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Weekly Issue: Streaming Services and the Middle Class Squeeze

Weekly Issue: Streaming Services and the Middle Class Squeeze

Key points inside this issue

  • Stocks continue to melt higher on hopes, but details will matter in the end
  • Our price target on Middle-Class Squeeze company Costco Wholesale (COST) remains $250.
  • Netflix: Mark your calendars for Apple and Disney events
  • Taking a look at LendingClub (LC) shares as consumer debt climbs

 

Sorry, we’re a day late with your weekly issue. I’m just back from InsideETFs 2019, the industry event for the exchange-traded (ETF) industry. This isn’t the first time I’ve attended the event, and attendees continue to hear about the uptake of ETFs, as well as the growing number of differentiated strategies to be had. Some, in my opinion, are faddish in nature, looking to capture assets even though their strategies may not be ones that survive more than a few years. We’ve got a long issue this week, so I’ll suffice to say that such ETFs are not thematic investing, but rather trend investing and we’re already starting to see several of those older trend products being repositioned to something else.

As we close out this week, we’ll be halfway through the first quarter of 2019. Hard to believe, as we have yet to go through the swarm earnings reports from retailers, but it’s true. Given what appears to be the rollbacking of items that weighed on the stock market during the last few months of 2018, we’ve seen all the major stock market indices rebound hard, even though the global economy continues to slow. Once again, this has made the US the best house in the neighborhood, which has likely bid up assets and made the dollar a headwind to multinational companies in the process. As we are fonding of saying, the devil is in the details and that includes any would be progress on US-China trade and Congress with immigration reform. We remain cautiously optimistic, especially on the China trade front, but recognize that more time is likely to be needed until a Trump-sized “big deal” can be reached.

As we get set for the second half of the quarter, we here at Tematica will continue to not only watch the data and our Thematic Signals to assess what’s the next likely step for the market from here, but also the happenings in Washington on trade and infrastructure.

 

Tematica Investing

Odds are, the Thematic Leaders have seen some lift from the sharp rebound in the market thus far in 2019. As we can see in the chart above, several of them are going gangbusters, including Chipotle Mexican Grill (CMG), Netflix (NFLX), Alibaba (BABA) and Axon Enterprises (AXXN). This morning we’ll get the first Retail Sales report since before the federal government shutdown, and in my view, it will more than likely continue to show what it did during all of 2018 – digital shopping taking share and Middle-Class Squeeze leader Costco Warehouse (COST) continuing to win consumer wallet share.

On a reported basis, Costco’s January same-store sales rose 6.6% (7.3% excluding the impact of gasoline prices and foreign exchange). Exiting the month, Costco operated 768 warehouse locations vs. 746 this time last year, a 3% year over year, which reflects its stated path to open more locations in 2019, allowing for the steady growth of its high margin membership fee revenue stream. In my view, this lays the groundwork for a favorable earnings report from Costco on March 7, which is also when it will publish its February sales results.

  • Our price target on Middle-Class Squeeze company Costco Wholesale (COST) remains $250.

 

Netflix: Mark your calendars for Apple and Disney

While we have our calendars out and are marking them for that upcoming Costco date I mentioned early, let’s also circle March 25th, which is the rumored date of Apple’s next event. Per the Apple rumor mill, the company will not only showcase its new news subscription service (say that three times), but also unveil its video service as well. This video service falls into the category of one of the best, worst kept secrets, given the number of deals it has inked for original shows and movies. The news subscription service, which is expected to be called Apple News Magazines, comes after Apple acquired Texture, the would-be Netflix (NFLX) of magazines last year.

While we could see a new device or two, this event will be focused primarily on Apple’s Services business, which it is using to further its position inside our Digital Lifestyle investing theme.  Much like Proctor & Gamble’s (PG) Gillette razor blade business, I would not be surprised if Apple adopts a similar mindset with its devices being the razor that gets replaced periodically, while its far more profitable Services business is the one that people consume on a frequent basis.

Soon after Apple’s event, Disney will hold its annual Investor Day on April 11th at which it is expected to unveil its much discussed, but yet to be seen Disney streaming service dubbed Disney+. Given its robust library of films, content, and characters, Disney should not be underestimated on this front, and in my view much like Apple and its Services business, success with Disney+ could change the way Wall Street values DIS shares. Key items to watch will be the Disney+ price point, original content rollout, and subscriber growth.

Stepping back, if one were to argue that we are on the path to a crowd of streaming services between Netflix, Amazon (AMZN), Hulu, CBS, NBC, AT&T (T), and now Apple and Disney, I would have to agree. In many ways, we’re heading for cable-TV without the cable box, but on an ala carte basis. While we’ve argued that consumers will go to where there is great content, the more streaming services there are the more likely we see the proliferation of good or not so good content. The risk they run is that just like cable channels that need to be filled with content, so too will their streaming services. Also too, one unknown is how many services will a person subscribe to? Past a certain point, consumers will balk, especially if all they’ve succeeded in doing is replicating that high cable bill they sought to originally sought to escape.

