Markets & Finance

Me-Too Tube?


The new online video venture between News Corp. and NBC Universal heats up competition with Google, Viacom, Apple, and ValueClick, says S&P

From Standard & Poor's Equity ResearchTwo media giants—News Corp. (NWS; ranked 4 STARS, buy) and General Electric's (GE; ranked 5 STARS, strong buy) NBC Universal—are planning a direct rival to Google's (GOOG; ranked 3 STARS, hold) YouTube, to be launched by this summer. The plans call for some noteworthy Internet distribution partners: AOL, MSN, MySpace, and Yahoo! (YHOO; ranked 2 STARS, sell). Although the new site doesn't yet have a name or more than a transitional management team, S&P analysts already have strong opinions on likely winners and losers, and have made some predictions about how the venture, dubbed Newco for purposes of this article, will change the online video landscape.

The likely winners will be News Corp., Yahoo, Time Warner (TWX; ranked 3 STARS, hold), and CBS (CBS; ranked 4 STARS, buy). The likely losers will be Google, Viacom (VIA.B; ranked 3 STARS, hold), Apple (AAPL; ranked 5 STARS, strong buy), ValueClick (VCLK; ranked 3 STARS, hold), and Liberty Media Capital (LCAPA; not ranked by S&P).

Winning Streak

Here's our analysis on each potential winner.

News Corp. already owns MySpace. That social networking site's affiliation to Newco could enhance its breadth of professionally created content, potentially complementing the site's vast user-content base and appealing to a broader online constituency. Longer term, we also see potential upside for Fox Interactive Media's (FIM) other properties (e.g. IGN Entertainment), providing FIM with an integrated platform that enhances its users' experiences, and generating meaningful subscription revenues to complement FIM's dominant ad revenue base.

As one of Newco's founding distribution partners, Yahoo could benefit materially, in our view. The company has been widely criticized for not seizing upon opportunities in online video and social media, and Newco could help improve its standing. Yahoo also has the traffic and online advertising clout that could make it the standout among the four distribution partners. Newco's content could potentially result in more users and usage for Yahoo, and enhance the appeal of its search capabilities. However, it's unclear how Yahoo's current and planned video offerings would meld with Newco's. Moreover, the alliance with Newco could make Yahoo seem less cool.

As for Time Warner, we think the pact with Newco could help to achieve a more robust content offering of online film/TV shows by AOL Video, which has recently emerged as one of the potentially viable players in the nascent online video segment, and remains a cornerstone of Time Warner's digital strategy. In addition to content from its parents Warner Bros. and Turner Networks, it's noteworthy that AOL Video features content from 20th Century Fox and NBC Universal (both Newco founding members), as well as Sony (SNE; ranked 3 STARS, hold) and Viacom's MTV (currently non-members).

It's noteworthy that CBS already has a relationship with YouTube (albeit still relatively small). As one of the more aggressive media conglomerates with strong brands that are actively seeking new media partnerships, CBS remains in a relatively strong position should it decide to strike a deal with Newco. CBS is also in the early phases of launching its own movie studio (a smaller-budget venture in collaboration with its Showtime network), and Newco could provide another important distribution outlet for this venture.

Losing Ground

Here's our analysis on each potential loser.

Notwithstanding what Newco proponents say, we believe it's a direct response to the Google/YouTube combination. We expect NBC Universal's relationship with YouTube to change, and its content to potentially be removed from the platform within a few months. We think YouTube's growth will be hurt by Newco. We also believe Newco will pressure Google/YouTube to offer content companies with better partnership terms, including greater financial benefits, copyright protections, and creative controls.

However, we think Newco will at least initially be reliant on Google's search services to drive traffic to its online properties and those of its constituents. What's more, we expect YouTube to remain the leader in the online video space as of the end of 2007.

It's not clear to us that suing YouTube, rather than coming to terms, is the best strategy to propel Viacom's digital strategy. By not moving as aggressively as it might have done with new media partnerships and/or M&A, Viacom has yet to fully capitalize on its leading brands, which tend to attract the younger demographic so highly coveted by Internet advertisers. Also, the company risks ceding further early-mover advantage to its content rivals (including the founding charter members of Newco). Also, we think Viacom's Paramount Pictures is in danger of losing its pay-TV output deal with CBS's Showtime (which expires in 2008).

Newco will offer premium television and movie content, and we think this could eventually lead to some sort of downloads business that could pose a modest threat to Apple. Interestingly, there is little if any overlap between Newco's constituents and iTunes video partners. Nonetheless, we expect that such content will find its way to Apple hardware and platforms.

As for ValueClick, Newco plans to build a significant sales force, and its partners already have substantial sales staffs. ValueClick, which provides advertising solutions relied upon by smaller publishers and advertisers, likely will not initially be involved, and as a result, we think the company's competitors could gain market share at its expense. AOL's Advertising.com unit will manage the advertising efforts for Newco.

Newco could also emerge as a viable competitor against Liberty Media Capital's Starz's subscriptions-based download service called Vongo, which currently offers content from virtually all of the major studios. Should the studios ultimately succeed with Newco, this will likely improve their bargaining position against potential competitors (such as Vongo and YouTube), which could be forced to accept significantly less attractive terms. Also, Newco does not seem to bode well for Liberty's recent announcement to launch its own film studio.

General Predictions

Beside our predictions related to potential winners and losers, we have some other general predictions about this venture. We think Newco will be, at least initially, focused more on content providers and advertisers than users, and we don't expect much in the way of customer experience or innovation. Despite comments to the contrary from Newco, we don't think the debut of its offerings will include notable features around true user-generated content.

However, with a relatively flexible operating structure and by offering relatively generous financial terms, we expect Newco to be modestly successful in signing up additional content providers, including possible equity participation from some of the major studios still holding out on issues of control, profit-sharing, and digital rights management.

In 2007, we expect potentially significant technology advances (with key milestones) related to the implementation of effective digital fingerprinting technology, potentially helping the likes of Newco, MySpace, and YouTube to prevent unauthorized use of copyrighted material.

We also see most content providers predisposed to reaching amenable deals with online video sites, rather than increasingly resorting to litigation (à la Viacom vs. YouTube). We expect "older-generation" sites such as Movielink and CinemaNow to continue to lose further traction in 2007, while we believe the advent of Newco may help to derail plans to auction Movielink by its founding owners (comprising some of the major film studios).

Notable, by its absence in Newco, Disney (DIS; ranked 5 STARS, strong buy) remains unlikely to align itself in 2007 with the likes of Google, Yahoo, or YouTube. Instead, the company will likely expand the breadth of its offering on Apple's iTunes, while also focusing its efforts on "homegrown" digital initiatives that leverage its strong brands.


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