"First they ignore you, then they laugh at you, then they fight you, then you win." Gandhi, despite decades of misattribution, didn't say that, but just because we can't pin the pithiness on an iconic figure doesn't make it entirely untrue. And right now, in the world of streaming video, the market is firmly in the "they fight you" stage against the pioneering powerhouse, Netflix (NASDAQ:NFLX). Seems like every media empire is rolling out its own streaming platform, as are tech titans like Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL).
In this segment from Motley Fool Answers, cohosts Robert Brokamp and Alison Southwick have invited senior analyst Jason Moser into the studio to talk about the current situation in video streaming: which offerings look strongest, how they might move the needle on media company stock prices, where it all leaves traditional cable, and whether Netflix will still be able to win once all that rising competition slams into its content-aggregation business model.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 10, 2019.
Alison Southwick: It is an amazing time to be a consumer of content. So many options! So many shows to recommend to coworkers that they don't actually end up watching! How are you enjoying Derry Girls, Robert Brokamp?
Robert Brokamp: I watched one and I quite enjoyed it.
Southwick: OK! That makes me feel better! It only took me a few times of recommending Derry Girls.
Jason Moser: I was having that conversation yesterday with Mac Greer, telling him about all of these latest and greatest HBO shows that he needs to watch. I'm sure he'll probably get to one of them. At some point.
Moser: It's just too much.
Southwick: It's too much. There's so much, and it's only getting crazier. That, of course, was Jason Moser piping, by the way.
Southwick: He's joining us today because this year, and also closing out the year, there's going to be a lot more streaming platforms available, which is going to put some more pressure on companies that have been longtime recommendations at The Fool here like Netflix. So today, we're just going to talk about it. We're going to talk about some of our options when it comes to streaming video and investing in these kinds of companies. And really, how does it look for Netflix? [whispering] Not good!
Moser: [laughs] I mean --
Southwick: We can get to it later. I don't know. From the research I did, every article I read, I was just like, [pained sounds]. But, I don't own Netflix.
Moser: I'd say it's a more challenging environment today than it was five years ago.
Southwick: For everything, for everyone, all the time. Let's start off by talking about Disney (NYSE:DIS). Of course, Disney earlier this year -- what, a month ago? Two months ago? -- announced Disney+ was coming. Let's head to the tale of the tape. Disney+ is going to launch on November 12th, so it doesn't have any subscribers to talk of yet.
Moser: That's not true, actually. I'll explain. But, keep going.
Southwick: OK. Content will include Disney, Pixar, Marvel, Star Wars stuff, 20th Century Fox movies, 25 original series, also National Geographic. It's expected that Disney+ will have about 7,000 TV episodes and 500 films. Iger says eventually the whole vault -- yes, the whole vault! -- will be available on Disney+. How much is Disney going to spend? Well, they're going to spend about $500 million in original content for the service, but, obviously, they're spending a lot of money on content all the time everywhere. The Mandalorian alone, one of the Star Wars TV shows, is going to cost $100 million. That $500 million might be a lowball offer if just one of the original series is costing that much. The price will be $69.99 a year, or about $7 a month. You can also do a bundle with Hulu, which Disney has recently taken control of, and also ESPN+, and that will be $12.99 a month.
That's the tale of the tape for Disney+. I think, as both a lover of Star Wars and a parent of a six-year-old girl, we are going to be running, not walking, to sign up for Disney+.
Moser: I fully agree with you. As a parent of two older girls -- we've got a freshman in high school and an eighth grader --
Southwick: Wow, I can't believe your oldest is in high school!
Moser: I know! Every birthday they have reminds me that I had one, too. There's a lot of content that they want to watch on Disney+ as well. I think they've done a good job of building out this offering that is going to scratch an itch for everyone.
Going back to the subscriber account that you talked about a little bit earlier, Disney did something very clever at the D23 conference this year. They release all of this information on what's going on in the Disney universe. Of course, D23 had much to do with Disney+ and the content that's coming out, and they offered pre-subscriptions. You could sign up in advance. And not only that, they said if you sign up for two years, we'll give you the third one for free. So they really were working on pulling the levers to get those subscribers in their early. By all accounts, it's worked out pretty well. It's certainly overloaded the servers and shut everything down for a little while until they get back in there to fix it. But it does sound like a lot of people are as enthusiastic as you and me, and I would assume Bro's probably pretty enthusiastic as well.
Brokamp: Very much so about Star Wars. My kids are probably too old for the Disney stuff.
