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All Hail King Content

28 March 2013 in Trading Ideas

From televisions and movie theaters to PCs, tablets and smartphones — evolutions in technology have created new ways for us to watch our favorite media.

What hasn’t changed: We’re still watching – and seemingly as hungry as ever for a payload of shows, movies, documentaries and wacky videos to be available when and where we want it. For the creators of this content, this can seem very much like the proverbial sweet spot: Create a compelling product and let your proliferating distribution partners compete on price to keep exclusivity.

This is the so-called Content Is King philosophy, which, as it happens, makes up the investment thesis behind our appropriately named Content Is King motif, a portfolio of stocks of film and television program creators that could continue to benefit from the surge in money paid by cable and satellite operators for distribution rights.

At its most basic level, the economics of cable and satellite programming are fairly straightforward: cable and satellite operators pay networks for the right to broadcast their content. Then the operators pass along some of that cost to customers to make their profit.

It also appears straightforward that costs to acquire continue to rise. For example, Time Warner Cable (TWC) recently said that its programming costs have grown 32% over the past four years.1

A big reason behind that trend is the changing landscape of content distribution. With the rise of online video streaming, augmented by the growing popularity of mobile viewing devices (smartphones, tablets), companies like Netflix (NFLX), Amazon (AMZN) and Hulu have become legitimate competition for the industry’s traditional players. Take note that Netflix said it would shell out $2.3 billion in the next year alone in content costs – up from about $500 million just two years ago.2

If you dig deeper into content dynamics, the picture gets a little more complex. Late last year, for example, Disney (DIS) entered into a billion-dollar movie distribution agreement with Netflix beginning in 2016. But the agreement doesn’t include Disney’s TV content, which it saves for its own Hulu streaming joint venture as well as its own traditional cable and satellite programming.3 (And now Hulu has been reported to possibly be on the block, with major production studios the early odds-on favorites as buyers).4

Then, you throw in the development of traditional cable operators getting into the act. As Bloomberg noted, Time Warner Cable is taking part in regional sports networks that carry Dodgers and Lakers games. Comcast (CMSCA) and DirecTV also own sports networks, while Comcast owns 51% of television content maker NBC Universal.1

See how that works?

Amid that dizzying array of cross-relationships, keep in mind the constant: We’re still watching, with an appetite for even more content not yet sated.

1 Alex Sherman, “Your Cable Bill’s Going Up Again, But Forget a la Carte Pricing,” Bloomberg.com, Jan. 31, 2013, http://go.bloomberg.com/tech-blog/2013-01-31-your-cable-bills-going-up-again-but-forget-a-la-carte-pricing/, (accessed March 26, 2013).

2 Tiernan Ray, “Netflix Rising: Wedbush Sees Steeper Costs In Debt Raise,” Barrons.com, Jan. 29, 2013, http://blogs.barrons.com/techtraderdaily/2013/01/29/netflix-rising-wedbush-sees-steeper-costs-in-debt-raise/,” (accessed March 26, 2013).

3 “What the Netflix-Disney Deal Means For You,” Yahoo Finance, Dec. 12, 2012, http://finance.yahoo.com/news/netflix-disney-deal-means-105030674.html,” (accessed March 26, 2013).

4 Ronald Grover and Jennifer Saba, “Hulu board contacts possible buyers of video streaming site,” Reuters.com, March 25, 2013, http://www.reuters.com/article/2013/03/26/us-hulu-buyers-idUSBRE92O0XL20130326,” (accessed March 26, 2013).