Changing media habits challenging SKY TV and investors
24 February, 2015
Two side by side articles in today's press highlight how the media world is changing and changing rapidly.
Yes nothing like the juxtaposition of two articles to paint a picture of change. Yesterday we had Sky Network TV present its results, and, whilst the company grew profits, subscriber numbers fell over the past six months. At the same time telecommunications infrastructure company Chorus noted that its rollout of ultra-fast broadband is on schedule, but that rapid growth in fibre connections is putting pressure on its capital expenditure budget. Customers are increasingly moving to ultrafast internet connections.
So this is the trend to streaming content and it's getting stronger.
Yes the way we consume media is changing and changing rapidly — companies like Netflix, Spotify, Hulu are all offering streaming content and are all growing like crazy. It is the increasing access to high speed broadband internet at home and on mobile networks that is making streaming more and more attractive to consumers. The idea that we can watch what we want, when we want and how we want is liberating. Netflix now has 57.4m subscribers worldwide and they watch a lot of TV. In the United States Netflix streaming is estimated to account for more than half the prime time internet traffic.
How do companies like Sky TV defend themselves?
There are two approaches that companies like Sky have to protect themselves from the risks posed by the changing environment.
First and most obviously they can imitate the competition. The new streaming services being offered by Sky, Neon and Fanpass, are one way of participating in the new market. Ultimately though, a "me too" strategy rarely works for long — it is real and enduring competitive advantages that drive long term business success. There are two related barriers to entry that I think will prove to be important for Sky — a large user base and unique content.
Almost half of New Zealand homes subscribe to Sky. That is a massive client base and gives Sky the scale and financial clout to secure or produce unique content. For kiwi's it is marquee sports like rugby and cricket which attract customers. Right now Sky can pay more for that content than anyone else.
It creates a real barrier that despite the risks beginning to build will protect Sky for some time.
What should investors do?
Change presents massive opportunities for investors but also real challenges. When things are so dynamic how do you pick the likely winners and losers? In short it is really hard given the rapid speed of innovation.
There is another approach that investors might want to consider. Rather than trying to be too clever it may be better to focus on those companies that will benefit from increased streaming without having to guess which TV channel or media property will win the war. Given that US Netflix users alone watch over 12 billion minutes of TV every quarter there some really interesting opportunities in businesses who service the internet. This includes opportunities in things like data centres, firms that own fibre optic networks or production houses who produce high quality, creative content.
To use an analogy sometimes selling shovels to gold miners is a whole lot more profitable than digging the holes yourself.