It's the worst kept secret in television: People are fleeing fat cable TV bills for digital media. They are cutting the cord in record numbers.
According to research reported in Fortune on Friday, net cable subscribers fell 4.1% during the last three months of 2018, a decline of 985,000 customers. The old business model is crumbling.
New, digital ecosystems are evolving. Investors should pay attention.
Craig Moffat, a principal at MoffatNathanson Research, the firm cited in the Fortune report, called satellite operators dead men walking. His assessment of cable TV providers was more pragmatic. Many have transitioned to providing broadband internet, insulating them from some industry weakness.
To stop the bleeding, cable companies are making bundles skinnier. They are stripping out expensive sports channels and movies, and throwing in some on-demand features.
AT&T Inc. (T - Get Report) began offering Watch TV in June 2018. The $15 per month service provides 35 live channels. Customers get favorites from A+E Networks, Discovery, AMC and some Viacom channels. And if they spring for broadband, Ma Bell will sweeten the deal with one premium channel like HBO. The pitch is low-cost cable, with fast internet and "Game of Thrones" for free.
The problem is it's not free, not even close. The skinny bundles, internet and equipment rentals push the monthly bill well above $100. And customers still do not get what they really want.
Netflix spoiled them. The streaming company gave the world commercial-free, on-demand access to a huge library of media content, for a relatively low price. It's simple to use, and it works flawlessly on everything from iPhones to Windows desktops to Sony PlayStations.
With paid subscribers nearing 150 million, Netflix is the 800-pound gorilla in the media industry. All of those subscriptions generate huge cash flow, which funds its aggressive content strategy. More content generates more subscribers. It's a virtuous circle, though to be fair it's still a challenge to find new content that's truly compelling. It's hard to create great shows and making more of them doesn't really increase the odds of a scoring a big winner.
Consumers know what they want, and it looks a lot like Netflix. But it is not going to happen.
Jeff Green is the 40-year-old chief executive of Trade Desk Inc. (TTD - Get Report) , a company that builds programmatic advertising technology software. Founded in 2009, the Ventura, Calif., company has become a cornerstone of the new digital media reality. And it's not at all what you might think.
Demand for digital ads is skyrocketing. The disconnect is that consumers can only afford so many Netflix, Amazon Prime, and cable TV accounts, skinny or otherwise. Green explained this new truth in a 2018 videotaped interview with ExchangeWire TV. Consumers are tapped out. They don't want ads, but they can't afford to pay for commercial-free TV.
Ad exchanges, like Yahoo, Google and Microsoft, auction content on their networks to the highest bidders. Trade Desk's robust software is on the other side of those auctions. It's listening to 7 million auctions every second, then helping clients like Domino's Pizza Inc. (DPZ - Get Report) , McDonald's Corp. (MCD - Get Report) and others understand where their ad dollars are best deployed.
eMarketer, a digital advertising research firm, predicted programmatic ad spending would reach $45.7 billion by 2019.
This is beginning to play out in real time. Both Roku Inc. (ROKU - Get Report) , a fast-growing connected-TV platform, and Trade Desk reported blowout results Friday, rising 25.2% and 31.4%, respectively.
Trade Desk grew sales to $477 million in 2018, a 55% increase year over year. The surge is being fueled by large networks such as ESPN, NBC and CBS racing to monetize more of their content online. Green said ad sales for connected-TV platforms grew nine times in 2018.
Investors are finally beginning to understand the potential of this monster new ecosystem. It's not only consumers cutting the cord with cable, it's content moving toward digital channels where it can be monetized. Trade Desk built a lucrative franchise in the middle of it all.
Shares are up 70% this year. They trade at 69 times forward earnings. While this may seem expensive, the business is growing fast. It could be many times the current size over the course of the next three to five years. Investors can consider buying Trade Desk shares into any significant weakness.
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