Aggregation Theory & NXST
I’m working on a sell of Nexstar Media Group (the largest television station owner in the US) right now. I’m focusing on the fundamentals of NXST’s business model and the media landscape. To frame my part of the pitch, I’m leaning heavily on Ben Thompson of Stratechery. Thompson’s series on aggregation theory, is particularly relevant. Today, I’m summarizing Thompson’s analysis – more for my own understanding than anything :) – and applying it briefly to NXST.
We can break down the consumer market value chain into three parts: suppliers, distributors, and consumers/users. Winning in any of the three markets is best achieved by establishing a horizontal monopoly in one of them or integrating two to earn a competitive advantage in delivering a solution to the third.
Pre-Internet, winners mostly emerged by controlling distribution. A clear example were printed newspapers. Papers were the principal means of delivering content to consumers. They integrated from distribution to supply (creating content) and saw outsized resulting returns in the advertising business. We see a similar pattern in book publishing (distribution + control of authors), video (content ownership + broadcast capability), and elsewhere.
The emergence of the internet, unsurprisingly, fundamentally altered these dynamics by,
bringing the cost of distribution to/near zero, invalidating the advantage of distributors merged with suppliers
and, bringing transaction costs to/near zero, enabling integration between distributors and end consumers at scale.
A few key takeaways from the digital sea change:
Distributors are no longer solely competing by integrating with suppliers. Instead, suppliers have been commoditized, and consumer experience is a chief priority.
In turn, incumbent winners (like newspapers) started losing to new players who favored aggregation over backward integration.
Who are the aggregators? I’ll focus on Netflix (NFLX), since we’re talking media today.
Historically, networks purchased content (supply) and dominated broadcasting (distribution). But, NFLX modularized supply in a few ways – check out this note I wrote if you want more detail.
Notably, Hastings innovated by (1) modularizing broadcasting availability with a content library available all the time in any order; and, (2) “integrating content purchases with customer management, enabling a virtuous cycle of increased subscription demand and increased purchase capability” (Thompson captures this very succinctly).
Now, let’s turn back to Nexstar. If we buy Thompson’s theory (I do) that the big winners in the post-Internet age will be the next-gen aggregators, not the legacy distribution to supply integrators, then NXST’s a bad buy (or hold) for GUSIF.
The Irving, Texas based media company makes money primarily by selling local ads through each of its stations (31% of revenue) and earning fees from cable, satellite, and multichannel video programming distributors (MVPDs, think DirecTV or Fios) for the use of its content (58% of revenue).
Setting aside cord cutting, falling DTV ad spend, and resultant slowing, inadequate investment in quality content – three major headwinds for NXST – we see that the company’s fundamental business model is not equipped for the post-Internet age.
Nexstar has failed to capture a single enduring market (note the government restrictions on monopolization of broadcasting) and is unable to integrate two parts of the consumer value chain like NFLX and its (relatively) less competitive streaming peers.