Laura Martin, Needham & Co. Senior Media and Internet Analyst, outlines how Big Tech investments in sports streaming and digital advertising could offset competition between streaming platforms.
- Competition in streaming is heating up. A new note out from Needham making the case that the entry of Apple and Amazon into the sports bidding wars and ad-driven business models is a threat to all streamers. Let's talk about this with the analyst behind the note, Laura Martin. We're also joined by Yahoo Finance reporter Josh Schafer. Laura, it's good to see you again. So Apple and Amazon getting an even bigger presence in this space, obviously a huge threat here to others in the industry. Break this down, though, just in terms of how big of a threat, and specifically with the ad-supported tier and the ad business.
LAURA MARTIN: So specifically on advertising, Apple is posting hirings to build its ad-driven business. As you know, their services business is about-- has 70% margins, so they're really looking at growing that business because today it's about 15% of Apple's total revenue. But it's a really fast driver of EPS. So when you think about Apple and how big it is, it's very hard to find total addressable market sizes that would actually move the needle on making it be able to drive its EPS growth, and digital advertising is one of them. It's a $600 billion a year global advertising revenue line with 70% margins. So the fact they're adding advertising makes a ton of sense to us.
And of course, where advertising is going, mobile advertising is about $400 billion a year globally, so they're going to go after that. Well, that means anybody who was sitting in those ecosystems last year is now under a bigger threat from a walled garden called Apple with best-in-class consumer data that it can get privacy permissions from every one of its customers, because when you turn on your Apple phone, it can ask can ask you for your privacy permissions. So this is a really important new competitor in the advertising space over the next three years, we think.
JOSH SCHAFER: And Laura, I wanted to get your take too when you mention the sports streaming here, and Apple and Amazon getting in there. We know Amazon's paying about a billion dollars to show one football game a week 15 times a year. Apple might be paying, or Amazon might be paying $2.5 billion for those Sunday ticket rights. It is quite a big spend up front. What's the roadmap look like for those companies as far as moving forward and getting to profitability there when we talk about the sports streaming space?
LAURA MARTIN: So I think that's the key point, is they never have to get to profitability in their streaming business. Because often, they do these rights deals to drive iPhone sales, or to drive Prime sign-ups because that has double the average e-commerce sales, so that's the point. They can actually destroy the streaming business because they have other businesses that will actually make a profit, or higher profit. iPhones are $1,300 these days. So they can make profit on some other part of their business that justifies them spending egregious amounts of money on sports rights.
- Laura, it's Dave here. You write about what changed during COVID in the streaming. And what is the most significant shift you've seen, and who's the beneficiary of it?
LAURA MARTIN: So the most important shift is we move from mobile devices towards connected television devices which are over 50 inches under the definition of the IAB. So that's the most important thing. So what's happening now is that connected television commercials on those big screens are more targeted, and they have higher returns on capital, and they're more effective than either linear TV commercials, which are still $60 billion of ad revenue a year, and mobile ads, because mobile ads usually are time sharing, and it's on a small screen often with the sound turned off. So the most important thing that is not reversing yet during COVID is that money and time and viewership are moving from small screens to big screens.
JOSH SCHAFER: And Laura, you point out in the note Apple and Amazon obviously have a ton of cash, and we know that. And Google does too, if they wanted to spend with YouTube. But you also highlighted Disney as a potential winner, and I was curious what stands out about Disney, because they really do have a lot less cash than those tech companies. What's their strong case here?
LAURA MARTIN: So I think part of their case is they can bundle. So churn is what's killing you these days, because as competition increases, consumers stay shorter on your service because they watch what they want, they turn it off, and they sign up for another service to watch what they want that month. So churn kills you.
What's great about the Walt Disney Company is two things. One is they have sister subsidiaries, so now, if you go to one of their theme parks, they give you three months free of Disney Plus. Cool. If you're a Disney Plus subscriber, they give you a discount on their theme parks. Cool.
Secondly, they have this really deep, high quality library. So as the streaming wars continue, we will end up with three or four winners. My opinion. That means everybody else gets bought or they go out of business. Those are the two choices. So if they have big, deep libraries, they're going to get bought, because that is forever IP that you can make your next film from, your next TV show, and you control in perpetuity.
One of the things we've seen with film libraries over 50 years is they always become more valuable because technology always figures out a way to resell you Cinderella on the new tech. So owning film libraries has always turned out to be a really high return on capital asset.
- Laura, you mentioned three to four winners. Who are those three to four winners? And further consolidation in this space, you were on Yahoo Finance last month making the prediction saying that Netflix teaming up with Microsoft on its ad-supported tier, that that's Microsoft cozying up to Netflix, or Netflix cozying up to Microsoft in order for Microsoft to maybe eventually buy Netflix. So what do you think the consolidation then looks like in the streaming space?
LAURA MARTIN: Right, so it is my point of view that Netflix has none of the assets required to survive as a standalone streaming service. It doesn't have live sports. It doesn't have news. It doesn't have affiliations around the world. It doesn't have sister subsidiaries that it can bundle with, nor does it have sister subsidiaries that make all the money, like Google Search, so it can just lose money indefinitely.
So many of their competitors do have those competitive advantages. I think Netflix sees the writing on the wall and is trying to figure out an exit plan here. And there are not that many companies large enough to buy Netflix, but Microsoft is one of them, and they have a good relationship because the CEO of Netflix was on the board of Microsoft. So if in fact Microsoft over the next-- they have to finish their Activision acquisition, but over the next five years, if Microsoft does buy Netflix, they become a winner because they're big enough. They have everything they need to compete with the Apple and Amazon standards. Otherwise, I think Netflix loses.
But other winners? I would say absolutely Amazon Prime. Unlimited resources, ability to bundle, never need to make money in streaming. I would say Disney, best-in-class marketers. They come at every film project and every service, whether it's Hulu, ESPN Plus, as a marketer primarily. And they break down the audience, and then they figure out how to get you in in any one of seven ways, and then add on, add on, upsell, upsell. And they try to grab you at five years old and they never let you go. They have a full life-cycle strategy. That has been true of the Walt Disney culture for three decades. So I would say they win.
And I think Apple-- I think this new Paramount Discovery is very-- forgive me, Warner Brothers Discovery, very interesting assets and best-in-class management.
- Well, the streaming wars are every bit as entertaining as their content. Needham's Laura Martin. Good to see you. Thank you.