UPDATE: How the Disney-Netflix streaming war will create collateral damage
By Jeff Reeves, MarketWatch
Five main companies -- including Roku, Amazon and AT&T -- will be competing for viewers
It's hard to believe a mega-brand such as Disney would be seen by investors as a growth stock. The company is nearly a century old, boasts some of the most entrenched franchises in entertainment and is already valued at more than $200 billion.
But as it has in so many other ways, the internet age has changed the rules. And after making a big splash Thursday with details about its much-anticipated streaming service (Walt Disney Co. (DIS) surged as Wall Street has started to think of this media king as a growth name once more.) that will launch in November, shares of
The oversimplified reason is that investors feared Disney's gain would be Netflix's loss. Yet as the dust settles and Netflix approaches a crucial earnings report Tuesday ( ), it's worth challenging the notion that only one provider can be the winner in a zero-sum game. As a personal data point, my household uses three streaming services, and there are many other customers like me out there.
Of course, not everyone will be a streaming winner. Since services are "unbundled," consumers can decide what content is worth paying for but also what services simply aren't worth it.
Disney's streaming efforts certainly don't prohibit others like Netflix from succeeding. But given the company's massive library and history of excellence, it does raise the stakes. Here's what the Disney-Netflix war means for the streaming industry in the coming months, and which stocks are worth owning.
Read:Disney launches $6.99 streaming service, but will Netflix fans go for it? ( )
The biggest bullish case for Disney's streaming service is the fact that it's offering premium content at a relatively discounted rate -- about $7 a month, around half that of Netflix and HBO Now.
It's not just the price, though. Disney is offering an amazing archive of films, from family faves like "Aladdin" and the "The Lion King" to content from its Pixar and Marvel franchises. And on top of that, on the heels of a massive $71 billion deal in 2018 to purchase Fox entertainment assets, the streaming service will also offer flicks from the Fox library that include "The Sound of Music" and "The Princess Bride."
The icing on the cake: Disney isn't just charging for reruns. It has ambitious plans for 25 original series and 10 feature-length productions. Remember, this is a company that made a ton of dough decades ago on direct-to-VHS sequels that capitalized on established brands, and it will surely execute well in this digital reboot of that strategy.
Oh, yeah, and it also has all those traditional TV properties like ESPN and Disney Junior it can bundle together with some or all of this stuff for subscribers who want the whole shebang.
Long story short: Investors are right to get excited about Disney and this service's November debut. A deep library, competitive price and ambitious production schedule means this newcomer to the space will quickly become a dominant force in streaming.
It may be too early to ring the death knell for Netflix. After all, even though it is clearly an established name and has much of its growth in the rear-view mirror, Netflix just put up a great fourth-quarter earnings report ( ) in January that boasted 8.8 million new global subscribers. And even when you bake in the Friday dip, shares are up more than 30% in 2019 to handily top both the S&P 500 and Disney's stock this year.
That growth is in large part because Netflix has embarked on an ambitious original-content strategy. Unlike Disney, which loves to create global smash hits, Netflix programming is more about singles and doubles based on keeping audiences involved in multiple episodes of multiple shows.
In case you didn't know, Netflix uses artificial-intelligence algorithms to suggest shows you may like based on your past history. It also records whether you binge, why you keep watching and how to keep you personally engaged. That's why its genre-heavy originals such as "BoJack Horseman," "13 Reasons Why" or its "Arrested Development" reboot may prompt shrugs among some people, but those shows have proven to be incredibly consistent viewing among others.
Sure, Netflix has its troubles with valuation and volatility. And longer term, investors may get increasingly grumpy about big investments in content and overseas expansion that have yet to deliver results to the bottom line.
But what Disney offers in star power, Netflix offers in first-mover advantage and a native digital platform that is in-step with how streaming-video audiences consume content. Maybe it won't crank out blockbusters with big merchandising deals, but you can be sure that Netflix will keep you binging on stuff that connected with you personally. That adds up to staying power, and should support the recent price increase in its service.
