Up in cottage country, I got into a conversation with three young adults between the ages of 18 and 22 about their TV viewing habits.
They watch the same shows as the rest of us do, but don’t use cable TV. They view video from their computers, tablets or smartphones. None of them expect to pay for cable TV when they move out of mom’s and dad’s house in the next few years. The only relationship with the cable company they want is as broadband customers.
Investors should pay heed. The generational shift in viewing habits that’s under way is going to reshape the outlook for cable companies – firms that people think of today as bastions of stability.
The driving force behind the change is the growing availability of video content that you can view on an Internet connection. As the options for Internet viewing multiply, cable companies will have to fight a tough battle to keep video subscribers. When today’s teenagers and young adults move out of their parents’ homes, they are likely to pay for Netflix or Hulu or whatever comes next, rather than sign up for traditional pay-TV.
It’s easier than ever for people of all ages to cut the cord. Some hot new shows like House of Cards and Orange is the New Black can only be watched online. These shows are already prompting many households to experiment with alternative video services. Look ahead a few years and I think it’s likely that cable companies will have to shift to a world where their primary, not secondary, business is to sell high-speed Internet service.
I’m not the only person who thinks so. James Dolan is the chief executive of Cablevision Systems Corp., a publicly traded cable TV company in the United States. In a recent interview with The Wall Street Journal, he acknowledged there could come a day when Cablevision stops offering TV service and makes Internet service its primary offering.
Mr. Dolan admits to watching Netflix, not cable, on TV with his young children. He says he’s working hard to improve efficiency at Cablevision because if the company does drop video service, “I don’t want to be saddled with an infrastructure that is as big as the one that I have now.”
Cable networks are fundamentally limited to the territory where they have connections leading to people’s homes. If you think of cable video as a geographically limited distribution platform, I don’t think it stands much of a chance against the much larger distribution capabilities of Internet TV.
As companies such as Netflix, Amazon.com, Apple or Google gain a consistently larger audience, they will amass more buying power. They will produce even more of their own shows. As this happens, the audience for traditional cable-TV will shrink.
Some people argue that sports will keep cable-TV alive. In the next few years this is probably true. But as time marches on, the argument gets weaker. Google is reportedly pondering a bid for the rights to distribute NFL Sunday Ticket on YouTube when DirecTV’s contract expires next year. Disney may bring ESPN to Web TV platforms, according to a recent Bloomberg story. Baseball and hockey games are already available online via special subscription packages.
As a growth investor with a focus on long-term transitions, I don’t want to be invested in the cable industry. I’m avoiding stocks such as Comcast, Time Warner Cable, and Cablevision. These guys all seem to generate about half of their revenue from traditional video businesses and I believe these businesses will shrink.
I’m even more skeptical of satellite-TV providers such as DirecTV and Dish Network since they’ll likely never be able to fall back on high-speed Internet like the cable companies can.
In Canada, the situation is a bit more nuanced. The largest pay-TV providers are Rogers and BCE. While both are exposed to the decline in traditional TV viewing, they both have strong wireless operations that reduce their overall business risks.
My Strategy Lab portfolio is set up to ride the transition to Internet-based video with positions in Google (which owns YouTube), Netflix, Amazon and Apple. They may seem like risky stocks. But I think it would be riskier to invest in a dying business.