Breaking Down The Streaming Wars: The Market Guide
By SA Marketplace:
by Daniel Shvartsman
Welcome to The Market Guide! This weekly newsletter features our Marketplace authors zeroing in on one of the hot topics of the week. The Marketplace is our platform for authors to run services that provide research, guidance, and ideas to investors, and to lead investing communities. So we thought this newsletter would be a natural way to share some of those ideas and guidance on specific topics. We'll also highlight related articles and must-reads from our authors over the past week, and any developments on the Marketplace as a whole.
One of this week's top stories has been Disney's big announcement and the repercussions for the streaming video sector. Disney (DIS) announced Disney+ last Thursday, grabbing headlines with its competitive pricing and its aggressive growth targets. Netflix (NFLX) sold off in light of the announcement, then reported earnings on Tuesday, leading to a mixed reaction. And AT&T (T) raised its head again as its newly acquired channel, HBO, released the season premiere of Game of Thrones, which would be a show of strength except that it's the final season of the hit show.
What to make of all this? We asked a group of Marketplace authors how they break down the news. Our panel:
- Andres Cardenal, CFA, author of The Data Driven Investor
- Elazar Advisors, LLC, author of Nail Tech Earnings
- Chris Lau, author of DIY Value Investing
- Joe Albano, author of Tech Cache
- Dividend Sleuth, contributing author on Margin of Safety Investing
What is your biggest take away from the Disney+ rollout last week?
Andres Cardenal, CFA: Disney is making a strong move with Disney+. The subscription price of $6.99 per month or $69.99 annually is very competitive, and Disney+ will also include outstanding content quality. Such as important, management said that Hulu is the fastest growing streaming service in the US with 23 million paying members, while ESPN+ has 2 million paid subscriptions, double the number from just five months ago. In a nutshell, Hulu and ESPN+ are growing rapidly, and Disney+ looks well positioned for success.
Chris Lau: Disney erased the discount markets imposed on the stock after the Disney+ announcement and rightfully so. It will monetize its massive library of valuable IP on a streaming platform. But the bigger winner is Amazon (AMZN), which currently hosts Hulu and will host Disney+.
Look at this job posted on Apr. 10. The job post says "The Polaris Team, specifically our Content Engineering Team is looking to hire an Associate Software Engineer in NYC for Disney Streaming Services."
Disney+ will likely draw many subscribers due to its low price and attractive well-known content offering.
Joe Albano: Disney has an uphill battle. There will be some easy low hanging fruit but marketing and pivoting against themselves in certain areas such as reducing licensing to other streamers (which is accretive, higher margin revenue) is going to be a multi-front financial battle. The market is getting ahead of itself a little.
Dividend Sleuth: "Disney Plus" is a great name and an extension of their iconic brand. Disney's move provides clarity for the horse race that's developing between communications powerhouses. Just as the U.S. had three major TV networks for several decades, we're moving toward perhaps three or four mega media powerhouses. The eventual mergers and acquisitions are yet to be determined, but potential constellations will continue to unfold. AT&T absorbed DIRECTV and Time Warner to grow distribution and content generation-aimed at growing subscriptions and advertising revenue. Will Disney overwhelm Netflix, or could they form a partnership? Or, will Amazon acquire Netflix to compete against both AT&T and Disney? Will Alphabet acquire both CenturyLink (CTL) and Lionsgate (LGF.A) (LGF.B)? There are countless variations for potential alliances.
Do you think the subscribers' goal for 2024 (60M subscribers) is realistic? Too ambitious, or sandbagging?
Andres Cardenal, CFA: These kinds of goals always have a large margin of error, but Disney has what it takes to meet and even surpass such a target. Content quality and brand recognition are key competitive strengths in the industry, and Disney+ is fairly unique in that area. The teams working on content for Disney+ are mostly the same teams that have created massive successes for Disney, Pixar, Marvel, and Lucasfilm over the years, so the platform looks very promising in terms of content creation going forward.
Chris Lau: Strong brand recognition and healthy demand for Disney Channel, Disney movies, and beloved Disney characters will draw subscribers. 60 million is just 12 million additions annually for the next five years. Netflix started with 23 million in Q3 2011 but did not have all of Disney's library of material. Therefore, this forecast is too conservative.
