Bollore: Streaming Music & Cash Flows

Our purchase of Bollore was never about Bollore. Now that we have got you confused, let us describe Bollore. It is a two-hundred-year-old French conglomerate that is run by Vincent Bollore. Over the last thirty years he has created tremendous value for Bollore shareholders (the stock is up more than 20x since the mid-’90s). We think of Vincent as the John Malone or Carl Icahn of Europe – his strength is not in running businesses but in identifying undervalued assets, taking control of them, and unlocking value. In other words, he is a great capital allocator. Bollore’s core business has two operating divisions: In transportation, it owns 17 ports in Western Africa, and a logistics business in Europe; and in renewable power, it owns Blue Solutions, a transportation-focused battery manufacturing business. The African ports are very good businesses. They are legal, regulated monopolies; they collect a fee on any good that enters or leaves the western side of the continent. Blue Solutions is on a twenty-year journey of designing batteries for electric cars and busses. Today it is still losing over a hundred million dollars a year. Bollore announced recently that either Blue Solutions will get to profitability by mid-2020 or it will be shut down or sold. We don’t know what Blue Solutions is worth – we think the value fluctuates between zero and some positive value – but today, because the company is losing money, the market is imputing negative value to this business. Bollore also owns 25% of Vivendi, and that is the sole reason we bought the stock. Vivendi’s prime asset is Universal Music Group (UMG), the largest music label in the world, which owns around 30% of the music created in the Western hemisphere. It is the home of Lady Gaga, Mariah Carey, Queen, Prince, and many other artists. Music sales were one of the first casualties of the internet – they were the first to suffer from online piracy. Apple’s iTunes was supposed to be a lifeline to the industry, but it did not make things much better – instead of buying $20 albums, consumers were able to buy one song at a time for $0.99. The music industry was saved by streaming, by the Swedish company Spotify to be exact. Spotify was started in 2006. At the time Sweden was the worst market for the music industry – online piracy was close to being endorsed by the government. Daniel Ek, the Spotify founder, went to music labels and offered to pay them an annual fee per Swedish subscriber for their catalogs. The labels had little to lose, so they agreed. Spotify discovered that given ease of use, unlimited choice (you can literally find any song ever created on Spotify) and a low monthly fee, people will default to paying for music rather than buying one song at a time or pirating (stealing) it online. After the successful experiment in Sweden, music streaming swept the rest of Europe and then came to the US. Music industry revenues peaked in 1999 at $21.5 billion and bottomed in 2015 at around $7 billion, but in 2018 they hit $19 billion, and we believe music sales have a long way to go, for several reasons. First, we have to make up for twenty years of stagnation, and over the last twenty years global population increased by almost 30%. Second, streaming will allow Western music to finally be monetized in the rest of the world, that is, the countries inhabited by the six billion-plus people who live outside the US and Western Europe, who did not always pay for music in the past. Third, the size of the market will increase because domestic piracy will decline. In the ’80s, if you liked the latest Queen album, you’d make a copy of the record to tape and give it to the girl you were trying to impress. In the ’90s you’d do this with a CD, and in the 2000s with a thumb drive. You never thought of yourself as a thief or music pirate, but with every copy you made you were stealing a potential sale from Queen. When I say “you,” I really mean myself – it’s so much easier to put point fingers at others. Sorry, Freddy Mercury and Brian May. This was socially acceptable behavior then, and thus the peak $21.5 billion industry sales in 1999 understated the true size of the music market. Today, if you’d like to share that Queen album, all you need to do is text your Spotify link, and if the recipient is a subscriber they can listen to it instantly. Finally, the size of the market is likely to grow because it is easier to listen to music now than at any point in history. Today every person who owns a smartphone (81% of the population in the US) basically has a “Walkman” in their pocket. Smart speakers bring music cheaply into every room of the house. The ubiquity and cheapness of the internet will lead to connected cars (my Tesla Model 3 comes with a built-in wireless service), and streaming music will be just another app in our cars. Tesla already has two built-in music streaming apps, including Spotify. Once you have the ability to listen to any music ever created at any time anywhere, a streaming music service will become another utility, like electricity, water, or Netflix, that you cannot live without. There is an interesting contrast between Netflix and music streaming services. When Netflix started its streaming