5 Media Companies With the Most to Win and Lose

BOSTON ( TheStreet) -- Media and entertainment companies are in the throes of the biggest upheaval since the television was invented. The VCR gave way to the DVD player, whose existence is being threatened by streaming video. Netflix ( NFLX), in its quarterly results from last week, all but declared the death of its own DVD business.

It's clear: The future of home entertainment lies in SVOD, subscription video on demand. If you're not streaming videos via Netflix on your Microsoft ( MSFT) Xbox, Apple ( AAPL) iPad, Sony PlayStation or DVD player, you might be watching TV shows and movies on-demand via your Comcast ( CMCSA) or Time Warner ( TWX) subscription. And coming this winter: an increasing number of new televisions featuring integrated Netflix controls, with no need for a connected device.

With so many changes, it's an exciting time for consumers. But for a company such as Netflix, which provides a streaming service, there are massive costs. In its most recent results, Netflix announced that streaming content costs in 2012 would be nearly double the amount spent in 2011, putting it "on par with what HBO spends in the U.S." Currently, Netflix has over $3.5 billion in streaming commitments.

And with other competitors, such as Amazon joining the streaming foray, the those costs can only move higher. Premium cable channels such as Time Warner's HBO and Epix have paid up for exclusive electronic distribution rights to movies and shows, effectively boxing out Netflix. Therefore, for any company with content, like a CBS ( CBS), Starz ( LSTZA) or AMC ( AMCX), this can mean only one thing: more control over content and higher profits.

One example of this phenomenon lies with Starz, a content provider to Netflix since 2008, which recently opted out of an extension, set to expire in February. Starz says the decision was to "protect the premium nature" of the brand and that the "network is in an excellent position to evaluate new opportunities and expand its overall business." Translation? Starz can likely shop its digital rights to a competitor for more money, or go the route of HBO Go and offer its own streaming option.

Therefore, as the experts try to forecast the prospects for steaming options such as Netflix, Amazon, Apple or even a resurrected Blockbuster/Dish combo, investors can be certain of one thing: Content rules, and it might be the best investment of them all.

This is a big earnings week for many media and entertainment companies, with Time Warner, Discovery Communications ( DISCA), News Corp. ( NWS), Comcast, AOL ( AOL), Scripps ( SSP), CBS and DirecTV ( DTV) all reporting results.

Next week, we'll see reports from Disney ( DIS), Lionsgate ( LGF), Dish ( DISH), AMC and Viacom ( VIA.B). Watch for any news or reports of new content deals. Here's a breakdown of a few of the names reporting this week and what sort of content they hold.

Discovery Communications: Owns Discovery Channel, TLC, Animal Planet, Oprah Winfrey Network (OWN). Reports Nov. 1. Recently announced its first TV-streaming deal: a two-year (non-exclusive) licensing pact with Netflix to stream shows at least 18 months old such as Man vs Wild. JPMorgan says Discovery has an average to above-average opportunity in monetizing its digital content. And given that the deal with Netflix was non-exclusive, Discovery could create "a new, high-margin revenue stream for its U.S. business."

News Corp.: Owns Fox, FX, National Geographic; also part owner of Hulu. Reports Nov. 2. Late last month, News Corp. inked a $100 million deal with Amazon, bringing Fox movies and TV shows such as 24, Arrested Development and The X-Files into the fold. Has non-exclusive pacts in place with Netflix as well, with licensing for TV shows such as Sons of Anarchy and The Wonder Years.

Time Warner: Reports Nov. 2. Owns HBO and Warner Brothers. Has SVOD deals in place with Netflix and Amazon. Netflix recently agreed to pay CBS and Time Warner (which jointly own CW) about $1 billion for the rights to stream CW network series such as Gossip Girl. And just last Friday, it was announced that Hulu had signed a similar licensing deal with CW.

JP Morgan says TimeWarner has an above-average opportunity to digitally monetize its substantial library of content. The company has done few deals to date, "implying increased opportunity going forward." According to the bank, "the CW deal with Netflix highlights the value of the TWX library."

Scripps Network Interactive: Owns HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel. Reports Nov. 3. According to JPMorgan, has a below-average opportunity for digital monetization due to no "must-have" networks. The bank calls Scripps a "pure-play cable network" with the highest exposure to advertising, at 68% of revenue.

CBS: Reports Nov. 3. Owns Showtime along with CBS Television, CBS Films. Has SVOD deals in place with Netflix and Amazon. In the second quarter, announced that net income more than doubled, helped by a new deal with Netflix. On the quarterly call, head finance chief Joseph Ianniello said those content deals aren't just "gravy" (because of the 50%-plus profit margins). They also represent "cream and cherries on top." CEO Les Moonves said that Google, Apple, Microsoft and Dish Network could be future buyers of CBS content. Stay tuned for more deals to be signed here.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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