Joe Albano: It's probably pretty accurate though the growth is going to have to be international as Netflix has only now reached around 60M in the US. So it's between realistic and too ambitious with plans to start a global rollout in 2021 - really leaving just 3 years to pick the slack up. 20M US subscribers by 2021 would be a tough goal but not surprised we'd see that. At $7 a month and 20M subs, that's going to equate to just over 2% revenue contribution in 2021 Q1 ($18.51B est), though. The market is getting ahead of itself a little.
Dividend Sleuth: The industry is moving toward individualized content based on each subscriber’s preferences, a model perfected by Netflix that demonstrates the potential for tailored ads. 5G will facilitate this personalized movement, making desired content available 24/7 over a variety of devices. All the players are thinking globally, so each company (or each consortium) will compete for its share of the worldwide audience. Disney’s goal of 60-90 million subscribers seems realistic. The coalescence of the industry into partnerships and/or mergers is happening at the perfect time to capture the rollout of 5G across the world. Verizon (VZ) CEO Hans Vestberg sees 5G as the “fourth industrial revolution.”
Netflix reported earnings this week and initially sold off, following a sell off on the Disney news. What do you make of its positioning as competition heats up?
Andres Cardenal, CFA: Disney does not necessarily need to kill Netflix in order to succeed, the streaming market opportunity is large enough to allow Disney, Netflix, and others to do well in the long term. The main losers from the streaming revolution will be traditional TV players that are adapting rapidly enough to the new industry paradigm.
Elazar Advisors, LLC: All the new entrants have the crosshairs on Netflix. If you noticed Netflix just reported gross margins that got worse the last two quarters. The cost of content drives that. Disney, Apple, Amazon are all in there bidding up content, making it more expensive for Netflix to drive new content which is the name of the game. So while the Netflix revenue and subscriber numbers were stellar with a lack of competition the first hint of competition showed up in those gross margin numbers. Because of that the earnings story looks like it's about to take a negative turn which can talk some big funds into cutting positions.
Chris Lau: Netflix will need to think twice about raising prices. It has limited pricing power in emerging markets like India. Now that Disney+ is coming in for less, the uptake for a Netflix subscription will slow. Near-term, Netflix customers may have both subscriptions but the long-term for Netflix is less clear.
Joe Albano: It's positioning is fine, it just came off the highest ever subscriber growth in a single quarter. The competition is not primarily from other streamers, it's from other distractions and management rightfully called out non-streaming competition like Fortnite, which is pervasive in Gen-Z. Households can have more than one streaming subscription, I do and I utilize them all. Let's not forget everyone shares everyone's Netflix account. Amazon Prime is a little harder to share since it means all of Prime, not just streaming, so less likely to let friends open to your Prime 2-day shipping benefits. Netflix has an advantage there. Expect Disney+ to have the same benefit - or problem - depending on how you look at it.
Dividend Sleuth: This is just the first leg of the race. Disney is now out of the gate in a field that has been dominated by Netflix. A negative initial reaction to big name competition seems quite normal. Netflix could partner with someone (Amazon, Alphabet, Apple, et al) to take up Disney’s challenge. Or, Netflix could become part of the Disney family, anti-trust fears be damned.
Is the final Game of Thrones season a reminder of AT&T's strength, or their weakness?
Andres Cardenal, CFA: Game of Thrones will attract some positive attention to AT&T stock, but the company has a massive revenue base of nearly $170.8 billion per year, so it is not easy to move the needle in terms of total financial performance. At the end of the day, both in the telecom and entertainment segments AT&T is operating in mature industries facing significant disruption risk, and this poses some serious limitations to upside potential in AT&T stock.
Chris Lau: Game of Thrones is a positive catalyst that validates AT&T's WarnerMedia buyout. Still, markets are forward-thinking. My DIY Marketplace portfolio recommends AT&T stock but I already modeled for a strong season for HBO in 2019. AT&T's near-term priority is paring its debt levels.
Joe Albano: It's back into the spotlight for GoT - for the last time. AT&T is going to need another hit like GoT as GoT disappears from the friend circle conversation and media hype. Not enough of a reason to hold onto an HBO subscription, which is just a single source of content, smaller than Netflix or Disney+. Non-factor here for helping T, it's a weakness.
