Today, just about any
company involved or associated
with streaming movies
or TV shows over the Internet
seems to have evaluations that
we haven’t seen in quite a few
years.
Companies like Netflix, Apple,
Akamai and others have
share prices that seem to be
based more on excitement than
basic business fundamentals.
While there is nothing wrong
with being excited about the
growth we are seeing in digital
content consumption, many
have now set expectations for
these companies that simply
can’t be achieved.
I do a lot of calls with institutional
money managers on the
buy and sell side lately, and far
too many of them are getting all
caught up with the idea that online
video is going to somehow
replace cable, DVDs or other
forms of media. The fact is that
today, digital content offerings
are a complement to traditional
media. Online video is not
replacing cable and streaming
movies are not replacing DVDs
today or anytime soon. Seismic
shifts like that don’t happen
overnight or over a few years,
but rather usually over a long
period of time, measured by a
decade or more. To put it in perspective,
Netfl ix has only been
streaming for three years and
while it has been the handsdown
leader, DVDs and cable
TV are still around in volume.
When you look at the kind of
money Netflix is spending to license
content for digital, there
is no way to run the numbers
to show that Netflix can possibly
sign up enough new subscribers
over the next five years
to cover its $1 billion licensing
deal with Epix. Yet in the past
six months, Netflix’s stock has
gone from $74 to $165 a share
simply due to excitement. Financial
analysts seem to be
asking more about the rate of
growth rather than how these
services work, what the quality
looks like, which devices the
services work on and what the
business model looks like.
I am amazed at the many financial analyst pieces in which
the authors talk about a particular
streaming service, yet admits
they have never used it.
How can they possibly have
tens of millions of dollars tied
up in a company yet haven’t
spent $99 to buy a box and actually
use the service for themselves?
I see a lot of investors making
decisions based on threeto-
five-year projections of the
size or growth of the industry
while ignoring the reality in
today’s market. I keep hearing
about devices, yet 95% of the
time when I ask someone on
Wall Street how many Rokus,
TiVos or broadband-enabled
TVs have been sold, they have
no clue. How is that possible?
How can you track or invest
companies in this space whose
sole growth is dependent on
these devices, yet not know
how many have been sold, how
they work or what the service
looks like?
The last thing we need is another
bubble, yet I’m afraid
that’s what we currently have. I
keep hearing or reading things
that imply that the ad dollars
from TV are flowing to online.
Online video advertising is absolutely
growing, but let’s keep
things in perspective. Last
year, the online video advertising
market was around $500
million; the broadcast-TV ad
market was $60 billion. One
is not putting the other out of
business. And while digital
video consumption is growing,
it’s not growing as fast as
some may think. NPD just released
numbers stating that
75% of all U.S. consumers did
not stream or download any
mult imedia content of any
kind in the past three months.
That’s the kind of data we need
more of in the market to keep
things in perspective.
Setting the proper expectation
is crucial in the long-term
success and growth of any industry. The market needs to
evolve into services that can
become profitable and sustainable
on real profits, not
hype or future projections. Just
take a look at how many companies
in this space are actually
profi table today. Very, very
few. To help them get there, we
need sensible, rational thinking
with expectations these
companies can meet, not evaluations
based on wild projections
and statements about one
service killing off and replacing
another.
I hate to say it, but the current
bubble we are in is not going
to be able to last much longer.
Some of these companies are
going to have to get knocked
down and many on Wall Street
are going to have to come back
to reality.
We need more folks looking
at the core fundamentals of
what companies have to offer as
opposed to the day-trader mentality
that is simply trying to fi gure
out if a stock will go up or
down the next day.
Dan Rayburn (blog.streamingmedia.com) is a principal
analyst at Frost & Sullivan, EVP
of StreamingMedia.com, and a
speaker, writer and consultant.
