Cable TV systems are facing a potentially existential threat from streaming video services. Streaming is rising in popularity as broadband access becomes accessible to more Americans and mobile streaming capabilities improve. Streaming offers the capability for "cord cutting" while providing preferred content, and in some cases, proprietary content.
How do you decide where to put your investment money within the streaming space? Consider the current state of the streaming market and participating companies with respect to three different aspects – devices, distribution, and content.
Investor's Business Daily cited a Parks Associates report compiling information in August showing the consolidation of the current market for devices. Four players control over 85% of the market, led by Roku with 37% of usage within the US. Google (NASDAQ: GOOG), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN) lag behind with 19%, 17% and 14% respectively. Sales in 2014 show a similar pattern except that Amazon has overtaken Apple in sales, pushing Apple into fourth place.
There is certainly room for growth in the field. Currently, almost 20% of households in the US that have sufficient broadband access have a streaming media player like Apple TV or Roku 3, while 8% have at least one streaming stick (2% own both methods). It is likely that more will follow but are waiting to see which vendor prevails. Who has the best record of performance, who offers the best features... and most importantly, who provides the best combination of content and price?
Investing on the device side is pretty straightforward for the moment. You can wait for the inevitable Roku IPO, or invest in one of the three large companies by evaluating the entire company as well as the quality of their streaming services. Invest in any of the other streaming devices if you like the technology and can accept the investing risk.
The distribution and content components are a little trickier. All streaming services are dependent on suitable broadband. Those who provide the Internet access are guaranteed a source of income — but as broadband becomes a commodity and price pressures kick in, will that income be enough to deal with the expenses of keeping up suitable infrastructure? As you look over the broadband providers, focus on that aspect and whether they also are expanding into one of the other elements — devices or content production.
Google, Amazon, and Apple are attempting to get into as many aspects of streaming as possible, with varying degrees of success. Anyone who does manage to establish a suitable position in all aspects is likely to grow and squeeze out the others. Keep an eye on sales numbers and reviews of the technological advances to look for technological tipping points.
On the pure distribution and content, Netflix (NASDAQ:NFLX) holds an excellent position with name recognition, plenty of content along with award-winning original content, and most importantly, a solid revenue model. Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and others trying to break into Netflix's territory are having difficult times establishing a feasible revenue model. Look for solid revenue plans before investing in Netflix alternatives.
As for Netflix, all of the streaming services pose a direct threat to Netflix when they can accumulate sufficient compelling content. Evaluate the content wars to determine whether Netflix can adapt and fend off this challenge or is forced to compromise or strike deals to maintain their position.
In the end, investing in streaming media stocks is not much different than investing in any other field. Analyze the strength of the company, their business model, revenue expectations, and competitive position. Are they overvalued or do they have unusual levels of debt? Are they keeping pace with technology? Are their offerings integrated? What is their growth potential compared to the level of risk, and does that ratio fit your needs? Do your research on any individual companies in which you are interested, answer these questions, and you will make the best investment decision for your case.