Content is King: The Increasing Demand for Content Creators

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

Last week, I wrote about the latest efforts from Netflix in the battle for video streaming supremacy. I detailed the ballooning cost of new content for the company, and hinted that perhaps content owners are the real winners in the streaming video revolution.

As the number of outlets for video grows, content acquisition has become the name of the game. Websites have cropped up just to compare the offerings of different companies. An increased demand and a steady supply could mean more profits for content owners.

The cost of content is increasing

Regardless of whether you believe Netflix’s (NASDAQ: NFLX) ever-increasing content budget is good or bad for the company, it’s undeniably good for content creators. Netflix has a $6 billion budget for content over the next three years, and it's not afraid to spend it. In the next year alone, Netflix will pay out $2.3 billion in content obligations, a dramatic rise from the $0.5 billion from just two years ago. (Source: annual report)

While we don’t always know the exact details or specifics of Netflix or Amazon’s (NASDAQ: AMZN) content licensing deals, all indications are that the prices are rising. For example, Netflix penned a deal with Starz in 2008 to distribute its shows and movies for $30 million. In 2011, Starz wouldn’t take a deal worth $300 million, and Netflix lost the rights to Starz’s content. A few months ago, Netflix failed to renew a contract with A&E to license 40 of its networks’ shows. If the costs stayed about the same, Netflix would have renewed the contract.

But A&E isn’t worried; it’s a seller’s market. Sure enough, Amazon snatched up the contract for its Prime video streaming service just a couple of months later. With cash-rich competition from Amazon, Google, and Apple now all bidding for content against Netflix, content distributors are simply going to where the money is. Epix realized this, and allowed its exclusive contract with Netflix to expire so that it could sell content to Amazon and the upcoming Verizon-Coinstar outfit, Redbox Instant, as well.

Rising content costs are evident in traditional pay-TV outlets too. The number of disputes between content creators and cable and satellite companies has continually increased as the latter demand higher prices. This is perhaps best exemplified by the coup AMC tried to pull on Dish Network last summer, demanding an increased price to renew its contract just before Breaking Bad’s new season was set to premier. While Dish Network subscribers missed out on the latest Breaking Bad episodes, the two companies came to an agreement by October, just in time for The Walking Dead.

Winning content

Quite a few content creators will continue to benefit from the increasing prices for content. However, there are two, in particular, that stand out: Disney (NYSE: DIS) and Discovery Communications (NASDAQ: DISCA).

Disney has its foot in just about everything: Sports (ESPN); Children’s programming (Disney Channel, ABC Family); Adult programming (A&E, ABC); And movies (duh!). Interestingly, ESPN is one of the most valuable assets to cable companies, and Disney announced that ESPN actually saw a decrease in profits last quarter despite its relatively high price (about $6 per subscriber).

There are arguments for and against Disney taking ESPN a la carte, but I think regardless of which direction it goes, Disney will find a way to maximize the value of its top content assets as current contracts expire, and a new round of negotiations begin. Whether that’s through (justifiably) increasing the price for cable companies or creating an entirely new product, it shouldn’t matter to investors, as the value of its content is what’s really rising.

Aside from sports content, Disney recently struck a $1 billion deal with Netflix to stream its movies starting in 2016 (allowing Netflix to bypass Starz). The deal does not include most of Disney’s television programming content, which the company saves for its own streaming content venture, Hulu, and for its traditional cable and satellite programming.

Discovery is a content creating dynamo. A leader in the documentary-style television format, the company rarely fails to produce compelling new shows Americans love to watch. It often succeeds by creating spin-offs of already popular shows, keeping viewers interest for years on end. For example, the hit show Gold Rush found its way to the top spot of its time slot according to Nielsen ratings in just 3 years. Discovery now offers Jungle Gold, an equally successful show, as well as Bering Sea Gold and Bering Sea Gold: Under the Ice.

In other words, Discovery makes content more efficiently and effectively than any other company. As the value of content rises, so too is the number of hit shows in Discovery’s back pocket. While the company currently has deals with both Netflix and Amazon, the exclusive rights may still be bought. With the growing amount of extremely popular content Discovery Communications can provide, it wouldn’t surprise me to see a deal similar to the one Netflix gave Disney for its movie catalog.

However, I’m most excited for potential increase in value of educational and children’s programming. One of the biggest focuses of Amazon’s Prime service has been kids’ shows. Amazon recently greenlit production on five children’s test-pilots. It also provides access to about 1,000 kids & family titles already.

Both Disney and Discovery offer the best in educational and children’s programming. As Amazon increases its content spending to compete with Netflix, Discovery is poised to capitalize. Generation Y (the early adopters of video streaming) is starting to have children, and in effect television streaming habits ought to change toward more kid friendly programming. Regardless of whether Amazon beats out Netflix or vice versa, the content creators, like Discovery and Disney, win.

Packaging doesn’t matter

There’s an evolution going on in our living rooms. Cable companies are trying to fend off internet video streaming outlets. Television manufacturers are fighting with tablet makers for eyeballs. I’m still waiting for the next step in couch technology for the optimal viewing experience. But regardless of how it’s packaged or what type of screen you’re watching it on, or where you’re sitting, the content and the content creators stay the same (for the most part). These are the companies that benefit most, and the companies that will surely last in the long run.

adamlevy owns shares of The Motley Fool recommends, Netflix, and Walt Disney. The Motley Fool owns shares of, Netflix, and Walt Disney. 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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