Content Providers are Likely to Prosper as TV Viewing Shifts
By Jim Kang
Capital Group Equity Analyst
A significant transformation is taking place in the way in which people watch television. The traditional pay-TV model, in which households get their programming largely from cable or satellite operators, is yielding to a new world of on-demand entertainment over the Internet. A host of web-based services are emerging to give viewers more options than ever for how they access and pay for content. I believe that the consumption of entertainment will be vastly different in five to 10 years as consumers increasingly move toward these on-demand sources.
This shift will have important consequences for the entertainment industry. In particular, I believe it bodes well for those that can create strong content. Such companies will have more outlets for their programming and greater negotiating leverage with cable providers and other distributors. The need for original programming should only grow as Internet-based services such as Netflix, Hulu and Amazon Prime seek to expand their customer bases and differentiate themselves in the marketplace. In other words, content is king. I expect that content will only gain in importance as the entertainment landscape continues shifting to a new framework.
As an analyst who has followed the entertainment industry for many years, I am paying close attention to the investment opportunities presented by this new environment. Even though the overall prospects for content providers are encouraging, I believe it takes a keen and experienced eye to sort potential winners from losers. For companies to succeed, they must prove that they are both willing and able to navigate uncharted territory. There are relatively few “pure play” content providers. Instead, many companies own both content and distribution. Branching into streaming services over the Internet may threaten some long-time business models, at least initially. But companies with a clear vision and the ability to adjust to this new reality should produce superior returns for investors over time.
Shifting demographics and consumer tastes are driving on-demand services.
This move to an on-demand world is being paced by a mix of changing technology, demographics and consumer tastes. For two decades, content creators and pay-TV providers had a mutual interest in preserving the conventional distribution model, in which households pay $100 or more monthly for cable or satellite service. However, the proliferation of Internet options, combined with dissatisfaction over rising pay-TV fees, has prompted consumers to look for alternatives. Other factors are feeding the migration to the Internet, including a sharp increase in the number of people watching shows on their smartphones and the popularity of YouTube.
Changes in the entertainment industry don’t necessarily signal the demise of cable and satellite companies. There is still notable demand for traditional pay-TV services. Many consumers would rather subscribe to a single provider than piece together shows from a variety of services. Just as radio adjusted to a world of TV, cable companies are adapting to the shifting landscape. For example, to offset concerns about the pricing of huge channel “bundles,” some are beginning to experiment with smaller and less expensive channel packages.
Far more important, cable companies are benefiting significantly from robust demand for high-speed Internet service. As consumers migrate to web-based programming, the need for broadband connections provided by cable operators is moving in lockstep. My colleague Brant Thompson discussed this topic in the Spring 2014 issue of Quarterly Insights.
Nevertheless, encroachment from digital rivals has forced cable and satellite companies to roll out their own streaming services over the Internet. Pay-TV providers are trying to dissuade subscribers from cutting the cord, dropping their services in favor of less expensive online options. To that end, they’ve pushed the idea of “TV Everywhere,” which allows subscribers to access content on computers, tablets and smartphones. That’s been successful, though it’s more of a stopgap measure than a genuine innovation.
Content providers are beginning to offer services directly to consumers.
The most dramatic development has come from content providers. In moves that would have been unthinkable just a few years ago, they are starting to bypass cable and satellite companies in favor of selling directly to consumers over the Internet. HBO, for example, garnered significant attention with its rollout of a stand-alone streaming service. Showtime, another premium channel, plans a similar initiative. CBS has begun offering a streaming service made up of current and past programs. These types of offerings can lure customers who don’t subscribe to cable. More importantly, the new services establish a foothold in the digital marketplace that can be leveraged as on-demand grows in popularity.
Demand for content is also being driven by international growth. Entertainment is a highly exportable product, and the opportunity for expansion overseas is greater than in the U.S. The increase in broadband availability around the world is making it easier for programmers to deliver their services internationally. Though the threat of piracy is always a concern, there is a significant appetite among foreign audiences for American programming. International sales have been a consistent source of growth in recent years, and I expect that to continue, especially as markets continue opening up in China and other emerging economies.
As with any industry undergoing rapid change, it’s unclear how the new paradigm will shake out. However, I believe that in coming years most viewing will be done on new platforms. In a sign of the changing landscape, live TV viewership is falling. Content companies face various challenges as the new framework evolves, including uncertainty about licensing revenue and upward pressure on production costs. But companies that are able to create sought-after programming across multiple platforms and devices will be in a strong position to prosper.
Jim Kang is an equity analyst with research responsibility for advertising, casinos and gaming, newspapers and broadcasting companies. Based in Los Angeles, he has 27 years of investment experience and has been with Capital Group since 1988.