The already crowded streaming video space is about to gain a new player looking to make deals, create services, and help existing companies grow.
AT&T (NYSE:T) and The Chernin Group, which manages and invests in media businesses around the world, will commit over $500 million to acquire, invest in and launch over-the-top video services. Over-the-top (or OTT) video is essentially streaming video offered without reliance on a cable company, Internet service provider, or satellite company. The content may travel over lines owned by those companies, but the they are merely providing a pipeline and have no role in what the content is. (To further simplify, a movie watched on Netflix (NASDAQ:NFLX) is OTT while one ordered through a cable company's on-demand service is not).
Their are a large number of services that can be considered OTT in the current marketplace with varying business models. Netflix, which offers movies, television shows, and original programming across a variety of genres, counts as OTT, as does WWE's (NYSE:WWE) network, which offers very specific programming built around the company's pro wrestling brand. AT&T and Chernin have not spelled out their plans but it appears they are looking at acquiring, investing in, and launching a variety of services rather than building a single Netflix-style service.
AT&T and Chernin look to be making a broad play that will include ad-supported streaming products as well as video-on-demand offerings. As part of the deal Chernin will be contributing its controlling stake in Crunchyroll, an ainme video streaming site the company bought in December 2013, Variety reported.
The announcement of the deal was short on details and mostly suggested that both AT&T and Chernin know that streaming video is only going to get bigger and that they need to be a part of it.
"AT&T and The Chernin Group are combining our skill sets to address the growing consumer demand for accessing content how and when they want it," said John Stankey, Chief Strategy Officer at AT&T, in a release. "Combining our expertise in network infrastructure, mobile, broadband, and video with The Chernin Group's management and expertise in content, distribution, and monetization models in online video creates the opportunity for us to develop a compelling offering in the OTT space."
The Chernin take on the deal was similar.
"A critical part of The Chernin Group's strategy has been our significant focus on the online video industry, and joining forces with AT&T only further underscores our strategic commitment in this area as operators, investors, and programmers," said Peter Chernin, Chairman and CEO, The Chernin Group, in his company's release.
Mostly we know that a joint venture now exists between a company with some content experience (Chernin) and another with a significant distribution network (AT&T) and both want a hedge against the ongoing changes to the current cable/satellite television model.
There are a lot of streaming services
In addition to the big players like Netflix, Hulu, and Amazon's (NASDAQ:AMZN) Prime Video, there are countless players in the streaming space. David Fannon, executive vice president of Popcornflix.com (a free movie streaming service), thinks the market is already too crowded.
"I believe there are too many streaming services like Netflix. The market cannot support these broad SVOD services that do not really distinguish themselves," Fannon told the Fool. "However, the market is bereft of genre services and free services.... As each of these SVOD services launch they will eat into each other's content."
Fannon advocates free ad-supported services (like Popcornflix), which is part of the AT&T-Chernin Group plan.
Stephen Wilson, director of solutions at Compuware APM, a technology company that helps digital streaming services offer an optimal user experience, believes that shifting TV habits leave room for growth in the streaming marketplace.
"The war for viewers and dollars will only escalate as people, especially Millennials, radically shift to a new definition of TV watching -- viewers want to consume media in their own ways, on their own schedules, and across their own devices of choice," he told the Fool.
It's clear that AT&T and Chernin are entering a crowded space but in looking to invest, acquire, and create, the companies may be sensibly hedging their bets. Creating a Netflix rival with only $500 million committed would be foolhardy -- Netflix spent $2 billion in 2013 on content alone and looks to increase that number. The play for AT&T and Chernin could be operating in the niches and looking for opportunities to reach audiences under-served in the current market.
How big is the digital streaming market?
The major video streaming services all grew significantly in 2013 in the United States as you can see from the chart below.
It's harder to judge growth for the lesser players, but WWE's streaming service had over 650,000 paying subscribers 42 days after the service launched and consumer acceptance of the technology has grown. In addition cable television actually lost subscribers (around 2 million) for the first time ever in 2013, which suggests that people are open to alternative video services.
There are room for more winners
Digital streaming has grown in popularity, and with streaming getting easier and faster on more devices used by more people, it's hard to imagine that there isn't room for more niche players ... maybe even more major ones if they find a way to offer value without attempting to be another Netflix. AT&T and Chernin has effectively agreed to nibble around the edges of this emerging field. The two companies have the ability to identify up-and-coming players and offer them more than just cash. Chernin brings content expertise and AT&T brings the audience and marketing muscle that turns good ideas into viable businesses.
And the two companies are not putting all their eggs into one basket. Instead they are building a portfolio where if one service hits it will not only potentially help the others it will have the potential of making this a smart investment for AT&T and Chernin.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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.