Needless to say, I’ll be watching the unveiling and uptake of these new services from Apple and Disney with an eye for what it may mean for Digital Lifestyle company Netflix (NFLX). One interesting item to watch will be to see what is actually included in the Disney and Apple services at launch and over time. Both companies are rumored to be working on streaming gaming services as are Microsoft (MSFT) and Alphabet (GOOGL), which to date is something Netflix has resisted at least publicly. If Apple were to bundle a gaming, video and news service along with Apple Music into one digital content bundle, that would offer some consumer wallet leverage over other single, stand-alone services.

 

Taking a look at LendingClub shares

Earlier this week, Tematica’s Chief Macro Strategist Lenore Hawkins posted a Thematic Signal for our Middle-Class Squeeze investing theme following the news that a record 7 million Americans are 90 days or more behind on their auto loan payments. Lenore went on to show some additional data that consumer loans from banks are in contraction mode, which as we know is a sign the US economy is not going gangbusters.

What we are seeing is the consumer looking to get their financial house in order, most likely after ringing up credit card, auto loan and student debt over the last several quarters. A new report from LendingTree (TREE) points to total credit card debt having climbed to more than $1 trillion in under five years, with more people using personal loans to manage existing debt. This has led the amount owed on personal loans to double what it was five years ago and the number of outstanding loans to rise some 50% in the last three years. According to the report’s findings, managing existing debt was the most popular reason for a personal loan, representing 61% of all loan requests in 2018. Of that percentage, 39% of borrowers plan to use their loans to consolidate debt, while 22% planned to use it to refinance credit cards.

From a stock detective’s point of view, the question to ask is what company is poised to benefit from this aspect of our Middle-Class Squeeze investing theme?

One candidate is LendingClub (LC), which operates an online credit marketplace that connects borrowers and investors in the US. It went public a few years ago and was heralded as a disruptive business for consumers and businesses to obtain credit based on its digital product offering. That marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, unsecured education and patient finance loans, auto refinance loans, and unsecured small business loans. The company also provides an opportunity to the investor to invest in a range of loans based on term and credit.

Last year 78% of its $575 million in revenue was derived from loan origination transaction fees derived from its platform’s role in accepting and deciding on applications on behalf of the company’s bank partners. More than 50 banks—ranging in total assets of less than $100 million to more than $100 billion—have taken advantage of LendingClub’s partnership program.

LendingClub’s second largest revenue stream is derived from investors fees, which include servicing fees for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on the company’s balance sheet.

In the past LendingClub was tainted with uncertainty given several investigations, but in mid-December, it settled with the SEC and DOJ, with the SEC stating:

“The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.”

The SEC’s comments are a positive affirmation of the company’s internal procedures and policies, which also helps reduce the potential negative impact from the still-remaining Federal Trade Commission complaint. The FTC’s complaint against LendingClub charged it has misled consumers and has been deducting hidden fees from loan proceeds issued to borrowers.

Those recent developments have improved the company’s risk profile at a time when its core business has been growing given Middle-Class Squeeze pains being felt by more consumers. According to data TransUnion, subprime personal loan balances have been climbing since 2014 and are forecast to increase 20% this year to a record $156.3 billion.

Here’s the thing, the year-end shopping season isn’t just for shopping,  it’s also the seasonally strongest time of year for subprime loan originations, which according to TransUnion rose to 5 million loans at the end of 2018. That sets up what is likely to be a favorable December quarter earnings report from LendingClub when it issues those results next week (Tuesday, Feb. 19). The thing is I continue to see far more upside to be had with Middle-Class Squeeze Thematic Leader Costco Wholesale, which is not only growing its very profitable membership fee income stream the company is also a dividend payer.

 

Tematica Investing: Thematic Tailwinds for 2019 and Scaling into AXON

Tematica Investing: Thematic Tailwinds for 2019 and Scaling into AXON

 

Key Points Inside this Issue:

Last Friday’s favorable December Employment Report showed the domestic economy is not falling off a cliff and comments by Fed Chair Jay Powell reflected that the central bank will be patient with monetary policy as it watches how the economy performs. Those two things kicked the market off on its most recent three-day winning streak as of last night’s close. In many ways, Powell gave the market what it was looking for when he shared the Fed will remain data dependent when it looks at the economy and its next step with monetary policy.

Taking a few steps back, we’ve all experienced the market volatility over the last several weeks as it contends with a host of issues that we here at Tematica have laid out through much of the December quarter. These include:

  • U.S.-China trade issues
  • The slowing economy
  • A Fed that could boost rates twice in 2019 and continues to unwind its balance sheet
  • Brexit and political uncertainty in the Eurozone
  • And more recently the government shutdown.

These factors have led investors to question growth prospects for the global as well as the domestic economy and earnings in 2019.

