Is This The Future of TV?

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

“I watch TV on the internet all the time.”  So said my 16 year old daughter with her laptop latched firmly to her side.  My facial expression gave me away.

“It’s not that hard, Dad, really.”

She’s right.  Searching for my favorite show “The Mentalist,” I discovered I could watch current episodes online and miss about ten minutes worth of commercials.  No need for a special subscription either.  Simply searching “internet TV” revealed scores of television channels available online without fees.  The more I look, the more opportunities I find for internet TV.  There are the free channels or content providing directly from the broadcasters (The Mentalist came straight off the CBS website).  Then there is Hulu, Amazon TV, Google Fiber and Boxee with all manner of offerings.  No wonder Time Warner lost 140,000 video subscribers in its most recent quarter.

Wireless downloads play a major role in this evolution of television services.  Verizon (NYSE: VZ), more specifically, Verizon Wireless, signed deals with four cable companies to jointly market  a package of wireless services including video and internet services.  Wireless users can browse over 14,000 titles anywhere, anytime.  Wireless provides 65% of Verizon’s revenue so expect further expansion of wireless video and television services.  This comes as Verizon shuts down its own Verizon Video service later this year.  However, Verizon’s FiOS products continue to include video and internet service, even though they may compete with each other.  

AT&T (NYSE: T) while not quite as reliant on wireless revenue, hasn’t ignored mobile devices and their role in internet TV either.  When mobile data traffic more than doubles in one year, that’s hard to ignore.  However, AT&T had better figure out how to generate more revenue from its wireless data service.  While data downloads grew 100% last year, revenues rose only 20% or so.  Something is wrong with this picture.  Underscoring the importance of wireless content and devices, AT&T will invest $8 billion to improve its wireless infrastructure and $6 billion on its fiber optic and broadband networks.  The hope for fiber optic and broadband is that rather than abandon wireline services, especially to rural customers, revitalizing these services might reverse the trend of fewer wireline customers.  

Providers need Content

All internet TV providers need the same thing: content.  This, in my opinion, is where the money is made or lost.

Consider Disney’s (NYSE: DIS) ESPN.  According to Businessweek, ESPN recently it signed a $1.9 billion deal with the NFL that supposedly Disney can’t afford without passing costs to cable carriers.  So when the cable contracts need renewing, the cable guys have to either pass along costs or drop the channel.  What cable company is going to drop one of the most popular sports channels in the country?  So cable loses customers from higher prices while ESPN/Disney makes money.  And Disney looks like it will make a whole lot more money on internet TV beyond ESPN.  As owner of ABC television, Pixar, Disney studios, Marvel, and now Lucasfilm, Disney exudes content.  They have been expanding the availability of their content across all manners of digital platforms.  Best of all, Disney makes money on it.  24% quarterly earnings growth yoy.  $8.5 billion in operating cash flow for the past year.  The most recent earnings disappointed and the stock tumbled.  However, Disney invested heavily in its theme parks this fiscal year which won’t show returns until a year or so from now.  With the dip, opportunity might be knocking.

Discovery Communications (NASDAQ: DISCA) provides multiple forms of video content as well.  With 30 network brands in 45 languages, Discovery reaches over 1.8 billion subscribers worldwide.  For those viewing non-fiction and educational programming, Discovery provides arguably the most programming of any online media company.  The recent acquisition of Revision3 should boost the company’s online video content.  Discovery might need it.  Latest quarterly earnings disappointed with revenues dropping 14%.  Overall, though, revenue and earnings have been steadily climbing for the past four years.  At 20 times earnings, the stock has some optimism built into its price.  The PEG comes in at around 1.13, so Discovery may not be so expensive looking forward.

Foolish Bottom Line

Wireless hotspots, smartphones, tablets and laptops have made downloads of internet content possible virtually anywhere.  Cable companies obviously can’t compete with telecommunications companies providing both telephone and internet services sending content to the wireless devices in homes and pockets.  Hulu, Google and Amazon are joining the fun.  No matter who enters the internet TV fray, they will need content to attract viewers.  Disney and Discovery are two popular content providers well positioned to provide and profit from this content need.  Of the two, I’m partial to Disney for its earnings consistency, diversity of offerings and brand recognition.  The recent sell off makes the stock all the more attractive.  Disney knows how to make a buck off of content and Disney shareholders will make a buck off of the company.

If you think cable still has some life in it, check out Matt DiLallo's excellent article posted here.

dylan588 owns AT&T and Verizon. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and AT&T.; 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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