Although this is theoretically true, there is a caveat attached to it. There is no guarantee that both Amazon and Netflix may emerge as competitors by offering original content, either produced or outsourced, which they are already doing in a small way. In addition, online sites can refuse deals that they consider costly, something that Netflix, Inc. (NASDAQ:NFLX) has already demonstrated.
The subscription video on demand market is presently not a very big market and comprises only 1% of total revenue of the six largest media companies. However, it forms roughly 5% of their total operating incomes because of the high profit margin. The Wall Street Journal quotes Sanford C. Bernstein that spending on content is estimated to be in the region of $4 billion in the next few years.
Impact of individual companies
CBS has the highest exposure with 10% of its operating income coming from licensing content to subscription on demand. Time Warner Inc (NYSE:TWX) and Discovery Communications Inc. (NASDAQ:DISCA) get 5% and News Corp (NASDAQ:NWSA) and Viacom, Inc. (NASDAQ:VIAB) get about 4%. Walt Disney is the least exposed with 3%.
The extent of impact depends largely on each company’s dependence on advertisement revenue. For example, CBS and Viacom are likely to be affected the most as they derive less revenue from affiliates and more from advertisements.
The media companies mentioned here have strong balance sheets. Barring Discovery Communications, all are dividend paying companies. With exceptionally high debt to equity ratios. Viacom appears weaker than the others, but at the same time it has the highest EPS.
Conclusion
For Times Warner, separation of the publishing arm is a welcome step and likely to unlock hidden value. As it continues to increase focus on Networks and Film and TV Entertainment segments, investors can expect the company to come up with better than expected results in the coming years.
For the industry as a whole, it needs to be noted that in the last three years, popularity of online streaming video has not been able to make much of a dent in traditional television viewership. This indicates that it is seen more as an alternative to DVDs and for viewing on mobile devices where TV is not available than as a threat to TV networks.
Sooner than later, media companies will realize that newness carries a premium and will be more disciplined in licensing new content. No matter where the threat comes from they need to protect their TV ratings and ad and affiliate revenues.
The article Time Warner Severs Publishing Arm to Focus on Threat from Streaming Video originally appeared on Fool.com and is written by Sujata Dutta.
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