- Providence Equity founder Jonathan Nelson has invested in 170 companies over 30 years, helping grow the cable and telecoms landscape.
- The dealmaker with billions under management shares why he’s betting on live music and theater.
- He also weighed in on AT&T’s acquisition of Warner and the future of streaming and Hollywood.
- See more stories on Insider’s business page.
Veteran media investor Jonathan Nelson is a pioneer in streaming, having poured $100 million into the launch of Hulu.
The founder and executive chairman of Providence Equity Partners has invested in 170 companies over 30 years beginning in 1989 with $171 million. Providence, now with $45 billion under management, has helped grow the modern-day cable and telecoms landscape.
He told Insider which areas he’s betting on today, shared his views on WarnerMedia’s Jason Kilar and AT&T, and explained why he thinks Hollywood’s power is over thanks to Netflix and Amazon.
Nelson’s biggest growth stories are in the communications space, from an early investment in German cable giant Kabel Deutschland, which was sold to Vodafone for $10 billion in 2013; to MasMovil Group, one of the biggest telecom firms in Spain, where Providence is still an investor.
Today he has his eye on the digital ad sector. Providence was looking for a way to enter the digital ad business without competing with Google and Facebook and bought a majority investment in DoubleVerify in 2017 at an undisclosed price. The ad measurement firm acts as a neutral third party in the identification of digital ads, and Nelson views it as akin to the Nielsen of the digital ad business. DoubleVerify’s market cap is now $5.6 billion.
“Services around media and communications have been fertile ground for us,” he said. “To say it’s done well would be a new standard for understatement.”
Nelson is a believer in live entertainment
When the pandemic hit, Nelson admits he looked at his portfolio of investments, which run the gamut from live entertainment, theater, and music to educational software, and thought, “Holy shit.”
Even so, Providence resisted the temptation to hunker down and invested instead.
“Ambassador Theatre Group bought other theaters. The music festival business, some of the smaller groups didn’t have the balance sheet that we did, so we expanded in Europe.”
Returns have since snapped back, Nelson says, citing record-breaking ticket sales for “Moulin Rouge” in London, where Providence owns theaters.
Providence is also an investor in live music. While in the US, consumers typically attend single-act concerts, in Europe there’s more of a festival circuit and Providence is trying to consolidate the industry to grow it. While most companies are focused on digital, Providence remains a fan of a very old analog business model.
“We always think there’ll be a need for people to listen to music,” he said. “Touring for musicians is an essential part of their revenue stream.”
Some of Providence’s investments had a less rosy outcome. Nelson put $100 million into streaming service Hulu when it was formed in 2007 to counter Netflix and worked with broadcast network TV owners to pack it with fresh premium content. He lured Jason Kilar — then at Amazon — to run it, then sold the idea to Fox and NBC. Disney came in later.
“We were well positioned, and it’s one of the great accomplishments and disappointments all in one deal: Hulu,” Nelson said.
With three network TV owners, all with conflicting digital strategies and changes in ownership and management, Hulu was an untenable investment. Providence sold out in 2012 for $200 million. Now controlled by Disney, Hulu could be worth $45 billion, estimated Rich Greenfield at research firm LightShed Partners.
Nelson said that he couldn’t believe what he was hearing from some of the Hulu investors who questioned whether the idea of growing value at Hulu was even worthwhile. “As an investor, that’s heresy.”
Tech is changing the streaming game
Looking into the future of communications is Nelson’s stock in trade, and he sees a point where streamers will prioritize profits over subscriber growth.
“Netflix will eventually obey the same laws of gravity that everyone does which is cash flow generation and real earnings. Eventually, those curves converge. At some point it will not be just sub growth, and you can’t borrow until the end of time.”
“Netflix has one pivot to make: growth to cash flow,” said Nelson explaining that traditional media companies have two to make, first a change in their model towards a growth business, and second, a return to profit metrics. “You have to turn growth into profitability. It’s the same for Warner Bros. Discovery.”
He also pointed out that big tech companies are buying media to boost their other businesses, which means that media won’t be judged on its own performance anymore. He suggests that Amazon’s $8.5 billion acquisition of MGM, the movie studio which owns the James Bond franchise, for double the next-highest bigger, could simply be viewed as marketing spend to boost its Prime Video service.
“We haven’t seen that in the media until now,” he said. “Amazon’s deal with MGM, it’s the first time we can begin to quantify what does it mean when you’re not really measured by the profitability of your media company, whether it’s creating content, aggregating or distributing it, because Amazon trades not on value of MGM but on Prime.”
As for other streaming competitors, he said Apple isn’t yet committed to streaming as it’s a service and device business but that Google could easily launch a premium streaming service. “They have a great launching pad of YouTube to support professionally generated content.”
Nelson proclaimed the century-old power of the Hollywood studio system is over, with Amazon overpaying for content and Netflix supplanting the old structures by going global for content.
He questioned the rationale of one Hollywood studio, Sony, being part part of the Japanese device maker, despite years of initiatives to translate games to the big screen. “Sony seems subscale. Is there any synergy between content and device manufacturing? The answer is no.”
With the exception of Comcast, he also saw little to no rationale for big attempts at vertical integration in AT&T’s buying DirecTV and WarnerMedia and Verizon’s acquisition of AOL and Yahoo. Housing Warner under Discovery management will lead to better returns, he said.
“There’s a conflict between managing a telco and a media company under one roof,” he said. “I don’t know how one stock can capture both, and the right manager might have been schizophrenic. AT&T is smart to spin this out. David [Zaslav, future head of Warner Bros. Discovery] will do a good job. He’ll be judged the way other media companies are judged, not with mobile multiples. The mission will be clear and much easier. Scale is the key ingredient in a global direct-to-consumer.”
Nelson remains a big fan of Kilar, the former Hulu boss who’s now CEO of WarnerMedia, and defended his controversial decision to release new movies straight to streaming.
“It was never going to influence AT&T’s value if they had a good box office weekend. What mattered a lot more and would move the needle was adding subscribers to HBO Max,” Nelson said. “It’s hard for any entrepreneur inside a big company, especially one that’s in a different industry.”
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