Gone are the days when sitting in front of the TV on a Friday night was the main way to absorb content. For businesses this presents both challenges and opportunities. Legacy media is evolving, while new kids on the block are using the industry changes to their advantage.
Here’s a closer look at three companies, each with a unique approach.
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Alphabet – YouTube the disrupter
YouTube itself isn’t a standalone business, it’s part of Alphabet’s umbrella, along with the Google search and cloud businesses.
YouTube is sometimes overshadowed by the likes of Netflix and Disney+, but it’s arguably one of the most disruptive forces in the streaming and media industry today.
It’s also a massive business that generates around 10% of Alphabet’s total revenue.
If we apply a similar valuation to Netflix, it’s easy to make the case that YouTube could be worth over $200bn as a standalone business.
What really sets YouTube apart is its unique content model. Unlike traditional streaming services that rely on expensive, professionally produced content, YouTube thrives on user-generated content.
This model not only keeps costs down, but also creates a vast, constantly refreshed library of videos that attracts millions of subscribers.
While platforms like Netflix are just starting to dip their toes into ad-supported models, YouTube has been mastering it for years. This makes it a highly attractive option for advertisers, particularly given the platform’s giant audience.
The rise of short-form video platforms like TikTok led YouTube to introduce YouTube Shorts a few years ago. This allows it to compete directly in this space.
Of course, Investors thinking about getting a piece of the YouTube pie need to consider the other elements of Alphabet’s investment case – from search to AI and all the risks associated with those businesses.
Read our latest full view on Alphabet below.
ITV – the old guard
ITV has traditionally relied heavily on advertising revenue from its television channels. But with the ongoing decline in broadcast TV viewership, moving ITV’s top line in the right direction has become increasingly difficult.
The bright spot for ITV is its digital advertising, particularly through its streaming platform, ITVX.
This platform has shown strong growth, and it’s crucial for ITV as it transitions away from the shrinking audiences that traditional broadcast attracts.
Advertising revenue on ITVX is growing at a healthy pace, and the momentum is promising. However, ITV’s digital offerings are still not big enough to fully counterbalance the weaknesses in the free-to-air side of the business.
What’s encouraging is that ITV has set a target to increase its digital revenues by about 50% by 2026, and this seems achievable.
But competition in this sector is intense, and many of ITV’s rivals have significantly deeper pockets to invest in growing their market share. It’s an expensive game, and this has led to increased production costs, which in turn has weighed on cash flows during the first half of the year.
ITV’s Studios business is another crucial part of its strategy.
This division not only produces content for ITV itself, but also creates hit shows like ‘Line of Duty’ for other networks. Studios is expected to have a record year, which is great news. But a few unsuccessful titles could quickly change that outlook.
Financially, ITV is in a better position than it has been in the past. Net debt has come down, which gives the company some much needed flexibility.
We think ITV has the right ideas and is making the necessary moves to adapt. However, the big question is whether it can move fast enough to offset the structural decline in broadcast advertising.
This uncertainty is reflected in ITV’s current valuation – it’s below its long-term average, suggesting investors are still cautious about the road ahead.
Netflix – king of the streamers
Netflix continues to dominate the streaming space.
Even in the face of stiff competition from the likes of Disney+ and Amazon Prime, subscriber growth once again exceeded expectations back in July.
A key driver behind this is Netflix’s ability to reduce churn (keeping viewers from switching away).
This success is largely thanks to its investment in original content. Expensive, shows like ‘Stranger Things’ and ‘The Crown’ keep viewers engaged, while Netflix’s strong cash flow allows it to continue outspending competitors on content.
The ad-supported product has been more popular than expected, helping Netflix tap into new markets and attract price-sensitive users. However, there’s still work to be done in fully monetising this new ad space.
While ad revenue isn’t expected to be a major growth driver this year, by 2025, it should reach a scale that makes Netflix a prime destination for advertisers. The company’s vast user data will also be crucial in delivering targeted ads that appeal to advertisers.
The international production network is also a major asset, especially as future subscriber growth is expected to come from emerging markets.
Localising content is no easy feat, but Netflix has an impressive track record here. Whether it’s producing series in India, South Korea, or Brazil, Netflix understands that to grow its subscriber base, particularly in emerging markets, it needs to offer content that resonates locally.
Netflix’s financial position is decent, but it’s still carrying a fair amount of debt. The focus remains on reinvesting in content and growth rather than paying dividends, so investors shouldn’t expect any payouts soon.
As far as the streamers go Netflix is a cut above the rest, however the challenges facing the entire industry are still at play.
Streamers might look like tech businesses on the face of it, but under the hood the cash needed to generate content is massive, and that’s a key industry risk.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
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