Netflix is to media what Amazon is to retail—maybe, probably—Bernstein financial research analyst Todd Juenger believes.
There’s a parallel between the ways Amazon has disrupted conventional retail and how Netflix is disrupting conventional television, Juenger wrote in a Bernstein report released Thursday.
“Amazon took advantage of a disruptive technology (e-commerce) to offer consumers a much better service at a lower price, and drove quickly to an unassailable scale advantage,” he wrote. “Similarly, Netflix took advantage of a disruptive technology (on-demand video distribution via the Internet) to offer consumers a much better service at a lower price, and drove quickly to an unassailable scale advantage.”
Amazon has brought in $255 billion worth of value during the past two years, while a group of 80+ retail stocks have lost $230 billion, the report states. In media, the story has been similar so far, with Netflix bringing in $35 billion during in the same time frame, while traditional TV networks lost $30 billion. Juenger collaborated with analysts Nataliya Nedzhvetskaya and George Zhao on the report, titled “The Long View: Is Netflix doing to Media what Amazon did to Retail?”
Other previously non-digital legacy industries have seen consistent declines in recent years. Since their peak subscription rates, landline phones have declined at -4% CAGR and newspapers at -3% CAGR, according to Bernstein.
“[That is] suggesting pay-TV's -2% subscriber decline rate has room to accelerate,” Juenger wrote. “Average U.S. cable TV margins have declined from peak of 49% to 44% today.”
Related: Netflix added 7M subscribers in Q4
Legacy television and media companies are stuck between a rock and a hard place, where they can either accept lower (or zero) returns, or double down on what’s left of the old TV business.
“Old media is indeed the next retail,” Juenger wrote. “But media's demise will be slower because pay-tv is a subscription model whereas retail is a transaction model. The slower, longer fade gives media companies and their investors the opportunity to continue harvesting cash along the way, and perhaps the companies can even find ways to re-invent themselves.”
The report says that the smaller MVPDs are the ones to watch, because they will be the first ones to reach zero revenue per user for video. If nothing changes, the Bernstein analysts predict that will happen in the year 2023.
“We think MVPDs like CableOne, Suddenlink, the NCTC members—those are the ones to watch,” the report states. “And what are they doing? Dropping groups of cable networks—especially Viacom.”
Meanwhile, Netflix and Amazon are already reinventing themselves—Amazon has been increasingly investing in streaming video recently in its seemingly limitless growth. In January, Amazon scored an exclusive kids' programming distribution deal in India. And Netflix could soon pose a big competitive threat to cable networks as it tries to outbid them for rights to brand-name reality TV series.
Consumers’ demand for Netflix originals is already on average eight times higher than that for Amazon’s originals, according to a study by Parrot Analytics. And the SVOD giant outpaced the projections it set for subscriber growth in the fourth quarter, adding more than 7 million new subscribers.
For Juenger, there is nothing that the cable networks and media companies can do to continue earning the extraordinarily high ROICs that they earn today.
“And it won't be long before an increasing number of investors begin thinking of TV network companies, e.g., U.S. Large Cap Media, as another sector that is largely ‘un-investable’ – at least until valuations come down and yields come way up,” he wrote.
Article updated April 14 with additional information.