Most investors spend a good deal of time searching for the next big story stock, or looking out for reasons to shed names they already own. And to be fair, these are important parts of investing.
Sometimes, though, it pays to do a little generalized, topical studying.
This is one of those times, particularly if you're a current or prospective owner of a cable TV service provider like Comcast (NASDAQ:CMCSA) or a media content creator like ViacomCBS (NASDAQ:VIAC) (NASDAQ:VIAC.A). Here's a rundown of the three key trends reshaping the cable television business that no company, or investor, can afford to ignore.
1. Broadband revenue is finally eclipsing cable revenue
We've known this day was coming. Now it's here, with its arrival accelerated by the pandemic. That is, broadband is now a bigger revenue driver than cable television is — or at least soon will be, depending on the company.
Altice (NYSE:ATUS) crossed this bridge a couple quarters back. Last quarter's high-speed internet revenue of $971 million is firmly above its cable revenue of $906 million, and the gap continues to widen. Ditto for Charter Communications (NASDAQ:CHTR). Its first-quarter broadband revenue reached nearly $5.1 billion thanks to the addition of 428,000 high-speed internet customers, while the loss of 145,000 cable subscribers let its cable TV revenue slip to $4.3 billion. Comcast's Xfinity brand still does more cable business than high-speed internet, but just barely. Moreover, at the former's current growth pace and the latter's ongoing contraction, Xfinity's going to turn the same corner in the quarter currently underway.
The implication is simple enough. These companies should focus more time and attention on the proven (and growing) breadwinner, and worry less about salvaging a dying business.
And to their credit, most of them are doing so. Comcast CFO Mike Cavanagh has made clear more than once that the company will "not chase unprofitable video subscribers," while AT&T (NYSE:T) has curtailed its deep discounting of DIRECTV packages that seemingly hurt the bottom line more than it helped. High-speed internet is the new cable cash cow.
2. Streaming will soon be bigger than conventional cable
It's no secret that the advent of streaming names like Netflix (NASDAQ:NFLX) and Walt Disney's (NYSE:DIS) Hulu are the chief reason the cable television business is on the defensive. What investors may be surprised to learn is how soon the streaming industry will be the bigger business. Strategy Analytics estimates it will happen sometime in 2024, when streaming's revenue is expected to reach $76.3 billion versus cable's expected 2023 revenue of $74.5 billion.
That's an estimate solely for the U.S. market, mind you. Certain overseas cable TV markets are projected to expand in the foreseeable future rather than contract.
It's a forecasted U.S. contraction with plenty of support, though. Digital TV Research believes 16 million of the nation's remaining 80 million cable customers will cut the cord by 2026.
Some companies are adapting. Indeed, some cable companies are even developing the very streaming services causing the demise of their cable businesses. Streaming platform Peacock now boasts 42 million signups since Comcast's NBCUniversal launched it in the middle of last year. ViacomCBS's Paramount+ and other streaming brands added 6 million paying subscribers last quarter, bringing the company's streaming headcount up to 36 million.
It's still the early innings of streaming's mainstreaming, however, and a great deal of future market share remains up for grabs.
3. Not all streaming revenue will come from subscription payments
Finally, while streaming is on pace to lap cable television, not all of that revenue is going to come directly from consumers. A big chunk of it will be supplied by advertisers effectively sponsoring or subsidizing programming.
This has been the trickiest part of the paradigm shift to pin down; how much are all these viewers really worth to advertisers?
So far, not much. Take ViacomCBS as an example. It reported $428 million worth of streaming ad revenue for its first quarter of 2021, most of which likely came from its ad-supported Pluto TV platform now serving nearly 50 million monthly viewers. That's only about $8 worth of ad revenue per viewer — per quarter — or less than $3 per viewer per month. Neither Peacock nor Fox's (NASDAQ:FOX) (NASDAQ:FOXA) ad-supported Tubi are faring any better.
Just bear in mind these ad-supported video services, as well as advertisers themselves, are still learning. As they get better, the average ad revenue per streaming customer will improve.
To this end, know that analysts with MoffettNathanson estimate Tubi will be generating $1 billion in ad revenue by 2023, with Fox's CEO Lachlan Murdoch reaffirming just a couple of days ago that its Tubi brand has billion-dollar potential. eMarketer forecasts that Pluto TV will drive $1 billion worth of U.S. ad business by 2022 as well, and further says Disney's Hulu is already producing on the order of $2 billion worth of annual ad revenue.
For perspective, streaming subscription leader Netflix did about $25 billion worth of business last year. That was, of course, before a slew of ad-supported and ad-subsidized options materialized.
The takeaway isn't a complicated one. Media companies need to be moving to where the market is going and not to where it's been. Some can, some can't, and some just won't. Doing nothing, however, won't prevent the paradigm shift from happening.
It would behoove investors who are taking a look at these companies to know where the companies stand on the subject and factor that into their decision-making process.