The Wall Street Journal - 20.09.2019

B12| Friday, September 20, 2019 THE WALL STREET JOURNAL.

Snapchat’s Ad Challenge

Advertisers are flocking to social media, but company’s appeal may be limited

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

AT&T Should Pause

On DirecTV Sale

Undoing the 2015 deal wouldn’t be easy for the

telecom giant and doesn’t make a lot of sense

Two wrongs don’t make a right

for AT&T.

The telecom giant might con-

sider that mother’s wisdom when

deciding whether it should unwind

its 2015 purchase of DirecTV. Buy-

ing the satellite programming

business might not have been a

great deal in 2015, and a slimmer

AT&T could look better now that

activist Elliott Management is

banging around the company.

But separating DirecTV would

remove cash flows that it needs to

pay a dividend and service debt,

not to mention invest in its busi-

ness. Its options for a decent deal

are limited, and it would have to

be a blockbuster to make sense.

DirecTV has been struggling

since AT&T bought the business

for $49 billion in 2015. Satellite

video connections fell 2.6% in 2017

and a further 6% in 2018. DirecTV

Now, the division’s over-the-top

streaming offering, hasn’t changed

the equation. Operating revenues

in AT&T’s entertainment division,

which also houses broadband op-

eration U-Verse and other dwin-

dling legacy voice-and-data busi-

nesses, fell more than 7% last year.

Carving out DirecTV might

prove a short-term boost to

AT&T’s share price, which has sig-

nificantly underperformed compet-

itor Verizon over the past three

and five years. Digesting the ac-

quisition of Time Warner, now

WarnerMedia, could be easier

without nursing a dying business.

DirecTV also has a willing suitor.

DISH co-founder and chairman

Charlie Ergen touted the value of

the combination at a conference

this week, according to reports.

But even Mr. Ergen admitted

that there might be regulatory

blowback. DirecTV also gives

AT&T something that it needs:

cash. The whole entertainment

segment should generate close to

$10 billion of earnings before in-

terest, tax, depreciation and amor-

tization this year—roughly 17% of

the company’s total, according to

Baird Equity Research. Baird pegs

DirecTV’s Ebitda near $8 billion.

To keep its dividend yield at

around 6%, AT&T needs to pay out

at least $15 billion a year, or more

than half its expected free cash

flow, all while servicing debt ap-

proaching $200 billion. If Di-

recTV’s value had gone up, per-

haps forgoing those future cash

flows might be worth the effort.

Under the circumstances, AT&T

shouldn’t be hitting rewind.

—Lauren Silva Laughlin

Apple ’s €13 billion ($14.3 bil-

lion) tax fight with Europe is

grinding through the courts. It

could end up generating unwel-

come headlines—for Apple and

Brussels alike.

What was a story about the Eu-

ropean Union hitting what it sees

as an undertaxed technology giant

has turned into a tussle for bil-

lions in tax revenue between Brus-

sels and Washington. The shift is

awkward for European officials,

who are seeking to avoid a trade

war with President Trump.

This week the iPhone maker is

in the European court arguing that

judges should overturn the Euro-

pean Commission’s 2016 decision

that a tax deal between Apple and

Ireland was illegal under EU law.

The ruling was a landmark in EU

competition enforcer Margrethe

Vestager’s campaign against multi-

national companies using complex

structures to slash their taxes.

The record €13 billion bill for

back taxes applied Ireland’s stan-

dard 12.5% tax rate to the interna-

tional profits that flowed through

Apple’s Irish companies between

2003 to 2014. The Cupertino-based

company previously paid barely

any tax on its international sales,

based on profit transfers signed

off by Dublin. It reported an aver-

age overall 27% tax rate between

2003 to 2014—and an average for-

eign rate of 5%—but much of that

tax was deferred rather than paid

out. Before the 2017 U.S. tax re-

form, Washington would have col-

lected the deferred tax on that off-

shore income only if it was moved

home.

Ironically, Apple won’t actually

benefit from a successful appeal.

Mr. Trump’s tax reform means the

company’s offshore cash pile was

taxed in the U.S. at 15.5%. If Ms.

Vestager’s decision stands, the €13

billion will be paid to Dublin. If the

European court overturns her de-

cision, though, those profits will

be taxed at the higher rate and

end up with the Internal Revenue

Service. The judges will take

months to rule and it will be years

before all appeals are exhausted.

