relationship is well maintained, media firms with monopolies should be able to increase profits for a long time. And as profits grow, so should the value of the firm. Newspapers are the best example of this competitive advantage—few cities can support more than one large daily newspaper, which means the incumbent paper in any market generally has a relatively easy time holding off competitors.

Licenses can also lead to strong profits, especially in the television and radio broadcasting industries. Even though the participants in these industries don't necessarily enjoy monopolies, it's tough for new entrants to break into the field. That's because a business must have a license from the Federal Communications Commission (FCC) to transmit a signal in a certain geographic area. Licenses protect media firms from competition because only a limited number are available in a given market. In addition, the FCC usually renews licenses for the maximum eight years for the broadcasters who own them.

Deregulation is also a key factor. Thanks to deregulation, companies such as Fox, Viacom, and Clear Channel have been able to buy multiple stations in the same market. This serves to further reduce competition and typically leads to higher profits because these companies can spread out their programming and back-office costs. Some parts of the media sector remain at least partially regulated; any future deregulation could spur even greater consolidation and, consequently, higher profitability. Newspaper, television, and radio companies with strong balance sheets would be the most likely to benefit from any future deregulation.

Smarter trading The art of day trading Trading Chaos Sane Investing In An Insane World
Beat The Odds In Forex Trading