October 26th, 2020

UW Finance Association Video Streaming Service Industry Primer Market Research Research and Education

Video Streaming Services Industry Primer

All amounts in $US unless otherwise stated. Authors: Brian Cheung, Ian Cheung, Kevin Overview Kuong Research Analysts 2020 has been a volatile year across different industries Editors: after being shocked by COVID-19. Some industries Ben Rawlings, Nipinder Ghuman experience a downfall when public places are forced to shut Co-VPs of Research and Education down to maintain safety precautions. The technology, media, and telecom sector has outperformed many sectors during an economic downfall. Upcoming innovations will make such industry a top choice for various investment decisions.

Video Streaming Service A video streaming service is an on-demand online entertainment source for movies, tv shows, and other streaming content. These services can be delivered through various devices such as televisions, computers, tablets, and smartphones. Video streaming is just like how data is sent over the internet. Audio and video data are broken down into data packets then are received by the client device to interpret the data as video or audio.

Exhibit 1: Main features for a successful video streaming service

Industry Overview

The video streaming service industry has become more popular after COVID-19 has hit the globe. Governments in many countries restrict public activities and consumers are now staying at home for a longer period than they ever had. Movies and television shows have always been a top

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entertainment preference for consumers to do at home. Many video streaming service companies experience an increase in demand in 2020. Today, there are different kinds of streaming services appealing to different targeted consumers. Netflix, Hulu, YouTube, and Amazon Prime have captured most of the market shares.

Exhibit 2: Markets shares of the industry

Exhibit 3: Most popular choice of OTT streaming services in the United States

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Main Players

Amazon (NASDAQ:AMZN) Amazon Prime Video operates as an internet video on demand service. The membership costs $119 per year (TechRadar, 2020), offers additional services such as free 2-days shipping, prime video, music, and reading material. It includes more than 12,000 free movies and television shows. The subscription costs ranged between $5.99 to $11.99 depending on the features. Current season TV shows are generally available within a day of airing, but availability of new movies is slow.

Disney plus (NYSE:DIS) Disney plus is the go to streaming service to watch almost everything Disney produces. Viewers can watch content from Disney owned brands like Marvel and Pixar to a lot of the family-friendly animated movies like Frozen. Due to the abundance of content at a price of C$9 per month, Disney plus is now sitting at 65 million subscribers in their first year of launch. Hulu is also a subscription video on demand service controlled by Walt Disney. Hulu’s subscription costs range between $5.99 to $11.99 depending on the features. Current season TV shows are generally available within a day of airing but availability of new movies is slow.

Netflix (NASDAQ:NFLX) Netflix is arguably the largest international online streaming platform which operates on a subscription business model. Netflix was originally founded in 1997 as a movie rental service that charged an average $4 plus shipping per rental. In 2007, Netflix launched its video on demand distribution system. Monthly plans range from $9.99 - $16.99 which offers a wide selection of TV shows and movies with exclusive deals and originals added in the mix.

HBO - (NYSE:T) HBO is a subscription based streaming service owned by AT&T and Warner Media and it is a relatively new entrant to the market, launching in May of 2020. HBO has a library of content ranging from their original series, documentaries and other third party licensing content. HBO is currently at 4.1 activated users and 21 million additional HBO TV pay customers who are entitled to their streaming services.

YouTube - Google (NASDAQ:GOOGL) YouTube, owned by Google, mainly operates as a free video sharing website that was founded in 2005. Although most commonly known for its free service, YouTube offers additional subscription services known as YouTube Premium and YouTube TV. The former allows users to enjoy their free content ad-free, access to YouTube Originals videos and YouTube Music, and adds additional features such as video downloading and background play for C$11.99 a month. YouTube TV, priced at $64.99 a month, allows the access to stream live TV from a wide selection of broadcast and cable networks.

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Comcast (NASDAQ:CMCSA) Comcast is an American media and entertainment company. It is known for some of the most significant television networks in the United States. This includes National Broadcasting Company (NBC), one of the United States’ big three television networks and the major Hollywood film studio Universal Pictures. Comcast’s revenue comes from broadcasting, cable television, HDTV, and digital telephone.

Fox Corporation (NASDAQ:FOXA) Fox Corporation provides television, news and film services. It was the fourth largest media corporation in the United States until it was acquired by The Walt Disney Company in 2019. There were some of Fox’s assets not acquired by the Walt Disney Company now operating as the new Fox Corporation. These assets include the Fox Broadcasting Company, Fox Television Stations, Fox News, Fox business and Fox Sports.

