(Image credit: Paramount Plus)
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Source: www.nexttv.com, January 2022
Barclay’s Kannan Venkateshwar says 2022 will force companies to either step up streaming efforts or sell off assets
As the number of streaming video services has increased significantly over the past few years, Barclays media analyst Kannan Venkateshwar believes it may be time for a shakeout in the business, with participants faced with the dilemma to either double down on content investment or sell off assets.
Since 2006, when Amazon launched Unbox, which became Amazon Prime Video, the number of major players in the streaming video business has ballooned from three (Netflix and Hulu are the other pioneers) to more than 50 services. And though fragmented, the streaming business continues to be dominated by the Big Three and those backed by major content players — like Disney Plus, Peacock, Paramount Plus, HBO Max, Apple TV Plus, AMC Plus, Discovery Plus, Tubi, Pluto TV — and lesser known names like BritBox and Docurama.
So it is only natural that streaming — like cable distribution and content creation before it — is ripe for consolidation. And as subscriber growth has begun to slow early in the life cycle of those streaming services, Venkateshwar wrote that companies have some big decisions to make beginning this year.
“In our view, 2022 is likely to force new entrants to either commit to a significant step up in investment or to think about reversing course and selling off assets or entire companies,” Venkateshwar wrote, noting that Discovery and WarnerMedia have set the ball rolling with their pending merger, which some expect will be completed by April. The analyst noted that with the WarnerMedia deal, Discovery has committed to a significant investment cycle for many years to come, and he added that he doesn’t believe they’re done yet.
“[W]e suspect that it may still need to enhance its content portfolio with more deals in the future to localize its offerings,” he wrote.
Just like broadband before it, video streamers are beginning to see their subscriber growth slow significantly. Even Disney Plus, which leads the pack with about 100 million global subscribers, reported 2.1 million additions in Q3, about half the 4 million most analysts expected.
On the greater investment front, Disney has committed to beef up its content spend beyond the $8 billion to $9 billion it planned to dole out in fiscal 2024, and ViacomCBS has also increased its content investment. But Venkateshwar thinks ViacomCBS may have a tougher row to hoe because of its reliance on licensing revenue and its relatively small cash flow ($1.5 billion annually).
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“We believe the best outcome for [ViacomCBS] is likely to be a sale of the different parts of the company to the most appropriate buyers which could catalyze a much higher value for the enterprise than is likely to be possible with streaming,” Venkateshwar wrote.
The analyst believes that Paramount studios would be more valuable in other hands and had the same idea for Comcast’s NBCUniversal content business. Other analysts have called for Comcast to spin off its content unit, unlocking value and giving it a new currency to beef up its portfolio through M&A. Venkateshwar pointed to the tepid response to its Peacock streaming service as proof that a deal needs to be done.
Peacock had about 54 million sign ups and more than 20 million active accounts in Q2. NBCUniversal did not reveal actual figures for the service in Q3, but CEO Jeff Shell told analysts on an earnings conference call in October that the service added “a few million” more customers in the period.
In his report, Venkateshwar noted that the need to beef up Peacock’s programming investment comes at a time when Comcast will need to increase spending for its core distribution business, as broadband subscriber growth slows and convergence opportunities emerge. Venkateshwar added that although Peacock may hold on longer than others because of its parent company’s strong balance sheet, it may never gain the scale needed to “move the needle enough.”
While other streamers will be faced with similar dilemmas, Venkateshwar believes that Fox’s Tubi, because of the sheer volume of content the ad-supported VOD player controls, is in an enviable position.
In an earlier note, Venkateshwar wrote that he thinks Tubi will be among the few survivors in the AVOD space because of its content library — about 28,500 movie titles alone, more than any other AVOD provider. While the remaining 13 AVOD services have about 72,000 movie titles, there is a huge amount of content overlap between the services, so much so that offerings like Pluto TV, Roku, IMDBTV and even Peacock to an extent, are more like a subset of Tubi, he wrote.
“In other words, Tubi is effectively a super aggregator of the other major AVOD services which raises the question of why consumers and advertisers need to engage with so many services when there is so much content overlap,” Venkateshwar wrote. “We are surprised that more companies haven’t taken advantage of this shared cost model which has effectively made Tubi an aggregator on a scale bigger than any other service. Given this backdrop, we believe 2022 could be the last year for some companies like ViacomCBS to experiment with streaming and if this prognostication does prove accurate, then it is likely to lead to a further round of M&A across media assets.”
While the media industry is no stranger to consolidation M&A and deep-pocketed tech companies have expressed interest in content in the past, the Barclays analyst added that it isn’t a given that the floodgates will be opened in 2022. Venkateshwar wrote that regulatory scrutiny is likely to slow the pace of deals, as well as lofty valuations for assets.
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“Also, with Discovery and Disney both in the midst of their own investment cycle, the biggest balance sheets are likely to be unavailable for M&A,” Venkateshwar wrote, adding that Netflix could look to beef up its position in the video gaming space.
Netflix launched a handful of mobile games in November — Stranger Things: 1984 (BonusXP), Stranger Things 3: The Game (BonusXP), Shooting Hoops (Frosty Pop), Card Blast (Amuzo & Rogue Games), and Teeter Up (Frosty Pop) — and more are expected to be released in the future. ■
