Originally published by Cuffelinks
We've seen this before – companies that spend big, not to improve their competitiveness, just to keep their current place. Newspapers around the world tried the strategy, but many eventually failed. In Australia, the auto industry, clothing and shoe manufacturers and video stores all tried to save themselves by spending more money. They collapsed, unable to prevent a tidal wave from drowning them in losses. And although we have not yet seen the final death battle, sellers of fossil fuels may have already received their death sentence by promoting renewable technology and battery storage.
Wrestling in a business death spiral
Throwing good money to bad seems to be the only strategy when an industry is in a "spiral of death & # 39; but history proves that it is often a waste of money from shareholders and financiers. Of course, the alternative to accept inevitability in a particular sector requires that companies abandon everything, including their income, while ending the vast majority of their employees.
Checkmate.
While disruption is just another buzzword for & # 39; change & # 39 ;, there is no escaping the profound impact it has on old technology, established businesses, and legacy earnings models. And often the disturbers are not better off
When a technology develops, as a result of which prices fall, it opens up new markets. The increasing use of customers lowers the price even further, opening new markets, increasing demand, the price decreases and so on … until, of course, a new technology takes its place. Companies that are in the cycle have to run faster to stay in the same competitive position.
Where does it leave television?
In the TV entertainment industry, video streaming technology has a fragmented audience and limited margins because consumer prices are reduced and the production costs of content increase.
Scale and globalization are important and the largest companies in the communication industry collide or compete. The growth of Netflix (NASDAQ 🙂 is the best proof of a changing dynamic in the creation and distribution of content.
This year, Netflix, Amazon (NASDAQ :), NBC Universal, Warner Media and CBS (NYSE 🙂 together spend US $ 7 billion more than last year on content. The & # 39; food fight & # 39; or hail Mary passes & # 39; in terms of creating unique script content explodes with the new companies that disrupt the traditional studio's by going directly to talent and bidding against each other. Viewers demand shorter life cycles of products and lower prices.
And while business leaders are addicted to legacy income from related parties [1]revenue suggests that content owners prefer to be aggregated in a bundle of channels and as a consequence receive affiliate fees, ignoring the fact that viewers use traditional cable and satellite packages with a new record of more than one million per quarter.
Cable operators may not listen to consumers who vote with their wallets. Just as we have seen in the music industry, consumers do not want to pay for an entire album – they just want to buy the songs they like. A & # 39; pick-and-pay & # 39; – or & # 39; skinny bundle & # 39; model in television offers, where consumers only pay for the channels they want, seems logical, but the consequences for older revenue streams are terminal.
Recently, veteran of the cable industry and Liberty Media (NASDAQ 🙂 chairman John Malone warned his industry brethren to change from bundled retailers of video services to bundled providers of interactive Over-The-Top (OTT) TV services [2] and devices that are inevitably connected to the internet of things.
Most content owners do not want to launch a direct channel and are forced to win viewers one by one via an OTT TV service and there are alternatives. They include nano-piracy networks, the private networks where applications are used to stream live or recorded content to the audience or a certain group of viewers. Do you remember what Napster did to the music industry? Content producers may still need to rethink their current distribution models. The Diffusion Group even estimates that every large TV network will offer an OTT service in just three years.
New competition with different models
The financial impact of the shift is not limited to the traditional producers of content and aggregators. Netflix has hundreds of millions of direct consumer relationships and their credit card details, but emerging competition from Apple (NASDAQ :), Facebook (NASDAQ 🙂 Watch, YouTube TV and Disney (NYSE 🙂 forces Netflix to cut prices while spending more money on it seek new income flows overseas. In the last quarter, Netflix reported a record negative free cash flow.
For example, Apple wants to develop a direct-to-consumer entertainment service beyond music. Just like Netflix and Amazon, Apple has an estimated 700 million direct consumer credit card relationships. It would be relatively easy for Apple to offer a service based on a subscription or free and supported by advertisements. According to reports, Apple has discussions with the content industry and wants to bring its ecosystem via video into the living room.
According to Variety Magazine, the increasing competition meant higher salaries for actors, directors and production workers, which increased the cost of producing a high-end cable / streaming drama of USD 3 million per hour in 2013 to as much as US $ 7 million today.
Meanwhile, younger, mobile-minded consumers are leading the exodus of cable television subscriptions. According to Deloitte, Gen Z, Millennials, Gen X, Baby Boomers and adult users are reducing their subscription to Pay TV. In the case of Millennials, those who have subscribed to pay-TV on pay-TV in the US have dropped from nearly 75% in 2013 to about 50% in 2017.
Higher costs and lower subscribers (cable television subscribers are lost at a rate of 11,000 per day) mean that business survival requires that existing subscribers pay more. This can only accelerate the exodus to cheaper and easier alternatives, by keeping an eye on traditional operators who can not stay in a company without raising the prices.
Consequences for investment markets
The S & P500 Media & Entertainment index recently shifted 15% of its highest point ever. Investors who are aware of the common characteristics that are found in the ready-to-eat industry are better positioned to prevent them from falling for a fall of potential values. Like many other history-changing technologies – think of the production of cars or air travel – it is often the consumer who wins, not the shareholders. In fact, in some sectors of today, such as TV, the best opportunities can be the result of short selling.
Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is general information and does not take into account the circumstances of a person.
[1] The regular development of television content is funded by affiliated contributions, which the & # 39; share & # 39; are the subscription fees paid to cable or satellite operators that are repaid & # 39; & # 39; or redistributed to the content producer / owner / distributor on a per subscriber basis. By way of example, ESPN – as a content owner – can negotiate high affiliation rights because, at least for the time being, a cable or satellite operator would be crazy by offering a television bundle without ESPN.
[2] Over-the-Top (OTT) refers to content providers who distribute streaming media directly to viewers over the internet as a stand-alone product, bypassing other broadcast platforms that traditionally act as controller or distributor of such content.
