Video Media – The Cord Cutting Myth Gets Real

sagawa

The death of the multichannel cable bundle will take years to play out, but investors were reminded of its inevitability by the signs of erosion from even the best regarded media players. TV viewing is in decline. Pay TV subscriptions are falling. TV ad sales are down. Meanwhile, viewership is booming for NFLX and GOOG’s YouTube, as Americans are expressing a strong and growing preference for streaming on-demand video. The TV nets are coming late to the game, licensing linear streams to OTT players, like DISH, SONY and likely AAPL, offering skinny bundles online. We believe that the OTT bundles are unlikely to stem the tide toward on-demand streaming, damaging traditional media brands, and leaving them at a growing scale and data disadvantage in competing for creative content. Rising programming costs, particularly for live sports, will squeeze networks simultaneously suffering from top-line erosion. NFLX is the clear winner in subscription on-demand streaming, likely to continue its explosive sub growth with significant future monetization options. AMZN is best positioned to be number 2, ahead of TWX and its overpriced HBO Go. YouTube dominates the similarly fast growing ad driven, short-form video paradigm that it pioneered. We do not see FB as a threat to YouTube’s primary use cases, although its newsfeed has proven a robust channel for auto-play video ads.

Viewers are shifting to streaming video. Primetime broadcast ratings have dropped 41% since 2005. Overall TV viewing began to decline in 2014, according to Nielsen, whose methodology we believe systematically overstates audiences. Total US pay TV subscriptions dropped in 2013 and accelerated in 2014. Meanwhile, we estimate NFLX streaming hours are up ~30% YoY to about 15 hrs/week for each of its 43M US subscriber households. Similarly, YouTube streaming hours are up 50% YoY – ~1.8B hours/mo or over 2 hours per week for each of the 155M unique monthly US visitors.

TV networks look to recreate cable bundles on line. After years of protecting the cable bundle, networks have begun selling live streams to on-line bundlers. DISH launched Sling TV in Feb with 16 channels, including ESPN, for $20/mo. A month after, SONY launched VUE for PlayStation owners, offering 50 channels for $50/mo., with CBS, NBC and FOX but no ABC or ESPN. AAPL is reportedly negotiating for its own bundled OTT service, which would include local broadcast channels.

Short window for bundled OTT. Live network bundles will compete with on-demand services, like NFLX and YouTube, for viewership. Beyond sports and other live programming, this is becoming a losing proposition. A recent study suggests that time shifted viewing – DVR, VOD, and streaming – has surpassed live viewing for a majority of Americans, with the preference even clearer for coveted younger demographics. The implied trajectory toward time shifting is steep, a very poor indicator for DVR-less OTT bundles. The increasingly attractive libraries of on demand programming available on NFLX, YouTube, and AMZN will make expensive OTT bundles less viable with time.

Talent is king. Broadcast networks typically buy 8-12 new series each year to replace the weakest 30-40% of their schedules. Major sports contracts expire after 5-10 years and must be renegotiated. With cable nets and now, streaming platforms, competing for the most attractive content, the cost has continued to rise, squeezing margins for all. A vicious cycle could eat at bundled TV as subscription and ad dollars follow viewership to streaming platforms, enabling the streamers to compete even more aggressively for content. Disney CEO Iger recently acknowledged the dynamic and the inevitability that its ESPN franchise would eventually become a direct to consumer service.

NFLX has an insurmountable lead. NFLX has a growing base of 42M US subs, collectively watching 3.4B+ person hours/month – on par with the suspect Nielsen estimates for the broadcast nets – growing some 40% YoY. Leveraging this scale, NFLX is funding 36 original series for 2016, far outstripping rival HBO, which is second at 21. Moreover, NFLX’s unique and detailed data on viewer preferences give it a significant edge in the buying process. Rival services, like AMZN and HBO Go, will joust for second place, as the TV networks dither over entering with their own branded online services, reviving the jointly owned and badly malnourished Hulu, or supplying their content to others.

YouTube dominates the alternative video paradigm that it pioneered. YouTube gave new talent and independent producers a platform to bring video direct to consumers, with few constraints on the form, quality or content of the programming and a 55% share of ad revenues. This has been wildly successful. YouTube has more than 2.5M regular contributors – more than 1,250 with >1M subs. YouTube viewing is up more than 60% YoY to ~10B hours/month. Half of this is mobile, which has doubled YoY. 8 of the 10 most popular celebrities with US teens are YouTube stars. 72% of US millennials regularly watch YouTube, vs. just 53% that watch cable TV.

FB starts from far back. FB and its 1.5B global MAUs is the obvious rival to YouTube for video ads, but its nascent business is way behind as a platform for popular content. While FB may someday break out a standalone video app, today its videos are embedded in user newsfeeds making it difficult for users to find relevant videos and for creators to effectively market to their audience. FB is reporting strong growth in views, but quality of those views relative to YouTube is suspect. Still, the opportunity is more than big enough for FB to build a successful video business without really challenging YouTube’s leadership. We note that ad hoc live streaming, pioneered by TWTR’s Periscope and the startup Meerkat, is an intriguing extension to the YouTube paradigm.

Few TV brands will make it. As the paradigm shift to on demand streaming for recorded video content plays out, TV networks face a dilemma: defend the status quo and slowly lose relevance or compete and cannibalize themselves. At this point, even aggressive strategies risk being too little, too late. Meanwhile, NFLX seems a juggernaut, with future monetization options in live content, pay-per-view, or new service tiers, including ad support. TWX’s HBO Go is intriguing with its “must see” originals, but the late start, high price point and narrow library leave it unlikely to challenge NFLX for leadership. AMZN is driving sub growth by bundling video with its other Prime benefits, but won’t match NFLX or HBO on the breadth of its originals or the depth of its library. Hulu is hamstrung by its owners’ unwillingness to commit. GOOG’s YouTube asset is underappreciated by investors, and should drive significant revenue growth going forward. FB will gain from placing video ads in its newsfeeds, but is not well positioned to compete with YouTube for on-demand ad supported streaming.

Please see our published research page for the full note.

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