Moser: How about the High School Musical series?
Brokamp: I might just have to convince them that they still like Disney just enough so I can get the Star Wars stuff.
Moser: This is where I think they've been so clever with this whole thing. Hulu has obviously been around for a while; it's had a few different iterations. What they've done with Hulu is actually pretty clever with this Hulu Live offering. It's essentially cable light. It's a much more affordable package than your traditional cable package. It really focuses on the content that people want to see. And it's a lot easier to use and to sign up for and manage. So, you've got Hulu, you've got Hulu Live. Now you've got ESPN+. A guy like me, I went to Wofford College, very small school, we had one heck of a year last year for the basketball team. But really, most of the games for Wofford, for example, are going to be on ESPN+. You get that bundled together, I'm there. And at $12.99, it's a no-brainer. I'm doing myself and my family a disservice if we don't sign up for it.
Brokamp: It's abuse, really.
Moser: It really is. It's like a Costco membership and Amazon Prime. If you don't sign up for it --
Southwick: Are you even American?
Moser: Exactly, what in the world is going on? This all goes back to, it's been a while we've been talking about this stuff for a while, what Disney was planning on doing. Now it's coming to fruition. And man, it really looks like it's going to be something pretty impressive. November 12th being the drop date for Disney+. It's not all going to hit at once. That's going to be neat. They're going to build this service out over the course of many, many years, adding content and, believe me, raising prices along the way. And that's really the genius of starting this price point so low. It's going to bring a lot of people in, and then they're going to get in there and see how much they like it. And then, over time, they're going to be able to bump those prices up slowly but surely, and convince you that the value proposition makes sense. I think that's one of the main reasons why we're all pretty optimistic right now.
Southwick: What happened with the stock price? How's Disney's share price been doing? We bought a while ago, and I feel like I've just been waiting and waiting for Disney to take off because of the optimism I have in the company, and it just hasn't.
Moser: The problem with Disney, Disney's stock is not going to be something that just takes off overnight. Part of that is because a lot of it's already known. There are not a lot of secrets there, right? We understand what the business is about, the different ways it makes its money. Now, I do think that we've seen over the past several months, particularly 2019, it's been a pretty good year for the stock. We've seen a lot of certainty come down the pike here with all of these new offerings that they're bringing out. We're starting to see a little bit more clarity as to what the future holds. And it's exciting. So we've seen a little bit of enthusiasm in the stock price. But really, Disney is one of those stocks where you have to look at the five and 10-year holding period. It's one of the first stocks that my daughters bought, for example. I think they've owned it ever since 2012. It's up about 150% or something like that. But you would never know it unless you actually went in there and really calculated it out. It's just slowly but surely winning the race.
Southwick: One of the big themes, of course, around streaming video is the whole idea that content is king. And boy, Disney is king of content.
Moser: They are, you're right. The advantage they've always had is that they own all of this IP. And the IP that they didn't own, they went out and acquired it, whether it was Marvel or Pixar, or most recently Lucasfilm. They've got something for everyone.
Southwick: The Simpsons!
Moser: And now, 21st Century Fox. They have so much in that regard. That is going to be something that really fuels this engine for a long time to come. Now, on the flip side, you see something like Netflix, Netflix was never really the content king. They were just getting content from everywhere else and basically aggregating it. Where Netflix really scored was on the distribution side. They saw early on the power of the internet and how to build out an internet TV service. You have content being king on one side. Is distribution king on the other? I don't know. I like to say, if content is king, then distribution is queen. And really, we all know that behind a good king is a better queen. You have to have both, is really ultimately what I'm saying here, Alison. And Disney now is going to have both.
Southwick: What's harder, to consistently create good content, or to create a platform where people can reliably watch video?
Moser: I think once you nail the platform, you've nailed the platform. I think to build out sustainably good content that keeps people coming back for more is probably a little bit more difficult, particularly if you don't own it and you have to figure out how to create it. That's going to be where I think Disney has a leg up there. We've seen with Netflix getting into that original content game. They've had some hits; they've had some misses. HBO has been doing that for 40 years plus, it seems like. They've certainly got it down to a science. They produce a lot of great content as well. But even they're not immune to the occasional miss as well. Distribution, I think for the foreseeable future, is going to be pretty much as we see it today. It's mobile, it's internet, it's catering to where we are and whatever we want to watch it. So now it is going to really be more about the content. It certainly looks like Disney has got the advantage there.
Southwick: Yeah. Alright, let's move on and talk about Apple TV+. Plus is the new "I." Everything is plus. Something we're probably less excited about?
