The future is now. Streaming media is here. It is ubiquitous, and companies are creating their own product and business model. No longer are we in a world where studios license their content to Netflix, Inc. (NASDAQ:NFLX) and bleed it dry. Now everyone is getting in on the action, and it’s a wonder why it even took this long.
So who are the streaming media players, and how will it all shake out? The prevailing wisdom, which I agree with, is that most households will pay for two or three streaming media services per month, at most. While some cord cutting is going on, just how much happens in the aggregate remains to be seen. What matters is how people choose to use their free time to consume content.
NFLX has obviously chosen to rely less and less on licensed content and plow billions into original programming for streaming media. In essence, it wants to supplant HBO, which seems unlikely given the popularity of many of that network’s shows. NFLX has generally produced excellent content and continues to ramp up. At issue, however, is capital.
NFLX is burning cash like the Joker in The Dark Knight to produce streaming media. It constantly has to return to the debt markets to finance all this programming, and for reasons I don’t understand, the debt markets are happy to oblige and at reasonable rates.
The stock remains insanely overvalued, but nobody seems to care. For NFLX to survive, it must continue to produce excellent content and raise prices both at home and abroad. The question is what price point can it get to without losing subscribers.
Amazon.com, Inc. (NASDAQ:AMZN) not only is ramping up original production, but it has a massive library of licensed content. Make no mistake, older shows are still very popular and have value. In addition to newer content for rental, Prime members get access to that massive licensed library. Amazon has a ways to go in order to catch up to NFLX as far as original programming, but it will get there. The other advantage it has is deep pockets. It has billions on the balance sheet and generates billions in free cash flow. It can outspend Netflix and also doesn’t have to worry about monthly subscription fees for Prime members.
Apple Inc. (NASDAQ:AAPL) has finally committed to original content, spending a billion dollars a year for it. We have no idea what kind of quality we are going to see, although the folks put in charge of the studio have an excellent pedigree. AAPL can also vastly outspend all the competitors put together. For now, we have to wait and see.
Walt Disney Co (NYSE:DIS) has just announced its own streaming service will be coming. It pulled its content from NFLX and will put all its content on its own service — everything from LucasFilm, Pixar, Marvel, and Disney Channel, plus much more. In addition, DIS is apparently talking about buying Twenty-First Century Fox Inc (NASDAQ:FOXA). If that happens, it will plow all of that studio’s content into its hopper as well. Disney would likely be a must-have service for just about every family and every genre fanboy.
Hulu is a joint venture among several studios. It has plenty of licensed content, and its few originals are getting pretty solid reviews. It isn’t a viable big-time player, yet, but I think it may also see some big changes coming up. DIS is a 30% owner as it is. FOXA is a 30% owner, so if DIS buys FOXA, it would likely turn around and try and sell the combined 60% stake to 30% owner Comcast Corporation (NASDAQ:CMCSA).
Bottom Line
For the time being, it seems like NFLX stock is a must-have. Over time, however, this is going to change. AMZN is coming on strongest, and DIS is next. That may be enough for any family.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns DIS stock. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
