Wall Street has been bearish on TV stocks of late. The downdraft is even catching overperformers like Comcast. Here are five reasons investors have every right to be cautious with the TV market.
Last week, Hollywood stocks took a beating on Wall Street. Disney fell 4.4% on Thursday, Viacom was off 3.6%, and Twentieth Century Fox was down 2.2%. Comcast turned in excellent results overall last quarter, led by NBCU which increased Q2 revenue 17% over the same quarter in 2016. This performance was not enough to stop its 6% slide on Thursday.
So, why is Wall Street so upset? To be sure, TV-related revenue has been under pressure from falling viewership and the resulting ad revenue declines. However, here are five reasons investors have good reason to be nervous about TV’s future.
Top TV producers slow to embrace DTC
Since 2013, Netflix has added 60 million streaming subscribers, Hulu has added 10+ million, and the number of people using Amazon Prime Video has increased to approximately 60 million.~ As well, over a hundred SVOD services have launched addressing many of the same needs as TV channels in the pay TV bundle.
Throughout this period of rapid streaming expansion, most major television producers have sat on their hands. They have launched streaming apps, but consumers need a pay TV subscription to use them. A few have launched direct-to-consumer (DTC) apps. HBO Now, Showtime, and CBS All Access are examples. However, only a small percentage of consumers are using them.
More shocking than this level of inactivity: Disney will not have a DTC SVOD app launched for two more years! Who knows what the market will look like then.
Revenue mix is different
TV has existed successfully for decades on the dual revenue model. Pay TV providers pay them a license fee for their content, and they earn revenue from advertising. The two revenue streams yield around $140 billion annually in the U.S.
Can TV providers expect to replace TV revenue with an equivalent amount of online revenue? Maybe not. Most SVOD services are ad-free, and consumers love the movie-like experience they provide. As well, Netflix’ price point of $10 a month constrains what other services can charge. It could be that content providers just can’t expect to make as much money online as they have with traditional television.
No lock-in online
TV producers have relied on the big bundle and the difficulty in switching pay TV providers to secure their place in the living rooms of consumers. In the online world, things are very different. Consumers are committed for one month only and dumping a service is as easy as clicking a button on the screen.
In the online world, content producers are only as good as their last successful show. They must justify their right to a consumer’s patronage every month, or they risk immediate cancellation. These are issues TV producers have simply never had to deal. Wall Street is worried they will not be able to compete.
Content is king, but only if it is the right content
The woes of the Hollywood movie business intensified over the over summer. The steady diet of sequels, remakes, and super-hero blockbusters is beginning to wear thin with consumers.
Meanwhile, the length of time people spend with SVOD services continues to increase. For example, the 15 million active Roku users spend 2 hours and 40 minutes per day streaming to their televisions. With riveting scripted shows such as Game and Thrones and Stranger Things, consumers can develop far deeper relationships with the characters than in a movie. Moreover, binge viewing allows them to spend as much time as they like in the experience.
It could be that by the time Disney delivers Marvel movies in its SVOD service in late 2019 people just won’t want them anymore.
Online providers coming for TV revenue
Facebook and YouTube are beginning to take the television very seriously. They are eyeing the $70 billion a year TV ad market and see it as their next big area for growth. Both companies are paying for longer form original content. They have both announced strategies that specifically target the television screen. Moreover, both companies expect to be supporting these efforts with ads.
What’s more, advertisers are beginning to look for more accountability for the ads. They find that in online platforms and struggle with it in television. In the past, advertisers have kept their digital and TV budgets separate. Increasingly, they are putting all that money into the same pot and allocating it where they can count its success. Even more of that money could end up with Facebook and Google if their television efforts are successful.
To learn more about what TV content providers have to do to win online, download the free white paper Finders-Keepers: Scenarios in the open market for TV entertainment.
Why it matters
Television stocks have taken a beating on Wall Street recently.
Investors are right to be concerned about the long-term health of traditional TV companies.
They have been slow to react to online threats, may not earn as much money online, may struggle with getting to and keeping online viewers, and online providers are competing for their ad revenue.
~There are 80 million Amazon Prime subscribers of which about 70% watch Prime Video.