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Morningstar | NBCUniversal Joins the Streaming Wars

Competition within the subscription video on demand, or SVOD, market in the U.S. continues to increase as Comcast’s NBCUniversal announced its plans on Jan. 14 to launch a new streaming service in 2020. Comcast, like other traditional media firms, faces the challenge of establishing direct customer relationships without disrupting the highly-lucrative traditional pay-television ecosystem. However, we believe its SVOD proposed approach is superior to AT&T’s plans for WarnerMedia. Unlike Comcast, AT&T’s legacy consumer segment remains heavily dependent on profits from traditional television distribution without a strong Internet access business to fall back on. We aren’t planning on any changes to our moat ratings or fair value estimates across the media and telecom spaces following Comcast’s announcement.

In a unique move, the ad-supported version of Comcast’s planned SVOD service will be free to pay-TV subscribers with an option to remove ads for a fee. For non-pay-TV subscribers, the service will reportedly cost $12 per month according to CNBC. Management at NBCU have publicly remarked in the past that the firm does not want to endanger the firm’s current business model and that the economics around a streaming service are “challenging.” By tying its product directly to pay-TV subscriptions, NBCU is attempting to solve both problems at once, as the link to pay television subscriptions should help the service quickly gain scale and allow NBCU to generate its target of $5 in ad revenue per month for each subscriber. However, by pricing the non-pay-TV subscriber version at $12, NBCU is effectively ceding the value spot for that market to Disney+, which we expect to launch at a price under $10, while also likely making the NBCU service unattractive to the vast majority of customers.

In contrast, we believe WarnerMedia’s planned SVOD offering, which will build around HBO at a price above $15 per month, is a strategic blunder as the firm needs to gain traction in what will be a highly competitive marketplace in 2019 and beyond. Ultimately, we expect Warner will need to create a service that opens non-HBO content up on a standalone basis to better capture the portion of the audience that simply doesn’t see value in super-premium content but would still occasionally like access to the more mass-market-focused programming available elsewhere in the Warner library.

We believe that the launch of this service increases the probability of Comcast selling its stake in Hulu to Disney after the Fox deal closes. Hulu, the third-largest SVOD in the U.S., recently announced that total subscribers to both its SVOD and pay TV services hit 25 million at the end of 2018. The 8 million subscriber additions for Hulu during 2018 is well above our 5.5 million net addition estimate for Netflix in the U.S. While Netflix remains the largest player in the space, the addition of another player and the continued growth at Hulu reinforces our belief that Netflix will continue to face increased competition in 2019 and beyond.