Disney streaming deal will blow up the cable universe
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Disney streaming deal will blow up the cable universe

It’s official. The streaming wars have begun. All of the big players have drawn battle lines.

Disney (DIS) announced last Thursday that its Plus service will arrive in November with a formidable arsenal of existing TV shows and movies, the promise of exclusive content, and a death blow.

Investors should get ready. This is going to get bloody. Few will survive.

But a handful of companies stand to profit handsomely as the business of streaming content over the internet grows by leaps and bounds …

None of this should be a huge surprise. The House of Mouse has been planning this fight for years. In the past, the company was willing to rent out its huge catalogue of Pixar, Marvel and Star Wars films to Netflix (NFLX). The pair were blissfully codependent.

The streaming giant got quality content, something its original programming badly lacked. Disney got secondary distribution, and money, lots of money.

The deal, struck in 2012, according to a report from CNBC, paid Disney as estimated $300 million annually.

It also fostered the spectacular growth of Netflix. Once an unassuming mail order DVD rental business from Los Gatos, Calif., it became a global streaming powerhouse. Subscriptions exploded from 26.5 million prior to its Disney deal, to 148 million at the end of last year.

The unintended consequence was a surge of so-called cable cord cutters and nevers. A Nielsen report in 2018 found 14 million U.S. households were living without cable TV, another important part of the Disney revenue stream.

Two years ago Disney announced it would sever is relationship with Netflix, and increase its stake in BAMTech, the streaming technology company behind major league baseball digital broadcasts.

At the end of 2017, Disney managers set their sights on 21st Century Fox and its huge content library that includes the Avatar movie franchise, the Simpsons, and 60% of Hulu, a network streaming service.

Disney Plus is a formidable streaming company, but its pricing is a death blow to many would be competitors. At $6.99 per month, it’s just over half of the cost for a standard Netflix subscription.

And Apple’s yet to be priced streaming service is probably dead on arrival.

Investors should focus on the likely winners, though. Beyond Disney and Netflix, there is not going to be a huge market for paid streaming services. Survivors will look for other sources are revenue. That means advertising.

Trade Desk (TTD) has become the cornerstone in the new digital media reality. Founded in 2009, the company owns the programmatic advertising platform ad buyers seek when they’re not funneling money toward Facebook (FB) and Alphabet’s (GOOGL) Google properties directly.

It means Trade Desk has a death grip on the rest of the internet. And the web is a very big, and expensive place.

Consumers may not want ads, but they simply can’t afford to pay for the cost of commercial-free media. Consequently, demand for digital ads is skyrocketing. And the Disney streaming service is likely to accelerate that trend.

eMarketer, a digital advertising research firm, predicted programmatic ad spending will reach $45.7 billion by 2019.

Amazon.com (AMZN) began staffing up to sell digital advertisements on its connected TV platform last year, according to a December 2018 report from The Information. The new network will operate under its IMDB subsidiary and will compete head to head with Roku (ROKU).

Even Netflix, a company that has resisted advertising so far, may seek that business model, according to Jeff Green. The 40-year-old chief executive at Trade Desk explained during a Recode podcast that ads make good sense as the streaming company expands its footprint into lower per capita income countries.

This echoes what has been happening in China right now. Last November, Trade Desk signed digital advertising deals with companies Alibaba (BABA), Baidu (BIDU) and Tencent, the largest internet companies in the country.

During 2018, Trade Desk grew sales to $477 million, a 55% year over year increase. In addition to its expansion overseas, large domestic networks such as ESPN, NBC and CBS continue to monetize more of their content online. For example, Green said ad sales for connected TV platforms grew 9x in calendar 2018.

This really is a monster new ecosystem, exacerbated by Disney’s aggression. Managers have clearly positioned the company Mickey built as the likely winner of the streaming wars. Now the rest of the industry needs to look for alternative business models.

Trade Desk built a lucrative franchise in the middle of it all.

Shares are up 70% this year. They trade at 69x forward earnings. While this may seem expensive, the business is growing fast, and likely to accelerate as trends move in its favor. It could be many times the current size over the next five years.

Best wishes,

Jon D. Markman

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Comments 1

jan April 15, 2019

Hello, I have to admit I always wonder why you do not recommend a company such as TTD far earlier than a 70% up. Someone has seen the value much earlier. You are indeed a tech guy, which I do appreciate, however, I would also appreciate write-ups when a stock is maybe up only 25% or less. Thank you. Jan

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