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It’s Time to Change the Channel
The way we consume media is evolving at breakneck speed while legacy networks and broadcasters scramble to get out of neutral. Everything we know about the media industry is being transformed by interactive and streaming technologies. There are incredible investment opportunities out there available for those who have done their homework and who know the right people.
We’ve been talking to industry players, hanging out at trade shows (like NAB in Vegas and MIPCOM in Cannes), and watching the data closely to get the clearest read on this ongoing sector disruption. Our thesis is these new technologies will create significant wealth-making opportunities and as such, we have been investing in this space for some time now. Here are some of the battles we are watching:
- Web Streaming vs. Cable/Satellite
- Over The Top (OTT) vs. Broadcast
- On Demand vs. Linear TV
- Second Screen Participation vs. Passive TV Screen
- TV Anywhere vs. the Family room
- UHDTV (4K) vs. HDTV
- Netflix, Apple, Amazon, Microsoft, Google vs. NBC, ABC, CBS, Fox, Comcast
Just following these emerging battles makes for great entertainment! (No, please not another reality show idea!) But at Difference we are more than just watching, we are investing in this eco-system at several points – including at the content level (Thunderbird Films, Blue Ant Media, even Virgin Gaming) and at the technology level (iPowow, Quickplay Media, Cricket Media as well as Baanto & BTI Systems).
The first part of our thesis is that even with all this disruption, content continues to remain king and new distribution technologies only serve to enhance its power position – like Kevin Spacey’s “Frank Underwood”. Companies like Thunderbird Films and Blue Ant Media are taking advantage of the 50+ big media buyers out there (up from a handful a decade ago).
And the second part of our thesis is that there is a decade long battle emerging between legacy video providers and new IP-based entrants, and investing in the technology arms dealers will show handsome returns. iPowow and QuickPlay, amongst others, are serving to disrupt how established entrants approach the market.
In the next few pages we highlight:
1. The IP-ization of TV
2. A TV in Every Pocket
3. Will Advertising Follow the Technology?
4. The Impact of 4K TV
5. Can the Pipes Handle It?
1. The IP-ization of television
Déjà vu! We’ve seen this movie before. At least a few of us old-timers have. IP technology has
- Data networks (IP vs. ATM, TDM, etc)
- Voice networks (VoIP vs. circuits)
- Wireless networks (IP based LTE, 3G vs. GSM, CDMA)
Now IP is moving into Television networks with the same potential for disruption. Think of it as yet another Hollywood sequel “The IP massacre part IV”.
Even before the arrival of IP-based services, classic scheduled television has been under attack for some time now. First it was the DVR with the ability to skip commercials, then IP first appeared with pirated content shared over peer-to-peer (P2P) networks, but mostly it’s threatened by IP/Internet based Overthe- Top (OTT) streaming from the likes of Netflix, YouTube, iTunes and more recently by Amazon, Xbox and others. Sure, legacy networks have fought back with expanded Video on Demand (VoD) services and even more specialty channels, but Cable video subscribers continue to decline while streaming users continue to grow.
I suspect many households are like mine. First, we got an Apple TV for iTunes rentals of movies. Then my kids and my wife wanted to get Netflix (thanks Kevin Spacey) for $8/month, and since I am always looking for ways to reduce my $100/month cable TV bill I agreed to Netflix, but only if we dropped to a more basic cable package. The result is we saved $40 on the Cable bill, offset by the $8 Netflix bill. Oh, and yes we had to bump up our internet package by $20 to have a higher download cap.
My older kids who have recently moved to their own apartments are probably a good indication of the millennial generation in that they have no cable TV service at all, (or wireline phone) and get all their video and voice services over the internet (including live sports). The IP-everything generation.
These trends are clearly showing up in the data as indicated in the charts below:
This chart says it all. The emerging generation of spenders get more of their video from online sources (the red line) than from broadcast. Sure, some of us old cranks will stick with the traditional networks, desperately looking for old re-runs of the “Sonny and Cher Show”, but that’s not where the growth will be. Expect the chart to rapidly shift to the right over the next few years as even more cable alternatives emerge.
