Digital Media

For years, consumers have dreamed about media on demand, everywhere.  Oddly, it took a dumb data pipe company to come up with the first legitimate plan to make that happen.

In late 2016,  AT&T chief executive Randall Stephenson revealed Direct TV Now, a media service with 100 channels of programming for just $35 per month, including mobile streaming costs.  It offers premium content from Time Warner, Fox and NBC Universal that can be streamed to any device, on demand for no extra cost.  This is possible because AT&T found a way to monetize time and data, the two most valuable commodities of the future.

With snazzy self-driving cars that are more living room than cockpit near, people are going to have more time on their hands. Digital entertainment, already big, is poised to explode in value.

Stephenson’s plan draws on AT&T’s considerable strength in networks, its vault of consumer data and media content arrangements already worked out by Direct TV. In a nutshell, the company wants to introduce premium-priced, addressable ads directly into programming. If that seems like Google and Facebook, you are on the right track. Digital media consumption is ripe for disruption.

And at $35, Direct TV Now is cheaper than anything sold by Silicon Valley.  It also does not require an installer, satellite dish, set-top box or any of the other hidden costs that have traditionally plagued established broadcasters.  Its skinny Direct TV bundle is scaring big technology companies and also media competitors like Walt Disney because it is price competitive with better content.  That is a winning combination.

“Consumers prefer established brands, and broadcasters need to capitalize on this while the iron is hot by aggressively investing in multi-device platforms and securing partnerships that leverage their footprint into the mobile space,” said Gavin Mann, global broadcast lead at Accenture.

It is easy to understand why big technology companies want to get into the media content delivery business.  For some it plays to their core strengths understanding and monetizing data.  For others, it’s about securing users’ attention and developing their ecosystem. While it’s way too early to know how AT&T will perform in its quest to monetize time and data, if it can deliver 100 high quality channels on demand everywhere for $35, it is going to be a major player.

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Why is this happening? The Internet is changing the way people consume media.

Just look at the big changes under way at Disney to ensure it has a plan B if the current cable TV model falls apart.

MouseCo has announced a strategic investment in BAMTech, the 15-year-old streaming technology company that grew out of Major League Baseball.  It will invest $1 billion for a 33% stake with an option to take majority control over the next four to seven years, and build out a new sports streaming business.  While BAMTech is best known for flawlessly streaming every MLB game to millions of subscribers – an amazing feat — it is also the technology behind the popular HBO Now streaming service.

Recently cable operators have experimented with so-called skinny bundles.  The idea is to cut monthly cable subscription prices by removing costly channels from the bundle. In many cases, Disney’s EPSN sports networks are the first items removed.  Cable subscribers got lower prices and Disney got a reduced payout.

This is not a terrible business strategy.  It’s a necessity and it is wise.  Cord cutting is an existential threat that cable operators had to meet head on: The acceptance of on-demand streaming services like Netflix, Amazon’s Prime Network, Hulu and HBO Now shows consumers are willing to buy content directly from providers.  Going skinny gave consumers options and bolstered loyalty.

Disney’s BAMTech investment is pushback.  It’s also a glimpse into the near future.

Software is changing the way we consume everything.  Car ownership is morphing into mobility.  We used to have relationships with travel agents; that has been replaced by keyboard strokes and instant booking sites.  Why shouldn’t media consumption go full-scale on demand too?  It’s already halfway there.  The content is all digital.  The rest is just distribution.  Technology is making that part easy and widely accepted.

Like most things today, we expect to push a button on one of our smart devices and have the stuff we want just show-up, magically.  Software is allowing us to embrace our inner caveman.  Me want stuff, me push button, stuff here.

The cable TV operators know this.  They have their own plan B already in place.  The percentage of households with cable TV started declining in 2014.  Prior to that it had always risen.  There are already 3 million cord cutters and a growing number of what Credit Suisse calls cord-nevers, people who have never bought pay TV because for them content has always been free on the Internet.  To make matters worse, a group of technology companies convinced the Federal Communication Commission to break the industry stranglehold on the cable TV box.  That will lead to greater competition for content.  It will also lead to new user experiences developed by software companies.

