ABS-CBN’s options

Even mighty giants fall and this is what happened to Lopez-owned ABS-CBN.

What can it do now? The owners can either sell the network, as what their enemies want, or strive to survive by going full blast into the digital space.

With the non-renewal of its franchise to operate free-to-air TV, ABS-CBN has lost its most profitable segment, which according to institutional brokerage and investment group CLSA would instantly cut the network’s revenue by half.

(Digital) content is king

What it can do is to drastically cut costs and come up with digital content that can generate ads. This is the only option for ABS-CBN to survive now that it has lost its franchise.

“Content is king and this is where the value of ABS-CBN lies. The challenge for the group is platform efficiency, going head to head with social media platforms for ads and other video-on- demand platforms for streaming. In the meantime, the bright spot is that it has a strong balance sheet which can support its digital ventures,” CLSA said in a report on the network.

I agree. But being new to the full throttle digital business, the network would have to grow its content, as well as its broadband business.

Losses, creditors

Losing the television and radio frequencies coveted for their powerful range would be enough to drag ABS-CBN in the red while it shifts to digital-only offerings and services.

CLSA expects the advertising revenue of what was once the country’s leading media and entertainment company to shrink to P1.8 billion in 2021 from an estimated P5.5 billion this year. That’s a huge decline from its advertising revenue fo P17 billion as end-September 2019.

With this steep drop in revenue, ABS-CBN will be in the red at least until 2022, CLSA said.

“The bright spot is its strong balance sheet position with net gearing at 0.37x. We factored in major cost cuts as the group will have to offset diminished revenue streams from the franchise. We expect profitability to return in 2022 as we expect digital to breakeven. While the lost franchise is a big loss, it allows the group to go all in with digital.”

ABS-CBN also has a debt load to address.

CLSA noted: “The top two creditors to ABS-CBN are Unionbank and Bank of the Philippine Islands, both holding P11 billion and P10 billion respectively. This is easily almost 80 percent of total debt. The remaining debt load exposes Rizal Commercial Banking Corp, Banco de Oro, Security Bank and Philippine American Life and General Insurance Company,” CLSA said in its report.

But I believe ABS-CBN can ride this out. Indeed, content is king, and if ABS-CBN is able to come up with high value offerings for the discerning viewers, advertising revenue may catch up and eventually save the network from this major crisis.

US FDA authorizesmarkeing of IQOS

Speaking of giants, taipan Lucio Tan’s empire has gotten a boost after the US Food and Drug Administration (FDA) recently authorized the marketing of IQOS — Philip Morris International’s (PMI) electrically heated tobacco system — as a modified risk tobacco product.

The taipan’s Fortune Tobacco and PMI are partners in PMFTC, the top cigarette company in the Philippines.

In 2019, earnings of Tan’s holding company LT Group reached a record high of P23.1 billion, up 43 percent, with the cigarette business accounting for 67 percent.

With the US FDA’s move, I’m sure PMFTC will eventually bring in PMI’s heated tobacco product in the country and further grow its business with the addition of heated tobacco products.

But I don’t think PMFTC would replace its entire cigarette line-up with these alternative products, although I don’t know for sure.

IQOS is the first and only electronic nicotine product to be granted marketing orders as a modified risk tobacco product.

“The FDA’s decision is a historic public health milestone. Many of the tens of millions of American men and women who smoke today will quit — but many won’t. Today’s decision makes it possible to inform these adults that switching completely to IQOS is a better choice than continuing to smoke,” said André Calantzopoulos, PMI CEO.

He said that because there is no combustion of tobacco with IQOS, it produces less harmful substances.

PMI submitted its application in December 2016, which went through a long tedious process with the US FDA including clinical studies.

As of March 31, PMI estimates that approximately 10.6 million adult smokers around the world have already stopped smoking and switched to IQOS.

Calantzopoulos believes that the US FDA’s authorization would help PMI further accelerate the transition of American adults away from cigarettes.

Will the same thing happen in the Philippines? I can’t imagine Filipinos in poorer communities shifting to IQOS, which is a pricey device. As I’ve said before the best alternative really is to totally quit smoking.

But the US FDA’s decision, just the same, is welcome news.