service, everyone thought that streaming would increase the value of its movie library. This has not happened. Netflix has started a new arms race in movies and shows – the quantity and often the quality of new video content being created by Netflix, Amazon, Apple, Hulu, and others is staggering. As a side point here, this dynamic has inflated the costs of creating movies and shows – the talent demands more money for their work (Apple is paying $15 million per episode of The Morning Show), so money buys a lot less in the movie industry today than it did five years ago. This will end too – probably badly. Since our everyday ability to watch TV is constrained by the Earth’s rotation around the Sun, it is really Economics 101: When supply increases and demand remains constrained by viewing hours in the day, the good becomes less valuable. Thus with a few very exceptions (Friends, Seinfeld, and a few other shows) the value of the back catalog has most likely declined. There is another factor that has made movie libraries less valuable. Given a choice, we default to watching new movies or TV shows and we don’t usually watch the same movie dozens of times. (Kids’ shows and movies are the only exception we can think of.) Music is different. We listen to the music we like countless times. Thus, the beauty of streaming is that it monetizes not just the newly released music but also the back catalog. In fact, if you carefully examine the music you are listening to today, you’ll likely find that the bulk of it (two-thirds for the society as a whole) was not released this year but, depending on your age, goes back decades. Yes, we are really excited about the future of the music industry. The size of the industry will double or triple over the next decade, and the value of the music library will double or triple with it. The question becomes, to whom will this value accrue – streaming services like Apple Music and Spotify or content providers like UMG? In the TV space the value has accrued to those who had relationships with the customer – the Netflixes of the world. When you fire up Netflix you don’t have the expectation that every show or movie ever created will be there. You’ll substitute Batman for Spiderman, as long as Netflix offers something to satisfy your vegetative state of TV watching, you’ll live with the incompleteness of Netflix’s library. With music streaming you are sold the expectation that all music ever created will be at your fingertips in an instant. Thus if you own 30% of the Western world’s music library (as UMG does) you have meaningful bargaining power with the streaming services. The relationship between streaming services and music labels has been symbiotic – they need each other. If in the course of negotiations UMG pulls its music from Spotify, it will destroy Spotify but at the same time cut off a big chunk of its own revenue. Okay, so it’s a Cold War-type, mutually assured destruction sort of symbiotic relationship. We have analyzed Spotify, and though we are consumers of the service and big admirers of the company and its management, at its current price the stock is of little interest to us. Vivendi, on the other hand, has a lot of potential. Its revenue growth can actually accelerate as old music businesses (CD and digital music sales) come to represent a small part of the mix. As importantly, Vivendi’s margins will likely expand substantially, for two reasons. First, streaming has higher margins than other parts of the revenue mix; and second, costs will not grow as fast as streaming revenues. What is Vivendi worth? Tencent just bought 10% of UMG for $30 billion (which we may find in a few years was a bargain), which equals the entire market capitalization of Vivendi (the owner of UMG). This is good for us, because Vivendi itself has businesses other than UMG that are worth another $10-12 billion. Vincent Bollore – who has operational control of Vivendi through Bollore’s ownership – is creating value for Vivendi and Bollore shareholders and ultimately for himself (he owns a big chunk of Bollore stock) through share buybacks. In our estimation, when we buy Bollore stock today, we pay about 4 euros for Bollore’s African ports and logistics business and get Vivendi, which is worth 6-10 euros, for free. And one more thing… I am not a journalist or reporter; I am an investor who thinks through writing. This and other investment articles are just my thinking at the point they were written. However, investment research is not static, it is fluid. New information comes our way and we continue to do research, which may lead us to tweak and modify assumptions and thus to change our minds. We are long-term investors and often hold stocks for years, but as luck may or may not have it, by the time you read this article we may have already sold the stock. I may or may not write about this company ever again. Think of this and other articles as learning and thinking frameworks. But they are not investment recommendations. The bottom line is this. If this article piques your interest in the company I’ve mentioned, great. This should be the beginning, not the end, of your research. Read this before you buy your next stock

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