Word on the street is that Google (GOOG) is in talks with major music labels Universal Music Group and Warner Music (WMG) to develop its own Spotify-like music streaming business. That is great news for the music labels and other content owners: competition from various distribution providers (Spotify, Rdio) will allow the content owners additional bargaining power when negotiating license deals.
Google's announcement also comes on the heels of the announcement that it made a $50 million equity investment for a 10% stake in the music video streaming platform, Vevo LLC, owned jointly by Vivendi (VIVHY.PK) and Sony Corporation (SNE). Both announcements are more than a tacit indication that Google continues to compete with Amazon (AMZN) Prime, Apple (AAPL) iTunes, and niche distributors like Spotify, Rdio, Hulu and Redbox for the dominant platform and subscriber base from which to sell through digital content.
Look around and it is evident we are undergoing a paradigm shift in the way we consume media content, with new revenue streams available to content owners. At Netflix (NFLX), CEO Reed Hastings is making a big bet that exclusive content and direct access to the consumer through its Internet TV subscription model is the way to create a moat and differentiation from competitors. If exclusive offerings such as "House of Cards", "Arrested Development", "Hemlock Grove", "Orange is the New Black" and "Derek", and other future exclusive offerings become must haves for consumers, Netflix will have emerged as a business with a sustainable competitive advantage.
In Netflix's Q4 investor letter, Mr. Hastings disclosed Netflix's view on the future of digital content consumption:
We believe that February 1st will be a defining moment in the development of Internet TV.
On that day, we will release all 13 episodes of "House of Cards" in all of our markets, allowing our members the freedom to immerse themselves when and how they want in the world created by David Fincher and his stars Kevin Spacey and Robin Wright.
Imagine if books were always released one chapter per week, and were only briefly available to read at 8pm on Thursday. And then someone flipped a switch, suddenly allowing people to enjoy an entire book, all at their own pace. That is the change we are bringing about. That is the future of television. That is Internet TV.
The market seems to agree as of late, the value of Netflix equity rose a staggering 50% in one day after it reported better-than-expected results on January 23, 2013.
The Google deals benefit the consumer and content owner
I'm one of Spotify's satisfied 1 million U.S. paid subscribers, and I buy video content through Google Play. If you haven't tried Google Play, the service is great: all you need is an Internet connection and set up a Google Wallet account for reasonably priced content, available at your fingertips, on demand. And once consumers buy the content, it's theirs forever, stored in the cloud for access at anytime, on any device. Cable TV operators, beware. Spotify, beware too. If Google can integrate a quality music service to its platform, it will only add strength to Google's distribution platform, making it easier for consumers to get music, TV and movies all from one place.
The benefits for the user are clear: the power of choice for when and what to buy, and for a better price than traditional media distribution channels. In turn, what is good for the consumer is good for content owners: a growing number of consumers are aware of the new choices for how to consume (and pay) for that content. For me, I'm unwilling to buy a $100+ per month cable subscription to watch AMC's Walking Dead, but I don't mind paying Google $1.99 per episode.
Google is one of the most innovative companies in the world. After a sharp rise in Google's stock quote since summer 2012 to record highs recently, the price to value gap has narrowed considerably. Rather than try to value Google, I'm using Google's content distribution business strategy as a confirmation that my other investment theses are working; namely, that content owners are generally undervalued.
Disclosure: I am long VIVHY.PK.