The brutal economics of the streaming era means that only a handful of companies are the best positioned to win the costly Pay TV streaming wars. "Most of them won’t survive," as Alexia Quadrani, a media analyst with JPMorgan, told Barron's in detailed report summarized below. "The economics aren’t sustainable," she added.
The article predicts that likely winners include Comcast Corp. (CMCSA), The Walt Disney Co. (DIS), Discovery Inc. (DISCA), Alphabet Inc. (GOOGL), Apple inc. (AAPL), and Amazon.com Inc. (AMZN). It anticipates that Netflix Inc. (NFLX), Roku Inc. (ROKU), CBS Corp. (CBS), and Viacom Inc. (VIAB) will struggle.
- Video streaming is an increasingly crowded field.
- Disney, Comcast, Discovery, Amazon, Apple, and Alphabet look strong.
- Netflix, CBS, Viacom, and Roku may struggle.
- Netflix has high cash burn, is losing content, and faces pricing pressures.
- A competitive shakeout is likely.
Significance for Investors
Quadrani likes Disney, saying, “You’ll see pretty big numbers quickly after launch." The new Disney+ service will draw on its Pixar, Marvel, and Star Wars libraries, while also adding new content. The company expects the service to break even in roughly 5 years. It also offers Hulu and ESPN+.
Discovery is the pick of John Maloney, CEO of M&R Capital Management. Its properties include the Food Network and HGTV. Its stock is cheap, at a forward P/E ratio of only about 8 times projected earnings.
Comcast trades at a reasonable 14 times forward earnings, and is launching its Peacock streaming service in April 2020, with a mix of new and old content. In Europe, it has Sky and Now TV, a leading over the top (OTT) player. Comcast has the advantage of being a leading cable service and internet connection provider. Its Xfinity Flex service is free to broadband-only customers.
Amazon offers a vast and expanding video streaming library mainly as a free perk for Amazon Prime frequent shoppers. Alphabet offers YouTube TV, but its YouTube video sharing service is "an endless gold mine," per Barron's. Apple is rolling out Apple TV+ with original content, but it may be primarily designed to increase device sales, partly through bundling.
Netflix stock is down by about 25% from its peak in 2018, as investors become increasingly skeptical about cash-burning businesses. It burned over $5 billion of cash in the last 3 years, increasing to about $7 billion for the 3 years starting with 2019. Studios, notably Disney, are pulling content, production costs are rising, and new competition is limiting price increases.
CBS and Viacom have a pending merger. CBS has an OTT option for viewing Showtime, and Viacom has Nickelodeon, MTV, Comedy Central, plus movies from Paramount. Both companies are priced cheaply 5 to 6 times earnings, which signals lack of investor enthusiasm, and an outlook for modest growth.
Roku's stock has increased roughly 9-fold since its IPO in Sept. 2017, but it lags in name recognition and content. For example, Roku's website recently gave top billing to the original Terminator movie from 1984.
Alexia Quadrani predicts that future TV viewers will buy bundles of core streaming services, plus niche services similar to the cable bundles already available today. However, she observes that there are already too many options, leading to her prediction that most will disappear.
"The low-hanging fruit of young streamers has been harvested," per John Maloney. “There’s such a profusion of services that older viewers could freeze and say, ‘I’ll figure that out later,'" he added.