- Comcast's NBCUniversal is reportedly considering consolidating its filmed-entertainment under the Peacock service.
- The company also may be interested in starting a new streaming service.
- The exclusivity gambit is a solid argument until one considers the loss of licensed revenue - there are solutions to such conundrum.
- An additional streaming service will offer flexible opportunities for Comcast.
- The shares are a buy for the long term, but on pullback days.
There are a couple news items that have caught my eye regarding Comcast (NASDAQ:CMCSA) and its continuing journey into the over-the-top industry. One mentions a possible desire on the part of management for consolidating content into Peacock - i.e., reduce its reliance on licensing films and television series to other streaming platforms. Another report suggests that Comcast may not be satisfied with just a single streaming brand: instead, it might want to create another one.
In this brief article, I'm going to consider both of these items and place them in the context of Comcast's long-term potential. I'll also offer an opinion on the current state of the stock itself - preview: it is still a long-term buy.
Let's face facts. I am bullish on Peacock, but for those who criticize it, yes, you have a point - not only does it have a long way to go until it even remotely gives Netflix (NFLX) and Disney (DIS) some solid competition, but also the management team behind it over at NBCUniversal clearly is finding its way in the streaming world. Here's the problem in the proverbial nutshell: streaming is receiving a multiple from the market. A healthy one. When you consider how overvalued Disney stock currently is (my opinion, of course), especially taking into account that parks and movies are essentially shut down and/or radically disrupted/displaced by the pandemic, when you consider that the market isn't even slightly interested in upping the risk column of the valuation model, and it's all because of streaming (in Disney's case, its D+ product), then it becomes clear that if you're a media conglomerate, you've got to be all-in on over-the-top. Now, all-in doesn't mean, in NBCUniveral's case, that it's going to shutter NBC and SyFy channel and all the rest of broadcast/linear, it's more of a mindset proposition: eventually, the company will have to shift further and further into over-the-top assets. And it simply is the case that if you're not the first-moving entity in the latest disruptive field, and you're getting in somewhat late in the game, you have to embark on a learning curve and begin to experiment and change-up the strategies.
So it is since last I covered the Peacock situation. But I believe investors, including those already in Comcast (as I am) can look upon the concept of adding another branded-streaming asset (if that does indeed come to pass, which I believe is of high likelihood) in a bullish context. On the topic of branding, many have found the name "Peacock" to be somewhat lacking; it never bothered me too much, but I can see that viewpoint. It's sort of like CBS All Access - that service became Paramount+, and that does have a better marketing ring to it. If NBCUniversal can start over again in terms of branding if it does create a second service, then that might present an opportunity at a second chance to capture value (in other words, never underestimate the value in a trademark).
Another opportunity exists in programming a service that isn't necessarily given away for free, as is the case with current Comcast subscribers and Peacock. Some Comcast subscriptions allow Peacock availability for those in the linear ecosystem, and as others have observed, this is evidence that the company doesn't want to abandon linear altogether (i.e., go after over-the-top cord-cutters while appeasing set-top-box/bundle enthusiasts). What I would like to see is aggressive courting of hardcore streaming fans who own Netflix, plus at least one other service, by Comcast with any new subscription service the company launches.
Adding another service to the portfolio allows for options to augment the current tiered structure of Peacock, which operates on the advertising/no-advertising model, in addition to the more-content-available-on-higher-priced-tier model. If NBCUniversal wanted, it could only allow subscriptions for an ad-free version of a new service, thus increasing its investment in streaming.
Having multiple platforms is useful, as content can bounce from one to the other in a repurposing fashion that amortizes costs (keep in mind Comcast's Sky could become a part of this new hypothetical entertainment ecosystem). Also, branding could take place that would position one service as more appropriate for certain content as opposed to the other. There are risks, too. Comcast might end up investing too much in one and not enough in the other. One thing that we know: grabbing consumer attention in the streaming marketplace requires the bravery of making big bets. Granted, talent tends to get overpaid, but Hollywood, if it is even looking for one, has yet to find a practical solution for the problem; therefore, the need to spend multiple billions of bucks on content is here to stay. This could lead to the biggest risk: one service withers away into nonexistence and turns out to be a waste of time and capital. While acknowledged, I believe the safer choice is to make the wager and go for the high reward, both in terms of cash-flow contribution and price-action/multiple.
Which leads to whether or not Comcast intends on playing hardball with content. Call it an exclusivity gambit.
Media companies, excluding Netflix, all have legacy linear assets. These assets need content, and all media companies have generally traded among each other various shows and movies. But as it concerns streaming, there is always a question that must be answered: Should content produced by X media company stay on X's streaming service and be seen nowhere else (at least in the pay-TV/SVOD spectrum)?
