TelevisaUnivision - A Unique Media Asset
One of our portfolio companies, Grupo Televisa (NYSE: TV), owns 45% of TelevisaUnivision (henceforth, TVU). TVU was created by merging Univision in the US with Grupo Televisa's content and media assets. These two companies have been closely linked for decades, with Televisa providing licensing content to Univision for the majority of its entertainment programming until the merger was completed in early 2022.
TVU now has 60-65% market share in radio and TV in Mexico, >60% market share in Spanish-language TV in the US, significant content production capabilities in Mexico City, and an unencumbered IP library that is one of the largest in the world. This platform was used by TVU to launch a streaming video service called Vix across the Spanish-speaking countries in the Americas. It is the leading Spanish content company in the world. In this post, we will focus on TVU's push into the streaming world.
Media Detour
Before diving into TVU and Vix, it's worth doing a quick detour through the challenges facing most media and content companies so that we can compare and contrast with TVU's opportunity. The traditional video content ecosystem has been under pressure for many years in the US. There are many reasons for this, but we will offer a simplified summary below.
Content companies were experts at monetizing every small change to the distribution of their content, which was great for their businesses initially but ultimately opened the door for newcomers like Netflix (NASDAQ: NFLX) to license content libraries, acquire customers through a pure on-demand offering, and build a big enough platform to fund proprietary content that would continue to draw new users and which would diversify its risks away from its legacy content providers. A customer could watch unlimited Netflix on demand for less than $10/month, while that same customer would pay $60-100/month for a traditional TV bundle and have limited on-demand options. Because of the superiority of Netflix's on demand, any device streaming platform, the price/value differential was imbalanced relative to consumers' consumption patterns. Media companies loved the pure margin IP licensing revenues and thought they could get away with continuing to raise prices on linear TV distributors (cable/satellite/telco companies, which in turn raised prices on pay TV subscribers) while also licensing IP to streaming platforms like Netflix, and slowly ramping up their own streaming platforms in parallel. For a time, it worked, and media companies enjoyed healthy growth and margins. But the growth of on demand services accelerated cord-cutting, and the buyers of streaming content rights (like Netflix) created significant proprietary content, reducing their willingness to pay for third-party content to populate their services. This also increased the competition for high-quality content.
The quality of media companies' revenue streams has been in decline for many years, and most have pivoted to operating their own direct-to-consumer (DTC) streaming services as the long-term solution. By pushing their best content to their own services to accelerate conversion to the end game, they further degraded the quality of their linear TV offerings which hurt their distributors and again pressured the price/value of the traditional bundle. It's been a tough evolution for them, and the end state of DTC streaming involves a customer base that they will have full engagement with, but which comes with new costs (customer acquisition, customer service, higher content intensity, etc.) and benefits (full transparency on customer behavior, direct contact information, etc.). On balance, we believe traditional media companies will have worse economics in the DTC streaming era than they did in the linear TV era. This is exacerbated by their need to program for on demand, random access content which is costlier and more demanding than programming for a linear TV schedule. If viewers can binge on a whole season of a show in one afternoon on a DTC service rather than watching one episode per week on linear TV, media companies must provide many more options or else risk elevated subscriber churn since no-contract subscribers can turn off streaming services month-by-month.
Back to Vix
Why go through this detour? Because TVU is a content company that faces a more favorable fact pattern and it's important to understand why. Let's walk through why TVU is better positioned than its US peers:
TVU has not sold its IP to anyone else. If you want to watch its content, you have to go through TVU's properties. This is different from US media companies. Its library has over 300,000 hours of content, all of which is exclusive and has generated >60% market share with its target audience over its life. This creates optionality - it could license its content, or it could exploit the content itself.
TVU has a vertically integrated, massive scale content production operation. In 2022, its operations produced 86,000 hours of content. It has on- and off-screen talent schools that feed directly into its studios, producing 90% of the talent used in production. It produces the vast majority of its content in Mexico City within its owned and operated studios, with internally-sourced talent, at a fraction of the cost of producing in the US (65-80% lower costs for like-for-like content).
Because TVU owns, controls and creates the vast majority of its content, it has the ability to more effectively manage its content strategy across distribution platforms so that they create synergy. It does not have to put all its best content on Vix at the expense of linear TV. For example, it can broadcast the biggest soccer matches on linear TV and/or ad-supported Vix, but it can reserve other soccer content for paid Vix subscribers, thereby optimizing its monetization strategy.