Moser: I would say "less excited" is probably an understatement. I'm not quite locked into the value proposition yet here. I admire Apple for a lot of reasons. I do feel like they really dropped this TV ball so long ago that there's really no getting it back. Now, let's be clear, this is a company that could just stamp its logo on a brick and probably sell three million of them, no questions asked. There are going to be plenty of people out there that love Apple that'll think this is the greatest thing since sliced bread. They're going to justify it however they're going to do that. I don't see it yet. That's just from the Apple TV interface.
From the content side, we've seen at least one show that they are going to be bringing to the market. It's some newsroom type Morning Show drama or whatever. I guess that's fine, whatever. But the content discussion we're having here, I think Apple is going to discover very quickly that it's difficult to do. It's difficult to do sustainably. Even if you have a lot of money. It costs a lot of money. You need to be careful getting into this. You need to understand the strategy and why you're doing this because you can get caught spending a lot of money on that content really fast, and you can go down one of those rabbit holes that's very difficult to get out of.
Frankly, I feel like this is not where Apple should even be bothering. I don't even see why they're bothering with it. I almost feel like they're doing it because we expect them to do it, kind of like with the Watch or with this credit card. To me, it's eh. Whatever.
Southwick: Well, they've got enough money. They might as well just throw some money at this, right? So, yes, Apple is only investing -- "only" -- $2 billion a year in original content. It includes an Oprah show, a Spielberg thing, the aforementioned Morning Show kind of comedy that you talked about, with Steve Carell and Jennifer Aniston. Big names. Big names at the launch. But, I don't know.
Moser: I don't know what audience it's really trying to capture. Oprah...
Southwick: It's Oprah!
Moser: Yeah, it's Oprah. She carries a lot of sway there. But she's worked for some time on her own network, the Oprah Winfrey Network. That was never anything that really changed the world, either. At some point or another, people's flame kind of flickers out. I feel like Oprah probably is closer to that than others. But, again, you have to start somewhere.
Southwick: It's rumored to eventually cost $9.99 a month.
Moser: Doesn't sound like a very compelling price, particularly when you compare it to Disney and what you can get from all of those three different channels. And really, I say three channels -- ESPN, Disney+, and Hulu -- but remember, Hulu is far more than just one channel. Hulu is an aggregator in that Netflix sense. Also, they have their own original content, and they brought some good stuff to market there as well. From a value proposition standpoint, the Disney offering certainly seems to be a lot more compelling than the Apple one.
Southwick: We also have coming down the pike, which we're not going to dig into, HBO and Warner Media are going to launch a new streaming service. NBC Universal is launching a streaming service in 2020. Viacom and CBS apparently announced a merger, so they're going to be doing something, too. It's really becoming a walled gardens, as I heard someone reference it. Everyone has their own walled garden of content, and you've got to pay to get into it.
Alright, let's talk about Amazon really quick. Tale of tape. Amazon Video. Amazon is in a unique position, considering this is kind of like, "Eh, here, we'll throw some video content at you. Why not?" Amazon Prime has about 100 million members. Content on Amazon includes a fair amount of originals like Marvelous Mrs. Maisel and Fleabag, HBO series that are more than a few years old, and a random smattering of stuff. Amazon spent $6 billion in 2018 on original content, and plans to spend another $6 billion in 2019.
Moser: It's a unique strategy. On the one hand, they're trying to convince us that their Amazon Prime video offering is strong on its own. But then, you mentioned the HBO shows and other different networks shows, where they'll offer you perhaps a season or two of one of their best shows. And the idea is, maybe they can talk you into signing up for a subscription for something like HBO or Showtime, and getting that subscription through your Amazon interface. Similar to Hulu in that regard. Hulu's got the same kind of thing. I definitely don't blame them for doing that. At the end of the day, most people, once they've joined Amazon Prime, they're going to stick with Amazon Prime. They're going to see that video product as just one more value-add. It's not about offering up the best and most award-winning shows that they possibly can. It's about giving the customer something that makes them feel like they're getting value out of that overall relationship. So, for Amazon, it's a much different end game. I think that goes to show the value in being more than just a one trick pony when it comes to this video streaming game or wars, as some might want to call them. When you're a one trick pony, you've got a lot more on the line. Your successes matter a lot more, and so do your flops. But, when you have other ways to make your money, other things that you're doing with the business, you can be a little bit more experimental and try new things, and get away with it when it works, and make us forget about it when it doesn't.
