Earlier this week, I wrote a post on my blog in which I pointed out that some companies involved or associated with streaming movies or TV shows over the Internet have valuations that, in my opinion, are being inflated by all the excitement around the subject of streaming video.
In short, they're based on the incorrect impression that streaming movies and TV shows are going to replace DVDs or put the cable companies out of business in the near term.
Et tu, Fool
Anders Bylund responded with "This Is No Digital Media Bubble," suggesting that he caught me with my "foot in my mouth." While I appreciate a good discussion on the topic, there are a few things in Anders' article that don't make sense.
For starters, Anders implies that I suggested Netflix (Nasdaq: NFLX), Akamai, and Amazon (Nasdaq: AMZN) are overvalued. While I did make that case about Netflix and Akamai, it wouldn't be accurate to talk about Amazon's valuation in that lineup, because today Amazon makes very little money at all from streaming movies and TV shows.
I also argued that, today, digital content offerings from the likes of Hulu, Netflix, Apple, and Amazon are a complement to traditional media. There is no doubt that digital is growing, but online video is not replacing cable, and streaming movies are not replacing DVDs anytime soon. Seismic shifts like that usually happen over a long period of time, usually measured by a decade or more.
Bylund counters that consumers moved quickly from the VHS format to DVDs -- but it's not a relevant comparison. With digital, we're talking about consumers moving to a completely new format that is free of any physical media of any kind. That's very different from comparing the growth of consumers moving from one physical media format to another.
Get ready for a good conversation
Bylund does say that "we could argue all day about the promise of digital media or the rate at which online movie streams and direct downloads are replacing cable TV and DVDs, but I'll leave all that for another day." My question is, why wait?
This is exactly the topic we should be discussing, since the growth and adoption rate of digital is one of the major factors that influences the share price of companies in the digital arena. And the great thing about this topic is that we don't have to "argue" about the rate of growth -- we have plenty of data in the market to prove that it takes more than a few years to see consumers replace one kind of media distribution with another.
To put it in perspective, Netflix has already been streaming for three years, and while it has been the hands-down leader, cable TV is not going away anytime soon. Many seem to think that Netflix has changed the industry overnight, but it has taken it more than three years to get even this far.
While Netflix is absolutely having an effect on how content is consumed (and thus is affecting the cable and DVD business), I stick to my argument that far too many investors are using excitement rather than realistic data to value companies. Just this week, NPD released data to show that in the past three months, 75% of all U.S. consumers did not stream or download any multimedia content of any kind.
The bottom line is that the consumption of digital media is growing, it's affecting multiple media industries, and it's very exciting. But one service is not replacing another anytime soon. Even with the positive balance sheets that Apple, Akamai, and Netflix have, one can't let the excitement around streaming movies and TV shows be the major catalyst for valuing them more highly.
