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The legislative situation
Capitalism moves in cycles and if society is not careful, monopolies can keep growing and charge consumers excessive prices. Mexico recently introduced legislative reform to bring more competition into the Mexican telecom and media sector. This will have a negative impact on some of Televisa’s operations, but it will also drive the firm to innovate and grow.
Televisa does have some hedges against changing Mexican legislation. A number of the company’s divisions have substantial operations outside of Mexico. In the first quarter of 2013 around 64% of the publishing division came from outside Mexico.
Within the world of online video, content owners have the upper hand. They are very influential in setting licensing rates. Televisa’s strong telenovela portfolio gives it an upper hand among companies that stream content for Latin consumers.
Competing firms
With Grupo Televisa SAB (ADR) (NYSE:TV)‘s move into the English-speaking U.S. market, it has come into closer competition with Time Warner Inc (NYSE:TWX). Time Warner is a very strong competitor with a substantial content portfolio. Its HBO division produces the popular Game of Thrones series. Time Warner Inc (NYSE:TWX) is looking to spinoff its publishing arm to help it to focus on the more profitable T.V. and media operations.
Time Warner Inc (NYSE:TWX)’s earnings before interest and taxes (EBIT) margin of 20.7% and return on investment (ROI) of 7.6% are lower than Grupo Televisa SAB (ADR) (NYSE:TV)’s respective EBIT margin of 25.9% and ROI of 8.0%. In the short term, the spinoff of Time Warner’s publishing division and the implementation of Mexico’s telecom reform law will probably boost Time Warner’s numbers and decrease Televisa’s numbers. Regardless, Televisa’s five year revenue growth rate of 7.4% and Time Warner’s five year revenue growth rate of -9.2% show that Televisa is on the right side of U.S. demographic changes and Mexico’s economic growth.
The online competitors
Online streaming companies like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) will benefit from Mexican telecom reform, as the country currentlysuffersfrom expensive and limited high speed internet. Experience shows that this may not be enough for Netflix, Inc. (NASDAQ:NFLX) to make a profit in the country.
To be profitable in the English speaking market Netflix, Inc. (NASDAQ:NFLX) has been forced to produce its own content. Producing this content is not cheap. Netflix spends around $4 million per episode for a number of its series. To really make a dent in the Mexican market Netflix would have to start producing its own content. It is more likely that Netflix, Inc. (NASDAQ:NFLX) would try and focus on the English-speaking market and simply license Televisa’s content. Televisa already made $57.3 million from Univision’s royalty fees in the first quarter of 2013.
Online streaming companies are not like the profitable old media giants. Netflix, Inc. (NASDAQ:NFLX) has a profit margin of 0.5%, an EBIT margin of 1.4% and a ROI of 1.5%. Amazon.com, Inc. (NASDAQ:AMZN)’s numbers are quite similar with a profit margin of -0.1%, an EBIT margin 0.6% and an ROI of -0.8%. Amazon.com, Inc. (NASDAQ:AMZN) is able to bear losses from its Amazon.com, Inc. (NASDAQ:AMZN) Prime streaming video streaming service because these customers bring in more revenue in other areas.
Conclusion
Grupo Televisa enjoys a powerful position in Mexico and played an important role in electing Mexico’s current president. While the recent anti-monopoly legislation will hurt some of Grupo Televisa SAB (ADR) (NYSE:TV)’s Mexican operations, it is highly unlikely that Mexico’s president would completely throw one of his strongest supporters under the bus. The company is profitable, diversifying itself by moving into America’s English speaking market and licensing more of its content. It a good long term investment.
Time Warner is another good investment, but Grupo Televisa SAB (ADR) (NYSE:TV) offers more growth and a surer way to play America’s growing Latino population. Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) are good technology plays, but the lack of profits mean that investors must be ready for a wild ride.
The article Don’t Miss the Opportunity in Grupo Televisa originally appeared on Fool.com and is written by Joshua Bondy.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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