Podcast: Understanding the New Media Ecosystem

The arms race of this evolving ecosystem is the increasing dollars being spent on speed and content.
With a seemingly limitless number of ways to consume televised content, investors are wondering which players to focus on.  In our latest podcast, Alger Senior Analyst Mike Melnyk provides some much needed clarity on the current media landscape.

ALEX BERNSTEIN:​ Hello. I’m Alex Bernstein and you’re listening to the Alger Podcast: Investing in Growth and Change.  Whether it’s Game of Thrones, Fleabag, or the Superbowl, investors and consumers now face a seemingly endless assortment of ways to consume televised content.  Traditional broadcast networks are going head to head with streaming platforms and upstart content bundlers – all of whom are aggressively competing through cost incentives, complex data plans and ever higher speeds.  Here to try to explain what is becoming an incredibly crowded playing field is Alger Senior Analyst, Mike Melnyk, who covers media, telecom, communication infrastructure and consumer discretionary sectors.  Mike, thanks so much for joining us today.
MIKE MELNYK: Thanks, Alex.  Happy to do it.

ALEX: ​Mike, you call all of this “the evolution of the media ecosystem.”  How did we get to this point – with all these choices?

MIKE: So effectively, what I’m talking about in the ecosystem is, specifically in this case, television.  And television used to be consumed in one form or fashion.  It was on a big box that sat in your living room.  

Now, content is really not television anymore.  Its content that people are consuming and they’re consuming that content on many different devices, on tablets, on mobile devices, on fixed televisions like we did back in the day.  And that content is being delivered to them not over just an over the air signal or through a cable wire, it’s being delivered over wireless airwaves as well.  Content is increasingly being streamed by the consumer.  So, the ecosystem is changing because there used to be only one way to consume content.  Now the consumer can have it when they want it, where they want it, and how they want it.

And those choices seem to grow every day.  In the past there were only four major broadcast networks then cable TV was invented and we went from a handful of cable networks to now the multichannel bundle has anywhere upwards of 200 channels.  

On the streaming side, the first company to start the streaming revolution, if you will, was Netflix.  Since Netflix we’ve seen a multitude of other players emerge and what we’re seeing now is the traditional media content companies are all starting their own streaming services.  We’ve also seen the invention of what’s called virtual MVPDs.  

ALEX: And what is an MVPD?

MIKE: So, the traditional MVPD, if you will, is a multichannel video programming distributor.  A traditional MVPD is basically a cable provider and those cable providers provide you your fixed linear bundle that you sit and watch in your living room.  

The virtual MVPDs create content packages that replicate that fixed cable bundle but are streamed to devices either over a fixed wired connection or wirelessly.  

Each of the virtual providers may have a little bit different product offering.  Most of them carry the major broadcast networks.  Most of them carry the same live programming that you’ll see on your traditional cable package.  Again, the difference is it’s a skinny bundle versus the 150 to 200 channel mega bundle you might get under the traditional cable provider.  

There are also streaming services that are not live TV.  They’re library content and they’re original content.  It’s original programming that they create, that other parties create, that they purchase, or it’s library content that’s sold to them from other providers.  And increasingly what’s driving viewership is original content and you’re seeing all of these services invest billions and billions of dollars in creating original content.  

The arms race of this evolving ecosystem, if you will, is increasing amount of dollars being spent on speed by the infrastructure providers and on content by those content providers.

ALEX: Let’s pick these two ideas apart for a second.  Tell us about speed.

MIKE: The high-speed data businesses are growing high single to low double digits.  Just to put that in context, internet traffic as a whole is growing 25% a year.  What’s driving internet traffic, 58% of internet traffic is video.  So, the content providers are building bigger pipes using fiber, if you will, to provide consumers with higher speeds.  

As consumers get access to higher speeds they’re consuming more content.  The average cable customer consumes about 200 gigabytes of data a month.  That’s just the average cable customer.  When you look at a cable customer without a video package they consume double that.  And the reason they’re consuming double that is they’re streaming their video.  

So, what’s interesting, that data consumption is growing 20%-25% a year and that’s projected to last over the next four to five years.  I want to compare that, because we mentioned that video can be delivered wirelessly as well, typical wireless customer uses 30 gigabytes per month of data.  So, the high-speed data customer on the fixed plan is using seven to eight times more data than a wireless customer and the reason is the robustness of that plan.

