It’s fitting that internet television services are called “over the top.” That can mean excessive, too, and viewers will soon face a bewildering sprawl of choices.
The phrase was also once used for soldiers scrambling up trenches to attack. Now, Disney (DIS), WarnerMedia, NBC, and others are about to enter the battle for streaming subscribers.
If cord-cutting accelerates among traditional cable customers, these companies will need to win streamers quickly. If TV viewers stick with their cable bundles for longer than expected, companies could end up having overspent to go over-the-top.
Even media chiefs disagree over how the next few years will play out.
Bob Iger at Walt Disney tells Barron’s that he expects continued erosion for big cable bundles and is intensely focused on Disney+, which starts on Nov. 12. “We’re creating a product that serves the consumer the way they want to be served, which is the best thing a company can do,” he says.
Bob Bakish, who heads Viacom (VIAB), and will also run CBS (CBS) after a pending merger, says the industry is segmenting on price, but that the traditional cable bundle still holds great appeal. “There are certainly people that have moved over the top and gone back,” he says. “What the steady-state penetration will be, time will tell.”
Brian Roberts at Comcast (CMCSA), speaking from China, where he is building Universal Studios Beijing to rival Shanghai Disneyland, says that his company, as a broadband provider, is in a good position to reaggregate what is now being taken apart. “Video over the internet is more friend than foe,” he says. “We want to get to a place of relative indifference where we can be rooting for the customer.”
How can investors pick winners or losers?
Most companies are taking hedged approaches. Some have lucrative other businesses facing less disruption, such as theme parks and wireless phone service. Others have deeply discounted shares to reflect the uncertainty. There is good money to be made in media stocks in coming years, not just despite the turmoil, but because of it.
Accompanying this article is a guide, analyzing the opportunities and risks for the biggest companies in streaming.
Comcast stacks up better than investors might expect, in part because, for it, cord-cutting is a misnomer. In Comcast’s markets, its broadband service is the top means of delivering Netflix (NFLX) and Amazon Prime to homes.
Disney has dominated Hollywood like no other company in recent years, making it a heavy favorite for the No. 2 spot in streaming subscribers, behind Netflix. But the transition will slow Disney’s earnings growth, and its shares trade at a premium to the group. Warner parent AT&T (T), along with CBS and Viacom, are challenged but cheap. Don’t write them off.
Netflix has made fools of doubters for years, and no company spends more on content per customer dollar. That’s an excellent reason to subscribe, but the company’s aggressive cash burn, combined with rising competition, make the path from here risky for shareholders. Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL)—all can thrive with or without becoming larger TV players. As for Roku (ROKU), its shares are a long- shot bet on a specific outcome—and they have been soaring.
The main thing to know about pay TV is that subscriptions peaked in 2012, at 101 million across cable, satellite, and telecom, and that they are down to about 90 million. That includes eight million or nine million skinny-bundle customers, who pay for streamlined channel assortments delivered over broadband to save money. The declines are accelerating: Investment bank UBS predicts 6.1 million lost subscribers in 2019, compared with 1.2 million last year.
For cable, the situation is much better than these numbers suggest. Satellite and telecom TV services are falling out of favor, and AT&T, which has both, could account for two-thirds of subscriber losses this year. Growth in skinny bundles has slowed, as providers have raised prices and customers have questioned the savings. And broadband is booming. Cable broadband added nearly three million subscribers last year, including more than a million each for Comcast and Charter Communications (CHTR).
Streaming can refer to different types of services, but keep one distinction in mind. Skinny bundles—also called virtual multichannel video programming distributors, or vMVPDs—seek to mimic the cable experience, with groups of live channels. Customers who choose these generally use only one.
Netflix, Disney+, and others are examples of subscription video on demand services, or SVODs, through which viewers watch what they want when they want. Consumers may want many of these services, but surveys suggest that they’re willing to pay for only a handful. There are also AVODs, which offer generally less expensive content for free, supported by advertising.
Alexia Quadrani, a media analyst with J.P. Morgan, says that future TV viewers will buy bundles of core streaming services and niche ones, like today’s cable bundles, and that there are already too many services. “Most of them won’t survive,” she predicts. “The economics aren’t sustainable.” She likes Disney. “You’ll see pretty big numbers quickly after launch,” she says.
John Maloney, chief executive of New York—based M&R Capital Management, says that streaming’s complexity could result in cable inertia. “The low-hanging fruit of young streamers has been harvested,” he says. “There’s such a profusion of services that older viewers could freeze and say, ‘I’ll figure that out later.’ ”
Maloney likes Discovery (DISCA), which owns the Food Network and HGTV and whose stock trades below eight times earnings.
Michael Lippert, co-manager of the Baron Opportunity fund (BIOUX), says that with streaming, some customers will sign up for the savings, and others for the more flexible viewing experience.
