Playing the Streaming War

Companies large and small are competing for your eyes. Which ones will be victorious? This article will attempt to pick a handful of winners.

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Cord-cutting is obviously very real. And it isn’t just the younger generations at this point. This Statista age breakout of cord-cutters shows that 45% of them were aged 45 or older in 2018. This is not just a millennial thing. Research firm eMarketer estimates that as of end of 2018, 33 million Americans have cut the cord. That’s a staggering number when you consider there are 120 million TV Households in the country. Where are these cord-cutters going? Wall Street clearly thinks Netflix and Roku are solid ways to play the Over The Top (OTT) trend in media consumption. Is the street right?

In my FAANGs article, I laid out a bit of a bearish case for Netflix. But I’m not bearish on OTT overall. Quite the contrary. The million dollar question is how do we profit from the future trends in media consumption.

If you’re thinking “maybe I should buy companies that own live streaming services like AT&T, Sony, or Google” I think those are reasonable thoughts. I’d never tell someone thinking along those lines NOT to give that a shot. But I’m of the opinion that even the popular Live TV Streaming services like Sling TV, YouTube TV, and Hulu Live are just a flash in the pan. Why?

Let’s look at DirecTV Now as a case study.

Beginning this month, the basic package will increase by $10 a month and actually have LESS channels than it did before. Here’s my favorite quote from the USA Today article on the price hike comes from Todd Juenger – Senior Analyst at Sanford Bernstein:

“Over time, the day of reckoning is inevitable. Even Google can’t keep selling a product to consumers for less than it costs to acquire, forever. Either the price has to go up, or channel lineup down, or both.”

To be clear, the live streaming services have been able to convert some of the cord-cutters. In large part because of the cost savings. We hate paying for channels we don’t watch and now we can get a skinnier bundle for a fraction of the price? Sounds good! Problem is, in order to do this, AT&T has been selling DirecTV Now at a loss. Like Juenger points out in the article and the quote above, this isn’t a sustainable business model.

Maybe the more alarming part for AT&T is that even before the price hike news, DirecTV Now’s total subscribers already went down in Q4 2018. And when you dig deeper into the live streaming service numbers, you’ll find that by most public estimates, there aren’t nearly as many pay-subscription live streamers as you probably think. Add up the subs from DirecTV Now, YouTube TV, Hulu Live, Sling, and Playstation Vue: less than 9 Million Americans are doing this. Throw in the lesser known entities like FuboTV and Philo for good measure. You’re still under 9 million. For context, there are more people using Crackle in a month than all of the pay services I just mentioned combined. Remember, we’re at 33 million cord-cutters and less than 9 million have converted to a pay streaming service. Putting the whole picture together; these live streaming services lose money, they haven’t received even close to the adoption you might think, and they’re already starting to raise prices. Problematic, no?

So, if not live streaming, where are these people going? Certainly Hulu on-demand. Obviously Netflix has been a massive beneficiary as a video on demand (VOD) streaming service. But unlike Hulu, Netflix isn’t ad-supported. And as I pointed out in my previous article, Netflix has built a subscriber base at a large future cost. We’re talking Billions of dollars in debt to license content that it doesn’t own. $100 Million just for Friends! WHAT?! Truthfully speaking, some of the best content options on Netflix are of the Marvel/Star Wars variety. Right before Disney is about to launch it’s own streaming service and almost certainly pull all owned content from Netflix. If you don’t think that’s happening, all of the Marvel TV shows getting cancelled on Netflix should be the tell.

In a lot of ways, the streaming war is very much the Wild West – we really don’t know what’s going to happen here ultimately. All we can do is make the best guess. I’m obviously not chasing Netflix at this valuation. In my opinion, the best way to play OTT on the street is through the true content creators/owners and the ad-supported services.

Cost saving; that is the most important part of the streaming war that, in my opinion, is getting glossed over. Consumers are done paying for channels and shows that they don’t want. The lack of live streaming subscribers compared to cord-cutters overall can’t be overlooked. Aside from sports, the future of streaming is probably VOD.

My theory: as more companies launch fee-based platforms, the fragmentation will intensify. Content owners will cut out middlemen like Netflix and go direct to consumer. Other companies will take a shot at free ad-supported platforms. It’s there that consolidation will take place. We’re already seeing this with Pluto TV and Crackle. But it cannot be overstated, consumers will get to a point of subscription saturation. How many services is that? 3? 2? Maybe a better barometer is total monthly cost. $50? It’s probably somewhere in that ballpark. I think the average American will ultimately pay for their favorite content and then accept commercial messaging to subsidize the rest.

Here are the stocks I like:

Viacom (VIA)
Strong content catalogue, potentially a merger with CBS, making a clear play at ad-supported OTT through the Pluto TV acquisition.
P/E Ratio: 9.15
Price to Book: 1.79
Yield: 2.38%
Market Cap: 12 Billion

Disney (DIS)
Possibly the best content catalogue in existence, a financial interest in Hulu that can’t be ignored, and a direct to consumer plan that is absolutely going to shake up this entire streaming landscape.
P/E Ratio: 15.41
Price to Book: 3.35
Yield: 1.59%
Market Cap: 202 Billion

Roku (ROKU)
This one is more of a play at ad revenue and a popular operating system. For full disclosure, I love Roku as a consumer but the company is still very speculative and is almost certainly overvalued. I’m waiting until this one comes back down to earth.
P/E Ratio: N/A
Price to Book: 10.2
Yield: N/A
Market Cap: 7.5 Billion

Chicken Soup for the Soul (CSSE)
This is your dark horse. The company just acquired a majority stake in Crackle and has a market cap of just over $120 million. Unlike other big players in the space, VOD is CSS Entertainment’s core business – meaning failure shouldn’t be because of a lack of focus. With a market cap so low, there’s a lot of room to run if the Crackle transaction proves successful.
P/E Ratio: 5.51
Price to Book: 1.82
Yield: N/A
Market Cap: 124 Million

Disclaimer: As of posting, I have no direct position in VIA, DIS, or ROKU. I am long CSSE. Views and opinions do not necessarily reflect the views and opinions of CLNS Media. I am not a financial adviser. I hold no licenses. I’m just a guy playing the ponies.