It's no secret that Internet distribution of content is disrupting television. By our count, there were 120 million aggregate over-the-top (OTT) subscriptions by the end of 2017 in the U.S. alone, suggesting that TV over the Internet is officially mainstream.
OTT distribution is fundamentally different from what has come before it: It's unregulated and it's global.
To be sure, streaming television is touching every corner of media, disrupting not just how content is distributed, but how it's created and by whom. Nevertheless, investors shouldn't assume that all new streaming services will succeed. Nor should they view all legacy businesses as dinosaurs.
In fact, traditional media companies with hard-to-replicate programming, or vast archives of movies and television shows, are managing to revitalize and amplify their growth through OTT distribution. A few notable examples:
- In the fourth quarter of last year, a premium cable and television network reported its highest subscription growth rate in a decade. By leveraging OTT, the company added five million subscribers (year in total) in a business that consumers historically bought through a cable bundle.
- One of the three major broadcast networks recently surpassed two million subscribers for its app, which charges users $6 a month for all-access to programming that is already available for free, though not on demand, to anyone with a television and an antenna.
- In 2014, a niche sports and entertainment company that traditionally focused on wrestling launched its own OTT. It now has a million and a half OTT subscribers paying $10 a month for unlimited streaming.
Cutting Cords, Not Spending
While consumer adoption of Internet distribution is accelerating, investors should keep in mind that the vast majority of U.S. households are still consuming TV through traditional bundles—often in addition to OTT apps. In fact, consumer spending on at-home entertainment is increasing and likely will continue to increase in the near future.
Over time, more consumers will probably eschew these cable bundles, shifting most of their television consumption to Internet-distributed apps. But while the traditional cable model is all about unbundling, we expect content to eventually re-bundle, albeit in an OTT construct.
To be sure, the uncertainty that television faces today is real and probably at the highest level we've ever seen. But the consumer desire for aggregation, curation and simplicity coupled with large programming budgets, suggests that merger and acquisition activity will continue, and may even pick up.
Meanwhile, OTT distribution is fundamentally different from what has come before it: It's unregulated and it's global. That means that companies can leverage their content across considerably larger audiences, all the while adding to their libraries of programming.
For more Morgan Stanley Research on key Tech, Media and Telecommunications themes, ask your Morgan Stanley representative or Financial Advisor. You can also visit the TMT 2018 page.
