The Future of Media: An Epic Battle -- Needham & Co.

We have funded or followed visionary billionaire entrepreneurs in the media space for nearly three decades and never has the outlook been so intriguing It is clear to us what happens next but the unintended consequences and ultimate outcome of the impending battle is anybody39s guessChallengers We expect each of the dominant US consumer facing internet platforms to spend billions of dollars in 2018 to create premium video content in an effort to take revenue viewers and time away from the incumbent TV and film content creators and distributors Because these companies have built their fortunes by aggregating consumers FB information GOOG products AMZN and apps AAPL we label them the Internet Aggregators Their competitive weapons are significant They are much larger have deeper pockets are held to different valuation standards by Wall Street implying a lower cost of capital have global distribution and revenue footprints are dominant in mobile and they are willing to subsidize losses for a decade as YouTube has done More ominously they are fast movers with agendas that have little to do with ecosystem health as evidenced by the value destruction of several historical media ecosystems We believe that their war will ultimately be against one another but that the TV and film ecosystems represent a key strategic battleground in that end gameChamps From an overtheair US TV industry generating less than 10B in revenue in 1980 the US TV ecosystem spent the next 35 years together building one of the most successful US consumer products of all time the linear TV bundle At its peak reach in 2010 88 of US households paid a subscription fee to the TV ecosystem for access to 250 Paytv channels Although megabundle Paytv subscribers are now declining revenue has continued to rise reaching about 170B in 2017 The US TV ecosystem has proven robust because it has hundreds of frenemy corporations negotiating a core competence unique longamp882 term contracts with each other that forward their own best interest Whenever any company gets an edge others follow Also it39s an ancient ecosystem so specialization is high and successful companies had to out compete every company that came beforeWhat media stocks should investors own in 2018 We recommend a CBS based on its OTT assets and US election advertising upside in 2018 b FB a mobile ad driven juggernaut with powerful ad targeting capabilities built on top of a worldclass consumer aggregation platform and c ATVI andor EA based on growing TAMs new revenue streams higher margins and eSports In midcap we recommend a ROKU which is an aggregator of OTT channels in the US and b WWE which has successfully made the transition to OTT and owns the wrestling super fan market globallyInternet Aggregators are coming Each Internet Aggregator has announced it will spend 3amp82086B in 2018 to create premium video content We believe this will be TV series type content based on a Facebook has found that audiences would rather watch multiamp8208episode video shows than oneamp8208off videos as Facebook series have twice the average viewing time of nonamp8208serialized videos according to FB b Three Mashable series quotSharp Sciencequot quotBad Daysquot and quotScamalotquot have an average watch time three times longer than nonamp8208serialized videos according to Mashable and c Attn reported that its monthly video series quotAmerica Versusquot compares US policies to other countries averages 30x longer engagement than what Attn gets for its oneamp8208off Facebook videosInternet Aggregators ie Apple Amazon Facebook Google have several competitive advantages in the fight for video economics each of which we discuss in this reportEnormous market capsHigh valuations ie low cost of capital and strong free cash flow from their core businessDeep pockets and patience with losses andSmartphone dominanceamp8212and smartphone viewing is where consumers are goingNetflix We do not include Netflix as an Internet Aggregator in this report Why not Because the Internet Aggregators organize longamp8208tail assets suggesting a power asymmetry with the platform having monopoly power compared to what it aggregates In contrast NFLX was built on contracts with the six major US studios each of which is taking its content away from NFLX to build their own OTT channels that will directly compete with NFLX Additionally NFLX must access capital markets to fund its 2amp82083B of annual cash losses suggesting it doesn39t have the balance sheet strength to survive in direct combat against the content conglomerates many of which have investmentamp8208grade balance sheetsChamps ie incumbent US TV ecosystem companies have several impressive competitive advantages in the fight for video economics each of which we discuss in this reportEngagement Enormous time spent daily with linear TV contentDual Revenue Stream Business Model TV generates 170B of revenue about 40 from advertising and 60 from subscription at a 20 profit margin This implies 136B is spent each year on TV and film content plus overhead We believe it will be nearly impossible for any single revenue stream competitor to unseat a dual revenue stream ecosystem owing to enormous implied lossesCluster Theory suggests that Hollywood and Silicon Valley are global winners in part owing to their geography Cluster theory jettisons the notion of competitive advantage as a concept relating to a single company and instead redefines competitive advantage based upon the geographic location of an ecosystem of companies which implies they cannot be movedTV Everywhere adds value to the perceived pricevalue relationship of the megaamp8208bundleMegaamp8208Bundle Value The high monthly price of skinny bundles and individual OTT channels for very limited programing andor access underscores the value of the 250 channel megaamp8208bundleConfusion Clutter created by a la carte choices confuses consumers resulting in a fear of making a bad decision This leads to inertia which means consumers stick with the megaamp8208bundle longerAd Growth US TV advertising is expected to grow adding about 1B in each of the next 5 years and reaching nearly 80B by 2020 As ad blockers threaten the adamp8208driven internet sites TV is a sure way for brands to reach audiences with their brand message via full screen sight sound and motion and no fraud thanks to independent thirdamp8208party measurement by Nielsen or comScoreClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

SUBSCRIBE FOR FREE MEDIAVILLAGE CONTENT | BECOME A THOUGHT LEADERSHIP CONTRIBUTOR

The Future of Media: An Epic Battle -- Needham & Co.

Author

Publish date

Channel

Read our important reports

The Future of Media: an Epic Battle

Laura Martin

FEMA and the Ad Council Encourage AANHPI Communities to Enhance Disaster Preparedness in New PSAs - Ad Council InSites

More Videos:

SUBSCRIBE FOR FREE MEDIAVILLAGE CONTENT | BECOME A THOUGHT LEADERSHIP CONTRIBUTOR

The Future of Media: An Epic Battle -- Needham & Co.

Read our important reports

The Future of Media: an Epic Battle

Enjoying This Commentary? There's More to Love

Laura Martin

FEMA and the Ad Council Encourage AANHPI Communities to Enhance Disaster Preparedness in New PSAs - Ad Council InSites

Cookies