Powell’s comments potentially take one of those issues off the table at least in the short-term. If the economy continues to deliver job creation as we saw in December, with some of the best year-over-year wage gains we’ve seen in years, before too long the Fed-related conversation could very well turn from two rate hikes to three.

Currently, that isn’t what the market is expecting.

The reason it isn’t is that outside of the December jobs report, data from ISM and IHS Markit continued to show a decelerating global and U.S. economy. With new orders and backlog levels falling, as well as pricing-related data, it likely means we won’t see a pronounced pickup in the January data. The JPMorgan Global Composite Output Index for December delivered its lowest reading since September 2016 due principally to the slowdown in the eurozone. Rates of expansion slowed in Germany (66-month low) and Spain (three-month low), while Italy stagnated. China, the UK, and Brazil all saw modest growth accelerations.

 

Despite the month over month declines in the December data for the US, it was the best performer on a relative basis even though the IHS Markit Composite PMI reading for the month hit a 15-month low. A more sobering view was shared by Chris Williamson, Chief Business Economist at IHS Markit who said:

“Manufacturers reported a weakened pace of expansion at the end of 2018, and grew less upbeat about prospects for 2019. Output and order books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years.”

That should give the Fed some room to hold off boosting rates, but it also confirms the economy is decelerating, which will likely have revenue and earnings guidance repercussions in the upcoming December-quarter earnings season.

There are several catalysts that could drive both the economy and the stock market higher in the coming months. These include a “good deal” resolution to the U.S.-China trade situation and forward movement in Washington on infrastructure spending. This week, the US and China have met on trade and it appears those conversations have paved the way for further discussions in the coming weeks. A modest positive that has helped drive the stock market higher this week, but thus far concrete details remain scant.

Such details are not likely to emerge for at least several weeks, which means the next major catalyst for the stock market will be the upcoming December quarter earnings season that begins in nine trading days.

 

Earnings expectations are being revised lower

Facing a number of risks and uncertainties over the last several weeks, investors have once again questioned growth prospects for both the economy and earnings growth for 2019. The following two charts – one of the Citibank Economic Surprise Index and one showing the aggregate profit margin for the S&P 500 companies – depict what investors are grappling with weaker than expected economic data at a time when corporate operating margins have hit the highest levels in over 20 years.

While expectations for growth in both the domestic economy and earnings for the S&P 500 have come in compared to forecasts from just a few months ago, the current view per The Wall Street Journal’s Economic Forecasting Survey calls for 2019 GDP near 2.3% (down from 3.0% in 2018) with the S&P 500 group of companies growing their collective EPS by 7.4% year over year in 2019.

 

Here’s the thing, in recent weeks, analysts lowered their earnings estimates for companies in the S&P 500 for the December quarter by roughly 4% to $40.93. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all the companies in the index) dropped by 4.5% to $40.63. In the chart below, you can see this means quarter over quarter, December quarter earnings are expected to drop breaking the typical pattern of earnings growth into the last quarter of the year. What you can’t see is that marks the largest cut to quarterly S&P 500 EPS estimates in over a year.

 

 

Getting back to that 7.4% rate of earnings growth that is currently forecasted for 2019, I’d call out that it too has been revised down from 9% earlier in the December quarter. That new earnings forecast is a far cry from 21.7% in 2018, which was in part fueled by a stronger economy as well as the benefits of tax reform that was passed in late 2017. As we all know, there that was a one-time bump to corporate bottom lines that will not be repeated this year or in subsequent ones. The conundrum that investors are facing is with the market barometer that is the S&P 500 currently trading at 15.9x consensus 2018 EPS of $161.54, the factors listed above have investors asking what the right market multiple based on 2019’s consensus EPS of $173.45 should be?

And while most investors don’t “buy the market,” its valuation and earnings growth are a yardstick by which investors judge individual stocks.

 

Thematic tailwinds will continue to drive profits and stock prices

One of the key principles to valuing stocks is that companies delivering stronger EPS growth warrant a premium valuation. Of course, in today’s stock buyback rampant world, that means ferreting out those companies that are growing their net income. My preference has been to zero in on what is going on with a company’s operating profit and operating margins given that their vector and velocity are the prime drivers of earnings. That was especially needed last year given the widespread bottom-line benefits of tax reform.

At the heart of it, the question is what is driving the business?

As I’ve shared before, sector classifications don’t speak to that as they are a grouping of companies by certain characteristics rather than the catalysts that are driving their businesses. As we’ve seen before, some companies, such as Amazon (AMZN) or Apple (AAPL) capitalize on those catalysts, while others fail to do so in a timely manner if at all. Sears (SHLD), JC Penney (JCP) are easy call outs, but so are Toys R Us, Bon-Ton Stores, Sports Authority, Blue Apron (APRN), and Snap (SNAP) to name just over a handful.

