YouTube is the big winner, according to a report last week from App Annie, a mobile application analytics firm … and it’s part of an important trend. Ad-supported services now comprise seven of the top 10 digital streaming services.
The most popular streaming business is not well understood by most. Dialing in on its prospects — and the sector as a whole — is a big opportunity for investors.
Don’t buy into the hype about paid subscriptions. Most are dead in the water.
Certainly, that is not the popular opinion. Many fledgling subscription video on demand (SVOD) services have been pumped up by the growth and popularity of Netflix, Inc. (Nasdaq: NFLX). The one-time mail-order DVD company had 207.6 million paid subscriptions through the first quarter of 2021, a gaudy measure by most standards.
The SVOD business has become a magnet for competitors. All seek to take share from Netflix while homing in on the larger cable TV cord-cutting trend.
In the eye of the pandemic, The Walt Disney Co. (NYSE: DIS) pivoted its business away from shuttered theme parks and movie theaters with Disney+, a splashy SVOD service with loads of content. And similar services sprang up from:
- Apple, Inc. (Nasdaq: AAPL)
- ViacomCBS Inc. (Nasdaq: VIAC)
- Comcast Corp. (Nasdaq: CMCSA)
- AT&T Inc. (NYSE: T)
- Discovery, Inc. (Nasdaq: DISCA)
The motto of show business is that content is king, and customers will pay for the good stuff. Unfortunately, the data is in: That is not remotely true.
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With the exception of Netflix, where quality content is debatable at best, customers have not been willing to pay up.
Even Disney, with its best-in-class franchises like Marvel, Star Wars, Pixar and Fox, the struggle to raise subscription prices has been epic. Disney+ is still only $7.99 per month versus $14.99 per month for a domestic Netflix subscription. The situation is more dire for the rest.
Apple has been giving away its Apple TV+ service. WarnerMedia’s HBO and HBO Max have 63.9 million subscribers, yet many are freebies bundled with AT&T wireless subscriptions.
NBCUniversal’s Peacock has 42 million signups, whatever that means. ViacomCBS claims 36 million global subscribers, although managers will not say how many customers are paying.
Discovery execs say 15 million subscribers are using its SVOD, although payers are far outstripped by ad-supported members, according to a CNBC report Wednesday.
Despite all of the propaganda to the contrary, streaming media is dominated by ad-supported services.
Top winners include YouTube, Twitch from Amazon.com, Inc. (Nasdaq: AMZN), Tubi, a Fox Corp. (Nasdaq: FOX) property, Pluto TV from ViacomCBS, hybrids such as Amazon’s Prime Video, Hulu from Disney and Roku, Inc. (Nasdaq: ROKU). And the numbers are not even close.
YouTube has 2 billion monthly active users … 10 times the size of Netflix.
These members watch a staggering 1 billion hours of streaming content every single day. Monetizing all of those eyeballs brought in $19.7 billion in revenues in fiscal year 2020, according to the Business of Apps.
Often, ad-supported networks are discredited in the financial media. They are seen as vulnerable to the latest so-called privacy choices from Apple or tracking legislation at home and abroad.
But none of these hurdles are significant … when given the choice, consumers overwhelmingly select ad-supported platforms over paid.
Ultimately, many of today’s SVODs are headed in that direction, too. There is simply not enough consumer money to go around.
Consequently, the best opportunity for investors is with the ad delivery platforms such as The Trade Desk, Inc. (Nasdaq: TTD) and Magnite, Inc. (Nasdaq: MGNI). And it is also with Alphabet Inc. (Nasdaq: GOOGL), the parent company of YouTube.
YouTube is a $20 billion business that shows no signs of slowing down. The creator-fed video streaming service is more relevant today than at any time in its history.
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And unlike the paid SVODs, its business model can scale to emerging markets where relative wages are low.
Monetizing spare time is one of the most important business segments. YouTube is in the best position to win that space going forward.
Although Alphabet shares are up 44% in 2021, the stock trades at only 32 times forward earnings and 8.5 times sales. The profit margin is 26.1%, with compound average sales growth of 19.5% during the past five years.
Longer-term investors should consider buying Alphabet into any weakness.
Best wishes,
Jon D. Markman