A lingering political battle in

Europe, with the associated accu-

sations that Apple dodges taxes,

could hurt the company’s slick

consumer image. So could an in-

vestigation into an antitrust com-

plaint Spotify has lodged against

Apple, which Brussels is currently

considering. Europe is an impor-

tant market, accounting for

roughly a quarter of Apple’s prof-

its last year. A high-profile victory

for Apple in the tax case may even

give Ms. Vestager—the commis-

sioner dubbed the EU’s “tax lady”

by Mr. Trump—more ammunition

for her initiative.

Brussels plans to redouble its

efforts to improve European gov-

ernments’ tax collection. It is

working with the U.S., China and

others on a project led by the Or-

ganization for Economic Coopera-

tion and Development to overhaul

the international corporate tax

framework by the end of next year.

But if that OECD effort fails—and

finding consensus will be challeng-

ing—Brussels plans to propose a

new European digital tax. Apple

has nothing to gain from winning

its European appeal—and possibly

a public-relations battle to lose.

—Rochelle Toplensky

Apple'sreportedtaxrates

Sources: S&P Capital IQ; company reports

*Current and deferred foreign

tax divided by foreign earnings

Note: Fiscal year ends Sept. 30

30

0

5

10

15

20

25

%

FY2004 ’06 ’08 ’10 ’12 ’14 ’16 ’18

Overalleffectivetaxrate

Foreigntaxrate*

China’s property giants are no-

torious for their issuance of debt.

But a more politically sensitive lia-

bility has risen even faster, posing

a less well known risk to the coun-

try’s housing market.

Unearned revenue—the line on

developers’ balance sheets that ac-

counts for presales or contracted

sales—now makes up a greater

share of the 10 largest property

developers’ liabilities than total

debt. Their combined unearned

revenue rose to just over $400 bil-

lion in June, according to financial

results covering the first half of

2019.

The practice of selling homes

once construction has started—but

often years before completion—

now makes up more than 85% of

total sales in China.

Yields of above 10% aren’t un-

common on Chinese property

bonds, making presales an attrac-

tive source of financing. China has

no escrow system and developers

have access to the full payment.

But the game can’t run on for-

ever. At some point, properties

promised must be built.

Until around the beginning of

2016, completions of residential

housing had a relatively close rela-

tionship with presales, according

to National Bureau of Statistics

data. But the two have since di-

verged. Completions are now well

below their 2014 peak, while pre-

sales have continued to surge. In

the 12 months to August, the NBS

recorded more than twice as much

floor space presold as completed.

One reason for the divergence is

likely developers selling down ex-

cess inventories. These fell dra-

matically between 2015 to 2018,

having roughly doubled during the

previous credit binge. Getting cash

upfront rather than raising debt to

build houses they haven’t sold—

and may never sell—means compa-

nies are no longer creating ghost

cities of unoccupied apartments,

protecting home prices.

But it still leaves developers

vulnerable. They would have to

complete a year’s worth of con-

struction just to cover the backlog

created over the past year, let

alone previous commitments. Pub-

lic complaints have begun appear-

ing in local Chinese media, and

this is only likely to ramp up. One

woman in Hebei province report-

edly bought a 22nd-story apart-

ment in 2015, only to discover re-

cently that the building had been

topped out at the 18th floor.

Last summer, China’s peer-to-

peer lenders discovered that even

minor public discontent can

prompt a rapid crackdown. As in

many countries, housing plays a

totemic role in the Chinese peo-

ple’s understanding of financial se-

curity. If the government fears

that social compact is under

threat, political pressure on devel-

opers to fulfill their promises will

be immense.

When that day comes, property

developers may wish they had cho-

sen to borrow from the vigilantes

in the bond market rather than

China’s middle class.

—Mike Bird

China’s Property Giants May Soon Have Regrets

A model wears the company’s glasses. A recent survey suggests many advertisers don’t use the platform.

SNAP/REUTERS

Advertisers are flocking to so-

cial media to reach its users with

pictures rather than words. It

seems they prefer a wide lens.

A recent RBC advertising survey

found 95% of advertising profes-

sionals say they are spending on

social platforms with 54% of those

allocating more than 20% of their

marketing budget to the cate-

gory—a record across the past 14

surveys performed by the firm.

