By Ciara Linnane, MarketWatch
Direct-to-consumer streaming services miss the point that content is just a small part of the equation, says BTIG's Richard Greenfield
Traditional media companies that are reclaiming their content from licensees or planning their own direct-to-consumer (DTC) streaming services may be biting off more than they can chew.
That's the view of BTIG analyst Richard Greenfield, who wrote Monday of the challenges posed by DTC services that lie outside of the expertise of legacy media.
Companies are grappling with the threat to their business from cord-cutting, which is expected to reach record levels in the second quarter, Greenfield wrote in a note to clients. Industry subscriptions are expected to decline at a more than 3% rate in the quarter, and that could grow to 4% by year-end. Adding to the gloom, TV ad revenue is flat to lower even as the economy has remained strong, he said.
"While we have argued that becoming an arms dealer to a growing array of tech platforms that are building streaming services is the optimal strategy for legacy media, their envy of Netflix's (NFLX) global platform and $160 billion market cap is driving their desire to enter the DTC wars themselves," he wrote.
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Netflix "is a rocket hurtling towards Mars, while legacy media companies are bicycles with engineers that only have the ability to make more bicycles," Greenfield wrote in an earlier note, in which he questioned whether it is just too late for legal media companies to compete with the streaming giant. After all, by licensing their content to Netflix in the first place, they helped create the monster it has become with an ability to continue to attract subscribers, even after a 10% price increase, he wrote.
The main reason to create a DTC service is to command a direct relationship with consumers, which is a shift away from legacy media's long history of wholesaling, via movie theaters, retail stores and multichannel video programming distributors, or MVPDs.
"Unfortunately, what media companies are missing is a full appreciation that content is only a small part of the DTC equation, with technology and data analytics equally, if not more important ," said the note. "Gross Adds, Subscriber Acquisition Cost, Lifetime Value, Retention Marketing and Churn are simply not part of legacy media's core DNA."
Greenfield further questioned the point of creating a DTC service for companies that are planning to use channel platforms, like those offered by Amazon.com Inc.(AMZN), Roku Inc.(ROKU) and Apple Inc. (AAPL) Those platforms are easy to use for consumers as subscribing takes just a few clicks and the consumer's credit card details are already on file with the platform.
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"From a marketing standpoint, these channel platforms can highlight individual pieces of content that drives you to subscribe versus app stores that are app focused versus content focused," he wrote. "Not only does this shift the subscriber acquisition cost to a third-party, but it also leads to far lower churn, as a subscriber through a Channel store is buried within a much larger monthly bill vs. a direct bill from the subscription service itself."
If legacy companies are in any case planning to use third parties, it may make no sense to also build a DTC service, said the analyst.
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"This is even more troubling in the case of Amazon and Apple, where they are creating competitive content offerings (Prime Video and the to-be-launched Apple TV+), whereas at least Roku is not in the content creation business (for now)," he wrote. "Why go through all the effort of building and iterating your own proprietary apps if the vast majority of subscribers will not even use the apps you build?"
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There is also the risk that a DTC service loses brand identity when the content is unbundled from the service on the channel platforms, further undermining the goal of having a DTC business.
Greenfield is hoping second-quarter earnings conference calls will reveal what exactly individual companies are planning to do with channel platforms. So far, the premium networks, namely (T) Showtime and Starz, have embraced channel stores, as has CBS Corp. (CBS) with its CBS All Access offering, whereas Disney's(DIS) ESPN+ has not. The three major streaming platforms, Netflix, Amazon and Hulu, have never used channel platforms and BTIG is not expecting them to start anytime soon.
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"With major DTC launches from Disney+, HBO Max (working name) and NBCU+ (working name), not to mention less ambitious launches such as BET+, we are curious who has the financial stomach to truly build a direct-to-consumer offering and who is going to take the easy road utilizing Channel platforms sacrificing the customer relationship and ceding data to tech platforms?" he asked.
"For those that embrace channel platforms, we hope to understand why they are even bothering with DTC launches, as it is really a wholesaling strategy," said the analyst.
Netflix shares were up 1.6% Monday and have gained 39% in 2019, outperforming the S&P which has gained 18% and the Dow Jones Industrial Average , which has gained 14%.
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
July 03, 2019 06:55 ET (10:55 GMT)
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