Very different, and we can see the difference in comparing revenue and profit growth as well as stock prices. The ones that are performing are responding to the changing landscapes across the economic, demographic, psychographic, technological, regulatory and other playing fields they face. In short, they are riding the thematic tailwinds that we here at Tematica have identified. As a reminder those themes are:

 

As we move into 2019, I continue to see the tailwinds associated with those themes continuing to blow hard. Despite all the vain attempts to fight it temporarily, there is no slowing down the aging process. Consumers continue to flock to better for you alternatives, and as you’ll see below that has led Thematic Leader Chipotle Mexican Grill (CMG) to bring a new offering to market.

As we saw this past holiday shopping season, consumers are flocking more and more to digital shopping while hours spent streaming content continue to thwart broadcast TV and the box office. This year 5G networks and devices will become a reality as AT&T (T), Verizon (VZ) and others launch those commercial networks. The legalization of cannabis continues, and consumers continue to consume chocolate, alcohol and other Guilty Pleasures.

Whether you are Marriott International (MAR), Facebook (FB), British Airways or the Bridgeport School System, cyber threats continue to grow and as we saw last night during the presidential address and Democratic response, border security be it through a wall, technology or other means is a pain point that needs to be addressed. While the last two monthly Employment Reports have shown some of the best wage gains in years, Middle-class Squeeze consumers continue to face a combination of higher debt and interest rates as well as rising healthcare costs and the need to save for their golden years that will weigh on the ability to spend.

Like any set of winds, there will be times when some blow harder than others. For example, as we peer into the coming year the launch of 5G networks and gigabit ethernet will likely see the Digital Infrastructure tailwind accelerate in the first half of the year as network and data center operators utilize the services of companies like Thematic Leader Dycom Industries (DY) to build the physical networks. Some tailwinds, such as those associated with Aging of the Population, Clean Living and Middle-class Squeeze are likely to be more persistent over the coming year. Other tailwinds will gust hard at times almost seemingly out of nowhere reminding that they have been there all along. Given the nature of high profile cyber attacks and other threats, that’s likely to once again be the case with Safety & Security.

The bottom line is this – the impact to be had of the tailwinds associated with our 10 investment themes will continue to be felt in 2019. They will continue to influence consumer and business behavior, altering the playing field and forcing companies to either respond or not. The ones that are capitalizing on that changing playing field and are delivering pronounced profit growth are the ones investors should be focusing on.

 

TEMATICA INVESTING 

Scaling into AAXN, and updates on NFLX, CMG, and DFRG

As I discussed above, the December quarter was one of the most challenging periods for the stock market in some time. Even though we are just over a handful of days into 2019, we’re seeing the thematic tailwinds blow again on the Thematic Leaders with 9 of the 11 positions ahead of the S&P 500. Yes, we’re looking pretty good so far but it’s too early in the year to start patting our backs, especially with the upcoming earnings season. Odds are Apple’s (AAPL) negative preannouncement last week won’t be the only sign of misery to be had, and that’s why I’m keeping the ProShares Short S&P 500 ETF (SH) active for the time being. As I shared with you last week, while Apple and others are contending with a maturing smartphone market, I continue to like the long-term Digital Lifestyle aspects as it moves into streaming content and subscription-related businesses.

Of those 9 companies that are ahead of the S&P 500, as you can see in the table above, there are several that are significantly outperforming the market in the brief time that is 2019. These include Netflix (NFLX) shares, Axon Enterprises (AAXN), and Chipotle Mexican Grill (CMG)  as well as Del Frisco’s (DFRG).

After falling just over 28% in the December quarter as investors gave up on the FANG stocks, as of last night’s market close Netflix shares are up 20% so far for the new year. Spurring them along have been favorable comments and a few upgrades from the likes of Piper Jaffray, Barclays, Sun Trust, and several other investment banks. From my perspective, even though Netflix will face a more competitive landscape as AT&T (T), Disney (DIS), Hulu, Amazon (AMZN), Google (GOOGL), Facebook (FB), and Apple (AAPL), it has a substantial lead in the original content race over the likes of Facebook, Apple, Google and Amazon.

Candidly, only AT&T given its acquisition of Time Warner, and Disney, especially once it formally acquires with the movie, TV and other content from 21stCentury Fox (FOXA), will be streaming content contenders in the near term. And Disney is starting from scratch while AT&T lags meaningfully behind Netflix in terms of not only overall subscribers but domestic ones as well. For now, the digital streaming horse to play remains Netflix, especially as it brings more content to its service for both the US and international markets, which should drive its global subscriber base higher.

 

New bowls at Chipotle signal the Big Fix continues

Since its beginnings, Chipotle has been at the forefront of our Clean Living investing theme, but last week it took another step to attract those who are aiming to eat healthier when it introduced a line of Lifestyle Bowls. These included Keto, Paleo, Whole30, and Double Protein versions are only available through the company’s mobile app and the Chipotle website. Clearly, the new management team that arrived last year understands the powerful tailwind associated with our Digital Lifestyle investing theme. More on those new bowls can be found here, and we expect to hear more on the management team’s Big Fix initiatives when the company presents at the ICR Conference on Jan. 15.

