Contrary to widespread opinion, streaming is not the inevitable victor in the content distribution race.
In this week's Industry Focus: Consumer Goods, Sean O'Reilly and Fool contractor Dan Kline explain why streaming services are nowhere near as big of a threat to cable as they were initially perceived to be, why the PlayStation Vue isn't having the impact it intended, what few major roadblocks streaming services will encounter as they become more popular, and more.
Also, we review JAB Holding's most recent move to become a coffee-conglomerate force to be reckoned with: its acquisition of Krispy Kreme Doughnuts (NYSE: KKD).
A full transcript follows the video.
This podcast was recorded on May 10, 2016.
Sean O'Reilly: Are streaming services really a cable killer? All that and more on this consumer-goods edition of Industry Focus.
Greetings, Fools. Sean O'Reilly here at Fool headquarters in Alexandria, Va.. It is Tuesday, May 10, 2016. Joining me on air via Skype is the one and only Dan Kline. How are you, Dan?
Dan Kline: I'm good. Happy to be back.
O'Reilly: You're a New Englander but you're in Florida?
Kline: I am. I'm very lucky to work for the Fool, or be a contractor for the Fool, and that lets me be wherever I want. Honestly, who would want to be in 50-degree Connecticut when I can be in 85-degree West Palm Beach?
O'Reilly: Did you ... are you on the beach?
Kline: I'm not on the beach. I'm actually sitting in a condo, but as soon as we are done, I'm heading to the beach.
O'Reilly: All right. That's good. Did you hear about the record rainfall we're getting in D.C.? Like, 13 straight days, and it's still going to be cloudy all week.
Kline: I think it's fitting given where politics is right now.
O'Reilly: It's symbolism and symbolism.
Kline: The Founding Fathers are crying.
O'Reilly: Yeah, they're weeping. First topic we want to talk about, if streaming live-TV services like [DISH Networks'] (DISH -1.84%) Sling and the PlayStation Vue, are they actually cable killers? What are your thoughts?
Kline: Not yet.
O'Reilly: Not yet?
Kline: This is one of those things where, Sling seems like a really good idea. There's people cutting the cord, maybe they still want some live programming, they'll pay $20, they'll get 20 channels with ESPN and TNT and some of the top ones. It might work, but so far the numbers are pretty dismal. This doesn't break them out, but the estimates of 400 to 600 thousand subscribers. That's ...
O'Reilly: That's a whiff.
Kline: Yeah. In a 95-million-household world, that's not that big. Cord-cutting itself hasn't been happening at the level everyone predicted. It actually leveled off last year. We're in a situation where everyone thinks this is the next big thing, but absolutely nothing has proven that so far.
O'Reilly: I'm actually surprised at how well ... how attractive are the offerings for Sony's (SONY -0.77%) PlayStation.
Kline: It's a great product. The problem with it is ... I think it's a killer, in that in most markets you don't get the broadcast networks. Part of that is a rights issue that might eventually be solved. You've got this product that you've got to figure out how to stream on your TV or through your PlayStation, easy for young people but not so easy for the 40- and 50-year-olds who might spend the money. Then once you do it, you still need some other solution to watch ABC or CBS or whatever it is you happen to watch locally, so it makes it a niche product. The same was true in the early days of satellite.
O'Reilly: Got it. I'm reasonably sure that most of my listeners are at the very least familiar with Hulu. Where do they fit into all this? Because they're -- it was weird because it seems like all the owners don't have an incentive to make it too good.
Kline: They don't. Hulu has announced it's going to get into the streaming skinny-bundle game. The company hasn't really said what that means, but two of its partners, Disney and Fox, are on board. That makes it an interesting prospect, because Disney has a lot of top cable channels. Both companies own networks, but Comcast, the other partner, has basically stayed on the sides and said, "Hmm, we're not sure we want to cannibalize our business with this."
O'Reilly: It's so funny that all of them own it, too.
