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Equity Perspectives

With media giants investing more money than ever in original content for TV, cable, and streaming video on demand, an epic battle for viewership is afoot.

In Brief:

  • After a major sell-off in the summer of 2015, media stocks have bounced back.
  • With increasing demand and prices for TV series and films, more companies are investing in original programming, and some observers fear a bubble is forming.
  • Cable customers for the most part have maintained their subscriptions to more channels than they can possibly use, but the opportunities to access smaller bundles are proliferating.
  • With increased innovation in video content delivery, binge-watching is at an all-time high.
  • Subscription video-on-demand is the fastest growing segment of the on-demand market, which could hurt linear (time-and-channel based) TV over time.

 

John Landgraf, the CEO of FX Networks & FX Productions, was alarmed. Media stocks, especially those with cable channels, had taken a beating in early August 2015, given concerns about declining subscribers and ad revenue. Speaking to television critics several days after that sell-off, Landgraf  warned about a mounting glut of scripted programming for TV, including networks, cable, and streaming services. (See Chart 1.)

This bubble has not only created a huge challenge in finding compelling original stories and the level of talent needed to sustain those stories, Mr. Landgraf said, but it also has had a tremendous effect on companies’ ability to cut through the clutter and excite audiences.1

“With more companies investing in original programming, the economics of content has changed,” added Lord Abbett research analyst So Young Lee, who covers media, Internet, and cable companies. “It’s harder to come up with a breakout series because there’s so much more original content available. If networks are not increasing viewership, over time, it will be harder to grow advertising and affiliate fees that justify the rising prices of original programming.”

Another challenge for programmers is balancing the growing desire of audiences to view their favorite shows without commercials via cable broadcasters or, more conveniently, to stream content over high-speed Internet connections with “over-the-top” (OTT) services, such as subscription video on demand (SVOD). 

A number of programmers are selling content to the largest SVOD providers, which in turn are pouring massive amounts of money into their own original movies and series. As a result, the race to monetize content over multiple distribution channels—anytime, anyplace, and on any device—has become much more complicated.

“The media companies have fueled the growth of SVOD players with their content, and, in turn, the SVOD players have created a new window for content that has increased the monetization of original content,” said Lee.

In any case, the implications of on-demand distributors building their own bundles of content are huge.  “There is some debate on whether content on SVOD is growing linear TV viewership for certain programming like Breaking Bad, or cannibalizing it. Over time, I believe that it is going to eat at linear [time-and-channel based] TV. This could harm the media industry because lower viewership will threaten its ad revenue.”

 

Chart 1. Double Feature: Two Ways to Look at the Content Explosion
Production of movies and TV series, 1980–2015

Source: Box Office Mojo, SNL Kagan, John Landgraf, and KPCB.

 

The Media Empires Strike Back
Since media stocks sold off last August, the TV advertising environment has actually improved. 

“There was real improvement in fourth quarter 2015 advertising, and that has persisted into the second quarter of 2016, whereby advertisers have shifted a bit of their budget from other ad categories, like outdoors, digital, or radio, and reallocated spending back to TV,” said Lee.

One reason for that dynamic is that it has become increasingly difficult for advertisers to gain reach, Lee added. Broadcasters still are successful at drawing larger audiences, particularly with its tent-pole events such as the NCAA basketball championships, as well as major entertainment award programs like the Oscars and Grammys.

Another factor behind improved broadcast results was a pause in digital ad spending because of poor audience measurement, in part due to bot-fueled ad fraud, which inflates the numbers of real viewers receiving a commercial message and exaggerates digital advertisers’ return on investment.

Against that backdrop, one big controversy Lee cited is whether current cable TV bundles (with far more channels than people have time to watch) stay intact.  According to consensus, the cable industry may lose 1.5% of its subscribers in 2016.  But that figure could be higher if there is faster than expected growth in the number of “cord cutters” (consumers who give up costly cable service in favor of Internet TV) or “cord nevers” (consumers who bypass cable subscriptions altogether) or a viable OTT offering.

While such defections might cut into video subscribers, cable companies that offer the best broadband Internet service should continue to benefit because that is the only way to stream OTT content.

For media companies, the risk is that more consumers will switch from existing cable subscriptions of 200 channels to “skinnier” products with, say, 20 channels they watch all the time.  In that scenario, marginal cable players could be hard pressed to recoup their programming costs.  

Oh, Say Can You Stream
Remember when Time Warner’s HBO was considered the king of premium cable networks, with legendary series such as The Sopranos, which ran for six seasons from 1999 to 2007?  TV Guide ranked it as the best television series of all time. More recent offerings like Game of Thrones have certainly drawn a huge audience, but legions of alternatives have stormed the marketplace.

In 2016 alone, Netflix plans to invest nearly $5 billion in original programming (see Table 1), a move that could help drive its international expansion as well as its share of the SVOD market. (See Chart 2.)  That level of spending also would eclipse Time Warner’s outlay for HBO and Turner Networks, as well as Fox, Viacom, Disney, and Discovery.  Meantime, Amazon is ramping up investment in original content after winning Golden Globes for two of its series.

To say competition for viewership is more crowded than ever, however, is an understatement, and some entries will be hard pressed to match the popularity of past hits about female prison life, White House treachery, and zombie invasions, to name a few.  But viewership is definitely on the increase.

According to a recent survey by Deloitte Consulting, 70% of U.S. consumers now binge watch an average of five episodes at a time, and almost one-third (31%) binge on a weekly basis. In addition to binge watching, nearly half (or 46%) of Americans now subscribe to streaming video services, with millennials aged 14–25 spending more time streaming video content than watching live television.

“The proliferation of online content shows no signs of slowing down, and the consumer appetite to consume content is equally voracious,” said Gerald Belson, Deloitte’s vice chairman and U.S. media and entertainment sector leader. “The survey data indicate that consumers are more willing than ever to invest in services to watch whenever, wherever, and on whatever device they choose.”

Among Deloitte’s other findings: 

  • More than half of all consumers, and three-quarters of millennials, watch movies and TV shows via streaming on at least a monthly basis.
  • Millennials aged 26–32 who currently pay for streaming video have an average of three subscriptions.
  • Millennials aged 14–25 value their streaming video subscriptions more than pay TV subscriptions.
  • More than one-third of baby boomers aged 50–68 (35%) who binge-watch TV do so once a week, and average four episodes per sitting.

The bottom line is that with faster and cheaper access to the Internet, on-demand penetration of the pay-TV market should continue to accelerate. As the head of one SVOD company put it earlier this year, “We are just beginning to break down the barriers so the world's best storytellers can reach audiences all over the world. The possibilities for building connections between cultures and people are endless and important."

 

Table 1. Bubble or No Bubble, Spending on New Programs Is Off the Charts

Source: Moffett Nathanson. *Includes HBO and Turner Networks.
Note: Some of the investment above would go to other media companies via licensing agreements; this excludes Amazon, which also is investing heavily in content.

 

Chart 2. Subscription Video on Demand (SVOD) Is Expected to Explode by 2020
SVOD home forecasts across 200 countries (in millions)


Source: Digital TV Research.

1Joe Flint, “FX Networks Chief Warns of Programming Glut,” The Wall Street Journal, August 10, 2015.


The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as a recommendation to purchase or sell such securities. Readers should not assume that investments in such securities were or will be profitable.

Investing involves risk, including possible loss of principal.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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