CBS All Access (NASDAQ:VIACA) CBS All Access is an American streaming video service owned by CBS Interactive and it is now a subsidiary of ViacomCBS after the merger of CBS and Viacom in 2019. CBS provides classic shows with over 10,000 episodes available. In addition to content on-demand, CBS All Access also offers streaming for live sports and news coverage. Prices range between $5.99 and $9.99 depending on whether the consumer wants an ad-free experience.

(As at October 23, 2020) Market Data Financial Data Valuation

Market Diluted Price Cap EV Sales EBITDA EBIT EPS EV/Sales EV/EBITDA EV/EBIT P/E Compa ny Name ($/Share) ($M) ($M) ($M) ($M) ($M) ($M) x x x x Amazon.com, Inc. 3,204 1,605,051 1,625,061 321,782 39,575 16,732 26.04 5.1 41.06x 97.12x 91.74x Alphabet Inc. 1,633 6,306,622 6,201,685 166,030 46,035 33,357 7.58 37 134.72x 185.92x 32.86x Netflix, Inc. 488 215,720 225,464 23,819 4,201 4,090 6.19 9.5 53.67x 55.13x 56.28x AT&T Inc. 28 198,227 388,906 172,890 49,957 24,772 1.51 2.2 7.78x 15.70x 8.74x The Walt Disney Company 128 231,937 290,894 69,762 11,879 6,575 ( 0.74) 4.2 24.49x 44.24x 125.29x ViacomCBS Inc. 29 18,119 38,665 26,513 4,584 4,176 2.17 1.5 8.43x 9.26x 7.09x Fox Corporation 27 16,134 20,331 12,303 2,779 2,497 1.62 1.7 7.32x 8.14x 13.78x Comcast Corporatio n 45 205,839 304,314 105,549 32,971 20,086 2.49 2.9 9.23x 15.15x 17.83x

Average 8.0x 35.8x 53.8x 44.2x Median 3.5x 16.9x 30.0x 25.3x

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Exhibit 4: Media Landscape as of Dec. 2019

Key Valuation Metrics

Aside from traditional metrics such as P/E , P/B, and EV/EBITDA, there are other industry specific valuation metrics explained as follows.

Average revenue per account (ARPU): Average revenue per account is the average amount of revenue generated per user. It provides an insight for companies to see how its services directly translated into revenue. ARPU can be calculated as:

푇표푡푎푙 푅푒푣푒푛푢푒 퐺푒푛푒푟푎푡푒푑 푑푢푟𝑖푛푔 푎 푡𝑖푚푒 푝푒푟𝑖표푑 퐴푅푃푈 = 푇표푡푎푙 푁푢푚푏푒푟 표푓 퐶푢푠푡표푚푒푟푠 퐷푢푟𝑖푛푔 푡ℎ푒 푠푎푚푒 푡𝑖푚푒 푝푒푟𝑖표푑

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Customer Acquisition Cost payback period (CAC payback period): Customer Acquisition Cost refers to the amount of time needed for a company to earn revenue to cover the costs of acquiring the customer. CAC payback period can be calculated as:

퐶푢푠푡표푚푒푟 퐴푐푞푢푖푠푖푡푖표푛 CAC Payback period = 퐴푣푒푟푎푔푒 푅푒푣푒푛푢푒 푃푒푟 퐴푐푐표푢푛푡∗퐺푟표푠푠 푀푎푟푔푖푛

Customer Lifetime Value (CLTV): Customer Lifetime Value measures the expected amount a company makes from any given customer over its total subscription period. This metric allows companies to assess the financial value of its customer. The formula is:

퐶퐿푇푉 =Average revenue per account * Gross Margin * Lifetime

Churn Rate: Churn rate is known as the rate at which users stop using an app with a company. Evaluation of churn rate can help the company assess its product and track customer’s behavior. Average churn rates for subscription services are approximately 6-8%, companies should always look to reduce the rate. The formula is:

