A report from analysts at MoffettNathanson (MN) suggests there are already different strategies emerging from the rival OTT suppliers to Netflix.
MN says that 2018 will go down as the year in which some of the largest traditional media companies started to show their cards vis-a-vis their over-the-top distribution strategies. “With three large-scale mergers (AT&T-TWX, Disney-Fox, and Comcast-Sky) either complete or nearing completion, we expect the market to increasingly focus on the differences in strategic approach and key subscriber metrics of each new OTT product.”
The analysts say that while some of these Netflix rivals have already confirmed their ‘closed’ approach to their OTT offerings, and are recovering their TV rights as speedily as possible from Netflix. “Of course, premium pay networks have always operated under this strategy as they have long created exclusive series like HBO’s The Sopranos or Showtime’s Homeland or buy exclusive Pay 1 window rights to current Hollywood blockbuster movies. However, Netflix’s recent massive increase in funding of original content on a global scale has challenged the orthodoxy of the open models. Disney has been very public about their intention to launch the recently named Disney+ at the end of 2019. Their pending acquisition of Fox will create unrivaled scale in global TV and film production, increased ownership of Hulu, the leading linear and online media presence in India – all the assets needed to build global closed-end systems,” says MN.
The firm says that the trio of Netflix rivals have not yet made clear their international (non-US) strategies. However, AT&T’s CEO Randall Stephenson, at a media investor event last week, said that WarnerMedia would not become “another Netflix” and that – as has been widely reported – had licensed Friends to Netflix on a non-exclusive basis. “In essence,” says MN, “AT&T is proposing a very different structure than Disney and, at the moment, unwilling to trade off the long-term value of building a globally scaled Direct-To-Consumer platform for the continuation of short-term licensing fees from traditional and SVOD partners.”
As Craig Moffett has noted, the strategic shift to closed-end distribution is neither cheap nor risk-free. “Looking into 2019, we would expect that recent M&A will impact how off-network TV and Pay 1 film rights will be sold and organized in the future. The differences in approach will mean that some companies like Disney will need to willingly forgo licensing revenue in order to develop a loss-making subscription business that will only be worthwhile if fully scaled. On the opposite side of the aisle, it does not sound like WarnerMedia will willingly sacrifice license fee revenue to build a fully-scaled SVOD platform. We call that the “having your cake and eating it too” strategy,” states MN.
But, as the report hints, Netflix is not stupid. “We would argue that Netflix has been prepping for these
days since 2016 and has been moving upstream to sign content creators away from the established TV studios. The high cost of that owned vs. rented strategy can be seen in the company’s negative free cash flow and increasing operating expenses,” suggests MN.
However, MN’s bottom line is that it finds it cannot justify Netflix’s current share price (around $270) but raises its target price on Netflix to $230 per share, up from $210 per share, as it reviewed its valuation methodology in this note. “Yes, you read that right. We have had a hard time justifying Netflix’s price for much of this year. Our current price target is based on a blended average of sum-of-the-parts ($232), DCF ($157), and P/S ($298).”