Streaming TV Creates Opportunity for Investors

Last Sunday, as you were watching the Golden Globes, you may have thought you were watching just another celebrity awards show: beautiful, famous, wealthy, talented people garnering trophies and recognition while hanging out with other beautiful, famous, wealthy, talented people. But amid the champagne, Versace gowns and polite applause, an uprising was taking place: a potentially big, fortune- and even history-changing revolution known as “disruptive innovation.”

Content coup

Two upstart providers of content who are decidedly not part of the broadcast television establishment staged something of a coup. “Transparent,” a show from electronic commerce company Amazon.com, won the award for Best TV Series, Musical or Comedy, and the show’s Jeffrey Tambor won Best Performance in a TV Comedy Series. Meanwhile, Kevin Spacey won Best Performance in a TV Drama for his role in “House of Cards,” a series from Netflix. That’s the provider of on-demand Internet streaming media that started out as a DVD-by-mail subscription service and whose insurgent past includes putting Blockbuster out of business.

Disruptive innovations through history

A disruptive innovation is a product or service innovation — typically in cost, capability or convenience — that arrives unforeseen and significantly disrupts an existing market. Ultimately, the disruptive innovation overtakes, replaces or even creates the market anew. Be it through scientific breakthrough (the printing press, the steam engine, electricity, the telephone, digital cameras), technological confluence (digitization plus Internet equals declining music album sales, connected devices plus logistics equals rise of online retail), low-cost competition (economy airlines, data storage, Wikipedia) or solutions to constraints (shale fracking), examples of these innovations fill history and drive it.

Not all big innovations are disruptive. Professor Clayton Christensen of Harvard, author of a seminal book on disruptive innovations titled “The Innovator’s Dilemma,” points out that the automobile was a revolutionary but not disruptive technology. It was unexpected, yes, but initially it was an extravagantly expensive novelty that few could afford and that didn’t threaten the horse-drawn-carriage industry. It wasn’t until Henry Ford’s mass-produced automobile decades later that the new innovation became affordable to the average middle-class American. The assembly line, interchangeable parts and other production techniques were the disruptive game-changer in the history of transportation, not the automobile itself.

Netflix, Amazon and Hulu step in

How are Netflix, Amazon, Hulu and others disrupting the world of television and why should you care?

For starters, you may be one of millions of Americans who are fed up with the high fees and poor service received from the likes of Comcast, Time Warner and Cox. According to a poll of 70,000 consumers conducted earlier this year by the American Customer Satisfaction Index, cable companies and Internet service providers are the two most reviled sectors in the country, and Comcast and Time Warner are the two single most hated companies in the country. According to the survey, “High prices, poor reliability and declining customer service are to blame for low customer satisfaction with pay TV services. The cost of subscription TV has been rising 6 percent per year on average — four times the rate of inflation.” Meanwhile, Netflix and Hulu Plus can be purchased for a total of $17 monthly, about a third of the cost of basic cable.

Cutting the cord

The result is that a small but growing number of consumers are cutting the cord on cable television. According to Forbes, only about 2 percent of the population have done it thus far, but the number is expected to grow to 5 percent in the next two years. And a study from Marchex states that nearly 26 percent of new cable customers only want Internet service from their cable company. Internet-streamed television now reaches 40 percent of U.S. households and Nielsen now measures viewership of those shows along with those of the big broadcasters.

Finally, if you’re an investor, the reason you should care about disruptive innovations is that they can also significantly disrupt, for better or for worse, your portfolio.

Great opportunity, great risk

Disruption brings great investment opportunity in identifying disruptors — hard to do — as well as in identifying incumbents at risk of being disrupted — a bit easier to do. Wouldn’t you like to have bought Netflix in late 2002 at $3 and change per share and held onto it through this past week’s price of well above $300? And wouldn’t you be glad to have avoided buying Blockbuster at its $19 high in 1999 only to see it go bankrupt just over a decade later?

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.