The streaming media and live TV worlds are colliding.
That's a key takeaway from State of OTT, a June 2019 ComScore presentation. The media analytics company set up measuring devices across 8,000 U.S. households to divine industry trends.
What analysts found was shocking. It's a wake-up call for investors.
Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report defined the rise of over-the-top media. Born as a mail-order DVD rental company in the 1990s, a direct-to-consumer business model was in its DNA. Going over the top of traditional telecom, broadcast and cable TV platforms was a natural evolution. And it worked.
The Los Gatos, Calif.-based streaming media giant amassed 137 million subscribers by letting people watch what they want when they wanted it, and on whatever screen they had handy. For a long time, that strategy seemed like it might be enough.
ComScore analysts found that 75% of the 64 million U.S. OTT households had Netflix subscriptions. The next closest competitors were people who had accounts with Alphabet's (GOOGL) - Get Alphabet Inc. Class A Report YouTube, Amazon (AMZN) - Get Amazon.com, Inc. Report Video and Hulu, with 55%, 44% and 32% respectively.
However, Netflix's market penetration increased only two percentage points year over year, according to ComScore. It's now clear consumers want everything on demand. And that includes live TV.
One of the oddities of the growth of OTT media consumption is that 65% of OTT households maintain cable/satellite subscriptions. Rumors of the death of cable TV at the hands of Netflix are greatly exaggerated.
The cable companies should be worrying about Alphabet and Disney (DIS) - Get Walt Disney Company Report instead. Through YouTube TV and Hulu, those companies are moving aggressively to give media consumers the best of both live and on-demand programming.
YouTube's live TV offering began rolling out in 2017. The big idea was to bring users the same glitch-free streaming YouTube mastered over the past 13 years, with access to 70 live TV channels including local news and sports, search powered by Google and six individual accounts, so family members can build TV experiences geared to their individual interests.
Mom, dad and the kids can even save favorites to a free personal DVR cloud that CNet called the best in the business.
And Google Assistant, the company's voice-activated, personal digital valet, is being carefully woven into the platform, too. Imagine never again scrolling through antiquated TV guide menus, or digging the remote out of the sofa cushion to flip the channel.
For its part, Disney announced a $53 billion agreement to merge with 21st Century Fox in December 2017. The deal gave Disney control of the third largest movie studio, the Fox TV network (minus cable news), and FX and National Geographic, two rising cable networks.
The new House of Mouse might be the biggest media empire ever assembled, with everything from the Star Wars, Marvel, and Avatar film franchises, to the Simpsons, the longest running TV show.
Most of that content goodness, along with the massive Disney animated film catalog, is being packaged as digital streaming channels, to be sold as a monthly subscription. At $6.99 per month, it's just over half of the cost for a standard Netflix account.
But the real action is behind the scenes.
In October 2017, Disney acquired a 75% stake in BAMTech, a streaming media technology company originally formed by Major League Baseball. The tiny New York company mastered high volume live streaming with proprietary algorithms.
The company put together a streaming platform for HBO in a matter of months, according to a New York Timesstory. The software went live just ahead of the season 5 premiere of Game of Thrones, the most viewed show on TV. It worked flawlessly.
Varietyreported in May that Disney was taking full control of Hulu. The $5.8 billion deal with Comcast (CMCSA) - Get Comcast Corporation Class A Report followed an agreement with AT&T (T) - Get AT&T Inc. Report in April to scoop up its 10% stake in the streaming business.
Hulu offers 85,000 TV shows and movies on demand, with ads for $5.99 per month, an ad-free subscription for $11.99 and a live TV service with 50 channels for $44.99 monthly.
ComScore analysts call this category a virtual "multichannel video programming distributor" (MVPD) because providers get all of the benefits of cable providers, without owning the infrastructure. Instead, the internet is the distribution channel.
Virtual MVPDs had 5% of the U.S. market in April 2018, a 58% increase year over year, according to a research note. Hours spent viewing programming jumped 53%. And the demographics of users is beginning to skew older. This suggests the category is moving toward mainstream adoption.
Disney shares are at an inflection. The company has the right technology, content and ambition to take on both Netflix and the cable companies.
The stock trades at 22x forward earnings and 4x sales, for a market capitalization of $256 billion. While the stock is up 29% so far in 2019, the valuation is not extreme. Netflix shares, for example, trade at 65x forward earnings and 10x sales.
But Disney's core streaming assets are better, growing more quickly and with better prospects.
Disney's stock could certainly trade to $215 during the next three years, or 51% above current levels. For growth-at-a-reasonable-price investors, Disney is a buy into any weakness.
To learn more about Jon Markman's recommendations at the crossroads of culture and technology, check out his daily investment newsletter Strategic Advantage. To learn about Markman's practical research in the short-term timing of market indexes and commodities, check out his daily newsletter Invariant Futures.
The author owns shares in Netflix and Google.