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How to Play Media Stocks for the Coming 'Streaming Wars'

Which of the media old guard are set up to succeed? Here’s how each of them is approaching the streaming future.

Which of the media old guard are set up to succeed? Here’s how each of them is approaching the streaming future.

Much has been written recently about the coming “streaming wars,” with dozens of mass-market and niche direct-to-consumer services available or soon to be introduced. The way consumers get their entertainment has come a long way from the traditional ecosystem dominated by cable and satellite TV. That meant limited options for consumers, long-term contracts, and little control over the content they receive—but wide profit margins and stable revenues for the distributors.

“The old model was characterized by mass adoption given few substitutes, high barriers to entry, limited competition among a static number of programmers and distributors, and high switching costs,” UBS analyst John Hodulik wrote in a report on Wednesday. “These conditions rarely persist in internet-driven industries where low switching costs, low barriers to entry, higher price transparency, and rapid innovation create a more dynamic playfield.”

That means more players, less loyalty among subscribers, and greater competition for customers’ viewing time. It is a recipe for lower subscription prices to attract users, and greater spending on new content to keep them. And the more attractive streaming services there are, the faster the pay-TV business will shrink.

Traditional media companies including Walt Disney (ticker: DIS), AT&T’s (T) WarnerMedia and the soon-to-be-merged CBS (CBS) and Viacom (VIAB) are all embracing direct-to-consumer streaming. They are going up against industry pioneer Netflix (NFLX) and new entrants with deep pockets such as Apple (AAPL) and Amazon.com (AMZN).

Which of the media old guard are set up to succeed? Here’s how each of them is approaching the streaming future:

• Disney: The media and entertainment giant has a three-pronged strategy for streaming. Disney+ made its debut earlier this month—the home for family and children’s programming. ESPN+ is a streaming service focused on sports and Disney-controlled Hulu targets adult viewers. Hodulik forecasts that the three services could have more than 120 million subscribers in five years. Despite the resulting hit to Disney’s traditional TV and movie businesses, he is bullish on the “all-in” streaming approach.

“We see Disney as the only traditional media company with the scale, brand recognition and [intellectual property] to join Netflix and Amazon as a leader in the retail marketplace for subscription video,” Hodulik wrote. “The launch of Disney+ and broader pivot to DTC [direct to consumer] will require increased investment and changes to business practices that pressure legacy revenue streams. However, we believe the transition will ultimately result in a faster growing company with dramatically lower exposure to secular headwinds in video consumption.”

Hodulik has a Buy rating and $155 price target on Disney stock, 6% above its recent $146.30.

• AT&T: Its WarnerMedia-unit will introduce HBO Max next spring, which will include content from HBO, the Warner Bros. library, and additional original and licensed content. It will be the priciest of the major streaming services, at $15 a month. AT&T sees 50 million U.S. subscribers and up to 40 million international subscribers by 2025. Hodulik noted that the strategy is likely to drive additional pressure on WarnerMedia’s legacy-media revenue, which will make up 28% of the telecom giant’s business this year. Bundling HBO Max with some AT&T wireless plans could help reduce cancellations and increase sales there. Hodulik has a Buy rating and $42 price target on AT&T stock, 14% above its recent $36.80.

• Comcast: The company is taking a more-balanced approach to streaming, having a lot of pay-TV business to defend with more than 40 million TV subscribers in the U.S. and Europe. Its NBCUniversal subsidiary plans to release a streaming service called Peacock next year, with both subscription and free ad-supported tiers for Xfinity TV and internet customers. Hodulik noted that NBCU will continue to license some content and keep other shows and movies for Peacock. That means a smaller decrease in its licensing revenue than the all-in path that Disney is on. Hodulik has a Buy rating and $49 price target on Comcast stock, about 12% above its recent $43.90.

• Fox: Fox’s (FOXA) strategy is focused on live news, sports, and event programming, after it sold most of its entertainment assets to Disney last year. “We believe this programming has less substitution risk to DTC relative to entertainment or kids networks,” Hodulik wrote. “That said, pay-TV subscriber declines have nonetheless pressured the stock in recent months and we expect these trends could continue to weigh on sentiment. Despite Fox’s favorable positioning, trends will remain highly dependent on taking share of a shrinking pay-TV ecosystem.”

Fox’s only direct-to-consumer offering is a Fox News service called Fox Nation, which includes original content from the network at $7 a month. (Barron’s parent company News Corp and Fox share common ownership.) Hodulik has a Neutral rating and $35 target price on Fox stock, just below its recent $35.83.

• ViacomCBS: The two companies are in the process of consummating a re-merger. The company is trying to compete with several of its own direct-to-consumer services—CBS All Access, Showtime, ad-supported Pluto, and niche offerings like BET+ and Noggin—produce content for third parties, and maintain its traditional TV business. But it is hard to have it all ways. Deals with Netflix and Amazon to make shows for their platforms increase the value of those services relative to its own. Keeping content for its own services accelerates the decline of pay-TV viewership. And its traditional TV (about 70% of revenue) best-case scenario is to capture a bigger piece of a shrinking pie. Hodulik rates both stocks Neutral. His $40 CBS stock price target is 3% above its recent $38.76 and his $24 Viacom target is 4% above its recent $23.15.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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