Streaming Scenarios

The business news is full of reports about deals going on in the media business. Will Comcast be able to best Disney’s latest offer to Fox’s film and broadcast assets? If Disney gets it will Comcast be satisfied to enlarge their global footprint by purchasing Sky in the United Kingdom? Will Comcast leverage up and try and purchase both Fox and Sky? If shut out of the Fox assets will Comcast make a run at Discovery as a consolation prize and, at the same time, enhance their global reach as Discovery has some fine overseas assets? I admit that I watch the financial soap opera daily and find it amusing. To me, however, it is not the really big issue out there although it is a part of it.

The real issue, to me, is the coming war for consumers in the streaming video space. As you know, Netflix, Amazon Prime, and Disney are active in this space. Two other tech giants, Apple and Facebook have talked about entering the fray. And, of course, there is Alphabet (Google), an absolute behemoth which has owned YouTube since 2006 but has yet to fully monetize its possibilities as an video and advertising platform.

Sumner Redstone, decades ago as CEO of CBS, popularized the term “Content is King.” The statement has proven to be true as distribution is now taking a backseat to content and the streaming bidding wars are beginning in earnest.

I have generally hesitated to make definitive forecasts but in this case I make an exception. We, in and of the media world, are going to see fireworks in mergers, acquisitions and new services in the next few years that will dwarf anything that we have experienced to date. Why? From my viewpoint, it is very simple. The companies involved are the greatest companies (by many yardsticks) in measured economic history. They have the deepest pockets of any publicly held companies since (adjusted for inflation) John D. Rockefeller’s Standard Oil was broken up by the federal government early in the 20th century.

Consider the players:

1) Apple—this company has nearly 200 billion dollars in cash. They are generating an additional several billion a month in free cash flow. Now, they want to get in to streaming content. They can lose several billion a year for a while and can play the long game. A year ago, I, along with other media observers, thought that Apple would be wise to purchase Netflix. Perhaps they are sorry that they did not. Since the beginning of 2018, Netflix shares have increased by 115% so the acquisition now would be far more costly and more risky.

2) Alphabet—for nearly 12 years, they have done little with their amazing YouTube platform. If they decide to go all in with streaming by creating content, they will be a formidable competitor very quickly.

3) Amazon—Jeff Bezos has a lot of irons in the fire but his 100 million plus Amazon Prime members gives Amazon a nice start in streaming. And, if you watch it, you will see that Amazon Prime video original content is getting better. Bezos is patient. Remember that Amazon was not consistently profitable for many years. As was true of Apple, Amazon can play the long game in streaming content if they choose to do so.

4) Facebook—The social media titan is losing a bit of luster with millennials but they have a huge global base and deep pockets to boot.

5) Disney—the “Mouse House” has a great deal of their own content and may indeed snare the Fox Studio and film library from Comcast’s clutches. They are planning their own streaming service and have great franchises such as Lucas Films (Star Wars), Marvel Entertainment and classic children’s fare. Perhaps they can shoehorn ESPN in to the package as well. Disney is a leader in global entertainment and has made few missteps over the years. If they price their streaming service well and package it up properly, they will be a force for sure.

6) Netflix—let me begin by saying that I love the service. I use it several times a week for their Netflix originals and, given my affection for classic films, I also re-watch a number of my favorites. One issue that I have with Netflix is that they are not spinning off much cash. Yes, they have tremendous loyalty and have become one of the world’s most valuable brands. But, they are spending a fortune on content. I have seen estimates of $8 billion dollars for calendar 2018 alone. When asked about it, talking heads on CNBC and Bloomberg have rationalized it by saying that they can easily issue more shares if they need more money. Okay, that is fine when a bull market is in progress but this one is getting long in the tooth. When will they get profitable and start delivering a boatload of free cash flow? Right now, their logarithm seems to have found a sweet spot for consumer likes and their original programming has surprised many of us with success after success. And, their global footprint is expanding much faster than the traditional media companies. Still, I think they are vulnerable and a sale last year to Apple might have been their ticket to immortality.

So, where does all this leave us? In the 40 plus years that I have been analyzing media properties, I have found that it has generally been a bad move to bet against Disney. Yet they do not have the borrowing power of an Apple, Alphabet, Amazon, or Facebook or the recent success of Netflix. Were this a simple fight with Netflix pitted against Disney, I would bet that once Disney made a complete commitment to streaming they would eventually win a very hard fought victory. But with all the FAANG’s involved, it is a whole new ballgame.

One good thing. As competition heats up, it will be great to be a consumer. We will get some really nice pricing on streaming venues over the next few years.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com