Consumers continued to cut the cord in 2021, with approximately 4.7 million Americans saying goodbye to the big bundle. And while the price is still a major concern for many households, especially during this period of heavy inflation, the shift from cable isn't all about money.
More and more people are saying they cut the cord because all the shows and movies they want to watch are available via streaming. That response has several implications for investors in media companies.
Image source: Getty Images.
A double-edged sword
Many media companies have made a shift from exclusive releases on cable networks and in theaters to putting a lot of their best content on their own streaming service, which they sell directly to consumers. Cutting out the middle man -- i.e., cable distributors and theaters -- can ultimately result in greater revenue and more loyal customers, but it's not a simple transition.
Cable networks are a big business. Disney (DIS -0.04%) generated $8.4 billion in operating income from its television networks in 2021. WarnerMedia, now part of Warner Bros. Discovery (WBD -2.17%), generated $6.1 billion. Discovery produced nearly $4 billion in operating profits.
But as more people cut the cord, those numbers are declining. Meanwhile, legacy media companies are burning cash as they try to attract subscribers and scale.
That said, there's strong potential for profits. Netflix (NFLX -0.63%) collected $6.1 billion in operating income in 2021. That said, future profit expansion may slow as it faces a challenge, having saturated many of the markets it operates in with its current offerings.
Prices can keep climbing
If price isn't the biggest reason for cutting the cord, it may indicate consumers are willing to spend more on streaming entertainment. The median streaming household currently spends between $20 and $30 on streaming services, but there could be room for that to climb if people cut the cord. After all, the average cable bundle is much more expensive.
With the proliferation of streaming services from all sorts of media companies, it's now possible to put together an a la carte package of services that provides better entertainment than the cable bundle.
The consumer response should be particularly welcoming for Netflix and Amazon (AMZN 3.43%) investors. Both instituted notable price increases in the last few months. Netflix, in particular, may be heavily reliant on price increases in its more saturated markets in order to grow revenue. Meanwhile, Amazon has stepped up its content investment for Prime, and it needs to raise prices to make the spending worthwhile.
Netflix saw a decline in subscribers in the first quarter, and management noted a slight uptick in subscriber churn rates during the quarter. However, management was keen to point out that the price increase didn't have a bigger-than-expected impact on subscriber retention, but other factors are at play.
Opportunity to bundle streaming
Suppose consumers believe the best content is available via streaming services. In that case, it may be an opportunity for distributors to shift to offering a bundle of on-demand streamers instead of linear networks.
Comcast (CMCSA 1.85%) has already started pushing customers to use its set-top box in order to stream the best content. It also has a stake in the game with its own streaming service, Peacock. It's a big shift for the largest pay-TV provider in the U.S. (and the U.K.), but ultimately the economics work out such that it's agnostic as to whether a customer signs up for traditional cable TV or uses its streaming box.
The bigger opportunity could be for platforms like Roku (ROKU -10.29%) or Amazon Fire TV. Since customers are already using those devices to stream TV, they have a lot of data on user preferences. They could put together a bundle of services to appeal to customers while promoting their own streaming content, garnering more ad inventory, and taking a cut from each subscription.
The companies that are pure plays on streaming have a much greater upside for investors. If cost is less of a concern for newer cord-cutters, behind the quality of content, that leaves a lot of room for streaming media companies to invest and grow. Older media companies and distributors will have to balance the transition, but it's still a big opportunity for the entire industry.
