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E-Commerce Flattens TV-Commerce

By Linda McDonough on July 12, 2017

Home shopping competitors QVC and Home Shopping Network agreed to merge last week. Much larger QVC, owned by Liberty Media, is acquiring smaller HSN in an all-stock $2 billion deal. QVC already owned 38% of HSN before the deal.

Although QVC and Home Shopping were first to introduce the concept of shop-from-home, a confluence of factors has whittled away their profits. The hope is that the merger will create a much larger single company with the scale to migrate its selling model to mobile phones and to improve shoppers’ internet experience.

QVC and HSN were renegades of their time. Both companies were huge innovators in what was then a pretty stagnant space- shopping. It’s hard for us to believe today when Amazon is gobbling up retail market share at a furious pace, but the concept of home shopping seemed downright ridiculous in 1977 when Home Shopping Network broke onto the airwaves.

Brick and mortar stores (which had no need for the brick and mortar designation back then), were pretty much the one and only distribution point for retail goods. Innovation meant malls, a radical concept where dozens of different stores would be housed under one roof. So while there was a big secular shift away from shopping on Main Street USA to sprawling suburban malls, the primary distribution chain was fairly static- a consumer goes into a store to buy goods.

Both Home Shopping and QVC started with the radical idea that consumers would rather NOT venture out to a store and instead purchase items from the comfort of their couches and have them delivered via mail. The capitalizing on human inertia and our desire for instant gratification has become the basis for most of the e-commerce’s success.

Although both QVC and HSN have been adept at shifting to a hybrid cable/online strategy, the slow demise of cable subscriptions and the abundance of other online options have hurt both companies’ profits.

The home shopping companies do have a unique selling proposal; products are sold via personal hosts on each channel. On the Beauty IQ channel, for example, a bubbly host describes exactly how to use Dr. Jart eye cream and flashes dramatic before and after photos to lure potential customers in for final purchase.

Instead of that annoying, “do you have a question” box floating in front of you on many e-commerce screens, QVC highlights its own always-available 800 number on the bottom of the screen. Both companies emphasize limited quantities and pricing to encourage hesitant buyers. While some of these tactics are just being employed by e-commerce companies, the home shopping guys were first.

But as we know from Netscape and Blackberry, being first isn’t always best. As consumers became increasingly comfortable using their credit cards online, the home shopping channels lost a whole swath of the population that may have migrated to television shopping instead.

Amazon introduced its Prime account which promises free shipping to any product purchased on its site. Sellers of every shape, color, and stripe flocked to Amazon, and its success blotted out many a competitor, both online and brick and mortar.

Finally, the long, slow bleed of cable customers cutting their cords and opting for Internet-delivered programming, left the home shopping networks with fewer eyeballs viewing their goods.

HSNi’s revenue declined single digits in each of the last two years, but earnings dropped more precipitously. Higher expenses necessary to bring the company up to speed in the digital age and more aggressive pricing chopped earnings 20%.

HSNi was founded in 1977, almost ten years before internet baby America Online was born. Consumers peruse its channels for products like Joy Mangano’s infamous self-wringing mop or Andrew Lessman’s Pro Cap Laboratories vitamins. If you don’t know these brands, you’re not spending enough time shopping on HSN.

QVC didn’t open its proverbial door until 1986 but grew to a much bigger company. It’s $10 billion in revenue is more than triple the size of HSNi’s.

I don’t think the merger of two declining companies is ever a good investment rationale. However, analyzing the path of these two prior high fliers is a worthy exercise. It’s important to note that QVC’s stock increased 12 times and HSNi almost 18 times from 2009 to 2015. Although both stocks are well off the 2015 peaks, they offered a myriad of profitable long and short entry points over time.

I try to look at both sides of every trade and offer investors both bullish and bearish trade ideas via my Profit Catalyst Alert service.

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