Thank you for watching the tutorial on primary industry research, which focused on providing a financial overview of a sector. We no turn our attention to secondary research topics which focuses on understanding market segments and business models.

We will continue referencing the Las Vegas gaming industry as well as telecom and other industries as practical examples. Before we begin, it’s worth noting that operational insight is helpful to understanding the rationale for corporate finance transactions, which frequently originate from strategic and operational motivations. As such, coverage bankers are often well-versed in the operations and terminology of their clients.


The Third question concerns the business model, where we look at the in-house capabilities, suppliers and distributors involved in delivering a product or service. This knowledge is essential to analyzing what aspects of a value chain companies might want to consider bringing in house through partnerships or M&A activity.

It’s also worth noting that businesses within an industry typically evolve to adopt best practices and provide a product or service in the most efficient way. Hence, some industries may exhibit a set structural models, which are adopted by the majority of firms. Identifying these models also helps analyzing what business combinations or divestitures a company may consider.

The key steps we would recommend following comprise:

  • Firstly, looking at the supply chain and intermediaries involved in the production and delivery of a good or service to the end customer.
  • The second item focuses on the business mix of representative industry players. Businesses can be set up to encompass one or multiple functional steps of a supply chain and may be integrated across different geographies and industries.
  • The third item on this list encompasses taking a closer look at the main cost categories such as fixed assets, equipment, inputs, labor and overhead to name a few examples. This usually leads to a better understand of the business and key operational trends. However, it also provides insight into what synergies could be realized through merger activities.
  • Lastly, you may want to look at certain technical processes or commercial arrangements inherent to an industry to better understand the unique competitive advantages of companies and their ability to combine operations. However, this level of technical knowledge is less likely to be required for basic screening of corporate finance activity.


We will use the TV industry as an example to illustrate the functional relationships and flow of funds within a supply chain.

At a high level, the supply chain can be described as consisting of:

  • A studio producing individual TV content pieces
  • A network aggregating this content into channels
  • And a telecommunication cable infrastructure company distributing channel bundles to end consumers for a subscription fee

When you look at these functional components in more detail, you will see that content aggregators can be broken into cable networks, who deliver TV content to paying subscribers via cable connection, and broadcast networks, who deliver TV content via over-the-air transmission.

You can also observe that TV content distribution is no longer limited to cable TV subscriptions or over-the-air transmission, but can be accessed by end consumers through social media platforms and streaming services utilizing a customer’s Internet connection. As such, customers only need to pay for Internet service and the subscription fee for the streaming service, which generally is significantly cheaper than the cable TV subscription.

It is also helpful to broadly understand the payment arrangements between key players in the supply chain. For instance, content produces will sell their content to networks for a fee in the case of TV content, or exhibit it in movie theaters and share in box office proceeds. They might also sell content directly to a streaming service as for examples in the case of Disney and Netflix.

Networks in turn will generate revenues from advertisement, in particular airing during prime time slots, or subscription fees paid by end users purchasing access to cable channels. These end user subscription fees will be collected by telecom or cable companies selling TV subscription packages to end users.

As can be seen in this chart, companies can be set up to provide one or all of the functions shown. For instance, Lions Gate is a pure-play film production studio producing TV and movie content. In turn Disney and Time Warner are integrated media companies who both create content as well as package it into Disney and HBO channels. Finally, Comcast is one of the most vertically integrated media companies that produces content, manages channel networks and owns telecommunication infrastructure to deliver content to end users.

On the content distribution side, examples of telecom, cable and Internet streaming companies include AT&T, Charter Communication and Netflix, which are increasingly looking to distinguish themselves through exclusive content access. AT&T for instance, made a move to purchase DirecTV to gain access to valuable content licenses and will be able to produce in-house content if the merger with Time Warner is successful. Following a similar theme, Netflix has moved from purchasing content from studios and networks to producing its own Netflix original content.

Next we take a closer look at the capital expenditures in the telecom sector. The addition of capital assets is closely related to corporate finance and M&A activity as it  provides insights into the areas to which strategic capital is allocated. In the wireless segment, government spectrum auctions create a recurring need for large capital allocations, as spectrum ownership is required to offer increased bandwidth to customers. This is one of the main differentiators in wireless services. In addition, since spectrum is sold through government auctions, there is a potential threat of competitors buying up all the spectrum.

Similarly, additional cell towers and network radios are required to deliver increased capacity to end users. However, since each cell phone tower can host multiple network radios dedicated to different carriers, many carriers have sold their tower infrastructure to independent tower companies, which lease them back to multiple carriers. In the wireline segment, telecom companies are also required to make large investments in fiber optic capacity in order to provide competitive service levels. It should also be noted that Verizon has slowed its expansion into the wireline segment to focus on the wireless segment.

Finally, both AT&T and Verizon have been allocating large amounts of capital to acquire businesses with content licenses that can be delivered through satellite and mobile devices. This trend is expected to continue as content has became a way of differentiating telecom services in a very competitive market.


In the following example, we look at a list of operating costs for video game manufacturers broken into variable and fixed categories. Analyzing these costs in more detail typically helps provides further insights on where costs are trending towards.

In terms of variable costs, we have various royalties paid to independent studios, console providers and content franchises, as well as game manufacturing costs. An important trend worth noting is that a the shift towards digital delivery of games will reduce manufacturing costs. In contrast, content royalties for sports franchises are forecasted to remain high.

In terms of fixed costs, the main categories comprise product development, sales & marketing and general administrative expenses.

For development costs, a shift towards fewer but bigger titles provides for higher margins with total upfront costs for major titles amounting to typically more than $100m on potential sales of $30-300m.

Various game developers have different philosophies to game development ranging from lengthy and costly development focused on high quality gameplay to shorter development periods motivated by quicker commercialization cycles. Examples include the popular GTA franchise which is released every 5 years and generates up to one $1 billion dollars within a short window compared to some recurring franchises by Electronic Arts which are released on a yearly basis. In contrast, online games can have much lower production costs and often feature ongoing in-game purchases and microtransactions.

Regarding sales & marketing expenses, it’s important to note that marketing campaigns are franchise-specific, which means that incremental marketing costs are added as the number of titles increases.

Finally, game sales are noticeably influenced by the console release cycles with console and new game sales stalling ahead of the release of a new console generation and ramping up once the new console generation becomes more affordable.


As an additional example taken from the filmed entertainment industry, this charts summarizes the financial cost exposure a movie studio takes on when producing a movie net of international presales, and the profits it stands to generate from its share of box office and TV sales proceeds.

As shown in this forecast, international presales and box office proceeds increase as the franchise matures, which reduces the financial exposure and increase profits. This example further illustrates the enormous financial impact one successful franchise can have on a film studio like Lions Gate accounting for over $1bn in estimated total profits for a company with approximately $5bn market capitalization.

This also highlights the benefits of diversification and having access to a large balance sheet as part of a media conglomerate such as Time Warner or Disney, which has become the prevalent business structure for most film studios.


Finally, this slide shows a summary recap of some key business model characteristics of the main players in the Las Vegas market, which we discussed in this tutorial.