Read:Netflix is already over Apple and Disney as it prepares to launch this quarter's earnings ( )
If streaming is not a zero-sum game and both Disney and Netflix can be winners, it's worth wondering who else is seizing the opportunities in this market. Near the top of the list of those options for me is Roku Inc. (ROKU).
You may think this brand is doomed, as its eponymous set-top boxes have already been replaced by on-board apps in phones and smart TVs. However, Roku is evolving to be more of a software platform -- a kind of marketplace for streamers -- than a hardware company.
Big picture, that's a great thing; just go ask Fitbit Inc. (FIT) or GoPro Inc. (GPRO) investors how hard it is to generate reliable hardware sales on gadgets. The company is already near break-even on this model, and investors have very high hopes for Roku's "free content" partnerships which integrates ads into third-party video. In an unbundled age, a streaming service without a monthly subscription is a concept with a ton of long-term potential.
While shares have been volatile and the valuation is admittedly a bit stretched, investors clearly believe in Roku stock. Since its 2017 IPO at $14, shares have more than tripled, and this year Roku's stock is up a jaw-dropping 80%. Who knows what the next 10 years will bring, but right now Roku is clearly a name in streaming worth owning.
Lots of folks like to put Amazon.com (AMZN) and its Prime video up there with Netflix. However, I am less bullish on Amazon's streaming outlook for a few reasons.
For starters, Amazon has remained tight-lipped about Prime and related streaming metrics. CEO Jeff Bezos said last year the service topped 100 million paying subscribers globally, but beyond that all we have is conjecture based on analyst estimates and surveys. Furthermore, a few of those surveys show overall Prime membership growth is slowing () or even at risk amid recent price increases.
Lastly, those same surveys over the years have hinted that Prime Video is a perk but not a go-to reason for subscriptions; most members rank the savings on shipping as their biggest draw, and see the membership akin to the fee they pay to shop at Costco (COST).
It's possible that there will be the resources and focus to ensure Prime originals continue to win awards or that Amazon fully capitalizes on video-game streaming with its Twitch property. But it's quite possible Amazon instead focuses on high-profile corporate efforts like Alexa and Amazon Web Services, and worry less about whether it falls behind on streaming. After all, it can always offer third-party content for rent and sale via its e-commerce platform without the hassle of a studio.
Didn't know AT&T (T) is offering a streaming service? I don't blame you. This is one of those corporate efforts that Wall Street tends to roll its eyes at -- an incumbent mega-cap looking to remain relevant by keeping up with the cool kids.
Over the past few yerars, AT&T has invested heavily in various video-content assets. In 2014, AT&T acquired DirecTV for $67 billion. Then with its 2018 mega-deal to purchase Time Warner, the telecom giant took control of Warner Bros. films and "Game of Thrones" creator HBO. The general plan has been to beef up alternatives to cable TV.
But in typical fashion for a stodgy, not-so-tech company, AT&T's business model prevents it from truly embracing the streaming age and has its highest hopes set on bundles that should debut in the coming months. According to reports, it will keep HBO Now -- a niche product with a relatively thin library of content and a comparatively high price -- but then try to layer on extra levels of content that include things like "Harry Potter."
There is admittedly a strong track record for HBO to build on, and a deep library of content from Time Warner. But given that "Game of Thrones" is about to wrap up, it's hard to project that success into the future -- and given the complexity of multibillion mergers, a fast-moving streaming category and the legacy leadership of sleepy telecom, it remains to be seen how effectively AT&T will compete.
I wouldn't count out this stock as a long-term player because of deep pockets, but in the next 12 to 18 months it could be a rocky road.
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MW UPDATE: How the Disney-Netflix streaming war -2-
Jeff Reeves () writes about investing for MarketWatch. He holds no investments in any companies mentioned in this article.
-Jeff Reeves; 415-439-6400; AskNewswires@dowjones.com
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