Picking Winners in Streaming Media (INTC, AAPL, GOOG, NFLX, AMZN, P, MSFT, SNE, DIS, CBS, CMCSA, VZ, CSTR, TWX, VIAB, NWSA)
), Spotify, Boxee, Roku, and Hulu.
These aren’t the only contenders. The makers of game controllers are also in the fray: Microsoft Corp. (NASDAQ: MSFT) has added video streaming capabilities to its Xbox; Sony Corp. (NYSE: SNE) will include game streaming on the coming PlayStation 4; and Nintendo and start-up controller firm Ouya already support video streaming.
The list of music and video streaming providers is seemingly endless. And all of them rely on the same thing: content. Most of that is controlled by well-established entertainment companies like The Walt Disney Co. (NYSE: DIS), CBS Corp. (NYSE: CBS), Comcast Corp. (NASDAQ: CMCSA), and other movie, TV, and music producers. And the cable and wireless carriers also want a piece of the action; see for example, Verizon Communications Inc.’s (NYSE: VZ) deal with Coinstar Inc. (NASDAQ: CSTR) for an on-demand streaming service.
The leader in video streaming, by a long mile, is Google’s YouTube. Google is trying to monetize the popularity of its video programming, but the efforts there have just begun. Intel is making a big push into building an ‘over-the-top’ box and is in negotiations with producers like Time Warner Inc. (NYSE: TWX) and Viacom Inc. (NASDAQ: VIAB) for content. How successful Intel is in negotiating prices remains to be seen, but the world’s dominant chipmaker is likely to have to pay a premium price for content, first because it’s large and can afford it, and second because the content companies are scared to death that they’ll leave a nickel on the table.
One additional wrinkle in video streaming is the potential sale of Hulu, co-owned by Disney, Comcast, and News Corp. (NASDAQ: NWSA). A sale would almost have to include content licensing for a long time at a reasonable price to the buyer. Without that, the streaming players are better off with Hulu going out of business. How Hulu’s co-owners handle a sale of the company will speak volumes about their thinking for the other licensing deals they’ve made or will make in the future.
The lead in music streaming probably belongs to Pandora, but Spotify has been pushing hard with its subscription model. It has been successful enough that Apple and Google are both said to be considering jumping into the music streaming business. Apple is apparently holding out for better pricing from the music publishers, but those guys have learned their lesson from iTunes and won’t be giving away the store again this time.
Another interesting wrinkle in the battle for the living room is Spotify’s reported plan to offer streaming video. According to a report at Business Insider, Spotify is looking for partners to help it fund the creation of its own content. Spotify, which is still privately held, has a paper value of around $3 billion, but one has to wonder how long investors will continue putting up big money if either Apple or Google launches a competing music service or Intel launches a killer video streaming product. Original content is expensive to produce and while it can be a big winner, it can also be a loser. HBO started out showing old movies and gradually moved to producing original content like “The Sopranos.” Spotify apparently believes it can shorten the cycle and go directly to producing original content. That’s a big gamble.
How do investors sort out the winners and losers? Obvious winners are the media companies like Disney and HBO that produce content. But the revenues from adding streaming licenses is likely to be only incremental. Disney’s a $100+ billion company that reported more than $11 billion in revenues in the December quarter. The 3-year deal Disney signed with Netflix is worth a suspected total of around $1 billion. That’s not chump change, but Disney won’t likely go broke without it.
And if any of the streaming video or music services really takes off? Then the content providers will jack up the prices and force the also-rans out of the bidding.
As for the streaming providers themselves, if Apple or Google gets into the business that could spell the end for the smaller players, whether solely streaming companies or hardware companies. Intel is committed and would have to slug it out with the other big two if one or both jump in. The Verizon-Coinstar joint venture has a chance, but a slim one.
Netflix, which we’ve noted elsewhere today, is currently a darling again after having spent 18 months or so in the doghouse. The stock is flirting with $200 a share again, but that’s still $100 a share below its peak. The company’s bet on its original production of “House of Cards” won’t be known in any specificity until Netflix reports first-quarter earnings. Interestingly, Netflix followed the HBO model of starting with old movies and then moving to original production and, in Netflix’s case, some big exclusive licensing deals. We’ll know better in a few weeks how that worked out and whether Netflix can maintain its status as an entertainment darling.
And Pandora and Spotify? They remain at the mercy of the music publishers who have historically been merciless. Without some serious financial backing it’s hard to see how either makes it, especially if Apple and Google are about to jump into the streaming music business.