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Stock Strategist Industry Reports

Content Still King as TV Evolves

As users gravitate to new services, Disney and others could benefit over the long haul.

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Over-the-top pay-television platforms such as Sling and YouTube TV are gaining momentum as subscribers and viewing time have grown rapidly over the past year. The subscriber growth of the new OTT pay-TV distributors has helped to offset many of the subscriber losses at the traditional distributors, helping to stabilize the overall pay-TV market. Also, households with an OTT pay-TV subscription are much larger consumers of all OTT video than households without a subscription, according to a new report from comScore. We believe that the gains in subscribers and viewing time have allowed media companies to become more open to placing their networks on the platforms of new untested partners such as FuboTV and SiliconDust. These new players should help to bring some long-needed innovation in pricing and bundles to the traditional pay-TV landscape.

We continue to project that the OTT pay-TV distributors will help to stabilize the overall pay-TV market, which will help the media companies with cable networks that have or could gain carriage on every platform. Among the media companies we cover, this includes wide-moat-rated  Walt Disney (DIS) and  21st Century Fox (FOX)/(FOXA) along with narrow-moat-rated  AMC Networks (AMCX). With Fox and AMC trading in 3-star territory versus our fair value estimates of $46 and $69, respectively, we prefer Disney, whose shares trade at a larger discount to our fair value estimate of $130.

Sling remains the largest player in the total OTT pay-TV landscape with over 2.34 million subscribers. DirecTV Now T had hit 1.8 million subscribers by the end of June, which means the two largest players now control over two thirds of the more than 6 million total OTT pay-TV subscribers, according to Digiday. While Sling leads the pack, the gap with DirecTV Now is shrinking, with only 535,000 separating the two providers, down from 836,000 at the end of the first quarter. While Sling had 41,000 net adds in the second quarter, the pace of expansion is slowing, as the service added 120,000 subscribers in the second quarter of 2017 and 91,000 subscribers in the first quarter of 2018. In contrast, DirecTV Now added 342,000 subscribers in the second quarter versus 152,000 in same period in 2017 and 312,000 in the first quarter of 2018. We expect that DirecTV Now will overtake Sling within the next year, but that YouTube TV and Hulu with Live TV will expand faster than their slightly older peers.

A recent report from comScore highlights the enduring value of the pay-TV bundle by noting that in April, a household with an OTT pay-TV subscription watched 128 hours of OTT content versus an overall average of 54 hours of OTT viewing per household. Roughly 49% of the 128 hours was spent watching the OTT pay-TV service, with almost all viewing done via a streaming box or stick. The use of a streaming box or stick to view pay-OTT content implies that the in-home large-screen TV remains the screen of choice for TV content and that AT&T’s WatchTV skinny bundle may not have the intended impact on wireless subscriptions. Also of note is that OTT pay-TV subscribers watched 20% more of other OTT content than the average household, reinforcing our contention that subscription video on demand services like Netflix serve as an additional conduit for video content for many households and should not be viewed simply as a replacement for the pay-TV bundle.

While much of the attention on OTT pay TV revolves around the five largest players (Sling, DirecTV Now, YouTube TV, Hulu with Live TV, and PlayStation Vue), a number of smaller players are attempting to carve out a piece of the growing pie. One of the first smaller entrants was FuboTV, which originally focused on live sports with an emphasis on soccer and has over 100,000 subscribers. The service has expanded its channel lineup over the last year but is still missing the Disney channels, including ESPN. While not carrying ESPN lowers affiliate fee costs, we think FuboTV will be hard-pressed to expand rapidly as a sports-centric service without offering the most popular sports channel in the United States.

Philo is an attempt to create a nonsports bundle for $20 per month. The service does offer content from Viacom, AMC, Discovery/Scripps, and A&E but is lacking the entertainment channels from Fox, Disney, CBS, and NBCUniversal. While we think there is a market for a sports-light bundle, we believe Philo’s price point of $20 per month may be a hard sell versus DirecTV Now, which offers many of same channels plus the other major networks for $40 per month.

A more recent entrant is SiliconDust, a company best known for its HDHomeRun extenders and DVR service for over-the-air broadcasts. The company recently announced a skinny bundle offering, HDHomeRun Premium TV, that includes 45 cable channels from Disney, Fox, NBCUniversal, Viacom, AMC, Discovery, Scripps, and A&E for $35 per month. The service avoids the painstaking process of obtaining streaming rights on a market-by-market basis for the broadcast channels by requiring the use of one of its over-the-air hardware products, which cost $89-$180. The HDHomeRun products support playback on a number of popular streaming devices including Xbox One, Android TV, Apple products, and Amazon Fire TV. While the required use of the HDHomeRun hardware may limit the appeal of HDHomeRun Premium TV, we believe the splitting of over-the-air broadcast channels and cable networks may appeal to some cord-shavers as the channel lineup is relatively robust. Sling TV offers a similar product with its Air TV device, but the hardware has received mixed reviews and Sling TV does not heavily promote the product.

While the three smaller players each have flaws that could hinder their overall growth, we believe that every new entrant could help strengthen the overall pay-TV landscape by serving unique niches better than the traditional one-size-fits-all pay-TV bundle has done in the past.

Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.