Morningstar - Q2 2024 - 57

Changing Playbook
Some streaming companies are turning
to sports to help boost profits.
SECTOR RAP
Ivanna Hampton
Live sports, once the prized programming of cable
and satellite television, are now being recruited
to streaming services.
That's because streamers are shifting their
focus from subscriber stats to profits, says Michael
Hodel, director of communication services for
Morningstar Research Services, in a recent
Communication Services Observer. And a strong
sports roster could help boost bottom lines.
Tech firms with lots of cash are competing for
sports rights against traditional linear TV giants
that are in more precarious financial positions,
says Matthew Dolgin, senior equity analyst for
Morningstar Research Services.
" It's the evolution to a streaming world, where
people want to watch streaming, and
sports is a critical piece to having consumers
pay for television service, " Dolgin says.
But the stakes are high as a game seven.
Tech companies are disrupting the media industry.
Apple AAPL offers MLS Season Pass. Amazon
AMZN hosts Thursday Night Football. The OG
streamer, Netflix NFLX, will become the new home
for WWE Raw. Meanwhile, traditional media
companies are still figuring out how to stem losses
and make money in streaming.
I spoke with Hodel and Dolgin on March 13.
Our conversation, which has been edited
for length and clarity, reflects conditions and
valuations as of that date.
Ivanna Hampton: Netflix's dominance extends beyond
streaming. Your research highlighted that Netflix
likely reaches more US homes than traditional TV.
How did we get here?
Michael Hodel, CFA, is director of
communications services equity
research for Morningstar Research
Services LLC.
Michael Hodel: The shift to Netflix from traditional
television is a tale of two classic dilemmas.
The first is the innovator's dilemma that was
outlined famously by Clayton Christensen in
the '90s, involving up-and-coming tech companies
that find ways to disrupt industries. The Netflix
streaming service began as a niche offering
that was perhaps inferior to traditional cable
television, but it had attributes that made it
attractive, such as no advertising, broad content,
and delivery to any device anywhere at an
unbundled price point.
The traditional media companies initially dismissed
the threat Netflix posed. But even after they
realized it, a second dilemma prevented a
strong response. That's the prisoner's dilemma,
where players acting in their own interest
undermine the group's interest. The traditional
television business is a complex web of
relationships between media companies and
distributors. As these firms looked out for their
own individual interests, the industry has
consistently moved in the wrong direction. Cable
TV has gotten more expensive, and the experience
hasn't meaningfully improved. One of the key
decisions most traditional media firms made was
to launch individual streaming platforms.
While each firm, acting in their own interest,
wanted to hedge its future, the collective
result is that more content is no longer included
in-or not exclusive to-the cable-TV bundle.
That's only accelerated the decline.
Hampton: Would you say we're now in a time
of alliances with the joint sports streaming service?
Matthew Dolgin, CFA, is a senior
equity analyst for Morningstar
Research Services LLC.
Matthew Dolgin: We're moving in the direction
of alliances. It seems part of the natural evolution
of the industry. We had been in a world where
each of these companies was looking to build their
subscriber bases almost at any cost and not
worrying if they were losing money.
We think we're part of an evolution now that is
necessary due to the number of streamers
and the amount of content in different places.
These companies are looking to have streaming
businesses be financially good, which they
had not been. They're realizing that what's going
to be in their best financial interest is to come
together. The sports joint venture with Disney DIS,
Fox FOX, and Warner Bros. Discovery WBD
is one of the early steps to bundle similar content.
It's to the benefit of all, even if it's less individually
they can make per subscriber. It's part of the
industry maturing.
Hampton: Peacock and Paramount PARA have
a partnership in Europe. Could that work in the US?
And for full disclosure, I own Comcast CMCSA
stock. [Peacock is a subsidiary of Comcast-owned
NBCUniversal.]
Hodel: We think that a partnership like that
could work in the US. Part of the reason
why they team up in Europe is to have enough
content to remain interesting or relevant to
viewers. I think similar to what's happening on
the sports joint venture side, partnerships
make sense on the entertainment side of the
business as well, almost recreating the traditional
cable bundle in a way that creates more
options for consumers and hopefully lowers the
price point. Then creates value for the
companies, giving them an audience of scale
for the content they're producing.
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