Sunday, 10 May 2015

Time Warner the cheapest way to play TV streaming?

Internet television has taken off with Netflix, Amazon and Hulu leading the way. Investors have had less choice with Netflix being the only pure investment choice Hulu is not listed and Amazon streaming comes along with a retail and cloud business (not too bad a problem to have). Netflix has been the default it is bigger than every other cable network in the US with the average user consuming nearly 2 hours of content a day. The release of HBO Now from Time Warner (TWX) gives consumers and investors new options. HBO is the premium TV service but until recently it was only available on cable.

HBO Now will target the 10 million homes with broadband who don't have a cable subscription. There are also 70 million households in the US that pay for cable but do not have HBO. It's an experience you've probably had but as a premium service HBO has been promoted as an add on to the basic cable bundle. According to Fast Magazine the average HBO pay TV bill added up was $130, HBO Now at $15 is a much more compelling offer. It is also a much cheaper option for investors. TWX is a not a pure play internet streaming investment but they are media content owners having Warner Brothers and the Turner network on their team. Both these services have the potential to be integrated into HBO now or in their own app.

 Note Netflix subscribers as of 31st March 2015, HBO December 2014 numbers include Cinemax subscribers.
HBO has around 30 million domestic subscribers  not including Cinemax.
Source: Netflix 10Q and TWX 10K

In the Game of Thrones you win or you die
HBO Now has 2,800 hours of library and output deals with 4 Hollywood movie studios. Including the most popular TV show of all time Game of Thrones. Management have mentioned that their Turner, Cartoon Network and Warner Brothers content could expand online. I'm expecting TWX to integrate all services or at least release separate apps. Warner Brothers has over 80,000 hours of programming include Harry Potter, Lego and Lord of the Rings and releasing Batman versus Superman next year.

Netflix wins on range and pricing with a large list of all time classics though I would argue HBO's originals are better quality. Netflix will pick up the slack on movies next year with an agreement with Disney which will include output like the Avengers and Star Wars. While there is a focus on originals approximately 40% of HBO subscribers only watch movies it is the number one reason for subscribing. Last year 14 of the top 25 films were on HBO (see other stats above). They have long term agreements with Warner Brothers (which they own), Fox, Universal and Summit which comes up for renewal in 2017. There is concern over HBO cannibilising themselves but I believe a lot of households are not subscribers because it is marketed as a premium extra service. As a standalone offer I believe it provides great value.

Netflix or HBO? Both
I believe that both services complement each other. It is a case of both rather than either/or currently 85% of Netflix subscribers are also cable subscribers.TV is not a winner take all market there will be plenty of users who subscribe to both. Netflix stands out for its large selection and HBO for its quality original series and movies. The battle will be interesting as Netflix tries to become HBO faster than HBO can become like Netflix. HBO has priced their service at $15 a premium to Netflix's $9.

The risk with TWX and other media companies are declining advertising revenues. Netflix's on demand add free business model is impacting TV advertising and ratings. Advertising is 17% of revenues TWX has the lowest advertising exposure compared to peers.

Investors have a new streaming option

Source: TWX investor day

TWX should see a re-rating of its stock. In the past year it has spun off its publishing business and with the release of HBO Now is giving consumers more access to their content. TWX trades at a 16.5x forward multiple a slight discount to the market. It's earnings have grown in the high teens % over the past 6 years and as above is expected to earn more than $8 a share in 2018 a near doubling of earnings from 2014. We also believe the stock could see a decent re-rating of the multiple as investors look for another way to get exposure to TV internet streaming.


Decisive has no position in Time Warner (TWX) or Netlfix (NFLX) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.