The year 2019 saw a host of new streaming services debut like Disney+, and more on the way. But the divergence in market reaction to the new launches show that not all services are created equal, at least in the eyes of investors. Andriy Yastreb, Telecom and Media Analyst, TD Asset Management, discusses his outlook on the streaming industry.
- The landscape of TV is changing. It's facing a growing threat from the streaming providers. Take a look at this chart. Since the launch of Disney Streaming Service last year, and with HBO Max and Comcast still to come this spring, we can see that, at least according to investors, not all streaming services are created equal.
So what does this all mean for investors? Here to give us his take is Andriy Yastreb, Telecom and Media Analyst with TD Asset Management. Andriy we've seen a divergence in reaction to the new streaming services. What's happening?
- So if you take a look at this chart, what it shows is valuations and more specifically the price to earnings ratios for Disney, Comcast, AT&T over the last three years. And historically, we wouldn't even compare these companies, because these are different businesses with different valuation drivers. But what's interesting here is that all four of these companies have launched or soon about to launch major streaming services. And the key is to focus on the changes in P/E multiples because they reflect changes in investor expectations.
And if you look at Disney, for example, it's multiple doubled over the past year. And the fundamentals of the business haven't changed all that much. And the key change was the launch of Disney Plus streaming service. If you look at Netflix, its P/E multiple held over the last three years. But the stock has more than doubled over the same time period just because the company is growing so fast. And as to AT&T and Comcast, their multiples declined over years for different reasons. But they also launched major-- or are about to launch major streaming services just like Disney did. And they're not getting any credit for that.
- So why aren't AT&T and Comcast getting credit for moving into streaming?
ANDRIY YASTREB: So if you look at the market right now, basically the assumption is that Disney will be the winner in streaming. And the logic is that, based on consumer surveys that we've seen, consumers are willing to have somewhere between three and four streaming subscriptions at a time. And Netflix and Amazon Prime Video already penetrate over half of US households, which leaves room for maybe one or two other companies to be winners. And Disney, because of their large library with really strong brands with all the cartoons and Marvel and Star Wars is expected to be one of the winners.
So for AT&T and Comcast, there are two reasons. One that analysts and investors don't expect, at this point, that they will necessarily be winners. They have not seen this must-have content compared to Netflix or Disney. And secondly, AT&T and Comcast are the two largest pay TV distributors in the US. And as streaming becomes larger and continues to grow, pay TV will continue to decline, meaning that their revenue and profits from that legacy business will decline.
And the interesting part about that is that Disney actually also has exposure on that side. About half of their revenue comes from pay TV related services. But for now, at least, the markets assume that Disney will be the winner in streaming. The value of their business will grow and it will offset declines in traditional pay TV.
- So what are some of the companies doing to try to boost their value?
ANDRIY YASTREB: So what we've seen from all the newcomers-- Disney, Comcast, and AT&T-- is that they're trying to grow as fast as they can. One way to do that is through partnerships. And we've seen Disney partnering with Verizon. Another way is that a lot of these services will be available for free to some consumers. For example, Disney Plus it's available to 17 million Verizon consumers. And HBO Max will be available to millions and millions of AT&T customers.
ANTHONY OKOLIE: And they're really trying to boost the subscriber growth obviously with some of these--
ANDRIY YASTREB: Absolutely, it's all about scale. And Comcast is the most interesting one because they will launch their Peacock Service this spring. And the basic version of it will be available for free to anybody who wants it, with monetization done through advertising. And finally, all of them are trying to differentiate themselves. So using Comcast as an example, they will include news and sports, including Olympics this summer on the service. And it will be available for free to anyone who wants it.
ANTHONY OKOLIE: This space is only going to become more crowded. What should investors look for?
ANDRIY YASTREB: Well, I think there are three major implications here. One is that for media companies themselves, if they move to streaming, there's a delicate balancing act that I mentioned before. The value of streaming services will be growing, but pay TV existing businesses will be declining. And for investors, there is another level of complexity there, because we have to think about where the stocks are trading relative to expectations. In other words, are expectations too high, too low, or just right?
Secondly, we will see cord cutting accelerating. And it accelerated last year, but I think that, as we discussed before, consumers have very limited time that they can dedicate to entertainment, to video entertainment. And as consumers watch more HBO and--
ANDRIY YASTREB: And Disney Plus and Peacock, the time has to come from somewhere. And most likely, it will come from existing pay TV. And finally, I think the last point is that it's not a winner take all market. I think there will be room for several large players in streaming. And that's very similar to what happened with existing pay TV ecosystem over time where four or five different studios dominated the whole ecosystem.
- So you could see four or five streaming services dominating the system as well.
- Andriy, thanks very much for your time.
- Thank you for having me.