The Cord Cutting Trend: What Are Investors To Do?
How is “cord-cutting” affecting the media industry?
The media industry is quickly changing as the “cord-cutting” phenomenon impacts traditional TV services and revs up the competition among streaming services and pay-TV. The phrase “cord-cutting” refers to pay-TV subscribers canceling their subscriptions for what they believe are more accessible and more cost effective options such as Netflix, Hulu, and Amazon Prime. Which leaves consumers and investors alike wondering – will streaming service subscriptions eventually surpass pay-TV subscriptions all together? What are streaming services doing differently and how are cable companies reacting to this new competition? And most importantly, how will this affect earnings?
Competition amongst streaming services
The companies driving this trend are also competing against each other, as they try to appeal to subscribers in different ways. Netflix, which sparked the original cord-cutting trend, is a key player in and has been dominating the industry. Netflix has several advantages in its offering, including original content and ad-free viewing. Amazon Prime allows consumers to download content, while Netflix is strictly streaming. Amazon also offers its video services for free to customers who sign up for unlimited delivery for Amazon.com goods. Hulu, another competitor, has a unique platform that provides content the day after it was aired on television. Hulu also recently introduced a commercial-free option trying to rival Netflix’s original content with current content. These streaming video services are also making an effort to target millennials.
Although Netflix remains an industry leader, its third-quarter profit tumbled 50% compared to last year, missing its forecasts as it reported less-than-expected streaming growth in the U.S. Netflix’s total revenue was $1.74 billion in the third quarter, up about 23 percent from the same period last year. So far this year, Netflix shares are up about 125%.
Another company with a unique platform in the space is Sling TV, provided by Dish Network, a TV-bundled service that offers live-streaming. According to research, Sling TV may pose an even larger threat than Netflix and its competitors, to pay-TV.
How are cable companies fighting back?
Cable companies are attempting to fight back, despite reportedly lower earnings. Reports indicated that 19 shares of these leading media companies were down 11% to 23% from August 4, causing a panic that led to investor’s paranoia. These companies include Fox, Disney, and Viacom, who have all been struggling despite their unique platforms and strong followings.
One way these companies are staying in the game is by providing information that streaming video services can’t. Disney, for example, owns ESPN, the number one provider of sports news in the United States. Luckily for Disney, their name remains an important one in the industry as both children and adults alike recognize the name and enjoy their movies.
Secondly, pay-TV subscriptions often come hand in hand with internet services. Most consumers still purchase a combined set of pay-TV and internet because it is cheaper than buying them separately.
Thirdly, cable companies are attempting to merge, although not always successfully, often as a direct result of Netflix lobbying. For example, earlier this year, Comcast and Time Warner failed to merge, due to the successful lobbying of Netflix and other media companies, including Discovery Communications. These companies were worried that their business would be harmed by this merger, which would have created the largest media and cable company in the United States.
There are many reasons why a subscriber may cut the cord to their traditional cable package. Reasons include cost, customization, and overall convenience. For the cable companies, the erosion will be slow as the average subscriber makes up his or her mind. Pay-TV will continue to expand satellite services, offer bundle packages, and improving its offerings.
At Ideal Asset Management, we watch trends closely to see how it will impact our holdings in securities across the board. As we continue to watch this trend impacting millions of consumers, we believe that investors should continue to monitor earnings from media companies to assess how quickly consumers are cord-cutting. If fears of cord cutting are overblown, traditional media companies may offer healthy returns, especially since the valuations for traditional media companies are reasonable. If the pace of cord-cutting accelerates, Netflix may be the better bet, and traditional media companies may turn out to be value traps. For this reason, Ideal Asset Management believes it makes sense to stay on the sidelines for now.
All of the ideas expressed in this article are the opinion of Ideal Asset Management LLC
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