Streaming Content: Cornucopia of Possibility or Limited Profitability?

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

Internet streaming is touted as one of the next lucrative online frontiers. However, all the companies rushing into it remind me of the search engines in the '90s, because of the complete fragmentation of the market. The market needed to whittle down to a few key players, which it eventually did.

The same thing will happen to streaming content. There are so many players entering the market, and that fragmentation is going to hurt everyone. Either each provider will have content that is unique to them, in which case people might stick with traditional stuff like cable and DVR; or providers will have overlapping content, in which case it will be hard for each company to make a solid profit with growth.

Amazon (NASDAQ: AMZN) is my favorite stock in this space. I think streaming will have a big impact on it as it moves forward. The company is going to start producing its own content in-house, such as TV shows. This is the general direction of the industry and is unsurprising. Amazon's advantage in my eyes is that it has the financial power to create extremely quality productions, thanks to the almost $6 billion the company currently has in cash. I suspect it will start with short mini-series-like seasons, instead of the 24-episode seasons of classic television.

Shorter seasons allow Amazon to focus on quality, while keeping costs under control. Finite seasons keep new content fresh; shows get more expensive as time moves on. Usually it is because actors get significant pay bumps to keep them tied to a successful series.

Netflix (NASDAQ: NFLX) is another company I expect to survive as the 40% to Amazon's 60% market share. Do not take that literally, I just mean that Netflix will be the well known second place. It is also working on its own unique content and a delivery system. Netflix has almost $800 million in cash, and that sounds good for the production of an online series, but Netflix has an entire business to run. One show is not going to be the decisive factor either. I imagine it needs a slew of them to really draw in subscribers.

Regular cable carriers should not be counted out, and Comcast (NASDAQ: CMCSA) is not going to be left in the dust. Its streaming content history stretches back to its stake in FEARnet, which is not something investors need to take too much not of. Comcast also has a stake in Hulu through NBC. It also launched its own streaming platform, but as of yet I do not believe there is any proprietary content on Xfinity. Exclusive content will be available if it is proven to a profitable draw.

Comcast's situation is a bit different from Netflix's or Amazon's. Since it owns 51% of NBC Universal it has its foot firmly in the content production arena. It can produce content for television, and then license that out to Netflix and Amazon while putting it on Hulu too. Maybe Hulu gets it first in order to play favorites. Its flexibility in the content arena is massive, because that is its business.

Finding a new place to shop your content is easy. The bigger decision for Amazon and Netflix is to decide if producing content is worth the time and expense. Comcast needs to decide if it is going to keep it exclusive or if licensing fees are better. Comcast can use the standard channels that make plenty of money and test the water with Netflix and Amazon. If it proves to be a good move, then Comcast will not have very far to catch up. It has ample properties and production capabilities to quickly create a lot of content for an exclusive deal with its streaming platform of choice. NBC Universal has lots of television and movie franchises, and the ability to create new content. Unlike NBC, Amazon and Netflix do not have studios and crews and the deep contacts with writers and directors.

Comcast also has $10 billion in cash, but that has to be tempered by the almost $39 billion in debt. This is not a crushing debt load for the company, but some of that cash has to be a buffer. Net income ttm is almost $6 billion, so the company seems to be doing well, and the 12% margin puts the income into perspective. Remember that Comcast provides cable and internet services, so looking at the financials will not compartmentalize this for you.

Conclusion

I like Amazon and Comcast because they provide a way of getting your feet wet, while having a strong and established business. I think Amazon will beat Netflix at its own game because it is committed to being a content producer. That level of commitment, combined with Amazon's balance sheet, makes it a force to be reckoned with. Amazon might be too expensive for some, but I do not see it getting much cheaper. Evaluate Comcast as a cable provider instead of a streaming content provider. For now now I will watch the development of Xfinity carefully.

There will be very few companies that provide broad access to a lot of content. The rest of the companies will have to license their content to Netflix and Amazon. People are not going to have 20 subscriptions. Even a pay on demand system would annoy people if they need to have a bunch of different sites or applications. People like ease: turn on the TV and watch. I think Amazon and Netflix are best suited to be the portal to peruse all the content out there. Comcast might displace Netflix if they decided to, but it depends on the profitability of the whole space.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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