푁푢푚푏푒푟 표푓 퐶푢푠푡표푚푒푟푠 퐿표푠푡 푤𝑖푡ℎ𝑖푛 푎 푃푒푟𝑖표푑 퐶ℎ푢푟푛 푅푎푡푒 = 푇표푡푎푙 푁푢푚푏푒푟 표푓 퐶푢푦푠푡표푚푒푟푠 푎푡 푡ℎ푒 푏푒푔𝑖푛푛𝑖푛푔 표푓 푎 푃푒푟𝑖표푑

Industry Trends

Growth

The recent outbreak of the Coronavirus has put approximately ¼ of the global population in lockdown which led to a 10% spike in viewership across streaming platforms. Notably, Netflix alone has seen an increase of 50% in the number of first-time installations on mobile in Italy. Popular live stream platforms such as Twitch, Facebook live and Youtube live have also gained widespread popularity and viewership up to 75% in Q2 of 2020 as people are looking for ways to stay connected with others and remain entertained indoors. Analysts expect the video streaming service to expand at a CAGR of 20.4% from 2020 to 2027 to reach $184.7 billion (USD). The growth is expected to be fueled by the rising demand for on-demand content and over the top video streaming services with the advancement in technologies like 5G and cloud computing; ultimately delivering a seamless entertainment for users.

M&A Activity

Disney Acquisition (NYSE:DIS) of Twenty First Century Fox

On March 20th, 2019, Disney closed its $71.3B acquisition of 21st Century Fox. With Disney having an overall market share of about 26%, combined with 21st Century Fox’s market share of 9.1%, they combine for over 35% of the movie market. As Disney had acquired Star Wars and

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Marvel previously, similarly, this acquisition primed Disney with a wider selection of films, TV shows, and intellectual property they can draw on as part of their content library on Disney Plus.

Netflix Acquisition (NASDAQ:NFLX) of StoryBots

In interest of expanding their educational content, Netflix acquired StoryBots, a children’s educational media franchise, in May of 2019. This purchase was abnormal as Netflix has not been known to make acquisitions on content companies and spends most of their expenses on the actual content. However, as kids’ content is cheap to make, this category has been the main testing grounds for their innovation in interactive TV shows and movies. Although the price of the deal wasn’t disclosed, CNBC announced it was immaterial, citing sources.

Viacom and CBS Merger (NASDAQ:VIAC)

On December 4th 2019, Viacom and CBS’s merger closed and was renamed ViacomCBS. This merger allowed for the addition of the movie studio Paramount Pictures, cable networks such as Nickelodeon, South Park Studios, and streaming service Pluto TV. With the combined assets, this merger was to allow ViacomCBS to remain competitive in the TV streaming landscape as an medium sized company with a market cap of $23B as of 2019. Valuation metrics for this deal include: TEV/Revenue of 1.40x and TEV/EBITDA of 6.12x.

Industry Risks

Tailwinds

COVID-19 Safety Regulations: COVID-19 has impacted many sectors resulting in financial loss. According to the CDC (Centers for Disease Control and Prevention), Covid-19 spreads from person to person through respiratory droplets that are released when an individual coughs or talks. The awareness of social distancing and safety has risen throughout the years. Traditional movie theatre experienced an exponential downfall in its revenue as a result of government implementation of shutting down certain businesses. Consumers would demand a safer environment for entertainment thus substituting video subscription services over movie theatre. The growing trend for video on-demand services will continue to rise when consumers are changing their ways of living to cope with COVID-19.

5G Innovation: The introduction of the 5G network will change the way humans live in many ways. Its deployment could speed up the process of delivering video and internet at much higher speeds. 5G allows consumers to download 4K movies in just seconds and buffering video will be a thing of the past. With an upgrade in streaming quality and download speed, consumers would likely shift their ways of watching movies from a movie theatre to a video subscription service app like Netflix, Hulu, etc. Currently, countries such as China, South Korea, and the United States lead in the world in building and deploying the 5G network. 5G is already available in some locations, it is expected to be widespread across the world in 5 years.

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Headwinds

COVID-19 Shutdown in content production: The global pandemic has slowed the progress of producing new content due to severe international travel restriction and most countries’ regulation to close all “unessential” businesses. Although most are accustomed to this new normal, an extended period of lack of production is expected to decelerate new subscription rate as content dries up in various platforms.

Saturation in the US Video Streaming Market: The growth of the US market is expected to slow down compared to the rate it has been growing in the past due to the fact that 75% of the US households have already been penetrated. With more new entrants to the industry, the margin will continue to be slim and viewers will have higher bargaining power.

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