 

Adding to Axon Enterprises as EPS expectations move higher

When we added shares of Axon Enterprises to the Thematic Leaders for the Safety & Security slot, we noted the company’s long reach into US police departments and other venues that should drive adoption of its newer Taser units but more importantly its body cameras and digital storage businesses. In the company’s November earnings report we saw that positive impact as its Axon Cloud revenue rose 47% year over year to $24 million, roughly $24 million or 23% of revenue vs. 18% in the year-ago quarter. Even better, the gross margin associated with that business has been running in the mid 70% range over the last few quarters, well above the corporate gross margin average of 36%-37%. Over the last 90 days, we’ve seen Wall Street boost its EPS forecasts for the company to $0.77 for 2018, up from $0.52, and to $0.92 for 2019 up from $0.73.

Even though we AAXN shares are on a roll thus far in 2019, the position is still in the red since joining the Thematic Leaders. Against the favorable tailwind of our Safety & Security investing theme and rising EPS expectations, we will scale into AAXN shares at current levels, which will drop our cost basis to around $61 from just under $73. Our $90 price target remains intact.

  • We are scaling into shares of Safety & Security Thematic Leader Axon Enterprises (AXON) at current levels, which will dramatically improve our cost basis. Our $90 price target remains intact.

 

Del Frisco’s shares jump on takeout speculation

Over the last few weeks, there has a sizable rebound in the shares of high-end restaurant name Del Frisco’s Restaurant Group. Ahead of the year-end 2018 holidays, the company’s board of directors was the recipient of activist investor action from Engaged Capital. During the holiday weeks, the company shared it has hired investment firm Piper Jaffray to “review and consider a full range of options focused on maximizing shareholder value, including a possible sale of the Company or any of its dining concepts.”

In other words, Del Frisco’s is putting itself in play. Often this can result in a company being taken out either by strategic investors, private equity or a combination of the two. There is also the chance a company going through this process is not acquired due primarily to a mismatch between the potential buyer(s) and the board on price as well as underlying financing.

From my perspective, 2018 was a challenging year for Del Frisco’s as it repositioned its branded portfolio. This included the sale of Sullivan’s Steakhouse and the acquisition of Barteca Restaurant Group, the parent of both Bartaco and Barcelona restaurants.

Transitions such as these can be challenging, and in some cases, the benefits of the transformation may take longer to emerge than planned. That said, given the data we’ve discussed previously on the recession-resistant nature of high-end dining, such as at Del Frisco’s core Double Eagle Steakhouse and Grille, we do think the company would be a feather in the cap for another restaurant group. As we noted when we added DFRG shares to the Thematic Leaders, there are very few standalone public steakhouse companies left — the vast majority of them have been scooped up by names such as Landry’s or Darden Restaurants (DRI).

From a fundamental perspective, the reasons why we are bullish on Del Frisco’s are the same ones that make it a takeout candidate. While we wait and see what emerges on the bid front, I’ll be looking over other positions to fill DFRG’s slot on the Thematic Leaders should a viable bid emerge.  Given the company’s restaurant portfolio, the continued spending on high-end dining and its recession-resistant nature, odds are rather high of that happening.

  • Our price target on Del Frisco’s Restaurant Group (DFRG) remains $14.

 

 

AT&T and Time Warner launch WatchTV, with new unlimited data plans

AT&T and Time Warner launch WatchTV, with new unlimited data plans

The dust has barely settled on the legal ruling that is paving the way for AT&T (T) to combine with Time Warner (TWX), and we are alread hearing of new products and services to stem from this combination. No surprise as we are seeing a blurring between mobile networks and devices, social media and content companies as Apple (AAPL), Facebook (FB), Google (GOOGL) and now AT&T join the hunt for original content alongside Netflix (NFLX), Amazon (AMZN), and Hulu, which soon may be controlled by Disney if it successfully fends of Comcast to win 21st Century Fox.

While we as consumers have become used to having the content I want, when I want it with Tivo and then the content I want, when I want it on the device I want it on with streaming services, it looks now like it will be “the content I want, when I want it, on the device I want on the platform I choose.” All part of the overlapping to be had with our Connected Society and Content is King investing themes that we are reformulating into Digital Lifestyle – more on that soon.

In short, a content arms race is in the offing, and it will likely ripple through broadcast TV as well as advertising. Think of it as a sequel to what we saw with newspaper, magazine and book publishing as new business models for streaming content come to market… the looming question in my mind is how much will today’s consumer have to spend on all of these offerings before it becomes too pricey?

And what about Sprint (S) and T-Mobile USA (TMUS)…

 

Taking advantage of the recent approval of its merger with Time Warner, AT&T on Thursday announced WatchTV, a new live TV service premiering next week — and initially tied to two new unlimited wireless data plans.