Unfortunately, not all canvases had

the same appeal.

RBC’s survey showed that, while

future spending intentions on

Snapchat improved in September

versus April, Snapchat spending

remained the weakest of all sur-

veyed platforms. These included

the likes of Facebook , Instagram ,

Twitter , YouTube and Pinterest.

In fact, 76% of all ad professionals

surveyed said they didn’t advertise

on the Snapchat platform.

Snapchat has had fantastic suc-

cess with younger users, with 75%

of 13- to 34-year-olds in the U.S.

now active on the platform, ac-

cording to the company. However,

speaking to a group of investors

on Wednesday at Goldman Sachs ’

annual “Communacopia” confer-

enceinNewYork, Snap Inc. chief

executive Evan Spiegel said

strength in his company’s core de-

mographic “can actually work

against us” with advertisers.

Because the largest segment of

Snap’s users are young, older

brand executives don’t necessarily

use Snapchat frequently, he said.

This can mean that they don’t un-

derstand the platform.

Snap has been working to com-

bat friction between its platform

and advertisers to boost sales. The

company said it launched a self-

service ads platform in 2017, which

has helped. Earlier this year, Snap

rolled out Instant Create, which

enables advertisers to make ads in

three steps. In April, Snap an-

nounced a partnership with e-com-

merce tech company Shopify.

Snap doesn’t report specific

data on advertisers, but said on its

second-quarter call that recent ini-

tiatives have helped to broaden its

advertisers. On Wednesday, Mr.

Spiegel said Snap has been ex-

panding the number of advertisers

as well as the amount spent.

This is evident in recent results.

Snap grew overall sales in the sec-

ond quarter by 48% year-to-year—

its best growth since the first

quarter of 2018. Snap reportedly

has done well with direct-to-con-

sumer startups like oral care

brand Quip.

But such initiatives will only go

so far. Self-serve features and in-

app ads won’t be effective with ex-

ecutives who aren’t socializing on

the app or interested in advertis-

ing on the app in the first place.

Mr. Spiegel himself said that ad-

vertisers looking to target a much

older demographic on Snapchat

aren’t likely to have much success.

Analysts are expecting annual

sales to continue to grow upward

of 40% in the next three quarters.

Much of that represents a rebound

from last year’s unpopular Android

redesign, though, and growth is

expected to moderate by the mid-

dle of next year.

Snap shares have rallied by over

200% this year, nearing a one-year

high in terms of enterprise value

to forward sales. Investors are a

bit too confident that the growth

picture won’t fade.

—Laura Forman

OVERHEARD

Millennials, we have been told,

prefer to spend money on experi-

ences. Does that go for their chil-

dren as well?

Tru Kids Brands, which owns

the postbankruptcy Toys “R” Us

brand, says it is reviving the for-

mer toy retailer with partners to

create “destinations.” It is linking

up with a self-described “soft-

ware-powered experiential re-

tailer” b8ta to “deliver the hot-

test toy products and brands,

carefully curated and show-

cased in highly immersive

smaller-format spaces.”

These are otherwise

known as stores and will be

in malls in Houston and Pa-

ramus, N.J.

Tru Kids is also joining with

Candytopia, the “candy-coated

experiential adventure,” to open an

“immersive wonderland that cele-

brates the whimsical, silly and fun of

toys and play” on Chicago’s Michigan

Avenue.

Building blocks-creator Lego

A/S has tried to jump-start its

sales by embracing digital offer-

ings and using hands-on stores

in malls.

Candytopia’s CEO told the Chi-

cago Tribune, “It’s not just about

Instagram.”

“As the retail landscape

changes, so do consumer shop-

ping habits. But what hasn’t

changed is that children want

to touch everything and

simply play,” said Phillip

Raub, co-founder and

president of b8ta.

Still, those who have

stepped over unwrapped

Barbie boxes in a Toys “R”

Us aisle might beg to differ

how much of a differentiator

this really is.

Apple Can’t Win Its

$ 14. 3 Billion Tax Battle

The satellite service has been struggling since the $49 billion acquisition.

PATRICK T. FALLON/BLOOMBERG NEWS

KELLY SULLIVAN/GETTY IMAGES FOR CANDYTOPIA