Streaming Services

Streaming services deliver video or audio content, such as movies, TV shows, or music, directly to a user's device over the internet. This model, often referred to as Subscription Video on Demand (SVOD) for video platforms, allows for immediate, on-demand consumption without the need to download the entire file first. Think of it as an all-you-can-eat digital buffet. Instead of buying a specific DVD or movie ticket, a consumer pays a recurring fee—usually monthly—for access to a vast and constantly updated library. The pioneer, Netflix, completely changed the media landscape, but the field is now a battleground of titans, including Amazon Prime Video, Disney+, HBO Max, and Apple TV+. The core business proposition is a simple trade: your subscription fee in exchange for a compelling catalogue of content. This has profoundly disrupted traditional media, challenging everything from cable television bundles to the century-old movie theater business model.

The heart of a streaming service is its content library. The entire business model hinges on acquiring and producing content that is compelling enough to attract new subscribers and, just as importantly, retain existing ones. This creates a relentless, high-stakes cycle of spending. Companies in this space generally follow two content strategies:

• Licensing: Paying other studios for the temporary rights to show their movies and TV series. This is a faster way to build a large catalogue but can be expensive, and the rights can be lost when the contract expires—often to a competing service.
• Originals: Producing exclusive, in-house content (like “Stranger Things” on Netflix or “The Mandalorian” on Disney+). This is incredibly expensive and time-consuming but creates a powerful asset that can't be found anywhere else, acting as a major draw for the platform.

This relentless need for fresh, engaging content means these companies operate with massive upfront costs. They spend billions of dollars each year, betting that this investment will build a loyal subscriber base that generates predictable, recurring revenue for years to come.

The glamour of Hollywood and the buzz of “subscriber growth” can be intoxicating. However, a value investor must look past the hype and analyze the underlying business with a critical eye.

An Economic Moat protects a company's profits from competitors. For streaming services, the strength of this moat is a subject of intense debate.

• Brand & Scale: A powerful global brand like Netflix is a definite advantage. Its sheer size allows it to spread its massive content costs over a much larger subscriber base than its smaller rivals.
• Switching Costs: This is the biggest weakness. The costs and effort for a consumer to cancel one service and sign up for another are practically zero. This puts a constant pressure on companies to keep users happy, as they can leave at the click of a button.
• Content Library: A deep library of beloved original content can function as a moat. If a family can't live without Disney's animated classics or Marvel movies, they are less likely to cancel Disney+, even if prices rise. The library becomes an intangible asset.

Wall Street often obsesses over one metric: subscriber growth. A prudent investor must dig deeper to understand the true financial health of the business.

• ARPU (Average Revenue Per User): This metric shows how much money the company makes from each subscriber. Is it trending up? A rising ARPU, often driven by price increases, can signal a strong competitive position and Pricing Power.
• Free Cash Flow (FCF): This is arguably the most important metric for a value investor. FCF is the cash a company generates after accounting for all its operating expenses and capital expenditures (including the massive spending on content). For years, many streaming giants operated with negative free cash flow, “burning” cash to fuel growth. A sustainable business must eventually generate more cash than it consumes.
• Debt: How is all this content being financed? Many streaming companies have taken on significant debt to fund their productions. High debt levels add risk to any investment.

The term “Streaming Wars” isn't an exaggeration. The market is fiercely competitive. As every major media conglomerate launches its own service, content becomes fragmented across dozens of platforms. This creates two major headaches for the industry:

1. It forces consumers to subscribe to multiple services to watch everything they want, leading to “subscription fatigue.”
2. It makes it much harder for any single service to raise prices without losing customers to a cheaper alternative.

Streaming services represent a fantastic business model—in theory. The appeal of global scale and recurring revenue is powerful. However, the reality is a capital-intensive, highly competitive industry where sustainable profitability can be elusive. When analyzing a streaming company, look beyond the headline subscriber numbers. Ask the tough questions: Does the company possess a durable competitive advantage? What is its path to generating consistent Free Cash Flow? How healthy is its Balance Sheet? Ultimately, the core tenet of value investing applies here as much as anywhere else: you must determine the company's Intrinsic Value and seek to buy its stock only when it is trading at a significant discount, providing you with a comfortable Margin of Safety.