WatchTV incorporates over 30 channels, among them several under the wing of Time Warner such as CNN, Cartoon Network, TBS, and Turner Classic Movies. Sometime after launch AT&T will grow the lineup to include Comedy Central, Nicktoons, and several other channels.

People will be able to watch on “virtually every current smartphone, tablet, or Web browser,” as well as “certain streaming devices.” The company didn’t immediately specify compatible Apple platforms, but these will presumably include at least the iPhone and iPad, given their popularity and AT&T’s long-standing relationship with Apple.

The first data plan is “AT&T Unlimited &More”, which will also include $15 in monthly credit towards DirecTV Now. People who pay extra for “&More Premium” will get higher-quality video, 15 gigabytes of tethered data, and the option to add one of several “premium” services at no charge — initial examples include TV channels like HBO or Showtime, and music platforms like Pandora Premium or Amazon Music Unlimited.

&More Premium customers can also choose to apply their $15 credit towards DirecTV or U-verse TV, instead of just DirecTV Now.

WatchTV will at some point be available as a $15-per-month standalone service, but no timeline is available.

Source: AT&T uses Time Warner merger to launch WatchTV, paired with new unlimited data plans

All those streaming services can add up to serious $$

All those streaming services can add up to serious $$

We continue to hear more and more about chord cutting as consumers increasingly to over the top and streaming vidoe services and they shift how, where and when they consume that content. Given the Content is King perspective that we have, it comes as little surprise to see that consumers are utilizing multiple platforms because they want the content they want – plain and simple.

While it’s one thing to have one or two streaming services, as companies like Apple and Disney/ESPN follow Netflix, Amazon, Hulu and others  the content game,  it means consumers could very well see their montly content bill soon rival the monthly cable bill they were looking to avoid. If we game it out, it means either consumers will swallow and pay those bills or as we have seen with in other industries market share will consolidate around less than a handful of providors. In many ways this will be the same evolution the internet went through over the last decade plus, the only difference is it will be unfolding not on the PC but across all of our other connected devices.

No matter what type of media consumer you are, there’s a difference between paying $13.99 per month for Netflix and the thousands of dollars you will be paying per year when you add up all the streaming services you will probably want to subscribe to. And that doesn’t even include the $40 to $300+ per month you will have to spend on broadband access. Let’s have a look at the various ways you might spend your streaming media dollars.

Movies, TV, and Video Streaming Services … Oh, My!

The rise of video streaming services has given us a world of alternatives to traditional cable and satellite video providers. Whether you’re a cord-cutter (ditching cable in favor of streaming services), a cord never (someone who’s never paid a cable provider for monthly services), or a cord plus (someone who pays for cable plus services like Netflix or Hulu), you’re likely paying for at least some of these services:

  • Netflix – $13.99/month ($10.99/month without 4K)
  • Hulu – $11.99/month ($9.99/month with ads)
  • Amazon Prime Video – $13/month (includes free shipping on Amazon purchases)
  • CBS All-Access – $9.99/month ($5.99/month with ads)
  • HBO Now – $14.99/month
  • Showtime Anytime – $10.99/month
  • Starz Play – $8.99/month
  • YouTube Premium – $11.99/month

What started out as an inexpensive way to replace trips to Blockbuster (or to keep you from buying DVDs) has turned into a battleground for your eyes and your wallet. And if you’ve got TV FOMO? Forget about it. Almost every service offers at least some awesome original content. We are lucky to be living in the Platinum Age of video storytelling.

I paid $99 for the first year of CBS All-Access, just to watch Star Trek: Discovery. Is that a smart financial decision? No! Is it worth it? For me it is, because I am a die-hard Star Trek fan and Discovery is awesome!

What further complicates the issue is the ever-changing landscape of rights ownership. Want to binge Parks and Recreation? Better sign up for Netflix. Oh, it’s on Hulu now? Better pay for that, too. Sure, you could buy the complete series on DVD for less than $50, but are you really going to get up from the couch and walk over to the DVD player 21 times to swap out the discs?

Source: Streaming Sticker Shock – Shelly Palmer

Disney’s buying Fox has a Connected Society appeal

With consumers increasing shifting their content consumption to streaming services, be it online or via mobile, we are seeing a number of moves by companies to position themselves accordingly. AT&T (T) is looking to buy Time Warner (TWX), Alphabet (GOOGL) is expanding the reach of YouTubeTV and Apple (AAPL) is hiring programming talent. Amid all of this, Disney scooped up key content assets of Twenty-first Century Fox (FOXA) this week, a long-time strategy of the House of Mouse, but it also acquired the controlling interest in stream service Hulu.

That extra nugget could radically change and potentially accelerate Disney’s already announced plan to launch its own set of streaming services, one for Disney content and the other for ESPN. We see this as a potential gamechanger that also adds our Connected Society tailwind to the Content is King company that is Disney.

