The advent of widespread high-speed Internet has catalyzed a dramatic shift in the way people consume media. Just a decade ago, to enjoy music, movies, or games, you had to purchase or rent a physical copy on disc or tape, or perhaps download it from the Internet to be saved on ones hard drive.
Today, most people in the developed world have access to fast broadband Internet. This makes it possible to stream music, videos, and even (to some extent) games. Streaming media offers big benefits in terms of convenience -- and is often cheaper, too! Here's what investors need to know about the dynamic and fast-growing streaming media industry.
What is streaming media?
Streaming media services deliver media -- principally music and video -- over high-speed Internet connections in real time. (New technology is starting to make streaming video games more feasible, but this article focuses on the more established music and video businesses.)
There are several common streaming media business models. Some services offer free, ad-supported content; others have a subscription model; still others have a pay-per-view model.
Many streaming media companies mix these business models. For example, Amazon.com offers pay-per-view video through its Amazon Instant Video service, but its Prime program functions as a subscription video service. Many music streaming services have both free, ad-supported versions and premium subscription options.
How big is the streaming media industry?
The streaming media industry is still in its infancy in terms of revenue generation. Netflix, one of the leading companies in streaming media, generated $3.46 billion in streaming revenue in 2013. However, this represented a 40% increase compared to 2012, and Netflix is on pace to grow streaming revenue by nearly 40% again in 2014.
The streaming music business is even smaller by revenue. Pandora is the dominant streaming music service in the U.S., yet it is on pace to generate less than $1 billion of revenue in 2014. Like Netflix, it has been growing at a 30% to 40% clip in recent years.
In terms of usage, though, streaming media companies are already quite prominent. Netflix passed 50 million global streaming subscribers in the first half of 2014. As of second-quarter 2014, Pandora had 76.4 million active listeners, and they listened to more than 5 billion hours of music during the three-month period.
How does the streaming media industry work?
As noted above, streaming media services have adopted a variety of revenue models. These include ad-supported services such as the basic versions of Hulu (video), Pandora (music), and Spotify (music).
Paid services include pay-per-view services such as Amazon Instant Video, as well as subscription services including Netflix, Amazon Prime, and the premium versions of Hulu, Pandora, and Spotify.
There are some big "behind-the-scenes" differences in how streaming media services work from a cost perspective. Streaming audio services must typically pay royalties -- either a set fee for every time a song is played, or a percentage of revenue. Pay-per-view streaming video operates similarly.
By contrast, subscription video services generally license content, paying a predetermined price for a certain period of time. The expected popularity of a particular movie or TV show plays a major role in setting the price, but there is no cost to the streaming service if more people watch a particular item.
As a result, the streaming video business has much greater economies of scale than streaming music. As a streaming music service grows, the amount it must pay to content owners grows at the same pace. By contrast, streaming video services can theoretically leverage their content costs over time by spreading their licensing costs over more users.
What drives the streaming media industry?
Growing consumer awareness of streaming media services is one of the top factors driving the industry's long-term growth. Streaming is still a relatively new phenomenon, and widespread adoption is just beginning. That said, the recent drop-off in digital music download sales shows that we are in the midst of a big shift toward streaming media.
As more people become aware of the diversity of services available and the improving quality of streaming media, streaming use should continue rising. Global expansion by the top companies will also drive industry growth.
Improvements in mobile broadband could also be a long-term growth driver for the streaming media industry. The comparatively slow speeds and low data caps for mobile broadband have led to most people relying on Wi-Fi or wired connections for streaming (especially video streaming, which is data-intensive).
In all likelihood, mobile data speeds will improve over time, while the cost will come down. (Compression technology is also improving.) In the long run, this should encourage people to use streaming services even when they're not on a Wi-Fi network. This, in turn, should lead to even more widespread streaming adoption.
Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends and owns shares of Amazon.com, Netflix, and Pandora Media. 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.