Kline: Can you imagine those meetings? It's basically a bunch of enemies getting in a room and trying to get along.
O'Reilly: Not only that, but they're debating on how to take advantage of America's desire to stream things and not kill their bread-and-butter networks. It's a fascinating case study.
Kline: They're in a tough position. You have to embrace the future, but you also don't want to hasten it. You're making a lot of money in traditional cable, and you only lost as an industry less than 400,000 subscribers last year. The fourth quarter had growth -- the first quarter has actually had a little bit of growth, so why would you make it that good? You don't want DISH to steal it all, so it becomes very complicated.
O'Reilly: Talk to me about pricing, because as we've seen with Netflix (NFLX -0.98%), people are more than happy to fork over $10 a month; the value is there. I'm pretty sure Hulu costs 8, 9, 10 dollars. They haven't announced pricing for their streaming bundle though. Correct?
Kline: Yeah, they haven't. Basically, Sling is $20 for the base package, which is roughly 20 channels. Sony is about $40 for 55, 60 channels, and Sony is sort of a true cable alternative for people who would just rather stream. It's a little cheaper, but it's not dramatically cheaper, and honestly you might make up the difference in what you're saving for having to pay more for broadband and losing the bundling discounts. Hulu will probably come in somewhere in the middle. The reality is, I don't think anyone has figured out the model yet. DISH had this idea that millennials wouldn't want broadcast networks, but they'd want Comedy Central and Adult Swim and things like that. It just hasn't proven to be true, if maybe a true a la carte service would work, where people could just hand pick a couple of channels to go along with Netflix ...
O'Reilly: [Amazon.com] Prime. Excuse me.
Kline: Sorry. I have all of them. I'm overpaying for cable and for streaming services, but until where it's seamless, where you only have to go to one service for everything and you can really get want you want, I think this stays a niche offering.
O'Reilly: Yeah, I'm very curious. The reason I sneezed Amazon Prime there was because they are trying to do something like that, because you can get, for example, Starz (NASDAQ: STRZA) through Amazon Prime and you pay Amazon the $10, and they send most of it over to Starz.
Kline: DISH does the same thing with Sling.
O'Reilly: Yeah, I don't know. It's ...
Kline: You still can't get -- I've written all these articles on how to get around having cable, and it involves having an HDMI antenna, subscriptions to three different services -- it just doesn't work. If you have Netflix but want a lot of network shows, you need Hulu, and you have to switch interfaces to do that. It just becomes -- we're used to flipping a channel, flipping the remote control and everything is there, and neither one of these products delivers that.
O'Reilly: Everybody is expecting cable to die -- we just don't know how and when. What's an investor to do?
Kline: I don't expect cable to die. I think we're probably moving into a world where cable digitally streams, and maybe the lucrative set-top-box revenue will ultimately go away, but I still think, because you're tied to broadband, that Comcast and the other big cable companies are going to find a way to tie in their television, so they're going to lose revenue on the television side. We're going to see some of the little channels go away, we're going to see definite change in that space, but I haven't seen a disruptor where, just because I have Netflix, once you have kids and a full family in the house, where even the millennials are going to say, "Boy, I need 50 channels because my wife watches this, and my kids watch all the Disney channels, and my teenager watches all the MTV channels." I think cable isn't the record business. I think it's going to evolve into something that makes sense, and it's just kind of "Investors, strap on your boots for a while."
O'Reilly: Yeah, I could not agree with you more. In fact, I said as much, particularly a point about how they'll just charge us more for Internet. I wrote an article on April 23; it got published Fool.com. I just wrote "Why Rumors of Cable's Death Are Greatly Exaggerated." Bottom line: If you look at the prices for just Internet packages from these guys, and it's just going to get worse when we need more and more bandwidth.
Kline: There's potential disruptors to it. If Google figures out how to put a blimp in the sky that brings the entire ...
O'Reilly: Internet drones.