It has an efficient customer acquisition and reacquisition engine, powered by its >60% market share in its core Spanish-speaking US and Mexican markets, which combine to about 180m people and $4 trillion of GDP. Its top-funnel marketing can be accomplished very efficiently on its own media properties given its reach and its daily interaction with users, which is especially effective because it does not run a full ad load in Mexico (i.e. it can run "free" ads for Vix by adding slots), its largest market. This compares to the largest media company, which has audience share in the teens and is in decline.
TVU has minimal legacy distribution into the rest of the Spanish-speaking world. There are 600m Spanish speakers spread across the world, but TVU had directly reached less than 1/3 of them in its legacy business. The company has an opportunity to exploit and monetize its content beyond its two core markets through its Vix offering. While many US companies are dealing with poor DTC-for-linear substitution effects, TVU has an opportunity to expand its TAM meaningfully.
On the last point, we can see from SensorTower app rankings how Vix is performing in the Entertainment category in different markets, ranked by population. We look at Google Play rankings because it has >90% market share in these markets.
It's important to recognize that Vix is like Spotify - it offers both a free, ad-supported tier and a paid tier. Unlike Spotify, the paid tier doesn't just eliminate ads - it also makes available exclusive content. Users can easily switch between both tiers of service and the free tier is the leading channel to acquire premium subscribers. Interestingly, paid subscribers that churn off often stay engaged in the free tier.
Source: SensorTower
Vix is a clear leader in entertainment across the Americas. The most popular apps that perform similarly to Vix are Disney+ and HBO Max, which command content and marketing budgets significantly larger than Vix's. TVU spends about $2b in content costs per year, while Disney spends over $30b and Warner Brothers Discovery spends about $10b. As mentioned above, TVU produces similar-quality content at a significant discount because of its vertically integrated content production in Mexico City, so its $2b of spend would compare to $5-10b of US-equivalent spend on a like-for-like basis. Interestingly, Vix is consistently a top-20 Entertainment app in US, despite addressing only the Spanish-speaking population (~50-55m people).
Although this is a young service that is still ramping and optimizing its content lineup, it has been reported that Vix has over 30m monthly active users (MAUs) and that its revenue run-rate exceeds $500m. This is a small drop in the bucket relative to the size of its opportunity, essentially generating less than $2 per year, per capita in its target markets, including paid and free, ad-supported users. Importantly, TVU expects Vix to be profitable by mid-2024, less than two years after its full commercial launch. This is occurring even as TVU's core, non-Vix businesses are growing with improved ad sales execution, a growing audience (very unique), and strong content performance.
Competitively, there are few scaled options for Spanish speakers in the streaming world. Service like Netflix have Spanish-language content, like Narcos, Money Heist (La Casa de Papel), and others. Others like Pluto TV and Tubi have dubbed Hollywood content in Spanish and have developed some of their own regionally-produced shows, but TVU has the largest native Spanish-language content library and the largest capacity to produce new content for its target market. Additionally, TVU has access to important soccer (and other sports) rights that are a big draw for Vix.
Vix's future growth will be dictated by its continued engagement with its audience - for both free and premium content - and its ability to onboard advertisers into its streaming video ecosystem. Latin American companies are less developed than ones in the US when it comes to adopting streaming video advertising, so this will be a gradual process, and it is reasonable to expect the US to be the leader in Vix advertising for some time.
As Vix evolves and grows, it will become a meaningful contributor to TVU's growth, EBITDA and free cash flow. Even though TVU is private today, there is a desire from Wade Davis (TVU's CEO and former CFO of ViacomCBS) and the management team to go public as Vix transitions to profitability, presumably within the next 9-12 months. Part of that effort may be to recapitalize the balance sheet and reduce the net leverage at TVU. It will be a very interesting and unique media asset to watch as that process unfolds. We think many investors will take a favorable view on TVU's market leadership and growth opportunities in the global Spanish-speaking market.
Closing
Recurve's primary reason for owning Grupo Televisa is its 45% stake in TelevisaUnivision, a dominant franchise with significant future growth opportunities that are differentiated in the media sector. Grupo Televisa also owns the largest cable operation in Mexico and a majority stake in Sky Mexico, but pay TV and broadband markets are very competitive market in Mexico due to overbuilding and are not attractive investments on their own - even though they generate cash flow. Nonetheless, we believe Televisa's stake in TVU alone will be worth significantly more than the current market value of Grupo Televisa, especially as Vix grows and becomes profitable. This value should be recognized in the market as TVU reveals more operational and financial data on Vix and/or when the company gets a proper mark-to-market valuation from investors.