That may be why cable operators hedged their digital media bets long ago.  AT&T is not just the owner of Direct TV, it also owns a massive wireless phone and Internet business.  Charter Communications, Comcast and others have been also careful to diversify away from the cable business and into broadband.  In fact, big bets on high speed Internet might mean they are the ultimate beneficiaries of the migration to over the top media streaming.

Disney is trying to protect its properties in an era of commoditization.  This is a new era where content is not king. The crown fits on the company that best combines software and distribution.

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Well actually there is one big corner of the digital media world where content is still king: Gaming. Now that big, prosperous, fast-growing industry getting bigger.  In fact, what used to be gaming is just the start of what its becoming.

Amazon ponied up almost  $1 billion in 2014 for a business built around watching other people play video games online, heads exploded all over Wall Street.  It didn’t make sense to casual observers.  What Amazon saw was the new business of gaming looked a lot like its retail business.  It was less about the initial sale and more about continued engagement.

Amazon Games’ first title is on the right track.  Breakaway, is what gamers call a 4v4 mythological sports brawler.  Players can engage in online battles individually or in teams, earn Stream+ loyalty points by staying online, participating in polls or wagering on battle outcomes.  They can even customize their Twitch live stream with Metastream, a feature that overlays fancy stats.  The experience is built from the ground up to keep players online watching ads and buying features to enhance gameplay.

On Wall Street, one-time boo birds are now cheering, too.  In a note to clients Brian Nowak, an analyst at Morgan Stanley said, “We are bullish on the digital gaming shift as gaming evolves from a units sold business into an engagement monetization business. We see digital in-game offerings leading to recurring and growing user bases, higher per-game engagement (time spent per user), and more monetization opportunities. The beginning (the initial unit sale) is now just the beginning.”

Online gaming has a reputation for fanaticism. When Amazon acquired Twitch in 2014 the network was consuming about 2% of total Internet bandwidth.  By 2015 it had 100 million monthly active users and 1.7 million broadcasters streaming live feeds every month.  The key average monthly minutes watched metric shot up to 421.

That zealotry has extended to video game franchises.  Call of Duty, a first person shooter game from Activision Blizzard (ATVI) was released in 2003 and has had 12 successful updates since.  These have sold more than 175 million copies and account for more than $10 billion in sales.  John Madden Football was first released in 1988 by Electronic Arts (EA).   It has been updated every year since 1990.  That franchise has sold more than 100 million copies and has in excess of $4 billion in sales.

In fact, Nowak believes Activision Blizzard and Electronic Arts are best positioned to exploit the new era of gaming.  He likes their portfolio of titles.  He also expects new digital content, monthly active user growth and ad tech, in the case of Activision, to drive share prices higher.

It is hard to argue with the premise. Engagement monetization is the new order in gaming and both Activision and Electronic Arts have momentum. To learn more about gaming, read my article in the Nov. 2, 2016, edition of Forbes here.

Bottom line for major media companies: There is no easy fix for the move to digital entertainment.  They must move more programming online and on demand because that is how the most coveted part of the audience consumes media. Yet that puts downward pressure on live TV ad rates.  If they move too slowly, or not at all, that will hasten the shift away from broadcast media in general. It’s a Catch 22.

There is a bright side.  Media consumers are changing. As Brandon Ross of the research firm BTIG notes: “Sports is less ingrained in the younger demographic.  It has been replaced by other things like video games and e-sports and Snapchat feeds.”   That trend is in the early stages and should be long lasting.

The idea that the future is about software is gaining momentum in the investing world. Although much of the focus has been on artificial intelligence and productivity, investors much not ignore what’s happening with entertainment. It’s a big, growing, lifestyle business with significant revenue streams and less fragmentation every year. This may not be your thing, but as an investor you need to pay attention.