Every time we turn on our TVs, we scroll through 700 channels and switch between hardware choices, hoping for a day when it will be simpler to use and perhaps not require a remote control, let alone five. Could that day be coming soon? It’s likely not a question of ‘if.’ It’s more of a question of ‘who?’ and ‘when?’ And the answers are important, not only to viewers but to investors.
Today, three distinct, often competing, players are vying for control of the future of the TV industry: Large distribution companies that have amassed enormous power, creators of original content who are increasingly driving most of the value and developers of emerging technologies that are attempting to transform the viewing experience. While all three have clear strengths, the weaknesses of each are no less significant.
The distribution systems - traditional cable and satellite TV giants – are buoyed by millions of subscribers paying high monthly fees, but they have an antiquated business model, and suffer from oversaturation and a lack of innovation. Content creators (TV and movie studios) produce troves of coveted intellectual property at enormous cost yet have limited means to deliver it without distribution access. And while many of the technology-based entertainment companies that have the potential to change the way people view TV (mainly web-based streaming video companies) have flourished, such offerings have struggled to find mass acceptance, as viewer habits are deeply ingrained over time and people are somewhat resistant to paying more for TV.
Based on these circumstances, the ideal company will have the capacity to successfully integrate all three of these elements that are transforming the TV entertainment industry – traditional distribution, content creation and web-based technology. Put simply, the players who successfully do so will end up becoming the 21st century media equivalent of the early 1900s industrial barons, who were clever enough to combine railways with steel mills. Such companies would not only control traditional captive distribution platforms and enable emerging platforms but have privileged access to – if not outright ownership of – quality original programming.
Based on that, the following entertainment companies are well-positioned for considerable potential upside in the future:
Comcast (CMCSA) – Comcast is perhaps best positioned to take advantage of the current trajectory of the TV industry through its diversified set of holdings. The company is the largest cable and high-speed internet provider in the United States, giving it extensive distribution capabilities to pursue emerging technologies. Plus, through its ownership of NBC Universal – which includes NBC CNBC, MSNBC, NBC Sports Network and Universal Pictures – Comcast controls broad range of entertainment and sports content, including a large movie catalogue and Sunday Night Football on NBC, year after year one of the highest rated programs on television.
Disney (DIS) – While Disney does not have its own full-spectrum cable distribution infrastructure, it produces must-have content across a range of genres over numerous company-owned network and cable channels, including ABC, ESPN and The Disney Channel – all of which have elaborate, user-friendly online, mobile and tablet-based offerings. ESPN alone produced over $11 billion in revenues last year and is by far Disney’s most profitable business entity, having monthly cable carriage fees of more than $5 per subscriber, easily the highest in the industry. Some observers have expressed concern that future ESPN profits could become imperiled by outsized broadcast rights fees the company has doled out to professional sports leagues and major college conferences. At the same time, such broadcast rights significantly raise the barriers to entry for others looking to challenge ESPN’s dominance, so the trend cuts both ways.
Lions Gate (LGF) – Lions Gate makes up for its lack of distribution with an incredible track record of producing high-quality, profitable movie and TV content, including, most recently, The Hunger Games, Twilight and Mad Men. Prone to excess and waste, movie studios are famous for squandering millions. But Lions Gate enjoys strong leadership at the top and truly understands the business model better than most, having successfully leveraged its movie, TV and streaming content into enormous profits at a time when many of its competitors have struggled.
Netflix (NFLX) – Netflix does not have an active traditional distribution network of its own and is increasingly finding itself having to fend off challenges from Hulu as well as networks and studios that are increasingly reluctant to share programming. And while Netflix has made forays into creating its own original content with the critically acclaimed Arrested Development and House of Cards, such productions are expensive undertakings, and it remains to be seen whether the company can sustain these investments and whether they bring in new subscribers. Even so, we believe Netflix is in a good position moving forward and will expand by continuing to invest in international markets and focusing more heavily on developing its own content.
CBS (CBS) – CBS is the highest rated TV network in America, with the rights to the National Football League and other great content, including top-rated shows such as Big Bang Theory, NCIS and 60 Minutes. It also owns Showtime, a very successful player in pay TV, reaching over 20 million pay subscribers in the United States. Even without an active distribution system of its own, content is king in today’s market, as Time Warner found out recently. CBS stands to rake in huge sums in retransmission fees in the coming years.
Today, viewers have a wealth of options, and chances are pretty good that we can find something worth watching by just by turning on the TV or, thanks to new innovations, by picking up a tablet or mobile device. However, when it comes to equities within the industry investors do not have the same level of choice. With the future of TV being uncertain, it is important to pick and choose your investments wisely – the future depends on it.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki (www.gerberkawasaki.com), an independent investment advisory and wealth management firm with approximately $200 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.