Communications Breakdown: The Great Subscriber Shuffle

On Friday, June 24, FTSE Russell conducted its annual index rebalancing. Many communication services companies migrated from the Russell 1000 Growth Index to the Russell 1000 Value Index. Components of the sector, including streaming services, entertainment, media, cable, telecommunications and social media companies, have come under pressure in the first part of 2022. But why? And amid the falling stock prices, are there still places to find value in the sector if you know where to look?

The dwindling predictability polka

After losing 200,000 subscribers in the first quarter of 2022, Netflix, the company that revolutionized streaming, warned that it could hemorrhage a whopping two million viewers in the second quarter. Its stock price cratered, taking much of the streaming industry with it. The stock has yet to meaningfully recover and has since been added to the Russell 1000 Value Index, while its weighting in the Russell 1000 Growth Index has been reduced. In some ways, Netflix may be the victim of its own success. With so many households already signed up for the service, it becomes harder to add new ones. Competition is getting increasingly intense. As more and more streaming services companies compete for a finite number of subscribers, organizations have had to find new ways to capture and maintain customer relationships. This shift in how media organizations run their businesses affects company fundamentals and has investors taking a hard look at the players in this evolving industry. The criteria for a “good investment opportunity” have changed along with the landscape.

The coveted content calypso

Several years ago, when people thought of direct-to-consumer (DTC) streaming services, content aggregators Hulu and Netflix came to mind. Recently there has been an influx of competitors into the space, and many media companies like NBCUniversal, Paramount Global (formerly ViacomCBS) and Discovery Networks, created DTC services that offer shows from their own studios. Major technology companies like Apple and Amazon are pouring money into their own services, further expanding the competitive landscape.

Subscription fees are a key component of these companies’ revenues, and fickle consumer behavior has reduced the predictability of these inflows. Consumers can sign up and later cancel without penalty and will often subscribe briefly to watch a show they want to see, then cancel and move to a different service. This pattern has caused media companies to invest heavily in original content to attract subscribers, as desirable content has become a primary driver of subscriber numbers. These content costs are the biggest expense many media organizations incur. In our opinion, a drawback to this subscriber-focused model is the steep depreciation in the value of these assets after the initial viewing window.