I try to know about every companies with a network and a dominant market position. And yet I’m frequently learning about new ones that are hiding in plain view as public companies.
This week’s revelation is a company called National CineMedia (Symbol: NCMI). It’s a company whose product you know well, though you may not know the company. NCMI runs the “First Look” network of regional and national ads that you see in movie theaters when you are waiting for the movie trailers to start. It’s not exactly scintillating fare, but it is more professional than the old, local slide show you used to see. And, hey you are a captive audience!
The company puts up some impressive numbers–like a 50% EBITDA margin, and a dividend yield of more than 5%.
You might be asking yourself, how does an ad network, albeit one for a captive audience, capture so much value for itself? Well, one of the reasons might be its unique ownership structure:
Yes, that’s right, NCMI is partially owned by three of the largest cinema chains in North America (AMC, Regal, and Cinemark)–who own about 50% of all theater screens– as well as some public shareholders a lot smarter than me. It’s a nice little duopoly which, I bet, makes pricing attractive for the owners (and NCMI). Of course, NCMI would argue it has huge share of this market, but only a tiny share of all advertising.
I call this market a duopoly because there is one competitor that is on most of the rest of the cinema screens, Screenvision. As you can see from the above diagram, NCMI was trying to buy Screenvision. That is until yesterday, when the Justice Department, sued to block the transaction. Apparently, the DoJ felt that a resulting firm, which would have had a combined market share of 88%, was simply becoming too big. (The DoJ decision is how I learned about NCMI in the first place.)
Even though I spend my time trying to help my clients become this dominant in their markets, I’m glad the DoJ stepped in. Can you imagine if Coke, Pepsi, and Orville Redenbacher had to pay more to advertise in theaters, what the price of soda or popcorn would be?! Wait a second…;-)
For you investors, NCMI was down yesterday on the news that the DoJ would stop the transaction. I remember when the Free Standing Insert business (those ad/coupon inserts in the Sunday paper) had only two competitors. They both made good money. It still may be an interesting stock with less than interesting content. (The stock is back up some today, so apparently others agree.)
Oh, by the way, have you ever noticed the ads for the Fathom network? These are the folks who re-broadcast theater, opera, comedy and other special events on movie screens across the nation. That’s owned by the same three theater chains and NMCI as well.