As the link stated in the introductory paragraph, Comcast management is trying to figure out what to do in this regard. To my way of thinking, it could be a mistake to necessarily take all content developed on a linear-based platform (The Office or a Modern Family, say) and then lock it away forever. Although that could be a good strategy depending on the situation (especially with new services), it might be best not to give up licensed-based revenue entirely. Selling content to other competitors' platforms is itself a useful hedge against the streaming business and its associated risks.
We have a real-time example of how that works, right from that SA news item. Modern Family comes from Disney (via the Fox purchase) and is actually an exemplary addition to the Hulu content portfolio; sure, it probably could get away being on D+ too, but Hulu is a better, more obvious fit. Comcast, however, which still has an interest in Hulu (until it goes away in a few years under a buyout deal with Disney), already had exposure to Family via syndication rights on its USA linear channel, as described by this Hollywood Reporter article. For Disney to gain the ability to bring the popular show to Hulu, an agreement was struck to allow Peacock streaming access. As time progresses in the streaming wars, studios will certainly iron that sort of situation out when selling rights, but it nevertheless indicates that a series asset can co-exist on two competing platforms. And for me, the key here is to think about what that exactly means, and what a streaming platform actually is.
So...what is a streaming platform? Is it all about exclusivity gambits? The best definition of differentiation is that one platform is its original content relative to another platform. If two platforms have the same show (as Hulu/Peacock do with Family), then the factor of differentiation will be its original content (the live-television component will be cited by many as another factor, but for me, I see original shows as the principal concern). Family being on both platforms creates an all-things-equal scenario that eliminates the complexity on the part of a consumer in terms of choice...it then becomes an original-content game. However, if you read this last sentence carefully, you might say, hey, that's the biggest argument for exclusivity...why make it easier to choose? In other words, give the consumer exclusive originals and exclusive linear-library content to really sell the platform. Yes, I agree, that does represent a valuable approach...but then we're back to the loss of licensing revenue, and unless we're talking about Disney, we might be inclined to conclude that the risk of non-exclusivity for library content is ultimately worth it, so long as killer-app originals are constantly developed.
There is a solution: sell incomplete libraries to competitors, and/or retain extra, supplementary content for Peacock. Comcast is currently experimenting with extra content on its streamer with The Office. If it wanted to, it could then use that as a way of enticing new subscribers, while still selling to other streaming units (along with not allowing all seasons on the competition's platform). All of this also brings to mind the exact definition of exclusivity...should that include cable channels, local channels? Should exposure to advertising only be done on Comcast's ad-supported Peacock? There might be an argument for that given Comcast's big investments in the tech side of advertising, as this article indicates.
Nevertheless, licensing is a big chunk of revenue to eliminate, and in fact, has been valuable during the pandemic when media companies, facing cancellation of movie slates, shifted to strategies of increased library-licensing, which was illustrated, to some degree, back in the fourth quarter. Media companies of smaller scale such as Lions Gate Entertainment (LGF.A) (LGF.B) rely even more heavily on licensing. This article shows how non-exclusivity can co-exist with Comcast's goals, but from the viewpoint of ViacomCBS (VIAC) (VIACA). In a deal struck last summer, Peacock received the right to show some Paramount films, as well as other content, but the seller, ViacomCBS, did not include exclusivity in the parameters. NBCUniversal management still perceived value from the deal, and ViacomCBS, which receives billions of dollars in licensing revenue per year, did not limit itself to one buyer (and it did not limit its own streaming ambitions, either, in terms of availability of its content to itself). Such precedent is a useful model. In a world where streaming concerns pay half-a-billion bucks for shows on par with Seinfeld, Comcast would do well to maximize licensing while prudently exploring some exclusiveness when it is appropriate.
I continue to hold Comcast in my portfolio and regard it as a long-term buy. While linear has been challenged, I believe synergy between NBCUniversal and the company's multi-platform ecosystem, which includes the important investment in Sky, as well as broadband and strives in advertising initiatives, will propel cash flow through the years.
The price of the stock is closer to the high end of the 52-week range at $54 (price at time of writing). Dividend yield is 1.8%. While it's not egregiously expensive, the stock does come in higher on some metrics comparing it to the sector median. In conclusion, I proffer that the shares will be a better buy on pullbacks.
This article was written by
Analyst’s Disclosure: I am/we are long CMCSA, DIS, LGF.A, LGF.B, VIAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I may initiate a position in Netflix over the next 72 hours.
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