As far as the three senior analysts at key Wall Street investment house MoffettNathanson are concerned, the debate as to whether streaming is as good a business as the legacy linear video business it replaced has long since settled: It isn’t.
Why is that the case? “To answer that question, it’s helpful to bear in mind what the media companies saw, or thought they saw, that made streaming once seem so attractive.”
A WALL STREET OVERREACTION?
Remember all the arguments about “owning the customer” and “capturing the distributors’ margins”?
For MoffettNathanson’s Robert Fishman, Michael Nathanson and Craig Moffett, it took some time but it happened later: the stock market began to overvalue streaming, “supercharging the media companies’ incentive to kill the goose that had laid the golden egg.”
That would be linear video. However, the MoffettNathanson analysts share in an investor note released Thursday, “What was lost on the media companies, and investors, in that early era of streaming euphoria was a clear understanding of why the linear business was so attractive, and why streaming was therefore never going to be as good.”
They continue, “Media companies had, over the course of decades, stumbled onto one of the greatest business models ever created.”
That would be the development of carriage agreements with cable and satellite operators, which demanded that every cable network of consequence be included in a “basic cable” package.
As a practical matter, that meant that customers had a choice between “everything” or “nothing at all.” For many, “nothing at all” wasn’t an option.
Then, there’s the profit-making scheme that MVPDs engaged in. The analysts note, “[B]ecause prices charged by the media companies (to distributors) were hidden from customers, price increases could be applied with impunity; it was the distributors who bore the customer’s wrath. That singular business model allowed media companies to raise prices faster than the rate of inflation for thirty years.”
By contrast, the streaming business was, and is, “rather pedestrian,” Fishman, Moffett and Nathanson state.
Why? “A media company makes a product and then works to convince customers it is worth the price,” they say, with “nothing at all” no longer an alternative. “Price increases are passed along with the imperative of persuading customers that the new price is justified by the quality of the offering, just like any other product.”
That’s not necessarily bad, but neither is it special, the analysts state.
The downside of the new model? Churn.
“Customers can and do leave, often as soon as their favorite show’s season has been binged,” the MoffettNathanson analysts note. Scale matters, as does “always having something to watch.”
However, the analysts state, scale isn’t measured by the size of the company but by the size of the bundle.
While trends are improving, and they’re improving because one – and only one – company seems to understand why what has happened … happened. “That one company has taken up the challenge of recreating what made the old linear media bundle so special,” they state.
That would be Charter Communications, which is adding COX Communications to its portfolio, which notably grew with its acquisition of Time Warner Cable, making its Spectrum service a national giant in markets ranging from Los Angeles to New York.
“Charter – ironically, it is not a media company but a distributor that is leading the way – has put the bundle back together — or, more precisely, has put ‘a’ bundle back together,” the analysts conclude. “It’s showing up in the numbers. Charter’s video business is single-handedly rolling back the clock.”