 

The deal puts Fox’s movie studio, 20th Century Fox, under the Disney umbrella, bringing with it the studio’s intellectual property. Having 20th Century Fox’s “X-Men” and “Avatar” under the same roof as Disney’s “The Avengers” and “Star Wars” could have huge ramifications in both the streaming world and the film industry.

Disney announced in August that it will pull its content from Netflix, effectively ending its relationship with the streaming service to start its own in 2019. This means Netflix users will no longer be able to watch content from Lucasfilm, Marvel, Pixar and Disney Animation.The deal between the two media giants means that Disney’s streaming service will include its own deep vault of intellectual property, as well as Fox’s decades of popular franchises, which would most likely get pulled from streaming competitors.

As much as this deal is about the content that Disney would be getting from Fox, it’s also about content competitors like Netflix would not.The deal also means Fox’s stakes in Hulu now belong to Disney, which already has an equal stake along with Comcast. With a majority stake in Hulu, Disney could change the award-winning streaming service’s offerings.

Source: What the Disney-Fox deal means for Marvel, ‘Avatar,’ and streaming – Dec. 14, 2017

The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

After days of speculation, Content is King champ Walt Disney (DIS) formally announced it was acquiring the film, television and international businesses of Twenty-First Century Fox Inc (FOXA) for $52.4 billion in stock. Viewed through our thematic lens, Disney is once again expanding its content library, which means that finally the X-Men and other characters will be reunited with their Marvel brethren under one roof. As the inner comic book geek in me sees it, perhaps we will know get the X-Men movie we deserve.

While I only half kid about the comic book potential of the deal, the reality is the transaction expands Disney’s reach to include movies, TV production house, a 39% stake in Sky Plc, Star India, and a lineup of pay-TV channels that include FX, National Geographic and regional sports networks. Via a spinoff, Rupert Murdoch will continue to run Fox News Channel, the FS1 sports network and the Fox broadcast network in the U.S.

Viewing the combination through our Connected Society thematic lens, we see the move by Disney as solidifying not only its streaming content business but its streaming platform potential as well. Recently Disney shared that over the next few years it would launch its own streaming services, one for Disney content and one for ESPN, in order to better compete with frenemy Netflix (NFLX), Amazon (AMZN) and other streaming initiatives at Alphabet (GOOGL), Facebook (FB) and the burgeoning one at Apple (AAPL). Let’s remember these streaming services are all embracing our Content is King investing theme as they bring their own proprietary content to market to lure new subscribers and keep existing ones. We have previously shared our view that we are in a content arms race, and acquiring these Fox assets certainly adds much to the Disney war chest once the deal is completed in the next 12-18 months.

The added Connected Society benefit to be had in acquiring Fox is it ups Disney to a controlling interest in streaming service Hulu, which has roughly 12 million streaming subscribers and 250,000 subscribers for its new live TV streaming offering — the online TV package that replicates a small cable bundle. Hulu used to have three different bosses — Disney, Fox, and Comcast (CMCSA) — each owning an equal stake. Following the Disney-Fox deal, odds are Comcast’s role in Hulu will diminish and over time I would not be surprised to see Disney acquire that ownership piece as well. What this does is quickly lay a solid foundation for Disney’s streaming service plans, and I would not be shocked to see Disney convert Hulu into its own branded streaming service once the Fox acquisition closes.

From a thematic investing perspective, the Disney-Fox combination is a win-win on several levels, even though Disney is spending quite a bit of capital to get it done. The reality is there is no better company at monetizing its content and squeezing dollars from consumer wallets and in the coming quarters, Disney will have two very strong thematic tailwinds behind it — a more solidified Content is King tailwind and a burgeoning Connected Society tailwind keeping its sails full.

Near-term, this weekend is the domestic opening of the next Star Wars movie – initial reviews are very positive and advance ticket sales indicate a $200 million opening weekend or better.

  • We continue to rate Disney (DIS) shares a Buy, and our long-term price target remains $125

 

Nielsen to measure Connected Society streaming content, viewers

Nielsen to measure Connected Society streaming content, viewers

Given the growing number of cord-cutters in the U.S. as more shift from broadcast TV to a variety of streaming services, Nielsen (NLSN) is pivoting its business model to ride this Connected Society tailwind. Give the enormous pool of advertising dollars that are at stake given the shift in viewer consumption habits it makes perfect sense that Nielsen would look to remain relevant lest it sees this revenue stream evaporate alongside the number of people still watching broadcast TV.  As the new ratings are tallied and compared, we suspect that Nielsen’s findings will confirm our Content is King investment theme as well.

Nielsen is hoping to make the viewership numbers for the shows airing on streaming services a little less of a mystery. The company is today announcing a new service, Nielsen Subscription Video On Demand (SVOD) Content Ratings, to measure streaming services’ programs in a way that’s comparable to linear TV. That includes ratings, reaches, frequency and segmentation reporting, Nielsen says.In other words, the service won’t just track the number of people streaming a show, but the audience makeup as well – like the viewers’ ages, for example. It will also help content producers track their shows’ full lifecycle – from airing on TV, to time-shifted viewing via DVRs and other on-demand options to streaming services.