And the chart below shows how the shift is manifesting. This chart shows how US cable TV is losing its TV subscribers – a process known as cord-cutting. I suspect this understates the revenue loss as many subs that remain are doing what I did, which was to move to a more basic cable TV package for sports and news, and use OTT services for all other content. Governments are in on this too – the Canadian government has recently indicated its intention to restrict mass television channel packaging and move towards a “pick-and-pay” system. As well, the CRTC recently indicated that 2013 was the first year where the number of Canadians cutting the cord exceeded the number of new TV subscribers.
The offset for the cable company to this decline of course is they are making some of their television losses back on higher fees for their internet services needed for OTT services. FYI, I recently bumped my download cap to 300G/month!
Meanwhile, streaming is coming on strong. The following chart shows how Netflix streaming is growing in all markets. Its recent quarter saw total subscribers (US and International) top 48 million. The traditional broadcasters recognize this – Hulu, arguably Netflix’s most visible competitor (and which just announced it has reached 6m subscribers) is a joint-venture between NBC, Fox and Disney/ABC.
And while Netflix is the largest, it’s far from the only game in town. Amazon Prime for example just acquired some key rights to older HBO content (like the Sopranos, etc). Microsoft is launching original content around its Xbox platform. And a very recent example is that of WWE (World Wrestling Entertainment) which just launched its first 24 hour OTT network and within six weeks had over 600,000 subscribers. This is a clear example that every content player should be looking at a streaming/OTT strategy. Note, one of our investments, Thunderbird Films, is now a supplier of content to Netflix and Hulu.
And as we`ve stated, the rush to cut the cord is being led by the young:
Here’s a really interesting stat: Video games now have more online spectators than traditional sports. A streaming service called Twitch, which features streaming video of video games played by others, apparently is now the most popular live streaming site in the US. We see this driving upside to our investment in Virgin Gaming.
How far can this trend go? The following chart suggests classic linear TV could be crushed from 65% to 10% of actual video consumption, with OTT and VOD being the new content delivery kings.
We think this all shows that the source of our video fix is changing rapidly, but in addition to how the distribution market is changing, how consumption is changing is equally important, as the next section discusses.
2. A TV in every pocket
Is that a “TV” in your pocket? Is that a TV in your briefcase? If you have a recent model smartphone or a tablet, you are walking around with an IP connected HD TV.
The IP-ization of TV combined with the power of the smartphones, tablets and the use of cloud computing have enabled a whole new technology known as the “second screen”.
There are really two leading parts to this:
- TV Everywhere – the ability to watch video anywhere, anytime, on multiple devices. And this is often labeled “TV Everywhere or TV Anywhere”.
- TV related Apps – the use of a related app on a smartphone or tablet while watching TV.
TV Everywhere has become quite popular and is available from many sources:
1. OTT services such as Netflix and YouTube offer their full range of programming on most smartphones and tablets. You can watch “Breaking Bad” on your smartphone while commuting (please, not while you are driving), on your PC when you are at work (on your break, of course), and on your tablet at home when your spouse is watching those ridiculous reality shows on the big telly.
2. TV Everywhere is also available from many cableco & telcos as an extension of their TV services. These are designed to let you take your TV services with you when you leave the living room. Want to catch the last few minutes of the big game, but your spouse is demanding that you leave NOW for the in-laws’ dinner? Grab you phone and go and make them drive while you watch! Our investee company Quickplay Media is a leading provider of this technology – see below.
3. Programming is also available directly from broadcasters and content creation companies as well. ABC, NBC, CBC, Disney, ESPN, Fox etc are all moving to delivering at least some online content directly to smartphones Tablets and PCs. For example, I think I watched more of the last Olympics on my tablet directly from CBC or NBC than the big screen.
TV Related Apps – Yes, there has been a big shakeout in the number of apps aimed at TV. Our view is that Facebook and Twitter will dominate the “Social TV” app space – after all, who wants a separate social networking app just to discuss TV? And who needs yet another on-line guide to the junk on TV?
But we are excited about a second generation of technologies that add to the battle arsenal for the legacy broadcasters. These apps work closer with the broadcasters to increase engagement (vs. pull eyeballs off the TV). These technologies embrace the fact that we all watch large screen TV with our smartphone or tablet beside us and grab it every time one of those irritating commercials comes up
(unless it’s a beer commercial, I love those!). Broadcasters use these technologies to fight back against streaming and encourage viewers to watch first-run shows as they are broadcast, where advertising prices are higher and users more valuable. See our iPowow investment below for a great example of the kind of technology we are talking about.