ALEX: And this is all pre-5G?

MIKE: This is pre-5G and that’s one of the things that 5G is going to enable.  There are about 99 million high speed data subs in the U.S.  20 million are on legacy technologies like DSL.  That’s the opportunity for 5G.  Either that customer isn’t served by a cable provider or by a fiber solution by the telco and they don’t have another choice.  5G will now enable them to have faster speeds and more internet access.  

Consumers want speed.  Those consumers have the most to benefit and the technology is going to be a superior technology, and they will likely take a very large chunk of market share there.  
ALEX: So, what’s the story with content?
MIKE: Sure.  The saying has always been, “Content is king.”  So, the most popular non-sports TV programming is not on linear TV.  It’s on streaming services.  Shows like Handmaid’s Tale, Stranger Things, The Crown, Marvelous Mrs. Maisel, that we’ve all heard of, all on various streaming providers.  Seventy percent of Emmy nominated comedies and dramas this year were not on linear traditional TV, they were on these streaming services.  

What we’ve seen is that consumers are chasing the best content and what that has driven is kind of an arms war in terms of content production budgets.  Content spend has exploded not just amongst the traditional providers that you know, the broadcast channels, the cable networks, but also amongst the cloud platform type providers.  

There are cloud and online providers who are spending upwards of one to $5 billion a year on content.  This is a secondary, tertiary, ancillary business for these guys, but what they’ve done is pushed the legacy players to increase their content spending.  Because what’s, again, driving eyeballs and is driving viewing is original content.  
ALEX: So, is linear TV – that is, traditional TV from broadcast networks and cable companies – dead or dying?  
MIKE: So, we think linear TV is declining.  You can’t argue with the numbers and I’ll share some numbers.  At the end of the first quarter there were 88 million linear television subscribers down from 99 million in 2016.  So that’s an 11 percent decline.  So yes, there is this phenomenon of cord cutting.  It is happening.  It’s generational.  And the younger generations are more comfortable with these app-based products.  So, what you see when you look in a survey of cord cutters 21 percent were 18 to 34, 23 percent were 35 to 44.  So, 46 percent are under the age of 44.  Generations that grew up with technology.  

There are also Cord Nevers, if you will.  Cord Nevers - you’ve never paid to have the ability to watch a live TV show on the television in your home.  You’ve never signed up for a linear video cable subscription.  You’re consuming content either from a streaming provider, through the internet for free, a YouTube, if you will, but you’ve never subscribed to any type of linear television service.  Again, this is a generational shift and we believe that shift is not going to reverse just given demographics.  
ALEX: But probably the biggest outlier here is sports?
MIKE: What you cannot get on these streaming services for the most part is live sports.  When I say live sports, I mean big events.  The NFL, Major League Baseball, the NBA, NCAA Tournament.  Why is this important?  If you look at the top 25 programs that were viewed in 2018, all 25 of those were sports or live events.  

This is a very powerful audience for advertisers.  And so, what we see is the content providers that are in this linear bundle, I mentioned an arms race for original content, there’s also an arms race to own sports rights.  Ninety percent of the top 50 shows on linear legacy TV are sports and live events.  

So, sports and live events are still very powerful, and they resonate with consumers and with advertisers.
ALEX: Mike, when you start to have all these conversations with your Portfolio Managers, what’s the single thing that you’re most excited about?
MIKE: At Alger we invest in Positive Dynamic Change.  And what excites me about the evolution of the ecosystem is really the infrastructure side.  The plumbing of the ecosystem.  There are going to be content winners, there are going to be content losers.  We talked about various streaming providers existing, and some probably won’t exist.  What will exist is the infrastructure.  Data usage is growing at 25 percent a year.  Networks are investing in speed.  Consumers are buying more speed.  

So, at the end of the day, the infrastructure, the cable companies, the fiber providers, the data centers, the tower companies that enable this ecosystem are exciting investments that fit Alger’s criteria for positive dynamic change.
ALEX: Mike, thanks so much for speaking with us today.
MIKE: Thanks a lot.  It was great to talk to you.  I appreciate it.
ALEX: And thank you for listening.  For more information and a transcript of this recording, please visit www.alger.com.

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