He likes Netflix and Trade Desk (TTD), which allows ad buyers to shop across a mosaic of digital TV s ervices. The company is fast-growing and trades at more than 50 times next year’s estimated earnings. The stock price has multiplied more than seven times in three years.
Here are the main TV players, their strengths and vulnerabilities—and what to do with their shares:
Buy the stock. It is up 34% this year, because investors have come around to the view that broadband gains in coming years will more than offset video losses, making cable companies low-risk tech utilities. But Comcast has lagged behind its cable peers because its television production assets at NBC and Sky add uncertainty. Its shares trade for a reasonable 14 times forward earnings estimates.
In streaming, the company’s Peacock service, which will begin next April with shows such as Parks and Recreation, Battlestar Galactica, and a rebooted Punky Brewster, isn’t an obvious threat to Netflix or Disney. But Comcast has wisely chosen a “freemium” model for it. That will help with churn, a big risk to streamers, if customers hop from service to service and binge on their favorite shows.
Sky offers English Premier League soccer, news, and scripted content. More important is its position in over-the-top TV distribution in Europe with Now TV.
Comcast’s cable business, however, brings in two-thirds of its earnings before interest, taxes, depreciation, and amortization, or Ebitda. Its position there is unmatched, as the largest player with the most sophisticated hardware and software interface, Xfinity X1, which some other cable carriers pay to license. Comcast’s recently launched Flex service gives a free streaming device to broadband-only customers, keeping those who step down from cable TV in the software ecosystem.
Matt Strauss, the new head of Peacock, says his vision for the future of television is a screen that is always on. “The TV is the biggest display in the home,” he says. “In the past, it’s where you watched video, but in the future, it will be for monitoring cameras, controlling the thermostat, and more.”
Barclays analyst Kannan Venkateshwar views rebundling as the future of streaming, and broadband providers as best-positioned to do it, because broadband and streaming are highly correlated services, whereas broadband and cable TV had little to do with each other. But in his view, only Comcast has made the technological investment to allow it to add high value as a bundler.
Matthew Harrigan at Benchmark, the biggest Comcast bull on the Street with a $64 price target, says that even assigning zero value to TV would leave the stock worth a price in the low $50s. The shares recently traded at $45 and change.
Other cable companies
They have raced ahead: Charter Communications is up 55% this year, and Altice USA (ATUS), 80%. Those two are 15% and 9% more expensive than Comcast, respectively, based on enterprise value against forward estimates of Ebitda. Investors should prefer Comcast, for its greater ability to compete against Apple and Amazon (AMZN) to become a major streaming bundler.
Hold off. This past week, the company missed third-quarter estimates for subscriber wins, but by only a little, which was a good-enough showing ahead of the introduction of well-funded rival services. The bull case on the stock is that Netflix’s huge and growing global customer base will allow it to hold the line on content costs and gradually raise prices, resulting in significant free cash flow. Barclay’s Venkateshwar, who sees rebundling as the future of TV, views Netflix as likely to become the equivalent of an anchor network.
Investors have lately turned skeptical on cash-burning companies, however, and Netflix, which has gone through more than $5 billion in the past three years, is expected to consume another $7 billion over this year and the following two, before generating positive free-cash flow in 2022. Estimates have been slipping. The stock peaked above $400 last year, but recently traded below $300.
Many studios, meanwhile, are pulling content from Netflix. At the very least, they are driving up the cost of shows, and new competition could make price increases more difficult. Leave the stock alone for now, and wait for free cash estimates to begin moving in the right direction.
Stick with the stock, but don’t expect rapid gains. It is up 20% this year, even though earnings per share are expected to decline by as much, because investors understand that the profit decline is temporary and because the stock was cheap to begin with. Disney+, which will tap the company’s Pixar, Marvel, and Star Wars franchises for a mix of library hits and exclusive new shows and films, requires substantial upfront spending before subscription dollars can cover the cost.
The company says the service will break even in about five years. Until then, it will look like a little Netflix inside Disney. Yet within two years, losses for Disney+ will be small enough that the overall company can return to growth on gains for theme parks, films, and other businesses.
Disney and Amazon recently clashed over ad revenue from Disney apps that appear on Amazon’s Fire TV service. That illustrates how streaming networks and streaming bundlers will vie for power, just as TV networks and cable bundlers do.
“I think that has been overblown,” says Kevin Mayer, who runs Disney’s direct-to-customer business. “It’s not war. We’re just negotiating.” Disney has been offering discounted streaming subscriptions to customers who prepay for up to three years. That could help with early growth, and churn. Mayer says the offers have been “well received.” A bundle of Disney+, Hulu, and ESPN+ comes in a few bucks lower than the top Netflix offering—a compelling pitch.
“Everyone seems to be setting this up to be an us-versus-them battle with Netflix,” Iger says. “We don’t see it that way at all. We’re well differentiated.” If he’s worried about customer turnover, it doesn’t show. “Netflix has managed to control churn brilliantly,” he says. “We think we will, too.”
