Streaming Video Wars Are Heating Up
The biggest technology and media companies are at war, fighting for position to monetize our free time.
Netflix (Nasdaq: NFLX) shares shot up on Tuesday to a record closing high. The Los Gatos, California-based company is by far the biggest player in digital media streaming, an industry worth hundreds of billions.
Yet the stock is no longer the best in the sector.
In the future, new businesses are poised to dominate as the industry matures, and others will be gobbled up in consolidation.
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In 2009, Netflix transformed media consumption when the business moved from mail order DVD rentals to subscription video on demand (SVOD). Executives at traditional TV companies were incredulous, seeing no demand for SVOD, especially given the lack of quality content.
They couldn’t have been more wrong.
In January 2011, The Hollywood Reporter noted that executives at HBO and Time Warner began warning studios that doing business with Netflix would hurt future deals with their companies. Studio leaders were undeterred as they saw Netflix as another bidder for their content.
• The fledgling SVOD company had 17 million subscribers at the time. Today, Netflix has 207 million paying members and has become the most important company in Hollywood, let alone streaming media.
New TV sets without access to Netflix collect dust on shelves at Best Buy (NYSE: BBY). The service is so important that Apple (Nasdaq: AAPL) and Google exempted the streamer from most of the 30% ongoing fee they charge vendors within their respective app stores.
The part being missed by investors is the impact on the media consumption landscape. For most people, the convenience of SVODs is simply a better option than traditional pay TV.
Consumers continue cutting the cord in droves. According to Forbes, since 2014, the number of people eliminating cable subscriptions has more than tripled, from 15.6 million to an astounding projection of 50.4 million in 2021.
SVOD Competition Heats Up
And — more importantly — the best content is moving away from cable TV.
Netflix is the gold standard. The company has pricing power and dominant mindshare. Disney (NYSE: DIS) is the obvious number two SVOD player. Its portfolio includes the Star Wars, Marvel, Pixar and National Geographic libraries. After that, things get a bit fuzzy.
Amazon.com (Nasdaq: AMZN)-owned Prime Video and Apple TV+ are likely to survive given their deep-pocketed parents and unique business models. Prime Video is a powerful incentive for Prime memberships, a business worth $25.2 billion in annual subscription revenue. Apple TV+ might be bundled with Apple Music to keep more customers within the Apple ecosystem.
The other SVODs are unlikely to survive in their present form. They must either quickly build scale or change the business model to focus on ad-supported subscriptions (AVODs).
And that’s exactly what’s happening.
Fox (Nasdaq: FOXA) acquired Tubi in 2020, the world’s largest AVOD. Tubi is an app that runs on smartphones and connected TVs. It’s free to use, assuming viewers don’t mind watching commercials peppered throughout films and TV shows. It’s a lot like traditional cable TV, except with better ad targeting.
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Pluto TV was acquired in 2019 by ViacomCBS (Nasdaq: VIAC), and Comcast (Nasdaq: CMCSA) bought Xumo TV a year later. These AVODs are the blueprint for Paramount+ and Peacock to make the transition to solely ad-based models.
Discovery (Nasdaq: DISCA), the company behind HGTV and the Food Network, is taking a different approach. Discovery executives announced plans in June to merge with WarnerMedia, a unit of AT&T (NYSE: T). This would add HBO Max, a standalone SVOD, and the forthcoming CNN+.
• The battle lines are being drawn, yet the winner is none of the above.
Investors should consider using weakness to buy The Trade Desk (Nasdaq: TTD), Magnite (Nasdaq: MGNI) and two smaller standalone players: FuboTV (NYSE: FUBO) and CuriosityStream (Nasdaq: CURI).
Trade Desk and Magnite are the dominant operators on either end of the digital ad spectrum. The former helps companies automate digital ad buying across the internet and AVOD platforms; the latter helps content providers sell digital ad inventory. These businesses are growing rapidly as all advertising inevitably goes digital.
FuboTV and CuriosityStream operate SVOD platforms devoted to live sports and science content, respectively. Both are likely to be acquired in the months ahead as larger competitors try to build scale.
Although Netflix is pushing to new highs … it is far from the most attractive investment opportunity. The great reward appears to be in digital advertising and niche content.
Jon D. Markman