Which stocks will shine in the golden age of television?

A night on the sofa watching television used to be a straightforward affair. With just a few channels, the choice was strictly limited and often rubbish maybe a soap, a lifestyle show, or a new BBC or ITV drama. Nowadays, just choosing what to watch can be an exhausting process in itself. Hours can pass by flicking between multiple channels provided by pay-TV (satellite or cable) companies, streaming platforms such as Netflix, Amazon and Now TV (which deliver their programmes over the internet), or catch-up services such as BBC iPlayer or All 4. The familiar complaint now is that there's just too much good stuff on telly, and that it is a struggle for many viewers to keep up with the latest must-see dramas such as Killing Eve, Chernobyl, Game of Thrones, or Stranger Things.

Why we have so much choice

This surfeit of choice is the result of profound changes in the television industry. More programmes ("content") and platforms are now being delivered "over the top" (OTT) to screens via the internet rather than over a limited broadcast spectrum, or through one or two powerful satellite or cable companies.

Companies such as Netflix and Amazon have ploughed millions into producing new shows or buying up libraries of content for their OTT streaming platforms in order to entice customers. Netflix alone is reported to be spending £15bn on content in 2019. The strategy has certainly attracted subscribers: Netflix now has 152 million globally. But it has also prompted a content war in the TV industry, with many existing players stepping up their investment in programmes so they can compete with the new entrants. For example, pay-TV service Sky, bought by Comcast last year, said last month that it would more than double its spending on original programmes to over £1bn a year by 2024.

A golden age of television

Not only is more content being produced, but the rising demand is rapidly boosting programme budgets. Tom Harrington of Enders Analysis says that the cost of drama has jumped by 40% in five years. Today's content war has led to a golden age of viewing for TV fans, good news (or bad news for those feeling overwhelmed) but the choice is going to get even wider. New streaming platforms are set to launch from the likes of Apple, Disney and WarnerMedia. All have been investing heavily in an array of shows for their new services as they look to take on Netflix and Amazon. Disney, for example, expects to spend $1bn on original programming solely for its Disney+ service. By 2024 this figure is to reach $2.5bn.

A market in flux

All this upheaval will see many established companies lose out, others successfully adapt to the new world, and a number of entrepreneurial newcomers emerge as key players. Let's start with the losers. They are most likely to be traditional pay-TV providers, says Jonathan Broughton, lead analyst at Broadcast Intelligence. In the US, the five biggest Comcast, AT&T/DirecTV, Charter Communications, Dish and Verizon saw subscriptions shrink by 4.2% in 2018, collectively losing around 3.2 million customers for the year. In the UK, regulator Ofcom reported last year that pay-TV revenues had fallen for the first time after a long period of growth. They have been hit as consumers have dropped pricey pay-TV packages in favour of cheaper streaming services such as Netflix (which costs $12.99 for a standard plan in the US, and £8.99 here).

Many pay-TV providers in the US have sought to stem the tide by launching cheaper, slimmed-down versions of their services over the internet, so called "skinny bundles" such as DirecTV Now and Dish's Sling TV. In the UK, Sky has sought to combat the likes of Netflix with its own skinny bundle, Now TV. But the US skinny bundles aren't growing fast enough to offset the loss of subscriptions from pay-TV, says Broughton. "These services added under two million subscribers per year less than half the growth needed."

Traditional broadcasters are fighting back

Traditional free-to-air broadcasters such as the BBC and ITV have also had their businesses hugely disrupted by the streamers. Last year, for example, the BBC admitted that young people are spending more time watching Netflix than all of its BBC TV services each week. Nevertheless, free-to-air channels still account for the majority of viewing in the UK and look set to remain popular for many years to come. "Linear TV viewership is obviously heading in the wrong direction, but there will always be an audience and purpose for that sort of television," says Harrington.

Many are also now taking action to counter the threat from the US streamers. The BBC and Channel 4 have recently struck deals to exploit the rights to their shows more effectively on their catch-up services, BBC iPlayer and All 4. This will allow viewers to binge-watch box sets for longer; shows have hitherto vanished from the website after a month or so. ITV and the BBC have also unveiled plans for a joint-venture streaming platform, BritBox, which will launch later this year priced at £5.99 a month. These broadcasters have strong brand recognition and produce local content that resonates with viewers. Their challenge is that they lack the budgets of the deep-pocketed US streamers, which don't have legacy broadcast businesses to worry about.

Where to look for the winners

As for the likely winners in the fast-changing TV market, they can be split into two camps: production companies and streaming services. Let's look at the production companies first. Producers have thrived on the back of the growth in demand for content, thanks to an array of new clients to make shows for. Demand for top content has also climbed because US studios such as Disney and WarnerMedia are now saving many of their programmes for their own new streaming platforms rather than licensing them to other platforms and broadcasters. WarnerMedia, for example, recently announced it was pulling Friends from Netflix. The hit series will air from 2020 on WarnerMedia's new streaming platform HBO Max.

The content producers to watch

Essentially, the US studios, who have long been key programme suppliers to broadcasters and streamers such as Netflix, are now going directly to consumers. That has left a big hole for their former customers to fill. "Any other content producer that is available suddenly becomes more valuable," says Ian Whittaker of investment bank Liberum.

Entertainment One (LSE: ETO), a film and TV production and distribution firm, fits into this category. It's best known for children's favourite Peppa Pig and thriller series Designated Survivor, but last year bought top Hollywood film and TV producer Mark Gordon's firm (which produced the popular medical drama Grey's Anatomy). It will also produce and distribute 5 Year, the next show from The Walking Dead creator Robert Kirkman.

Lions Gate Entertainment (NYSE: LGF), meanwhile, has the The Hunger Games and Twilight franchises to its name. Lions Gate has been in talks about selling its entertainment network Starz, but could become an acquisition target itself. Its share price has halved in the past year following disappointing earnings, but it still has a reputation for top content and clever acquisitions.

ITV (LSE: ITV) is best known as a broadcaster, which might explain why its share price has halved in the past four years as investors worry that it has most to lose from the growth of the streamers. But ITV has been diversifying: ITV Studios, its in-house production division, now accounts for half of the company. It produces and owns the rights to hit formats such as I'm A Celebrity... Get Me Out of Here! and Love Island.

Which streaming platform will prevail?

Moving on to the streaming platforms, Apple (Nasdaq: AAPL) launches its own service later this year, Apple TV+, while Amazon (Nasdaq: AMZN) has had great success with Prime Video. For those wanting to invest in this sector, they are attractive because the risk of their streaming push is hedged by their strong presence in other areas. Amazon is using video to lock customers into its retail platform, while Apple is looking to add to the services it has built around its devices.

Netflix (Nasdaq: NFLX) is a riskier bet. On the plus side, says Harrington, Netflix is increasing its spending on content and marketing more than anyone else, so it may get even further ahead of its competitors. However, Whittaker points to concerns about cash burn at Netflix and whether its subscriber growth can hold up amid stiff competition. It is also extremely richly valued.

Finally, Disney (NYSE: DIS) straddles both production and streaming. Many are bullish about Disney's prospects, citing unrivalled content. In addition to Walt Disney Pictures, it owns Pixar, 20th Century Fox, Lucasfilm and Marvel Studios. Disney also now has full control of successful US streaming platform Hulu, giving it the know-how to launch its own Disney+ service. Disney is lauded for being well run, truly global in reach, and efficient at monetising programmes across multiple platforms, merchandising and theme parks. If anybody can adapt to the profound changes sweeping through the sector, it is likely to be Disney.