Iger says that Disney eventually will harmonize the two technology platforms that will be used for its streaming services at first.
Mayer points out that Disney will continue to make good money in cable. “We have a hedged position,” he says.
Buy the stock for income, but be ready for price volatility. Time Warner, bought last year, brought a streaming-friendly mix of sports, news, films, and DC Comics superheroes, plus HBO, which has an over-the-top offering. But legacy AT&T has one of the weakest hands in TV distribution. Its DirecTV and U-verse are losing customers. So is AT&T TV Now—the new name for the DirecTV Now skinny bundle.
The fix for all of this, the company hopes, is a new OTT service with a slightly skinnier name. AT&T TV, which is currently available in a limited number of cities, comes with a streaming box running Android TV software and offers channel bundles that rival traditional cable. On Oct. 29, the company will host a WarnerMedia day in Burbank, Calif., where it will offer details on HBO Max, another streaming service coming in the spring, and will presumably explain how the services will work together.
That neither streaming service will carry the DirecTV name says something about the wisdom of the $49 billion acquisition of the satellite operator in 2015, but what’s done is done. Elliott Management, an activist investor, is pressuring AT&T to review its TV portfolio, perhaps sell the satellite business, and put cash toward stock buybacks and debt repayment. Fortunately for AT&T, the U.S. wireless phone business has rarely been stronger. An agreement this month to sell operations in Puerto Rico and the Virgin Islands to Liberty Latin America bolsters cash.
Lower debt will add confidence in the outsize dividend yield, recently 5.4%. And AT&T shares go for a modest 10 times earnings. In September, the company appointed WarnerMedia’s boss, John Stankey, to a newly created No. 2 position, setting him up to succeed CEO Randall Stephenson.
Ultimately, AT&T will need to explain why the telephone and TV businesses belong together in an over-the-top world—or it will have to do something to change that. For now, however, it just needs to stem TV declines and keep the dividends coming.
Viacom and CBS
When Bob Bakish took over at Viacom three years ago, its young viewers were leaving for the internet, advertising revenues were shrinking, and its film studio, Paramount, was producing big losses. Now, ratings are better, ad revenue has returned to growth, and Paramount is profitable. That makes Bakish a good pick to oversee the stronger assets at CBS when the two companies recombine for the first time in 14 years.
CBS All Access is no Netflix killer. It will gain some appeal once Viacom folds in shows from Nickelodeon, MTV, and Comedy Central, and films from Paramount, to form a new service. CBS’ Showtime, like HBO, already has an over-the-top offering. Ad-supported Pluto TV answers the question of how to keep making money from customers who churn out of paid services, while pitching them on upgrading again later. Together, these assets give Viacom/CBS a shot at becoming the third or fourth most popular streaming service, behind Netflix and Disney’s bundle, and not counting Amazon Prime Video, a giveaway for Amazon Prime customers.
More important is that Bakish has an arms dealer’s indifference to taking sides in the streaming wars. Disney is stripping Netflix of valuable children’s programming. Bakish can send in Teenage Mutant Ninja Turtles, Dora the Explorer, and PAW Patrol to fill the gap. And in traditional TV, as he likes to point out, the two companies have 22% of the audience, but only 11% of payments from distributors. For investors, the killer feature is the valuation. At five and six times earnings, Viacom and CBS are priced for disaster. Modest earnings growth seems more likely.
Shares of Roku made their trading debut at $14 apiece in September 2017. Now they go for $126. The company sells streaming boxes, but doesn’t have nearly the name recognition of Apple and Amazon. And the Roku Channel? Its website recently gave top billing to The Terminator—not the new sequel coming out Nov. 1, but the original from 1984. Roku’s limited content is part of its appeal for media partners. They can put their apps on the service without worrying about enriching a direct competitor.
Roku enjoys rapid gains in revenues and viewership, and widespread deals with TV makers that allow it to build its service into new sets.
The company could swing to profitability in a couple of years. Its stock trades now at just over 40 times the early consensus for 2023 earnings—although individual estimates are all over the place. There’s no cash-generating side business to fall back on, so the stock is for daredevils only.
Apple, Amazon, Alphabet
Yes to all, but not for TV.
The $5-a-month Apple TV+ service looks less like a big Hollywood play than an effort to goose hardware sales and expand future bundling power. Disney is spending $120 million to make one season of a Star Wars spinoff called The Mandalorian, whereas Apple TV+ will have Oprah Winfrey talking about books once every two months.
Why doesn’t Amazon use its huge free cash flow to squash Netflix in streaming? Because it is a retailer first, and needs only so many shows to offer a perk for its buying-club members. Alphabet’s skinny bundle, YouTube TV, is mildly interesting for investors, but its original YouTube video-sharing service is an endless gold mine.
The surest bet over the coming year is that some streaming services will overspend in the grab for market share.
Couch potatoes are sitting pretty.
|For more news you can use to help guide your financial life, visit our Insights page.|