Conservative Administrations and TripleLift

The government of the US consists of 3 separate bodies - the executive, legislative, and judicial. The legislative branch (house + senate) makes the laws, the executive branch executes those laws, and the judicial branch makes sure the legislative branch follows the constitution and the executive branch follows the laws and the constitution.

The executive branch is often given relatively broad discretion by legislation to effect the objectives of the legislation pursuant to the authority it was granted. For example, legislation created the Department of Education with certain mandates (that had to be approved by the judicial branch). The Department of Education itself is part of the executive branch, run by the president and his/her appointees, and must act pursuant to the legislation it exists under, as well as the constitution - as enforced by the courts.

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So Donald Trump won the election. But perhaps more importantly, the Republicans have majorities in the house and senate, and have an opening to fill in the Supreme Court - which will likely be staffed by a conservative appointee. So how does this impact TripleLift?

This is a complicated question because Trump doesn't have have reliably conservative positions. For example, we discussed the AT&T / Time Warner merger in a previous Lift Letter (AT&T - Time Warner Merger). Conservatives are normally pretty relaxed about M&A activity and tend to be less active in antitrust enforcement. Trump, meanwhile, has asserted that he is directly opposed to this transaction, in part because of his opposition to consolidating media power. Antitrust enforcement is run by the FTC and the Department of Justice - both executive agencies - meaning Trump appointees will have their say on this merger.

Advertising itself is often regulated by the FCC. This is an executive agency, with its lead administrator appointed by the president. Conservatives tend to take a very free-speech approach to corporate speech (meaning companies can say what they want). This tends to mean that advertising enforcement - ads found to be deceptive or otherwise not cool - declines in conservative administrations. Trump, however, has expressed interest in expanding libel enforcement, meaning corporate speech (and all speech) may generally be more constrained. Trump has exhibited a strained relationship with the media at large, though it's unclear how his appointees may try to alter FCC policy.

A common refrain is that conservatives are "pro-business." Often this is reflected by a predisposition towards lower taxes. It is congress which writes the tax code, as specified by the Constitution (Article I, Section 8). The president may submit plans or make their positions known, but only Congress has the authority to create the bills that form the basis of our tax code. The president may choose to sign or veto the laws. The fact that three relevant bodies (house, senate, president) are controlled by conservatives means company-favorable legislation will likely pass. That said, tax is quite complicated, so it won't happen quickly.

Companies may be negative one year and profitable the next - and can carry some amount of the losses over to the next year (or years). This is called a net operating loss (NOL), and offsets potential taxes for companies that operate on multi-year profitability cycles. NOLs incentivize investment for projects that may not be immediately profitable. Meaningful changes in NOL legislation could, theoretically, impact TripleLift's future investments. In addition, many US companies keep significant amounts of cash overseas because of tax liabilities related to "repatriating" money from their overseas activities. Conservative tax legislation may significantly change this, meaning large companies could be flush with cash. Generally speaking, reduced cash means increased economic activity which could theoretically result in more money for advertising.

Taxes may have more direct impacts on TripleLift. Payroll taxes are direct expenses that the company incurs as part of employing and paying people. This includes Medicare, Social Security, unemployment taxes, insurance taxes, etc. Many of these costs could be reduced by conservative legislation, meaning the company could have more resources to increase investment in our products. On an individual level, the general notion is that tax rates are higher under Democrats and lower under Republicans. This isn't entirely backed by data, but Trump has proposed a plan with lower rates for higher earners. Further, stock sales sometimes result in capital gains taxes. The theoretical justification for capital gains being taxed at a lower rate than ordinary income is questionable, and various Democratic candidates have proposed eliminating the favorable treatment for capital gains. This will not happen in a conservative administration, so an M&A our IPO for TripleLift during that period - to the extent it results in capital gains for an individual - would be at a lower rate.

A very interesting area of discussion is immigration. The US has a very complicated immigration policy that I struggle to defend. That said, the legislation is written by congress and carried out by the executive branch. The Obama administration, love it or hate it, probably violated the Constitution by choosing to fail to enforce the parts of immigration policy that it disagreed with (creating de facto legislation that differed from the real legislation) - but a 4-4 Supreme Court left us a lack of real precedent here. Certain conservative branches favor much more restrictive immigration policies than others. It is likely that the Trump brand of conservatism will decrease the availability of the H1-B visa (among others). This particular visa allows for high-skill workers to come to the US. It is what Melania Trump came to the US on, and it is generally what highly-qualified engineers use as well. This possibly means that there will eventually be more competition for high-skill engineers.

AT&T - Time Warner Merger

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AT&T and Time Warner (TW) recently signed a merger agreement in which AT&T would acquire TW for roughly $85B. This is a big deal, both in dollar amount and potential media industry impact. Generally, the acquiring company pays in some combination of cash and stock. There may be conditions to actually complete the transaction, such as antitrust approval and financing requirements. In the current deal, AT&T plans to get a ton of debt, bringing its total outstanding debt load after the deal to $200B. That means that the combined company will, among other things, need to pay an awful lot of interest every year - meaning it must be very profitable.

Deals over a threshold around $85M are automatically subject to antitrust review in the US. That threshold is, as an aside, what dictated the maximum amount Google was willing to pay for Invite Media. Often very large deals come with certain stipulations by the US or foreign governments. In addition, broadcasters are highly regulated - especially by the FCC. When Comcast bought NBC, for example, it was required to continue to make NBC programming available overall channels. When Verizon bought AOL, there was less traditional broadcast content, so the deal was less impacted (that said, Verizon's use of wireless data in the AOL ad context is still heavily regulated). 

So what's going on here? First, the growth in the cell phone market appears to be tapering. The number of net new subscribers in the US is quite low. There is also some degree of price competition, meaning there's an effective ceiling on industry profitability. While still a very lucrative business (meaning AT&T can indeed afford a high debt load for a while), the writing's on the wall on the growth side. Cellular is, to some degree, becoming a "dumb" commodity. Services like Google Fi have taken it further and are actually white-labeling Sprint and T-Mobile, meaning the customer may completely lose direct contact with wireless provider in the future. Even the worst providers are good enough.

In the meantime, content is changing. The new guard consists of players like Facebook, Youtube, Amazon Prime and Netflix. Each has some new or planned play on the infrastructure side of things. The old guard (Time Warner, Disney, Paramount, etc) is losing its hegemony. That said, Time Warner has a huge range of great assets, including HBO, Warner Brothers, a large interest in Hulu, etc - but not Time Warner Cable (that was spun out and then acquired by Charter). AT&T has DirecTV, Uverse, AT&T Wireless, etc. This new enterprise is a complete suite of offerings - every channel of distribution, and nearly every sort of content. It lines up most directly with conglomeration under the Comcast umbrella, including cable, NBC, Universal - and, starting next year apparently, a wireless service.

There are currently rules about not being able to favor one's own content as a provider, but this is constantly under assault through lobbyists and targeted legislation. So one theory is that eventually net neutrality may be significantly weakened, allowing these players to increase the value of their own services by offering exclusive content only on channels they own. Another is simply that they'll be able to more effectively monetize by controlling the end-to-end experience - and possibly create a truly viable competitor to the new guard. Comcast's Xfinity has, for example, created an experience that allows you to watch TV seamless across all your devices.

As platforms like Apple and Google get more powerful (Apple was reportedly eying TW as well), it may very well be the case that traditional FCC rules separating distribution and content are decreasingly relevant, because the distribution platform - which is unregulated - may become just as, if not more important than the infrastructure. This would mean that a change in net neutrality and a strengthening of the importance of their distribution channel with high quality, unique content is the only way to remain relevant in the future.