Winners in a Changing Media World

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

Cable companies changed the face of television. Now companies like Netflix (NASDAQ: NFLX) and Hulu are changing the television experience again, and cable companies are being forced to rethink their business model. The Internet may turn this into a win/win proposition for everyone involved.

The Past
There was a time when televisions received their signals over the open air via two long poles that stuck up from the back of the device. The so-called rabbit ears are little more than nostalgia today for most people, because cable companies brought a direct line into peoples' homes. While the over-air signal was free, the cable line provided crystal clear images and vastly more content.

This combination was a winner for cable companies. So, too, was the monopoly nature of their business, in which, for the most part, only one cable company would serve an area. The companies had massive pricing power and made good use of it. One of the most frustrating practices was the bundling of channels, in which a customer had to take a collection of stations to get a small number of desired ones.

This all or none nature of the product offering was reviled by customers, but there were few other viewing options that matched the cable experience. So customers took what the cable companies offered. Then along came the Internet and it looks like things are heading for a revamp.

Netflix to the Rescue
Customers have long desired to watch what they want, when they want. This is what made TiVo (NASDAQ: TIVO) and TiVo like hard-disk recording devices so popular. You no longer had to be present to watch a show. Much more complex and better integrated than a VCR, these devices proved that people would pay extra for the ability to gain control of the viewing experience.

Netflix took that concept to the next level, which is bad news for TiVo. While Netflix started with a library of DVDs that could be ordered through the mail, it realized early on that the Internet was the optimal delivery mechanism. Now, customers can pay as little as $9 a month and watch a huge portfolio of movies and television shows over the web. What they want, when they want, where they want.

Seeing the possibilities, a number of content providers teamed up to form Hulu.com, which competes head to head with Netflix. Hulu's big benefit is that it provides access to a large amount of content just days after it was aired live. Although customers have to pay to use the full service, the ability to watch what, when, how, and where they want easily outweighs the cost (and the need to still view advertisements). Even Amazon.com has a video service. With its huge customer base, it's also a material competitor.

The one common thread here is content. There's no need to wait for it to be aired. There's no need to set up a machine to record it. It's always there, ready to be watched. Cable can't compete with that, though they have been trying with their own online video service.

Content has Value, but How Much?
This has put cable companies in a bind. They are losing customers to the upstarts. While they aren't sitting still, their efforts to compete with the TV Everywhere concept just doesn't have the same appeal to today's consumers. So, cable companies are feeling the pinch of the Internet. What's changing?

The first thing that appears on tap for a change is the “availability” of so much obscure content. When you can force feed consumers content they may not want, and the number of channels is used as a selling point, you take just about anything and shove it on the air. When people start moving on, you start getting picker about the content you provide.

So, less desirable content appears headed for the chopping block. That could easily mean the demise of channels and shows that didn't get huge ratings, but still had loyal fans. Except that many will now be shifting to the Internet. With the search for content fierce and the price high, companies like Netflix and Amazon have started creating their own content—taking on the traditional network model, to some extent.

One of the most interesting aspects of the Netflix model, however, has been the resurgence of once forgotten content, such as Arrested Development, that seemed to take on a new life when it was available online. With more attention being paid to the channel selection at cable companies, any eliminations, even obscure content, could quickly find new distribution through the upstarts. This could turn things into a win win win.

The Beneficiaries
The biggest benefit is likely to go to the consumer, who will continue to keep access to his content but get the ability to watch whatever, whenever. The Internet delivery portals, like Hulu, would gain access to new content and, potentially, new customers searching for their lost channels. The content creators get to remain in business. The cable companies, meanwhile, get to continue charging for the high-speed connections needed to watch Internet delivered content and start to rightsize and change their businesses to be more customer friendly.

Everyone wins. Growth minded investors should keep a keen eye on Netflix and Amazon, with an outside chance of a Hulu IPO. Income focused investors should consider some of the larger cable operators, which provide the invaluable pipes into the customers' homes.

Yours,


ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com 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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