In the last decade, it's clear that technology and the internet are having a more profound impact on the economy and society. One area where this is incredibly obvious is in the media and entertainment sector.
More specifically, streaming entertainment has taken over. In the U.S., for example, less than half of all households still have a traditional cable TV subscription. This secular trend has major investment implications.
Luckily for investors, though, it's not really necessary to pick a single winner in the streaming industry. Let's take a closer look at the numerous businesses in the space all vying for a piece of the growing pie. It might just be a good idea to adopt a basket approach and own a few of these to gain adequate exposure.
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Content companies
Everyone is likely familiar with Netflix. Co-founder Reed Hastings correctly predicted years ago that the internet would change how people consumed video entertainment, so early on he positioned the company to capitalize on this trend. Netflix is widely considered the pioneer of the industry.
It's a pure-play streaming company, now introducing advertising to the mix to boost subscriber and revenue figures. However, this business model is expensive because billions of dollars must be spent regularly to develop new content to attract more members and keep existing ones satisfied. Netflix is in an advantageous position, however, because of its first-mover status allowing it to reach a massive scale. As of June 30, it had 238 million global customers.
This size is why Netflix generated $1.6 billion in free cash flow last year, with the expectation this profitability will continue. That's something the bulls have long been waiting for, and something the bears didn't think was going to happen, especially after Netflix was burning through so much cash for most of the past decade.
This favorable financial situation is in stark contrast to a company like Walt Disney, which offers streaming services Disney+, Hulu, and ESPN+. Combined, these three offerings have 220 million subscribers, making the company a formidable player in the industry. But the direct-to-consumer segment, where the streaming services are included, posted an operating loss of $500 million in Disney's latest fiscal quarter (the third quarter 2023, ended July 1).
CEO Bob Iger believes that Disney+, which was launched in November 2019, will achieve profitability by the end of the next fiscal year. But there are reasons to be skeptical. Cutting costs drastically could lead to subpar content that would result in consumers canceling their memberships. And raising prices too aggressively could also lead to higher churn, particularly because competition is so fierce these days.
Platform companies
Instead of looking strictly at content producers, investors can also consider platform businesses. Roku operates a three-sided ecosystem that connects consumers with all their favorite streaming services in one place. Moreover, advertisers can target Roku's 73.5 million active accounts in a connected-TV format.
Roku commands top market share in the U.S. when it comes to smart-TV operating systems, positioning it well as households continue to cut the cord. Because it's been investing heavily in growth opportunities, the company isn't profitable. But management believes in 2024, it can achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
A discussion about any consumer-facing internet-enabled industry usually isn't complete without mentioning the big tech enterprises, namely Alphabet, Amazon, and Apple. They all have their hands in the streaming market in unique ways.
Alphabet owns YouTube, which has over 2 billion users and is the most popular streaming choice among consumers, with more viewing time in the U.S. than Netflix. Alphabet also sells Chromecast products, competing directly with Roku's media sticks.
As part of its thriving Prime membership, Amazon lets subscribers watch TV shows and movies. In 2022, the business purchased MGM Studios for $8.5 billion to bolster its capabilities in content production. Amazon also sells Fire TV Sticks that can connect any TV to the internet.
Then there's Apple, which has sold Apple TVs since 2007, the same year that Netflix launched its streaming option. Apple TV+ is the company's budding streaming service, which received 54 Emmy nominations this year. Thanks to its fortress balance sheet and deep pockets, the iPhone maker has the financial resources to succeed over the long term.
As you can see, investors have plenty of choices when trying to gain exposure to the streaming industry.
