Fitch Ratings-Chicago-02 April 2019: in direct-to-consumer (DTC) streaming intensifies and companies vie for must have programming, according to Fitch Ratings.
Most competitors have the ability to invest but returns could suffer if consumers experience content overload, subscriber growth slows and cash flow comes under pressure. The quantity and quality of programming will likely differentiate winners from losers with content aggregation via industry consolidation continuing as the media ecosystem evolves.
Capital allocation across the sector is favoring investing for growth with content spending rising and more programming being developed in house. However, market saturation is a risk due to the increasing number of subscription video on demand (SVOD) offerings. We believe, at some point, companies will rationalize content spending and more efficiently deploy capital behind the most relevant intellectual property.
We view scale and the ability to invest in content as prerequisites for a successful DTC model. Netflix has first-mover advantage in DTC streaming and is still spending more than $10 billion annually on content but investments have been supported by the issuance of non-investment grade debt, given FCF has been increasingly negative. Netflix announced a price increase in the US earlier this year to help fund spending.
Megamergers created franchises which should be able to effectively compete against Netflix. Larger competitors that are better capitalized than Netflix including, AT&T (A-/Stable)/Time Warner Inc., Walt Disney (A/Stable)/Twenty-First Century Fox (A/Stable), and Comcast (A-/Stable)/NBCUniversal (A-/Stable) have the financial flexibility to meaningfully invest in content and technology to strengthen DTC platforms and drive subscriber growth.
CBS (BBB/Stable), Viacom (BBB/Stable), Discovery Communications (BBB-/Stable) and AMC Networks are able to internally fund content investments but have smaller scale, particularly AMC Networks, relative to behemoth peers, and could be at a disadvantage as the race for streaming content intensifies. These stand-alone media companies risk losing revenue from licensing and carriage agreements as vertically-integrated competitors, such as AT&T/Time Warner Inc., which own content and distribution platforms, could favor internally-produced content. We view general-entertainment cable networks, such as Lifetime and TNT, as most vulnerable as brand strength seems to have weakened.
We believe the media sector is on the precipice of a new phase of competition driven by secular shifts including, evolving media consumption patterns and growing consumer preference for on-demand viewing, which resulted in emerging distribution platforms. Non-traditional competitors including Amazon (A+/Stable) with Prime Video, Apple with Apple TV+, and Facebook Watch are spending billions on DTC platforms. Apple showcased a suite of original Hollywood produced programs for the 2019 launch of its streaming service last week.
These secular shifts have also disrupted business models for traditional media companies. Disney will launch its widely-anticipated Disney+ over-the-top SVOD streaming service later this year and continues to expand programing for Hulu, which is a joint venture between Disney (60%), Comcast/NBCUniversal (30%) and AT&T/Time Warner (10%). AT&T'sWarner Media (A-/Stable) intends to launch a new streaming service this year and Comcast's NBC Universal Media (A-/Stable) is scheduled to roll out its DTC service in 2020. Discovery will also create its own global DTC service bolstered by a 10-year content partnership with BBC Studios. Discovery's DTC service is expected to launch in 2020.
We view Disney as even better positioned to monetize its content after acquiring Fox. Smaller media competitors have less ability than larger companies to increase spending on content without pulling other levers to fund investments. CBS indicated on its fourth-quarter 2018 earnings call it views investing in content as the best use of its cash, believes it provides the best return for shareholders and intends to allocate 100% of cash flow during first-half 2019 to invest in content. However, the company is also funding additional investments with asset sales and cost efficiencies.
For more information see Special Report 'U.S. Media Shakeout May Emerge with Race for Streaming Content' at www.fitchratings.com.
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