The world’s largest accommodation provider, Airbnb, owns no property. The world’s largest ride hailing service, Uber, owns no cars. The world’s largest media company, Google,  creates no content. What an amazing time we live in!

 

Many companies which didn’t exist twenty, ten or even five years ago now create products that play an increasingly important role in our daily lives. So important that the word “google” was added to the Oxford English Dictionary as a verb in 2006, in reference to the action of going online to search for information.

 

Very broadly speaking, a business life cycle can be divided up into four different stages: start-up, growth, maturity and decline.

 

  • In the first two phases, a company expands rapidly to grow revenues and gain market share, reinvesting the profits it makes (if any) back into the business.
  • Maturity begins as sales growth slows and the company transitions from focusing on growth to maximising profits, often paying out ever growing dividends in the process.
  • Lastly, due to economical and structural changes, individual businesses and even entire industries will eventually face decline, sales fall and profits decrease.  It is often during these turbulent times, that a business tries to reinvent itself by cutting costs, creating new products or entering new markets in the hopes of rejuvenating growth.

 

Increasingly, we are seeing businesses transition from the maturity into the decline phase as a result of technological disruption. A prime New Zealand example is currently playing out in the pay TV space.

 

Cracks first began emerging in Sky TV’s share price around mid 2014 as people began questioning the long term viability of its existing business model in the face of new entrants such as Netflix, an online video streaming service. The downward pressure on Sky TV’s share price accelerated after the 2015 investor day presentation, when the company highlighted higher content costs in the face of increased competition and investments.

 

By June 2016, Sky TV announced the proposal of a merger between itself and the Vodafone New Zealand business, highlighting that “The internet has permanently changed the way people consume media and entertainment services. To stay ahead of the game, we must find new and innovative ways to deliver our content.”

 

Sky TV talked about significant revenue and cost synergies that will be achieved as a result of the merger and the market interpreted the announcement positively, with Sky TV’s share price up 17.5% on the day of announcement. However, the share price has since fallen.

 

Will Sky TV’s merger bring back growth  and ultimately be a long term success for shareholders? Only time will tell.

 

What is certain is the rate of technological change is not slowing and we will increasingly be living in a world where the largest accommodation provider owns no property, the largest ride hailing service owns no cars and the largest media company creates no content.

 

Shing Zhu

Analyst

 

Disclosure of interest: Milford Funds Ltd holds shares in Alphabet and Sky TV on behalf of clients.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.