Tuesday, March 18, 2014

Curse of the Mogul

I was blown away by Curse of the Mogul by Knee, Greenwald and Seave. If, like me, you have enjoyed Bruce Greenwald's other books, particularly Competition Demystified, you'll probably love this one too.

The authors take a microscope to the media industry, viewing it through the lens of the value investor. A great deal of conventional wisdom about this industry is turned on its head, as the reader is introduced to some of the rich and famous players in the industry. Unfortunately, many of these moguls have generated poor returns on capital. While management has likely gotten rich, shareholders in many cases have not. The authors surmise that these moguls not only have misaligned incentives, but don't actually know where their competitive advantages come from.

The reader is then taken on a competitive analysis of the massive media industry, using the same framework as that developed in Competition Demystified. The authors divide the industry into three groups: content creators (e.g. a movie studio), packagers (e.g. a business information company that aggregates data for its subscribers, or a tv station that purchases original content), and distributors (e.g. a movie theater, or a company that runs cable to households).

While the lines are often blurred between these groups within individual companies, this division makes it easier to analyze each segment of the vertical. Each of these groups have different success factors that are likely to lead to competitive advantages. For example, a database company that has integrated its software with its customers' would enjoy high switching costs and thus may develop a competitive advantage. A book publisher, on the other hand, benefits from no advantage when the content it creates is discrete (e.g. a one-off book) but can benefit from a continuous series, due to a demand preference on the part of customers.

In my opinion, the book contains a great mix of the theory behind various sources of competitive advantages, and real-life cases that demonstrate these advantages. I strongly recommend the book to all value investors and anyone who works in media.

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