Southwick: Speaking of one trick ponies, it's time to talk about Netflix.
Moser: Had to happen eventually.
Southwick: Here's the tale of the tape. 60 million subscribers in the U.S., and 150 million-ish worldwide. Of course, the content includes a lot of original programming, and also a lot of licensed stuff. Licensed by people like Disney and NBC. [groans] Oy. That's what's keeping Reed Hastings up at night, huh? The cost varies, but most people pay about $13 a month.
I thought this was interesting -- apparently, everyone already knew this, and I'm the only one who didn't know this -- even though Netflix spends $12 billion to $15 billion on original content --
Moser: It's about $15 billion annually now.
Southwick: -- actually, what most people are watching is The Office, Friends, and stuff that's licensed.
Moser: Yeah. It does sound like the data supports that. I can tell you just from our household of four, The Office probably gets the most play on our Netflix subscription as compared to any other show on there. Content is interesting in that everybody's got an opinion, right? Content is art, at the end of the day, and everybody has an opinion on art. I look at Netflix, and I personally think, for me, the content, I don't think it's all that great. I'm more of an HBO guy, always have been, I think they have better shows. There's an occasional Netflix show I watch. But for a long time, Netflix was really the only player in the space. They defined this space, they invented it, and they've ruled it forever. You can't take that away from them. I think that what we're seeing now is a natural consequence of more competition entering the fray. And I think Netflix is going to have to think about how they are going to change their strategy a little bit. They're already making some adjustments. They're focusing a little bit on spending less on content; instead of trying to just throw this big wide world of a million different shows out there, have a little bit of something for everyone in the world. I think they're trying to be a little bit more thoughtful about the content that they make, and make a little bit more quality stuff that attracts an audience similar to something like what maybe HBO does. They are looking at, potentially, instead of releasing every show at once, releasing them in batches, like three or four shows at a time over the course of a month or something, so that the shows can live a little bit of a longer life. You were talking about The Mandalorian, $100 million. You think about how much money you spend on some of those shows, some of those series -- you do 10 episodes, and you drop them all at once, you have people watching the entire series in the matter of a day, and then it's gone. It's over. Not only is the series over, but people aren't talking about it. You need to figure out a way to draw that conversation out. So I think Netflix is looking at trying to do that.
They seem to be very committed to never introducing advertising to the platform. That was a question that was brought up in the most recent earnings call. I think that that's the right thing to do. I think that if they ever tried to bring advertising, it would run counter to what Reed Hastings has been talking about all this time, in producing this experience that's not cluttered by it. It's interesting on their shareholder letter, I noticed this -- Hastings said, "Like HBO, we are advertising free." That's true to an extent. But remember, HBO is owned by AT&T. AT&T is not advertising free. There's a big advertising revenue component to AT&T's business. So HBO and Netflix really are not playing the same game from that perspective. HBO can hide behind the big corporation. Netflix, unfortunately, can't. And I think the questions regarding their finances are fair. They have a lot of money that they owe. They're going to have to keep paying a lot of money going forward.
Southwick: $4 billion in debt in the last year.
Moser: And they have over $18 billion in content obligations right now. They're going to have to continue to pay a lot of money in order to develop new content. And, oh, yeah, by the way, a lot of that stuff that they've built this business on with the Marvel content and whatnot is now leaving because of Disney.
There are a lot of questions as to Netflix for investors. I think personally, Netflix is always going to be a mainstay. It's going to be a staple of people's streaming subscriptions. I think people are always going to subscribe to it because it's a great value proposition. Now, as an investor, I think you have to be asking the question, how much more can they raise prices? I don't know that they can raise prices a whole heck of a lot more if the content is going to be what it is. To put some numbers around that, if worldwide they have around 160 million subscribers today, if they increased that just $2 per month -- seems pretty reasonable, and it's probably where people might start taking notice -- that's $320 million per month. Around $3.8 billion per year. That money has already been spent. And that's just a hypothetical. But that $3.8 billion doesn't even come close to continuing to fuel that engine. So, you can see the challenges that they have on the content front. That's why I say, for investors, that's one of the things you have to keep in mind there. I think it's going to become for Netflix more about how much more can they raise prices; less about how many more subscribers can they add.
Southwick: I saw an interesting quote in Recode talking about all these new streaming services coming out. It said, "If you want everything, you'll need to get Netflix and Hulu and NBC Universal's thing and AT&T's thing and Disney's other streaming service," and it's funny, because we got to this place, I think, because we all wanted to cut the cord. But now we're spending so much money! [laughs]
Moser: What was the point of cutting the cord? It was convenience, it was getting what you wanted.
