The Real Winners From the New Video Paradigm

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Music, books and magazines have been completely disrupted by the Internet and related technologies over the last years. Video is changing too, and it’s only a matter of time until it becomes a completely digital business. There will be some very exciting opportunities to benefit from this revolution, but they may not be the usual suspects.

A Challenging Business Model

Netflix (NASDAQ: NFLX) has been the pioneer in video streaming, and the company has the first mover advantage when it comes to popularity among clients and access to content. However, the business model is proving to be quite challenging, especially now that Amazon (NASDAQ: AMZN) is increasing its competitive pressure versus Netflix.

Both Amazon and Netflix are in the business of buying content first and profiting from it later. This requires a lot of capital, and content costs are expected to rise as different players join the industry in competitive bidding wars. On the pricing side of the equation, competition limits the possibility to raise prices, especially with a player like Amazon, famous for its aggressively low profit margins, joining the industry.

Verizon (NYSE: VZ) is planning to join forces with Coinstar to offer both subscription services and on demand rentals for competitively low prices. The business model is challenging enough, and new players are entering the competition with aggressive pricing, so things look like they will get more complicated before getting any better.

I'm not saying that companies like Netflix and Amazon won't benefit from online streaming over the following years, but their profitability will likely remain under pressure because of a very challenging business model and increasing competition.

Apple is in the Right Position

Apple (NASDAQ: AAPL) on the other hand, is in a much more comfortable position. The company simply charges a 30% fee on digital media downloads and subscriptions and it only needs to take care of credit card transaction costs in exchange for that. Apple doesn't have any material upfront investments to make, and the company is not betting on what kind of content people will choose to watch.

The Cupertino giant completely revolutionized the music industry, and it has an enormous user base of more than 435 million individual iTunes accounts, which provides tremendous leverage when it comes to negotiating with media companies.

The iPad is the dominant product in the tablet space, and Apple is also working on a new Apple TV product. Just like the iPod and iTunes gave Apple a fantastic position in digital music, the iPad –and perhaps a new Apple TV in the middle term – could mean the same for digital video.

Digital movies should also be much more profitable than digital music for Apple. Making 30% of $1 for an iTunes song is not the same as making the same percentage from a $15 movie. Apple should achieve much higher profit margins because the costs for the company are relatively stable while revenue is sensibly higher.

Both in terms of market position and when it comes to profitability, Apple has an outstanding business model to benefit from the digital video revolution.

Google and the Power of YouTube

Here are some mind-blowing statistics regarding YouTube:

  • 60 hours of video are uploaded every minute, or one hour of video is uploaded to YouTube every second.
  • Over 4 billion videos are viewed a day
  • Over 800 million unique users visit YouTube each month
  • Over 3 billion hours of video are watched each month on YouTube

Almost all of this content is free, but Google (NASDAQ: GOOG) is the undisputed leader in online advertising, so it's in a fantastic situation to monetize this unique asset. Google doesn't disclose profitability figures for YouTube, but the video platform has an undeniable strategic value from a long term perspective.

The network effect is a crucial factor behind the success of YouTube: if you are uploading content you want to go where the viewers are, and as a viewer you value quantity and diversity. More users add value to the service, which also attracts more users, this leads to a very strong competitive advantage.

When it comes to free online video, Google is in an unchallenged position to capitalize its online advertising experience and market size advantage via YouTube.

Watching the Right Movie

When it comes to analyzing opportunities from the digital video revolution, most investors focus their attention on companies like Netflix and Amazon. However, players like Apple and Google should not be underestimated, since they are in a fantastic position to leverage their strengths in other areas and make some serious money from the new video parading.

 


acardenal owns shares of Apple, Google and Amazon.com. The Motley Fool owns shares of Apple, Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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