Dividend Sleuth: It’s a reminder that AT&T has joined the race. But, it’s a crowded field. Everyone is scrambling for the best technology applications, for “first mover” advantage and for advertising and subscription revenue.
What are you watching most over the rest of the year in this space?
Andres Cardenal, CFA: Most of the attention will be focused on players such as Netflix, Disney, Amazon, and Apple (AAPL). However, Google (GOOG) (GOOGL) has lots of potential in this market over the middle term. YouTube has over 1.9 billion monthly users, and over 1 billion hours of video are being watched on YouTube every day. Google is barely in the first steps of monetizing YouTube, so it's a major player to watch going forward.
Chris Lau: We are watching Viacom (VIAB), CBS (CBS), Comcast (CMCSA), AT&T, and Netflix. VIAB and CBS are unlikely to hold recent gains unless the family is willing to entertain M&A activities to consolidate the businesses.
Joe Albano: I'll be keeping my ears open for chatter in the friend and family circle about Disney+. So far no real buzz. We'll see come November how hot it gets and if it sizzles out or Disney gets it right with marketing it. Netflix is the leader, everyone else is playing catch up. There are some formidable competitors but no one's made a dent in Netflix's armor, yet.
Dividend Sleuth: I’m watching for a relatively quick formation of alliances. This will be an intense competition and it will be costly. If everyone competes against everyone else, the content and infrastructure costs would be astronomical. The early advantage will go to the companies that make the smartest alliances in a timely fashion. Apple is in the catbird seat with its large cash capability. Does it choose a partner or an acquisition target? Or, does it ditch TV and buy Tesla?
Other related articles from Marketplace authors:
- Netflix: Rapid Margin Expansion Being Masked By Marketing Investments by Long Hill Road Capital
- Netflix: Is Disney A Threat? by David Zanoni
- AT&T's Quarterly Results May Give Shares A Needed Boost by Mott Capital Management
- Disney Knocks It Out Of The Park by Daniel Jones
Other big stories this week
A Focus On Energy: Chevron Is Paying A Fair Price For Anadarko by KCI Research Ltd.
Chevron (CVX) announced a deal to acquire Anadarko Petroleum (APC), which is sparking renewed animal spirits in the energy sector. KCI Research Ltd., who runs The Contrarian, breaks down the deal multiples and the immediate implications for both CVX and the sector at large.
Qualcomm Hands Apple A Stunning Defeat by Mark Hibben
Qualcomm (QCOM) has been crowned the major winner in its patent struggle with Apple after the two companies reached a settlement to drop all litigation. Mark Hibben of Rethink Technology goes over what happened and what it means for both Qualcomm and Apple, as a bull about both companies.
Why UnitedHealth Is Due For A Rebound by Chris Lau
It's tough to find large-cap stocks at 52-week lows, but the place to look is in healthcare. UnitedHealth's (UNH) earnings report may have been a trigger for the latest leg down, but Chris Lau argues that a rebound is due.
- Global Water Resources: The Best Kept Secret In Utilities by Ian Bezek
- Oppenheimer's Dubious Baidu Downgrade by Akram's Razor
- IBM: Incessant Buyback Machine by Trapping Value
- Sector Allocations: Defense Might Win Championships, But Offense Will Generate Higher Returns by The Investment Strategist
- Why The Next Leg Of This Bull Market Could Take Stocks Much Higher by Victor Dergunov
- This Better Be One Heck Of A Trade Deal by Lawrence Fuller
- Kinder Morgan's Canadian And CO2 Cash Flow Drivers by Kirk Spano
Marketplace Roundtable Podcast
Our Roundtable podcast features 30-45 minute interviews with Marketplace authors about investing strategies, their background, and development in investing, and current ideas or market views of interest. We featured two podcasts this week:
Andres Cardenal, CFA (involved in our Disney discussion above) joined Nathaniel E. Baker to talk about why emerging markets might turn up, and the ongoing strength of Google and US tech more generally.
J Mintzmyer of Value Investor's Edge talked with Jonathan Liss about shipping and deep value, and how the sector plays into the investing style, as well as how shipping is really split into 8 different sectors.
Thanks for reading, and have a good holiday weekend, whichever holiday you have on your calendar!
See also May Departure Signals New Brexit Phase (Wall Street Breakfast Podcast) on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.