Show Me the Money: Analysts Sour on Streaming18 Jun, 2009 By: Erik Gruenwedel
The bloom apparently is off Hulu.com and other online aggregators of ad-supported repurposed TV programming and movies. Wall Street has awoken to the reality that free content on the Internet could have disastrous economic results on a $300 billion content industry at a time when media companies can least afford it.
Though enamored by the promise of streaming as evidenced by the resilience of Netflix and traffic to Hulu (co-owned by News Corp., NBC Universal and The Walt Disney Co.), TV.com (CBS Corp.) and other sites, analysts contend a Pandora’s box scenario is emerging that could result in revenue and margins that pale in comparison to the traditional business models.
Laura Martin, analyst with Soleil Media Metrics, said the rush to migrate professionally produced TV content on the Internet for free could turn out to be “anti-consumer,” “anti-media” and even “anti-America”.
“If consumers are being retrained to pay less for professionally produced TV content, then returns on capital (ROIC) should fall and Wall Street will move on,” Martin said in a note.
In other words, the billions investors pour into studio movie and TV productions (Martin said CBS spends $3.5 billion annually) will disappear and consumers will be left with largely user-generated content. Studios facing dwindling revenue streams will trim budgets inevitably resulting in job losses.
“We would expect large amounts of capital to be allocated toward or away from all players within the TV value chain as it becomes clearer whether aggregate ROIC of the entire TV value chain are rising or falling,” Martin said. “There is no user-generated content that is a true substitute for long-form premium TV content.”
Spencer Wang, analyst with Credit Suisse, said network programs generate 64% less in ad revenue when streamed online and 36% less than cable, according to DeadlineHollywoodDaily.com. He argued that simply increasing the number of ad spots online would not necessarily play with Internet viewers accustomed to free content.
“[They] are not trained to directly ascribe monetary value to TV shows,” Wang wrote in a note.
Michael Nathanson, analyst with Sanford Bernstein in New York, said Fox TV, which is owned by News Corp., generates about 18 cents in revenue from advertising for “The Simpsons” on Hulu compared to 54 cents for the network broadcast.
He said that while individual online daily video viewing hovers around two minutes compared to more than 300 minutes a day for traditional TV, the rush to repurpose programming for free online portends “potential problems” for media companies.
“[Online video traffic] is too small to matter now, but it better be fluid because it makes no sense if it gets bigger and nothing changes economically,” Nathanson said.
Martin said the push to migrate TV content online and to wireless devices backfires economically because many measurement services, including AC Nielsen, do not track Web and mobile usage, which she said undermines the traditional cost-per-thousand (CPM) ad-model.
“Advertiser perception of professionally produced content loses its effectiveness,” Martin said.
Independent analyst Rob Enderle said Hulu and other streaming sites remain limited in scope due to select content options from their studio owners and uneven connectivity with some set-top boxes.
“The majority of people don’t have their PC hooked up to the TV, which limits the reach of the streaming services,” Enderle said. “That makes growth very difficult, and the market likes to see a clear path to strong growth.”
Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, agreed Netflix is getting a pass on streaming from Wall Street due to its offsetting by-mail DVD business. He said Amazon and Apple also have strong core businesses other than digital downloads.
“If [Netflix] didn't have that DVD rental business they would be soured on too,” Woo said. “If their business momentum changes [DVD to streaming], then that would be a different situation.”