Southwick: "I'll only pay for what I want!"
Moser: It was paying less. You're paying the cable company $200 a month for all of this crap that you never watch. And then you're beholden to the cable company with this box in your house. And if it breaks, or God forbid, something happens, then you have to deal with the cable company! The over the top movement here has helped from a lot of a lot of perspectives. Now you don't have to worry about the cable company. And that's great. But the cost argument has disappeared more or less. Like you were just saying, if you want to watch all of your stuff, basically, now you're getting close to that same $200 cable bill you were paying before.
Southwick: What I need is for someone to disrupt delivering internet to my house. I still have to pay Comcast a ton of money every month just to give me internet so that I can then get all these other streams.
Moser: It's a fair statement for you to say something like that. I think people feel the same way probably about Verizon. We get our internet from Verizon. When we moved to a new house a few years ago, I told Verizon to cancel my cable, I just wanted the internet. Of course, they tried to offer me cable for basically free and I turned it down because I don't want to deal with that. The less I have to deal with them, the better. But slowly but surely, they are raising the price on the internet. Therein lies the value of being the company with the infrastructure that delivers that so, so valuable wireless connection.
Southwick: Gotta have it!
Moser: They have a big leg up in that. Whether it's Comcast or AT&T or Verizon, having that infrastructure is so valuable. Again, those are companies that exist for investors. They can be great investments. They're not stocks that will double overnight. But you see companies like that, they're able to pay out really nice dividends over the course of time because there's a level of certainty to the business model. What they're providing us is really what is making this earth turn more or less at this point. So, they can continue to offer up nice dividends without having to worry so much about the debt levels, because they've got a pretty reliable revenue stream. So those can be good investment ideas, as long as you understand the purpose they would serve in your portfolio. It's more of a slow and steady dividend payer that you want to hang on to for many, many years to really realize the effects.
Southwick: What's your bottom line thoughts, as we enter this exciting war in the battle for our eyeballs?
Moser: My bottom line thoughts?
Southwick: I don't know. Sum it up for everybody.
Moser: My bottom line thought is, beyond just video streaming, I think entertainment has turned into a market opportunity that is one that investors cannot ignore. Five years ago, seven years ago, we were just talking about Netflix and that being the future. That future is now. We're seeing a lot of competition in the space on the video streaming front. But we're seeing so much more happen, whether it's Amazon trying to bring hardware into your house, or Apple trying to bring hardware into your house, Microsoft developing a gaming platform. We're seeing these big tech companies trying all of these new things because they're all competing for our attention. There are a lot of different ways to invest in it. I think that's the bottom line. Try to step back and see the entertainment industry for what it is. It's much more than just video streaming. We're talking about everything from the technology, to the delivery of that technology, to the content behind the technology. We've got an environment now where gambling is becoming legalized virtually everywhere. I think it's just a matter of time before it's everywhere, and gambling is legalized. That adds a new dynamic to sports. Advertising is a tremendous driver in the entertainment industry as well. A lot of different ways to invest in advertising. That, I think, is the ultimate takeaway. Investors need to look at entertainment as a massive opportunity. Identify the different pillars that are really driving that entertainment industry, and start figuring out ways to invest in those for the long haul.
Southwick: Which is why we're going to have you back on the show at some point here to talk about another component of that which you mentioned -- sports, e-sports, video games, all of that.
Moser: There's all sorts of stuff to talk about.
Southwick: A lot to unpack there. It's crazy what the kids are looking at these days. Alright, Jason, you want to stick around for a little trivia? See how smart you really are?
Moser: Well, I can tell you, I'm not that smart. But I will stick around.
Southwick: We talked a lot about a number of video streaming platforms and companies. One we didn't talk about because I don't really understand it, because I'm old, is YouTube. Obviously, I get YouTube. I know what it is. I understand it. I don't think I watch nearly as much YouTube as the kids watch these days. So, what we're going to do here is, I'm going to ask you some trivia questions about YouTube and see what you know. Did you know that in an average month, eight out of 10 18-49 year olds watch YouTube?
Brokamp: What does that mean? They watch a short video?
Southwick: Anything. They just watch it.
Moser: I believe it. Listen, I posed the question to my daughters. You have YouTube and Netflix. I'm going to take one away from you. What's the one you want to keep? And they both said, without even hesitation, YouTube.
Brokamp: I could totally see that.