Kline: Yeah, if something really changes then maybe, but the reality is, a lot of the cable companies are also the people that own the content. Comcast is going to find a way to deliver its channels. That might mean partnerships, but it's also going to mean slowly being at least on pace with the curve in terms of skinny bundles and a la carte services. There's going to be shakeup, but there's not going to be disaster.
O'Reilly: Awesome. If it's OK, if you would pivot over from streaming services and making money off the "death of cable" over to doughnuts. Go ahead.
Kline: I'm keeping the coffee industry alive pretty much on my own.
O'Reilly: Yes, you are. You New Englanders and your Dunkin' Donuts. JAB Holding, which just closed a deal to buy Keurig Green Mountain, is buying Krispy Kreme. I'm not surprised, because I know their evil scheme, but what do you think?
Kline: It's an interesting strategy. Basically you've got, on the retail front, two major players. You've got Starbucks and Dunkin' Donuts. One with something like 22,000 stores, the other with 11,000 to 13,000. I forgot the exact number. At least in terms as being a retail competitor, what JAB Holding is doing, is they are buying every single coffee chain that's available. They bought Peet's; they bought Intelligentsia. They've picked up all sorts of little local chains, and now with Krispy Kreme, they have a brand that's [...], they also own the parent company of Einstein Bros. Bagels. You can start to see a strategy emerge, where maybe Peet's would be an upscale product at Krispy Kreme. Maybe Krispy Kreme will become the coffee brand at Einstein, but it's still just a collecting-assets strategy that hasn't really congealed.
O'Reilly: Yeah. They clearly want this, just, portfolio of coffee and doughnut chains. It actually makes me wonder how long until they buy the local mom-and-pop coffee shop here in Alexandria. They're a private company. Correct me if I'm wrong. They're based in Europe, right? I think ...
Kline: They are based in Europe. They even own one of the leading makers of Nespresso pods, which is the dominant single-serve brand in Europe.
O'Reilly: Oh, boy.
Kline: They are all over the map in terms of what they own, and I really do think so far that it is an acquisition strategy, and that eventually they'll figure out how to put it all together, because most of these brands they're buying -- Keurig and Krispy Kreme specifically -- are still being run as independent companies by their old management. They aren't even buying things and consolidating them. They've turned some Caribou Coffee into Peet's, as you mentioned to me earlier, but they haven't made any wholesale changes so far.
O'Reilly: Are you speculating when you say the goal is synergy? Because they clearly haven't done that just yet.
Kline: They haven't done it. I don't know -- it seems very odd if you own Keurig, obviously it keeps the money more in the family when you make a deal with Krispy Kreme for K-Cups, which, actually, the coffee I had this morning, but that's efficiency. If they don't start sort of pushing the brands on each other, then they're just giving up on opportunity. It doesn't make a lot of sense.
O'Reilly: Yeah. Bottom line for Starbucks shareholders and Dunkin' shareholders, should we be nervous at all?
Kline: I don't think so. With Starbucks there is some exposure in the fact that they have a K-Cup partnership, but because of the rights issues where really any company can make K-Cups -- we've all seen it, it's pretty easy --
O'Reilly: Yeah, it is. You can make your own.
Kline: Right. For Starbucks, I'd be scratching my head a little bit; they do appear to be putting [...] together and maybe in the supermarket end of the business, Starbucks and Dunkin' shouldn't worry about this company that now has sort of all this combined clout, but it doesn't like a competitor for the go-out-to-a-cafe market, and Keurig was already dominant in the home market.
O'Reilly: Got it. OK. Well, Dan, thanks for joining me on, air and thank you especially for your thoughts. Enjoy the beach; get some rays.
Kline: Thanks for having me.
O'Reilly: You bet. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at email@example.com. Once again that is firstname.lastname@example.org. As always, people on this program may have stocks in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks. Don't buy or sell anything based solely on what you hear on this program. For Dan Kline, I'm Sean O'Reilly, Thanks for listening, and Fool on!