We see lots of opportunities for disruption in the second screen wave and have made two major investments so far in the area including:
QuickPlay Media – a Toronto based firm than provides TV Everywhere to major operators like AT&T and Bell through a complete managed service. Its technology allows an operator to quickly launch a complete mobile television service for all major devices and as a result is seeing incredible growth.
iPowow – Originally from Australia and now based in L.A., it provides an imbedded technology to broadcasters that allows them to interact with TV watchers through their smartphones. The technology is already being used on major sporting events (like asking the audience if they agree with the Ref’s call) or on major news events and entertainment shows such as Modern Family and Suits. iPowow’s technology has seen huge engagement rates with audiences and we expect this to drive rapid deployment and significantly enhance show ratings (and associated ad dollars!)
Example of iPowow’s technology being used on a sports talk show:
We also have an adjacent investment that is capitalizing on these trends:
Baanto International – This is more about the TV screen than the second screen and we are sneaking it in here. Baanto has developed what we think is the best technology for touch enabling large screens. Users (especially young ones) love the touch interface of their second screen and this interface will have to migrate to the big screen.
Below are some charts reflecting the second screen opportunity:
This chart shows that in 2013 we started consuming more media digitally than any other method, including legacy TV. Note that the mobile element of digital consumption is the largest and looks to be on track to pass TV within the next few years. Also notice that the overall pie is growing as mobile consumption opens up new time for us to consume as we commute, work (!), etc. Although: these numbers suggest we spend almost every waking hour (12 hours) consuming some form of media including 4.5 hours of TV. Come on people, get a life!
Below is a chart from 2012 and thus a little dated, and many of the names have since moved on, reflecting the consolidation and evolution of the sector. However, it does show the many areas that second screen technology has a role in – including TV analytics, ad serving and content discovery.
The next chart highlights the second screen opportunity. About half of all couch-potatoes are using their smartphones while watching their 4.5 hours of TV per day. The good news is you don’t have to actually get off your butt to use your phone!
3. Will Advertising Follow the Technology?
As investors, one of the key issues we can’t ignore is to make sure the money is following the technology. It is still early days in tracking this, but this will be a key metric for our investment strategy to pay off.
Media revenue comes from two sources:
- Direct from consumers via subscriptions or pay-per-view fees
- From corporations via advertising revenue
Don’t kid yourself – advertising is still the big one. TV advertising still dominates (58%) amongst all media ad spend as shown in the chart below. Do these advertisers know that when an ad comes on, more and more of us either press the skip button on our DVR (if recorded) or turn to our smartphones/tablet (if a live show)?
However, the chart below shows that advertising money is starting to follow the eyeballs – with internet spending growing at 32%. So far TV hasn’t suffered, with 4% growth, and most of the growth in internet coming at the expense of print.
While Netflix and some other OTT services are mainly subscription based, with limited or no advertising, we think that longer-term models will evolve to include some form of advertising components.
In particular we see significant opportunity for OTT video ads to be more targeted, engaging, measureable, and interactive. Just like the switch from print advertising to online advertising, next generation media distribution platforms will offer advertisers much better targeting and analytics. As consumers, we can expect the media advertising to be more relevant (targeted) to us. As a result of this, we remain keen on video ad and analytics technologies.
4. Will 4K TV impact these trends?
For those who haven’t heard about the next wave in large format television, here’s a quick primer on it: Generally it’s called 4K TV or Ultra HD TV. The 4K refers to these screens as having four times the resolution of existing 1080p HD sets. Many TV manufacturers now have sets shipping with this 4K resolution – along with much higher (but falling) prices than HD TV.
More and more content is being filmed with 4K cameras. Looks good right? Yes – and especially for sports events this will be big. Eventually…
There are two big issues that will moderate this transition. The first is 4K resolution is only really noticeable on TVs over 60” in size. The second and most important is that moving a 4K TV signal around today’s networks is much more difficult. The 4K bitrate, even after compression, is 12-20Mbps, while a HD signal is now about 3-4 Mbps and SD is about 1.5 Mbps. Traditional cable/satellite networks will likely need to use the spectrum/bandwidth of four HD channels to transmit one 4K channel and upgrade all set-top boxes to enable 4K channels. This will take some time.
