December 2022 / VIDEO
The Rise of Streaming Video Won't Lift All Boats
Key Insights
- The streaming revolution is forcing legacy media companies to play catch-up. Passing this screen test won’t be easy.
- The shift to a direct-to-consumer model means that streaming services are on their own to attract and retain customers.
- Potential success depends on the strength of a company’s content and its scale to invest in new shows and movies.
Transcript
Streaming video has been a boon for consumers.
You can watch what you want when you want. And the options are seemingly endless—from user-uploaded content to highly produced series and movies.
Cable is losing subscribers, and broadcast TV viewership is in decline. The streaming revolution is forcing legacy media companies to play catch-up.
Passing this screen test won’t be easy. A new competitive environment requires companies to flex different muscles to succeed.
The rise of streaming video and the decline of the cable bundle have changed the competitive dynamics dramatically.
The cable TV distribution system guarantees networks a subscriber base and keeps sales costs low. Cable providers handle the customer relationships. And media companies that own channels in the TV bundle historically succeeded in pushing cable and satellite providers for annual fee increases.
However, the shift to a direct-to-consumer model means that streaming services are on their own to attract and retain customers.
Content is king in this new world, and I expect the winners to take most of the spoils.
Shrinking viewership prompted several media companies to launch their own streaming services during the pandemic.
The big question is whether this new business could eventually match or exceed the economics of the old distribution system. Some will fall short.
Building a large, stable subscriber base is critical. More users and more viewing time equal more revenue from subscriptions and advertising.
Potential success on this front depends on the strength of a company’s content and its scale to invest in new shows and movies.
A robust content library that spans genres and offers something for everyone is key to attracting subscribers and limiting churn.
I favor companies that have amassed a trove of popular movies and shows. Replay value is part of the appeal. But these properties can also set the stage for sequels and spin-offs. New content that taps in to an established fanbase typically has better odds of success. All of this helps to attract subscribers to the service and to retain them.
The market tends to fixate on quarterly subscriber additions because they provide insight into a company’s scale. I monitor these metrics, too. But I also consider how a company’s revenue mix and margin profile could change over time.
Advertising could be an important driver in this regard. The lower monthly price of ad-supported subscription tiers can lure in new users while layering on marketing dollars. And I see the potential for innovation in advertising to drive pricing.
The disruption taking place in media is another sequel in an evolving storyline. Growth and value investors alike should tune in and follow the plot twists.
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Daniel Shear is an investment analyst on the media/telecom team in the U.S. Equity Division. He is a vice president and Investment Advisory Committee member of the US Large-Cap Equity Income, Communications & Technology Equity, US Large-Cap Core Equity, and US Value Equity Strategies. Daniel is a vice president of T. Rowe Price Group, Inc.
