Digital disruption has emerged as a key investment theme, with many companies offering investors a play on the technological advancements that are transforming certain industries. Astute investors stand to benefit from the significant change occurring as a result. With the significant upheaval that has occurred in the digital entertainment space, music, television and film streaming are particularly interesting.
The music streaming evolution
A natural next step
The music sector was one of the first to be hit by the digital revolution. The way we listen to music on the go continues to evolve in line with our devices. Portable music began with Walkmans, before Discmans, then iPods and other MP3 players. Now smartphones are the most common portable music device.
Digital sales in Australia have now overtaken physical sales of records. Physical sales started to decline in 2005, the year Apple iTunes Australia was launched. The reason why music streaming is surging on smartphones and mobile devices is being driven by faster internet speeds, larger mobile data packs and lower costs.
Ten years ago consumers paid around $30 for a new release CD, whereas music streaming costs on average $12 per month for access to exhaustive music libraries.
Who are the players?
In Australia, there are 16 different players in the market that offer music streaming services. This figure continues to change at a rapid rate as players enter and exit the market. The Australian market is dominated by the international players, with Spotify, Apple Music, YouTube, Google Play and Pandora leading the way. While there are some Australian companies, such as Guvera, competing for a share in a highly cluttered local and international market.
Each player offers a mix between free services backed by intermittent advertising, or an ‘ad-free’ paid subscription. According to Spotify’s website, it has more than 20 million subscribers paying $11.90 per month from 75 million active users in 58 countries.
Apple Music launched on 30 June this year, offering consumers a three-month free trial. Interestingly, Spotify also offered a free three-month trial one month before Apple Music’s launch.
The other player is YouTube, which holds the title for the most watched music videos in the world. YouTube’s most watched videos are music videos, for example Gangnam Style by Psy, which is the most watched video on the internet, with over 2.4 billion views. YouTube has flagged that the launch of its own streaming service has been delayed to late 2015.
Locally, the only ASX listed company that has exposure to the sector is JB Hi-Fi, through its product JB Hi-Fi Now, which launched in 2011. In my opinion, it is a good offering, however consumers are spoilt for choice and we are seeing the global players gain more traction locally.
While JB Hi-Fi acted early in the face of its declining CD sales, responding promptly with the launch of a respectable product, it remains immaterial in terms of its contribution to the company’s financial results.
Spoilt for choice
Music streaming combines lower costs and wider choices than its predecessors, and its prominence in the broader music sector is secured for the longer term. In our opinion, the Australian market remains crowded and is set for consolidation over time. This has commenced with the recent market exits of Telstra Bigpond Music and Grooveshark. With plenty more movement to come, we will be listening closely.
How we watch TV and movies will never be the same
The end of the family box
The way consumers watch television and films has undergone significant change in recent years. We have seen rapid growth in consumers watching content through mobile devices or streaming via the internet. The vast majority of Australians currently have access to broadband, with the latest figures showing 77% are connected at home. Consumers are increasingly time poor and like to watch TV in their own time and on-demand. The average Australian consumer downloads between 50 to 60 gigabytes per month and this is growing at around three gigabytes per month. This pace is expected to accelerate as online streaming gathers momentum, particularly as high definition videos have become the norm.
Lounge room leviathans
Global behemoth of on-demand streaming media, Netflix, which entered Australia in March, along with Stan and Presto, are set to gain significant local market share. In recent months we have seen Foxtel significantly reduce prices for its various consumer packages in response to the competition and free-to-air networks’ ratings have fallen. This week Telstra announced it will launch a device, Telstra TV, which will broadcast streaming service such as Netflix, just as Apple TV does already.
Shrinking audiences for some
How the free-to-air businesses and Foxtel can adapt and build a product that entices consumers over the next decade will be a critical part of sustainability and profitability going forward. This will also help shape the industry landscape around media laws. For example, last year Nine’s CEO David Gyngall put regional TV stations on notice: “In five years’ time we will just go around regional television and stream our content into those markets”. As viewers watch more television over the internet, he said he was no longer lobbying for repeal of the 75% reach rule that prevents metropolitan broadcasters from taking over regional affiliates.
Where to from here?
When investing in any of the entertainment companies in the Australian sharemarket, it is important to understand the dynamics of current and future structural change. We will be looking to closely monitor the companies’ responses to such a shift in the industry landscape. In our view, the ones that adapt will be the winners in the long run.