Nielsen’s new offering initially only works with Netflix, but expects to add Amazon Prime and Hulu in 2018.

Source: Nielsen will now measure TV audiences on Netflix | TechCrunch

Verizon to join AT&T, Comcast and others with its streaming TV service

Verizon to join AT&T, Comcast and others with its streaming TV service

Following in the footsteps of HBO, AT&T, and Comcast, it’s looking like Verizon wants to appeal to the watch what I want, when I want, where I want Connected Society viewer. More competition should serve to improve choice, price and programming choices, and hopefully lower cable bills as well. The question is what does this mean for Hulu?

AT&T will soon have competition for its DirecTV Now service, according to a Bloomberg report, which says that Verizon is preparing to launch its own service in the summer. Verizon Communication…

Verizon Communications Inc. has been securing streaming rights from television network owners in preparation for the nationwide launch of a live online TV service, according to people familiar with the matter. The telecommunications giant plans to start selling a package with dozens of channels this summer.

Source: Verizon launching its own streaming TV service in the summer as net neutrality under threat | 9to5Mac

More U.S. Households Now Have Netflix Than a DVR… Who Even Has a DVD Player Anymore?

More U.S. Households Now Have Netflix Than a DVR… Who Even Has a DVD Player Anymore?

The power of streaming the content you want, when you want it on the device you prefer is not to be underestimated. It’s been a sea-change in how people consume content, and that has led to a shift in the hardware that people use. With Netflix outstripping digital video recorders (DVRs), we have to question how much longer companies will manufacture those devices, which could be problematic for Tivo, a company that has already been contending with built-in DVR functionality inside digital cable set-top boxes. With Google set to unveil a TV streaming service with DVR functionality in the Cloud, it’s looking more and more like the only streaming hardware we may need will be smartphones, tablets, and smart TVs…. no good for all that cable set-top box subscription fee revenue at Comcast and others. Technology evolution…. a great tailwind for some, and a painful headwind for others.

Netflix has hit a new milestone: More U.S. television households now have the streaming service than a digital video recorder, according to a recent study.

About 54% of U.S. adults said they have Netflix in their household — while 53% have a DVR, according to Leichtman Research Group’s annual on-demand study. It’s the first time that households with Netflix (including those that use shared accounts) have surpassed the level of those with a DVR in the history of LRG’s studies. In 2011, according to the research firm, 44% of TV households had a DVR and 28% had Netflix.

Netflix has now eclipsed DVR usage despite the latter having a years-long head start. TiVo’s first digital video recorder shipped in 1999, while Netflix debuted its video-streaming service in 2007 and started the shift away from its DVD-by-mail business. As of the end of 2016, Netflix had 49.4 million streaming subscribers in the U.S., up 10.5% year over year.

Overall, 64% of respondents said they get a subscription video-on-demand service from Netflix, Amazon Prime Video, and/or Hulu.

Source: More U.S. Households Now Have Netflix Than a DVR | Variety

Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

There is little question that streaming content is altering the playing the field, not just how people consume audio and video content, but increasingly where certain content can be found. First, it was movies, then TV shows, but as back catalogs were seemingly pervasive, streaming services like Netflix, Hulu, and Amazon have looked to differentiate themselves through proprietary content. It used to be as Bruce Springsteen sang, “57 channels and nothin’ on,” but that has morphed into hundreds of channels that need to be filled. The end result is an arms race for quality content that is likely to hasten the switch to streaming video services from traditional broadcast and cable networks. If asked, “What’s wrong with that?” for Seinfeld jumping ship to Netflix, we would say nothing… nothing at all.

Jerry Seinfeld is headed for Netflix.The comedian has signed a multifaceted production deal with the streaming giant, The Hollywood Reporter has learned. Under the pact, Seinfeld’s award-winning Crackle series Comedians in Cars Getting Coffee will move with new episodes to Netflix, with the comedian also set to film two new stand-up specials exclusively for the streamer.

The Seinfeld deal marks the latest investment in comedy for Netflix, which also shelled out $20 million each for a pair of Chris Rock stand-up comedy specials. Netflix’s entry into the stand-up space has created a growing arms race to land top talent in an increasingly competitive landscape against featured players Comedy Central, Showtime and HBO, among others. Other comedians who recently have gone to Netflix include Amy Schumer, who made a name for herself via Comedy Central, and Dave Chappelle.

The deal is a blow to Sony Pictures Television’s little-watched streaming service Crackle, which had been the exclusive home for Comedians in Cars, with Seinfeld’s deal with the independent studio expiring.

Source: Jerry Seinfeld Teams With Netflix for Two Stand-Up Specials, More ‘Comedians in Cars’ | Hollywood Reporter