Scaling Up in Video Distribution Now is Risky

Scaling up or out of the video entertainment business is a decision Citi equity analyst Michael Rollins believes Verizon could make if it were to acquire Dish Network.

Ignoring for the moment the mid-band spectrum Verizon would acquire, this latest version of an older story (Verizon “needs” to buy Dish for its spectrum), the thesis runs counter to the general narrative about AT&T’s similar moves in video distribution, where the linear video assets help fuel a move into streaming.

Many observers did not like the AT&T acquisition of DirecTV, as many did not approve of the Time Warner acquisition, either, which positions AT&T with a broader role in the ecosystem most akin to Comcast.

Ignoring for the moment the free cash flow boost provided by both those acquisitions, one objection to the DirecTV purchase was that it represented the acquisition of a company whose product (linear subscription video) is in declining demand.

So the suggestion that Verizon could choose to “scale up” its video subscription footprint by acquiring Dish Network video accounts (though the spectrum holdings arguably are the real prize) would then represent the same sort of bad decision AT&T is reputed to have made.

Verizon has not been keen on an expanded role in consumer video distribution, it is safe to say, in either linear or streaming roles.

And it is arguably a tougher decision now that Netflix has changed the video distribution from a domestic-only to a global business. So now any firm contemplating surviving the eventual consolidation of the U.S.-anchored video streaming business has to decide whether it can gain enough scale to compete with the likes of Netflix, and likely YouTube, Hulu and Amazon.

To be sure, there are a couple different roles. Netflix and Amazon, so far, focus on pre-recorded content. Hulu and YouTube are anchoring their services with live streaming.

It remains unclear which roles Disney will attack, likely some combination of both, as it owns the ESPN live sports franchise plus a deep catalog of movies.

UBS equity analyst John Holulik estimates Disney could get 20-percent to 30-percent take rates from U.S. broadband households by 2024.

The other potential issue is whether success primarily in the U.S. market, or “going global,” is feasible, and a way to remain in the top five or six such services.

For consolidation is inevitable. And all contenders have to factor in how they deal with Netflix, in a multi-subscription market. An April survey from research firm Hub Entertainment Research showed that if consumers had to abandon one streaming service to get Disney+,  44 percent would keep Netflix, while 29 percent said they would keep CBS All Access.

Another survey, by Streaming Observer suggests 60 percent would keep Netflix, while 20 percent would subscribe to both Netflix and Disney+.

source: Streaming Observer

Why Verizon would want to reverse course and get into the crowded streaming field now is unclear. Eventually, consolidation of a few of the leading services seems inevitable, given the presence of brand names such as Netflix, Apple, Disney (ABC, ESPN), YouTube, Amazon, AT&T (Warner Media) and Hulu (Disney) at the top and upper end of the market share ranks, and some others, such as Comcast (NBC Universal), yet to make their moves.

The fate of many smaller services remains quite unclear. To be sure, Verizon eventually could change its mind, but there seems no obvious reason why it has to move now, and whether it has the financial strength to be an acquirer, if it desired to do so.

So scaling “up” in video distribution, from Verizon’s standpoint, seems unlikely. Whether some risky moves will eventually be necessary seems fairly clear, though. With revenue growth rates now very low, Verizon eventually will have to get more aggressive if it wants to boost growth.