The pandemic fueled a surge in media stocks as people binge-watched their way through lockdown. Video streaming stocks like Netflix and Disney had big runs in 2020 as Covid disrupted the entertainment industry. And as the world opens up, these content giants plan on spending big bucks to keep subscribers tuned in.
Investors Focus On Subscriber Growth
The battle to retain subscribers is of particular interest to investors who view that metric as a key indicator of future growth and revenue for video streaming services.
Netflix stock plunged after its most recent earnings report as it released a disappointing outlook for subscriber growth. The company says it expects to add 2.5 million subscribers in Q1. That is lower than the 3.98 million it added in Q1 2021. In total, Netflix currently has about 222 million subscribers worldwide.
Meanwhile, Disney stock soared after its Q4 earnings thanks to strong subscriber growth. Disney+ hit 129.8 million subscribers, beating analyst expectations of 125.4 million.
Media companies are investing heavily in content and the user experience to keep viewers tuned in, says John Harrison, who heads the media and entertainment division at EY. The consulting firm publishes an annual report analyzing key trends in the media sector.
But is that the best use of cash? Harrison explained that for now, it appears subscriber growth in the U.S. seems to be slowing. And if that continues, it will be important for media companies and investors to shift focus.
"Streaming companies and media companies with video streaming services are going to have to pivot toward more of a focus on the long-term profit opportunity with streaming and maybe away from just all-out subscriber growth," Harrison said. That includes Netflix, Disney+, Amazon's Prime Video and others.
Harrison in a recent video interview with Investor's Business Daily outlined three key themes for investors to watch.
Trend No. 1: Video Streaming Services Continue To Invest Heavily In Content
According to Harrison, the top media industry trend will continue to be heavy investment in video streaming content. Spending in this category for the top nine media companies will hit $140.5 billion this year, according to data from Wells Fargo. That's a 10% increase over 2021.
"The pivot to streaming is absolutely the top strategic priority for the big media companies," Harrison said. "The constant need to refresh the portfolio of content is going to remain so I think the investment will only continue to grow from here."
Trend No. 2: User Experience Takes Center Stage
Video streaming services aren't only throwing money at content, but they're also investing heavily in the user experience.
"The streaming landscape for consumers has gotten so complex," Harrison said. He explained that it's important for video streamers to provide viewers with services on how to find programs and services to watch.
"There's going to be a push toward making that experience more simplified and more customized," Harrison continued. "Whether that's through content recommendation engines, or making the technology experience as seamless as possible in terms of signing up or switching across devices or finding a way to do creative bundling."
Trend No. 3: As Movie Theaters Gain, Will Video Streaming Sustain?
Another key trend that will affect video streaming services like Netflix and Disney+ is the return of the movie theater. Box offices were hit hard during Covid lockdowns, with 2020 revenues hitting a 40-year low. While those numbers rebounded in 2021, theaters now have to contend with streaming services for movie releases.
So, can the movie theater industry bounce back and still help streamers? Harrison pointed to the recent success of "Spider-Man: No Way Home" as a possible model moving forward.
"I think the studios recognize the value of the theatrical release for their biggest film," Harrison said. He noted that the biggest change the industry will see in 2022 is the shortening of the exclusive theatrical window to approximately 45 days. This release approach would enable consumers to view new movies in the theater or at home.
But Harrison says the biggest driver that will affect growth for video streamers will be balancing investments in programming with healthy cash flow.
"The emerging trend that will have the biggest impact will be media companies looking at their streaming businesses and identifying really whether the long-term growth potential is aligned with the amount of investment they have to put into those businesses," Harrison said. "It's a tricky balance."
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