Internet TV – All hail the king

Rising content value is likely to drive a verticalisation of the industry.

• Every man and his dog seem to be preparing to launch a streaming TV service with Apple and Comcast being the latest.
• Apple and Comcast is a particularly strong combination as one has almost limitless resources and the other is close to controlling almost all the distribution as well as a good slug of content.
• While, Netflix shareholders fret about the impact this would have, it is worth remembering two factors.
  • Users are driven by content
  • Apple’s reach into the television is still very limited.
• This means that as long as Netflix is available on almost every platform users have under their TV’s and it has exclusive content, users will not be switching it off in favour of something else.
• This headlong rush into Internet TV is likely to ensure that the user experience and the service itself rapidly becomes a commodity with all the value migrating into content.
• Here, a natural conflict arises.
• To the owner of a piece of content, the most value will be earned the more widely it is distributed.  However the operator of a service will want to limit distribution to his network only.
• This will be the only way in which one service will be differentiated from another and I suspect that users will be forced to subscribe to multiple services to get everything that they want.
• Hence the likely outcome will be TV services bidding higher and higher for content that they want to keep to themselves.
• This will erode their margins while widening the margins of the content owner.
• As value migrates more into content, there will be an added incentive for the networks to own their own studios and I can see an M&A frenzy around those assets that are still independent.
• Two good examples of this would be Media Rights Capital (the privately owned studio behind House of Cards) or Lionsgate.
• Taking assets like this on board would ensure a source of exclusive content that would not beggar the service provider to acquire.
• This is where I would be investing in the entertainment industry as the service providers are already commoditising fast and without content users will not pay to play.