The OTT players don’t have quite the same constraints and are already delivering some 4K content. For example, Season 2 of House of Cards is available in 4K. Of course you still need a 4K TV and a big fat download cap if you really want to watch Frank Underwood in Ultra HD. The timing to full launch may be a while however, Netflix recently launched a discount package for standard-definition only viewing.
Our overall view is that the delta from HD to 4K is smaller than that of SD to HD, and along with high transmission costs, this will keep the adoption rate quite modest for some time. Ironically we think OTT will be the first major providers of 4K content, however ultimately it will be live sports over traditional networks on large screens that will be the best use case.
The introduction of 4K and its bandwidth needs leads us to the final part of our thesis:
5. Can the Pipes Handle this?
If you’ve read this far, you must be a real techy geek. So we’ve saved this section just for you. But for the non-geeks that somehow made it this far, the bottom line here is that our changing media consumption is driving communication infrastructure change on par with what the Internet build-out did to landline networks in the late 90s and what smartphones did to wireless networks over the last five years. Infrastructure players with solutions may have a few good years ahead of them due to this. It’s like a JDSU déjà vu!
First a little basic physics:
- A text message uses about 1 Kbps
- A Cell phone voice call takes about 15 Kbps
- A quality VoIP landline voice call takes about 100 Kbps
- A reasonable speed for web surfing is about 250-500 Kbps
- A Standard Definition (SD) Video Signal after fancy compression takes about 1.5 Mbps
- A HD Video Signal after compression takes about 2-4 Mbps
- A 4K HD Video signal after compression uses about 12-20 Mbps
See the problem? Watching an HD quality video on your smartphone uses 200x times the capacity that your voice call does. 4K HD video uses 20,000x as much data per second as that text message your carrier charges you 15 cents to send!
So as we shift more and more video off of broadcast networks to the Internet by streaming, there will be significant network stress. But stress can be good for new technology solutions (and this is part of our thesis for our investment in BTI Systems, which provides ultra-high capacity media data-centre connectivity).
Below are some graphics showing the network stress:
Let’s start with some data from our good friends at Sandvine (another way to play this stress). The following two charts from their latest (2H 2013) Internet report clearly show the stress that video (Real- Time Entertainment) places on the wireline network. Basically 60% of all traffic in North America is Real- Time Entertainment. Netflix and YouTube alone represent more than half of the downstream traffic!
And if we look at Mobile networks, we are starting to see the same issue, with Real-Time Entertainment already accounting for close to 40%, with YouTube representing almost half of that. Note that mobile devices on Wi-Fi networks would be counted in the Wireline or Fixed Access numbers above and not in the mobile access.
The following two charts gives you a sense of where things are expected to go.
The media world is seeing significant change – well beyond replacing Starsky and Hutch with Mad Men. Technology is disrupting the paths from content to consumer and changing viewing habits, locations and boosting consumption time. All of which can offer opportunities and threats to investors in the space.
Investors in content companies, broadcasters, cable and media-tech and infrastructure companies (equipment and software) have to be on their toes with this much change. We’ve focused our strategy on emerging content players and new technology companies that either enable the disruption or help the established players defend their positions. We align ourselves with the innovators and disruptors because we believe that if they don’t adapt quickly the old media world could become a “House of Cards”.
As always, we are open to new ideas and discussion.
Tom Astle, Head of Investment Strategy, Difference Capital
Mr. Astle brings over 20 years’ experience in equity research and has been a top ranked analyst for most of his career. Prior to joining Difference, Mr. Astle ran research departments for 6 years at independent dealers which were recognized in several awards for stock picking ability. As a technology analyst, Mr. Astle has lead top ranked teams at major firms including Merrill Lynch and National Bank Financial. At Merrill Lynch, he led a global team that spanned three continents. Mr. Astle has covered many Canadian and US technology stocks over his career and presided over several of the key cycles the sector has seen. He holds both a CFA and P.Eng. designation.
About Difference Capital Financial Inc.
Difference Capital Financial Inc. invests in and advises growth companies. We leverage our capital market expertise to help unlock the value in technology, media and healthcare companies as they approach important milestones in their business lifecycle. Difference Capital Financial Inc. is traded under the Toronto Stock Exchange under the symbol “DCF”. http://www.differencecapital.com