The cord-cutting trend and newer technologies continue to raise the spectre of the death of traditional cable TV. The ongoing race amongst Warner Bros, Apple and Amazon for acquiring distribution rights to the James Bond mega-franchise points to an intensifying rivalry between tech and traditional media companies as they compete for viewership and revenues. Disney's decision to end its distribution deal with Netflix and start its own direct-to-consumer streaming service in 2019 is another sign the media landscape will continue to be shaken and stirred for some time to come.
The market for streaming content is growing rapidly. Streaming services are projected by the Deloitte's Media and Entertainment Outlook report to grow exponentially with the number of video-on-demand viewers expected to reach 209 million by 2021, from 181 million in 2015.
It's little surprise that companies are betting big on creating and procuring original programming as they jostle to own a bigger piece of the streaming pie. Earlier this year, online video provider Netflix announced plans to spend nearly US$16 billion on streaming content, of which US$6 billion this year alone, according to multiple media reports. Apple too plans to invest US$1 billion in producing and procuring original content, according to the Wall Street Journal.
The following businesses are well positioned to benefit as the market for original programming explodes. These companies have deep resources, innovative ideas, tech and content-creation capabilities, and are quick to realign their business models to changing consumption patterns and participate in the industry's digital transformation, according to Morningstar equity research.
| Walt Disney Co. | ||
| Ticker: | DIS | |
| Current yield: | 1.61% | |
| Forward P/E: | 14.7 | |
| Price: | US$96.87 | |
| Fair value: | US$130 | |
| Data as of Sept. 8, 2017 | ||
Media giant 
Walt Disney (DIS) makes live-action and animated films under such popular labels as Pixar, Marvel and Lucasfilm. The House of Mouse also owns and operates media networks (ESPN, ABC and Disney Channel), television production studios, theme parks and resorts, and other assets.
Disney is making a big push into the fast-growing online video-streaming market. It recently announced the US$1.58-billion acquisition of majority ownership of BAMTech LLC ¬-- a global leader in direct-to-consumer streaming technology -- and is poised to launch its ESPN-branded video streaming service in 2018, followed by a new Disney-branded direct-to-consumer (DTC) streaming service in 2019.
CEO Bob Iger said at a recent investor conference that the firm expects to create four to five original films and three to four Disney-branded original television shows for the forthcoming DTC service, which will also have Star Wars and Marvel movies, and Disney's television library, according to a Morningstar equity report.
"We expect the unique content on ESPN and Disney Channel will provide the firm with a softer landing than its peers as viewing transfers to an over-the-top world over the next decade," the report says. "The Disney Channel also benefits from attractive economics, as its programming consists of internally generated hits with Disney's vast library of feature films and animated characters."
And while ESPN continues to generate the bulk of revenue, Disney's "stable of animated franchises will continue to grow as more popular movies get released by the animated studio and Pixar, which has already generated hits such as Toy Story, Cars, and most recently Frozen," says Morningstar equity analyst Neil Macker, who puts the stock's fair value at US$130, nearly 40% above its current price, as of Sept. 8, and projects 2.5% annual sales growth for the media networks, 5% for parks and resorts, and 2.3% for the filmed entertainment segment.
| Netflix Inc. | ||
| Ticker: | NFLX | |
| Current yield: | -- | |
| Forward P/E: | 102.4 | |
| Price: | US$177.72 | |
| Fair value: | US$73 | |
| Data as of Sept. 8, 2017 | ||
The king of over-the-top (OTT) streaming, video provider Netflix (NFLX) is now available in almost every country worldwide, with China the most notable exception. Netflix delivers original and third-party digital video content across the entire range of Internet-connected devices to more than 100 million subscribers worldwide.
A service to which many ascribe the global trend of "binge-watching", Netflix accounted for 35% of downstream prime-time traffic (the largest source) in North America during the first half of 2016, according to the Sandvine Global Internet Phenomena Report. "The average Netflix user worldwide now watches more than 90 minutes of video per day as overall Netflix streaming has increased 350% since the beginning of 2012," says a Morningstar report.
The company reported much better-than-expected paid subscriber growth in the second quarter, in both international and U.S. segments. This growth, Macker says, was expected given the large slate of originals released in the quarter. Management unambiguously attributes this outperformance to "excitement around original content."
International expansion and extremely large consumer data sets conspire to create a strong tailwind for Netflix and carve out long runway for growth, says Macker. "Already the largest provider in the U.S., Netflix is expanding rapidly into markets abroad," he says. "The firm has used its scale to construct a massive data [which] it leverages to better purchase content and produce original material such as Orange Is the New Black."
The online video provider recently announced it plans to splurge about US$16 billion on acquiring and producing streaming content, including US$6 billion this year alone.
Macker, who pegs the stock's worth to be US$73, projects 10% average annual revenue growth between 2016 and 2021 in the domestic market, and 21% in the international market for the same period.
Experts assure investor concerns over Disney's recent decision to cut its ties with Netflix are overblown and that the streaming giant will survive the impact with relative ease.
| Apple Inc. | ||
| Ticker: | AAPL | |
| Current yield: | 1.49% | |
| Forward P/E: | 15 | |
| Price: | US$159.48 | |
| Fair value: | US$145 | |
| Data as of Sept. 8, 2017 | ||
The maker of the iPhone and other digital devices, Apple Inc. (AAPL) is one of the world's most valuable tech brands. In addition to the most coveted smartphone, the iPhone, the US$800-billion behemoth makes tablets (iPad), digital media players (Apple TV), portable music players (iPod), personal computers (Mac), and smartwatches (Apple Watch).
"Apple's strength lies in its experience and expertise in integrating hardware, software, services and third-party applications into differentiated devices that allow Apple to capture a premium on hardware sales," says Morningstar equity analyst Brian Colello, who recently raised the stock's fair value from US$138 to US$145.
Earlier this year, Apple entered the world of original content with its first TV series, Planet of the Apps, a reality show about developing apps. The tech titan has allocated a whopping US$1 billion for producing original content and has been using its war chest to hire TV executives behind some of the most popular TV shows to fuel its original programming push. Apple's ambitious foray into streaming content fits right into CEO Tim Cook's plan to double the business, which also includes App Store sales, Apple Pay and Apple Music, to about US$50 billion by 2020, according to a Wall Street Journal report.
Apple is known for generating a buzz around its products and demanding premium pricing for its products and services that create an ecosystem that consumers find hard to leave. The hysteria around the recent launch of its US$999 ultra-premium, 10-year anniversary phone, the iPhone X, reveals a loyal customer base that tends to respond well to Apple's pricing strategy.
"We consider almost all other products and services that Apple offers (Apple Watch, iCloud, HomePod, AirPods, Apple Pay) as not only incremental revenue and earnings drivers for the firm, but more important, improving the iOS ecosystem that will enable Apple to sell future iPhones at premium prices to a loyal customer base," notes Colello.
Editor's note: The author owns a small position in shares of Apple Inc.
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