It's no secret--consumers are increasingly opting for online entertainment viewing. And a number of secular shifts are taking place that will lead to Internet streaming companies doing even better at the expense of Pay TV and DVD rentals.
And the major beneficiaries of this shift in consumer demand will be subscription services like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Hulu. This trio of companies is well positioned to take advantage of the growth in the Over-the-top (OTT) market because they provide a mix of commodity content on a non-exclusive basis, as well as exclusive and original content.
These streaming players are expected to generate revenues of $6.6 billion in 2013, which is expected to surge to $17.4 billion by 2017, an annual growth of roughly 27%, according to PricewaterhouseCoopers. And five secular forces will provide substantial tailwinds for the growth of these Internet TV companies:
1. Higher penetration of TV-connected devices: Most entertainment viewing is still done on TV with 90% of consumers still watching on their TV sets, according to NPD. And the increased penetration of connected devices including gaming consoles, smart TVs, and video streaming players will drive more online viewing due to ease of usage.
And the rapid proliferation of Internet video streaming players including Roku, Apple TV, and Google's (NASDAQ:GOOGL) Chromecast device will aid in enhancing customer satisfaction, driving subscription growth, and also lead to increased transactional sales for Amazon's Instant Video. Also, Hulu Plus and Netflix should see lowered churn rate as well owing to their presence in the living room.
2. Tablet and smartphone adoption worldwide: The rapid growth of mobile devices across the globe will grow the addressable market for Internet video. With Netflix operating in more than 40 countries, the incremental benefits of tablet and smartphone penetration should grow the company's International segment. Also, the higher quality of streaming on rapidly improving hardware devices should aid as well. According to IDC, the tablet market is expected to surge to 375 million in 2016 from 125 million units in 2012.
Amazon has a leg up over Netflix and Hulu in terms of tablet usage due to its strong and robust presence in the tablet market with Kindle devices. Amazon is also making its Kindle line more available in newer territories as well. Another major beneficiary of incremental tablet viewership would be Google's YouTube, which has in excess of 1 billion monthly users. Google's rapidly increasing market share in mobile OS with Android will provide strong tailwind for other Google offerings like Google Play, Motorola devices, etc.
3. Internet connectivity and usage: With higher-speed Internet services like Google Fiber just around the corner, the quality of video streaming should become even better in the future. And all the Internet TV players will benefit immensely from a larger Internet audience. In 2013, more than 2.7 billion people are using the Internet, which represents 39% of the world's population. But Internet penetration in the developing world represents only 31% of the total online population, compared to 77% in the developed regions, according to International Telecom Union (ITU).
Higher levels of broadband penetration and enhanced ISPs will dramatically increase the addressable market for Netflix's territories. Hulu operates in only Japan and the U.S., and Amazon operates in the US, UK, and Germany. A larger Internet audience will encourage Hulu and Amazon to venture out their offerings into newer markets as well.
4. Consumers want ubiquitous access: Consumers have moved away from viewing video content only in their living room, and they are demanding access to information and entertainment on the go, driven by high quality hardware devices. This trend is already driving heavy usage of Internet video companies with YouTube disclosing that roughly 25% of its global views are on mobile devices.
To keep up with these Internet TV companies, media and cable companies have started providing access to consumers with TV Everywhere offerings, but the usage of cable content on mobile device remains largely questionable. In the first quarter of 2013, the number of viewers watching TV Shows through streaming subscriptions increased 34% year over year with Netflix dominating the space with a 90% share of video streaming units, according to NPD. And going forward, streaming through SVOD companies should increase further with Netflix, Hulu Plus, and Amazon being the clear cut winners.
5. Cord-cutting is not myth, but a reality. As cord-cutting takes place Internet TV players will benefit, at least on a small scale, from lower usage of linear TV. Cable and satellite providers have seen their pay-TV consumers drop video connections and use comparatively inexpensive subscription offerings. Cable/Satellite firms including Comcast, Time Warner Cable, and Dish Network are losing video customers due to this phenomenon called "cord-cutting."
In the first two quarters of 2013, Time Warner Cable and Comcast lost 307,000 and 219,000 Pay TV subscribers respectively. Even though these numbers are relatively small for these cable companies, they might worsen in the future. But subscription services should benefit from these cable names as many consumers choose multiple online video offerings instead of picking just one. In addition, numerous consumer surveys have shown that Netflix subscribers are more likely to cut or not possess pay-TV subscriptions at all.
Becoming major entertainment outlets
Netflix will likely build on its top dog status, and continue to benefit from TV consumption habits. Nowadays, even colleges are cutting the cord because of lack of usage by the youth. Netflix now accounts for more than 30% of downstream Internet traffic in peak periods in the U.S., and Hulu and Amazon are increasingly gaining traction as well, according to Sandvine. As these firms get incremental consumer mindshare, the top-line of these firms should see healthy growth for years, and their stocks should follow suit.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Netflix. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.