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Daily Intelligence Briefing

Thursday, August 17, 2023

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Television Viewership Tumbles as Streaming Services Begin to Counter the Content Bubble Crash

Summary: As streaming breaches new thresholds of popularity, television’s share of viewing hours has fallen to an all-time low, dropping below 50% for the first time ever. Though streaming platforms have siphoned off a massive amount of subscribers from pay TV, fierce competition had previously kept prices ultra-low and made profitability almost non-existent. More recently, however, streaming services have cut their content spend and initiated large price hikes. Some claim that a package of the leading platforms now costs more than cable.


Offsetting some of those price increases has been the advent of ad-supported packages. These lower-cost subscriptions have made up 40% of new Disney+ users since being launched late last year, blunting the sticker shock of monthly costs that are testing the inelasticity of streaming demand.


Related Stocks: The Walt Disney Company (DIS), Comcast Corporation (CMCSA), Netflix, Inc. (NFLX), Roku, Inc. (ROKU)

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July marked the first time in history that broadcast and cable’s share of total US viewing time fell below 50%, according to new Nielsen data. That means streaming and other media platforms have taken the lion’s share of viewing. Weakening television viewership, relative to streaming, has coincided with a perpetual drop in pay TV subscribers, which are also plumbing new lows. The latest data from Q2 shows that total subs dipped below 50 million for the first time in a second quarter. Variety reports that, collectively, multichannel providers Comcast, Charter, Altice USA, Dish and Verizon absorbed their steepest ever year-over-year loss in subscriptions, which surged to -3.8 million.


Though streaming has boomed in popularity, it has not been a particularly lucrative venture for the owners of popular streaming platforms. According to IndieWire, Netflix and Hulu are the only two major streaming services that were profitable by the end of 2022. Other big-name services like Peacock, Disney+, HBO’s Max platform, and Paramount+ have incurred significant losses. As The Wall Street Journal writes, entertainment giants have lost tens of billions of dollars since joining the so-called streaming wars in 2020, as they spent big on content to drive subscriptions while charging bargain-basement prices for their services in pursuit of fast growth. MRP highlighted the emerging “content bubble” long ago, going all the way back to 2018, as money was being poured into hundreds and hundreds of new programs, even as margins in the streaming business were not improving.


That bubble is now reaching its reckoning, as streaming giants begin raising their prices significantly to counter the irresistibly strong pull of inflation that has eliminated the ability of media companies to keep their streaming packages ultra-cheap. The average cost of watching a major ad-free streaming service is going up by nearly 25% in about a year, according to a Wall Street Journal analysis, with virtually all of the major platforms announcing price hikes in 2023. Though content spend will likely remain relatively high, MoffettNathanson data shows content spending will drop marginally at Warner Bros. Discovery and NBCUniversal for the year. Overall media spending on TV shows and movies is estimated to climb by just 1%.


Now that over half of their audience’s viewing time has been pulled away from the television, the focus of streamers will shift to discovering how inelastic the demand for their offerings is. In a widely cited report, the Financial Times claims that a basket of the top US streaming services will cost more than $87 per month by this autumn, following already announced price hikes from Disney and others. The significance of this claim is that the cumulative price surpasses the average cable TV package cost at just $83 per month, but that is not entirely accurate.


Not only does the streaming basket ignore the effect of bundling services like Disney+ and Hulu (which cuts the price from $32 separately to just $20 together), it only accounts for the price of the most premium offerings available. In an effort to blunt the sticker shock of ongoing price hikes, many streamers have offered lower cost, ad-supported subscription tiers, which allows the revenue from intermediate commercial breaks in viewing to pay off a portion of the price that viewers with the ad-free service are charged. Ad-supported streaming, which can cut customers’ streaming bill in half, appears to be quite popular, with Disney claiming that the ad-supported tier of Disney+ has been the package of choice for 40% of new subscribers since its launch late last year.


Some of the most explosive growth in streaming is occurring among streaming platforms that charge nothing for viewing, and are completely ad-supported. TechCrunch writes that these platforms, which include Amazon’s Freevee, Paramount’s Pluto TV, Fox’s Tubi, the Roku Channel, and Chicken Soup for The Soul’s Crackle, are all enjoying significant growth. According to Samba TV’s latest State of Viewership report, a third of US users now subscribe to free ad-supported TV streaming services. As an example, Insider Intelligence data shows that Freevee’s viewership is growing more quickly than Apple TV+, Disney+, Max, and Hulu. Earlier this week, Roku and Comcast’s NBCUniversal reached a deal to launch new ad-supported channels for reruns of shows like Murder, She Wrote, Little House on the Prairie, and Saved By The Bell. Despite massive expenditures on new content, some of the most-watched streaming programs are older shows from previous eras. In July, Nielsen noted that the most-watched show in the US was “Suits,” which debuted on cable more than a decade ago.


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