Cord-cutting has been slowly growing, and that has begun to change how people consume television. The trend is speeding up, and a number of companies have become established in the space, while a few others have big plans to go after the growing market.
On this episode of Industry Focus: Tech, Dylan Lewis is joined by Motley Fool contributor Daniel Kline to dig into what's happening in the cable and streaming space in 2018. The discussion includes how Disney's(NYSE: DIS) purchase of parts of Fox (NASDAQ: FOX) will give it more presence in this space, including a controlling share in Hulu. In addition, the two talk about the wild card of T-Mobile's (NASDAQ: TMUS) decision to offer a television service and whether the U.S. market has become saturated for Netflix (NASDAQ: NFLX) and Amazon.com (NASDAQ: AMZN).
A full transcript follows the video.
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This video was recorded on Dec. 15, 2017.
Dylan Lewis: Dan, you teed up TV disruption. Why don't we start talking about that? In the past decade, the way people consume content has radically changed, I think it's pretty safe to say. You spend a ton of time covering cable and streaming tech, and this is one space that you think is going to be a major focus for the next year.
Dan Kline: The cable universe, as we've talked about endlessly for the last four years, has gotten smaller. And the pace of that is accelerating. That means that people who used to buy a traditional cable bundle are now cutting the cord or never opting to have cable, or they're going with alternative services. And as more and more services come out, that becomes more likely. If you look, we have a second home, and our second home, instead of cable, we have Netflix, we have Sling, we have Hulu, we have an antenna. So we got a little bit of live programming through Sling, can you get a couple of channels over the antenna, there's everything you can watch on Netflix, everything you can watch on Hulu. I have Amazon Prime, although aside from The Tick I don't think I've used it. And this is a space where there's five or six other players, the most interesting one being T-Mobile, that are going to come into it in the coming year.
Lewis: I'm with you, Dan. I'm someone that has high-speed internet. I recently moved. I have high-speed internet, I have Netflix, Amazon Prime, and my roommate has HBO Go. And between those three, we cover a lot of the programming that we want to watch. So I don't think that you and I are alone in that. In this space, what are the players that you're most interested in? You mentioned T-Mobile. Why specifically them?
Kline: There's two big changes that are coming. The first one is the Disney-Fox deal. The Disney-Fox deal will give Disney a controlling interest in Hulu. That could absolutely change due to regulatory concerns. They could have to cede control or agree to a split board. It's hard to know exactly what will happen. But Hulu offers live streaming, much like Sling TV, and its Netflix-like archival and original series. That will give Disney a platform to add to its own planned sports and entertainment offerings that will have live streaming TV. So really, you might be able to buy a $30 or $40 package from Disney that, it won't replace everything you have in cable, but it'll hit all the ages. You'll get the adult Marvel Disney shows, you'll get the kids' stuff with the Pixar, you'll get the live streaming stuff with the sports. So that's potentially the first package that a family can look at and say, "Wow, I don't need cable because I'm hitting all ages." And with Netflix, we don't know exactly what they're going to do. They just bought a company called Layer3. Layer3 was an alternative cable provider. It's an interface that allows you to have one log-in for Netflix, Hulu, all the different services, along with your cable properties. It's a premium property. In theory, T-Mobile will offer that both on a digital streaming basis over its phone network and as a wired service. What that's going to look like, what the prices are, it's hard to know. But when you look at what T-Mobile has done in the wireless carrier space, you can assume it's going to be very consumer-friendly. And their ability to market to their customer base could instantly get them up to speed.
Lewis: So, a lot of that centered on the domestic market. I look at Amazon and Netflix specifically in the streaming space, and it seems to me like with Netflix's users and Amazon Prime's users, they're inching closer and closer to saturation with paying members domestically. Looking broadly internationally, is that where the growth is going to be for these guys?
Kline: I think for Netflix, absolutely. Netflix has a huge first-mover advantage. There are a lot of markets where simply the concept of streaming television has not been fully embraced. In Japan, people are not paying for this content in the same fashion, so Netflix has some education to do. When you look at Amazon Prime, I think their issue is different. I think the best majority of people who buy Amazon Prime do not buy it for video. So, if they're hoping to grow with video, they still need their killer content. You look at a show like Transparent that won all sorts of awards and got all sorts of acclaim -- most reports said it was only watched by about a million people. That doesn't compare to, a hit show on a network might do 15 [million]-17 million. So, yes, there's absolutely growth potential with video as a driver for Amazon outside the U.S. And for Netflix at 50-something million in the U.S., yeah, they're going to need to keep growing in some new markets, and that's expensive, but clearly, it's been working so far.
Lewis: And, for Netflix, that means bespoke content, it means creating content specifically for certain geographies.
Kline: And even simply translating. House of Cards might be interesting, or Jessica Jones, as we talked about before, which has a lot of action, that works in any language, but you're probably going to want to watch it in your language, not with subtitles, and probably not in English.
Lewis: Dan, anything else with the cable space or the streaming space that you're looking at for 2018?
Kline: I'd be worried about big cable. Obviously, Comcast and Verizon and some of the other players have made up for cable losses with selling broadband internet, because you need broadband internet to get these cord-cutting services. The problem with that is, there could be an innovation that allows some other method of delivery. Whether it's Google blimps or Facebook comes up with something, there absolutely could be a disruptor there. But I don't like any of the begrudging skinny bundle offers that are being put out by Comcast or Charter. They clearly are married to an old model, just like they were married to a monopoly model, and I don't think they're going to move fast enough. Obviously, it's only a portion of Comcast's revenue, but I would be very worried about Charter as more and more people leave the traditional cable space.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Facebook. Dylan Lewis owns shares of Amazon, Facebook, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Facebook, Netflix, Verizon Communications, and Walt Disney. The Motley Fool recommends Comcast and T-Mobile US. The Motley Fool has a disclosure policy.
