Technology is dramatically changing the entertainment industry, unlocking a whole host of new business opportunities for companies ranging from traditional media to potential entrants from tech, telecom, and beyond.
As in any sea change, winners and losers will emerge from this industry upheaval based on the competitive advantages inherent in their business models and their abilities to lead these industry shifts. Investors interested in buying and holding the best entertainment stocks would do well to take a closer look at The Walt Disney Company (NYSE:DIS) and AT&T (NYSE:T).
Like many content-driven companies, the House of Mouse finds itself navigating the shift from a cable-based content-distribution paradigm to an over-the-top world. This change has come with its fair share of headaches for profit driver ESPN. The world's most popular set of sports networks has hemorrhaged customers in recent years, losing a whopping 12 million subscribers over the past six years. Contractually pre-set rate increases have offset much of this pain, but can't do so forever.
Disney CEO Bob Iger says his company is working to remedy the situation, with plans that include continuing to build out the Watch ESPN app in the years to come. Doing so will require ESPN and Disney to manage the delicate balancing act between catering to their cable provider partners, who facilitate the majority of subscriptions, and establishing their own over-the-top presence. Iger & Co.'s ability to keep up with trends in the media business has led to incredible results -- its studio business serves as a perfect case study.
As for its non-TV operations, Disney's track record in recent years is second to none. The media power has leveraged its multibillion-dollar acquisitions of Pixar, Marvel, and Lucasfilm to produce a series of blockbuster franchises that should succeed for years into the future.
Better still, Disney has expanded its global footprint to cultivate and profit from an ever-increasing fan base. The most obvious example is the June 2016 opening of Disneyland Shanghai, whose performance the company cited as a major contributor to the 20% operating income increase in its parks and resorts segment in the most recent quarter.
Disney stands alone in the media world for both the depth of its content assets -- spanning the gamut from Bambi to Darth Vader -- and its ability to monetize them at the box office and through its network of parks, resorts, cruises, merchandise, and more. The company owns a significant portion of many people's favorite childhood characters and knows how to print profits from them. That's a powerful business model that seems sustainable over the long term.
Though you might not associate AT&T with the entertainment industry, the company is already one of the largest cable providers in the U.S., thanks in large part to its 2015 acquisition of DIRECTV. As of the company's most recent earnings report, AT&T provided cable services for 25 million consumers, the bulk of whom came from DIRECTV. What's more, AT&T figures to join Comcast as a bona fide entertainment industry force when its $85.4 billion deal to acquire Time Warner (NYSE:TWX) closes later this year.
In terms of its place within the entertainment industry, Time Warner will give AT&T control of TV networks and motion picture studios including CNN, HBO, TNT, TBS, and Warner Bros. Pictures. Though it looked as if the deal might encounter regulatory roadblocks, it now appears it will be allowed to pass without coming under the review of the FCC or Justice Department.
Controlling these assets should allow AT&T to secure the necessary rights from other cable providers -- which in turn need Time Warner's content for their own businesses -- to launch a cable TV product that streams directly to wireless devices in the coming years. Assuming AT&T bundles this service with cellular, internet, and other services into a single, cost-effective package, AT&T stands a strong chance to emerge as a dominant force in the entertainment industry in the years to come.