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July 3, 2019, 6:55 a.m. EDT

Media companies are taking the wrong approach as they play catch-up with Netflix, analyst says

Direct-to-consumer streaming services miss the point that content is just a small part of the equation, says BTIG’s Richard Greenfield

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By Ciara Linnane, MarketWatch


MarketWatch photo illustration/iStockphoto, Getty Images
Netflix is a formidable competitor for legacy media companies

Traditional media companies that are reclaiming their content from licensees or planning their own direct-to-consumer (DTC) streaming services may be biting off more than they can chew.

That’s the view of BTIG analyst Richard Greenfield, who wrote Monday of the challenges posed by DTC services that lie outside of the expertise of legacy media.

Companies are grappling with the threat to their business from cord-cutting, which is expected to reach record levels in the second quarter, Greenfield wrote in a note to clients. Industry subscriptions are expected to decline at a more than 3% rate in the quarter, and that could grow to 4% by year-end. Adding to the gloom, TV ad revenue is flat to lower even as the economy has remained strong, he said.

“While we have argued that becoming an arms dealer to a growing array of tech platforms that are building streaming services is the optimal strategy for legacy media, their envy of Netflix’s /zigman2/quotes/202353025/composite NFLX +1.46%  global platform and $160 billion market cap is driving their desire to enter the DTC wars themselves,” he wrote.

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Related: Opinion: How the Disney-Netflix streaming war will create collateral damage

Netflix “is a rocket hurtling towards Mars, while legacy media companies are bicycles with engineers that only have the ability to make more bicycles,” Greenfield wrote in an earlier note, in which he questioned whether it is just too late for legal media companies to compete with the streaming giant. After all, by licensing their content to Netflix in the first place, they helped create the monster it has become with an ability to continue to attract subscribers, even after a 10% price increase, he wrote.

“While we have argued that becoming an arms dealer to a growing array of tech platforms that are building streaming services is the optimal strategy for legacy media, their envy of Netflix’s global platform and $160 billion market cap is driving their desire to enter the DTC wars themselves.”

Richard Greenfield, analyst, BTIG

The main reason to create a DTC service is to command a direct relationship with consumers, which is a shift away from legacy media’s long history of wholesaling, via movie theaters, retail stores and multichannel video programming distributors, or MVPDs.

“Unfortunately, what media companies are missing is a full appreciation that content is only a small part of the DTC equation, with technology and data analytics equally, if not more important ,” said the note. “Gross Adds, Subscriber Acquisition Cost, Lifetime Value, Retention Marketing and Churn are simply not part of legacy media’s core DNA.”

Greenfield further questioned the point of creating a DTC service for companies that are planning to use channel platforms, like those offered by Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.81% , Roku Inc. /zigman2/quotes/205087179/composite ROKU +0.66% and Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.36%  Those platforms are easy to use for consumers as subscribing takes just a few clicks and the consumer’s credit card details are already on file with the platform.

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“From a marketing standpoint, these channel platforms can highlight individual pieces of content that drives you to subscribe versus app stores that are app focused versus content focused,” he wrote. “Not only does this shift the subscriber acquisition cost to a third-party, but it also leads to far lower churn, as a subscriber through a Channel store is buried within a much larger monthly bill vs. a direct bill from the subscription service itself.”

If legacy companies are in any case planning to use third parties, it may make no sense to also build a DTC service, said the analyst.

/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 298.60
+4.31 +1.46%
Volume: 4.81M
Sept. 17, 2019 4:00p
P/E Ratio
117.10
Dividend Yield
N/A
Market Cap
$128.85 billion
Rev. per Employee
$2.22M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,822.55
+14.71 +0.81%
Volume: 2.03M
Sept. 17, 2019 4:15p
P/E Ratio
75.62
Dividend Yield
N/A
Market Cap
$894.26 billion
Rev. per Employee
$359,671
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/zigman2/quotes/205087179/composite
US : U.S.: Nasdaq
$ 150.52
+0.98 +0.66%
Volume: 11.18M
Sept. 17, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$17.54 billion
Rev. per Employee
$668,322
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 220.70
+0.80 +0.36%
Volume: 18.37M
Sept. 17, 2019 4:00p
P/E Ratio
18.82
Dividend Yield
1.40%
Market Cap
$993.77 billion
Rev. per Employee
$1.98M
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