In the space of a decade there has been a dramatic shift from people watching linear TV to streaming shows through various platforms. In the US 99% of households pay for at least one streaming service with Netflix (NFLX:NASDAQ), Amazon’s (AMZN:NASDAQ) Prime Video and Apple’s (AAPL:NASDAQ) Apple TV being the most popular.

Streaming has become part of peoples’ everyday lives. According to US lifestyle website Forbes Home the video streaming industry is valued at $544 billion. Projections from consultancy Exploding Topics indicate that by 2030, the industry could be worth $1.9 trillion.

Shore Capital’s Roddy Davidson says: ‘Kantar’s latest Entertainment on Demand (EoD) report, which covers Q1 of 2024, flags that the competitive environment remains intense with leading streaming players jockeying for position and achieving varied levels of growth across geographies and local services also forging ahead in specific markets by offering “highly tailored” content.

‘Overall, Apple TV+ showed the strongest progress in new subscribers during the period with Prime Video seeing a partial reverse of strong gains during Q4 2023 (see below). Encouragingly, VoD household penetration increased across nearly all markets on a quarter-on-quarter basis, with only the UK showing a marginal reduction.’

AT AN INFLECTION POINT

However, the industry is at an inflection point. The focus is shifting from spending millions on content, marketing and subscription deals to try and attract more and more people to a platform and not worrying too much about profitability.

Now the emphasis is on making streaming pay by cracking down on password sharing, increasing the cost of the premium ad-free service and adding an ad-supported cheaper offering, which also has the effect of diversifying revenue streams.

Netflix’s success in forging this path has seen it be rewarded by the market with a 290% gain from its 2022 nadir and rivals like Disney (DIS:NYSE) are following suit. Though interestingly, this shift towards carrying advertising as well as moving into areas like live sport, brings streaming much closer to the linear television set-up it has sought to supplant.

Breaking down the streaming industry, Netflix is the only major ‘pure’ streamer listed on the stock market. Disney has its theme parks, cinema releases and cable television operations. For Amazon and Apple streaming has largely been a loss leader to bring people into their wider eco-system.

While in the UK, for the likes of ITV (ITV) and STV (STVG), streaming sits alongside their broader terrestrial TV and production businesses.

Investors can either put money into the shares of entertainment companies involved in the streaming industry or diversified ETFs (exchange-traded funds) which offer some exposure to the streaming names.

THE MAIN PLAYERS

Putting Apple and Amazon to one side, Netflix is the biggest streaming giant by market capitalisation at $264 billion, followed by Walt Disney, Comcast (CMSCA:NASDAQ), Warner Bros. Discovery (WBD:NASDAQ) and Paramount (PARA:NASDAQ).

Disney+ reported a four million increase in new subscribers for the second quarter of this year, giving the company a total of 153.6 million subscriptions.

Importantly, the company managed to achieve operating profit in the streaming segment, and Disney announces that it is on track to maintain a positive streaming result throughout 2024.

The company achieved an operating profit in the Entertainment segment of $780 million (up 72% year-on-year), with streaming contributing $47 million in profit (compared to a loss of $587 million the previous year).

ITV has recently sold its 50% interest in Britbox International to BBC Studios (the public broadcaster’s commercial arm) for £255 million to focus on ‘supercharging’ its UK advertiser-funded streaming service, ITVX (whilst growing the ITV Studios production business).

NETFLIX, DISNEY AND ITV INVESTMENT CASES COMPARED

Netflix is being priced by the market as a growth stock, trading on 37.1 times 2024 consensus forecast earnings, so its share price performance is likely to be dependent on its ability to deliver or exceed the 53.1% and 21.1% earnings growth forecast for 2024 and 2025 respectively.

Disney trades at 21.5 times 2024 earnings. Having faced off activist pressure from Nelson Peltz, CEO Bob Iger needs to demonstrate he can lead its streaming operation towards sustainable profitability while dealing with the cable TV arm, controlling a major investment programme in its parks and dealing with the succession issue. His return after the failure of his previous anointed successor Bob Chapek means the market is particularly concerned about this issue.

Finally, ITV is very much a recovery play, trading on just 8.8 times 2024 earnings. If it can maintain the momentum in ITVX and deliver growth in its production arm it could achieve a re-rating. 

In its latest set of results, ITV saw total streaming hours up 16% in the first quarter of the and digital and digital advertising revenues grow by 14%. The company said ITVX’s monthly active users ‘continue to grow in line with expectations’ and it remains on track to deliver at least £750 million of digital revenues by 2026.

This has helped revive a bombed-out share price with the shares up 25% over the last six months. Shore Capital analyst Roddy Davidson observes that ITV’s ITV Studios production arm and STV’s own production operation could be a beneficiary of ongoing competition in the streaming space.

He says: ‘We see particular upside for companies with strong creative talent / track records and production resources, well-established industry relationships and the financial strength to capitalise. Within our coverage universe, we would particularly highlight ITV and STV, both of which tick these boxes and have made considerable progress in building momentum within their production businesses.’

Another potential beneficiary of streaming’s growth is Zoo Digital (ZOO:AIM) which runs an in-house designed, multi-tools cloud technology platform that allows media owners to repackage their TV and film content for different geographies, languages, formats, and technologies. CEO Stuart Green told Shares: ‘There has been a structural shift in the ways media companies deliver film & TV content to audiences, away from traditional linear models and towards streaming.

‘A similar shift led to fundamental changes years ago in the music business where you only need to look at the likes of Spotify to see the impact of reimagining the economic model for an entire industry, yet we’re listening to more music today than ever before.’

Green adds: ‘Film & TV is now going through a similar change [to the music industry] and this brings its own disruptions. Big players like Disney and Paramount are moving away from making cash through linear TV channels to VOD (video on demand). They are also targeting new territories for future growth, and we are helping the media giants do this by localising their content for international audiences.’

MUSIC STREAMING COMPANIES

Music streaming revenue is dwarfed by that of video streaming but still stands at a hefty $19.3 billion (as of 29 April 2024 according to figures from Statista).

Global music streaming revenue increased by 11.5% worldwide in 2022, to account  for 67% of total global recorded music revenue.

Spotify (SPOT:NYSE) dominates this space and its shares are up 107% over the last 12 months at the current $319 mark, as it has been able to consistently push through increases in the price of subscriptions.

Other players in the music streaming sector include Apple Music, Tencent Music, Amazon Music, YouTube Music and Deezer. Amazon also has its Audible audio book platform.

According to Statista, Apple Music has a 13.7% market share, Tencent Music and Amazon Music occupy a similar market share at 13.4% and 13.3% with Spotify leading the way with a share of 30.5%.

HOW TO INVEST THROUGH ETFS

Investors looking to gain diversified exposure to streaming through ETFs could consider iShares S&P 500 Communication Sector (IUCM).

Not only does it have a significant weighting towards Netflix, but it also holds Disney+ parent company Walt Disney (8.55%) and Comcast Corp which created a streaming bundle in May combining its Peacock service with Netflix and Apple TV+ called  StreamSaver.

The ETF with the largest weighting in Spotify is iShares Digital Entertainment and Education (PLAY).

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