Wall St Speaks Out on Netflix OTT, Roku 4K, Facebook Video & DVD Sales - Janney/MediaEntertainment

OTT Updates – NFLX usage is increasing, with 36% of subs using the service daily in 2014, and 72% using it weekly, according to Leichtman Research Group. Usage has increased since 2010 when only 10% streamed daily and 43% weekly, although this is likely mostly driven by the amount of content now available. We suspect that the increased amount of children's content is also a driver. Daily usage is slightly lower for subs that also subscribe to pay TV (32%). Penetration among pay TV subs is 36%, and 48% among non-pay TV subs, implying that consumers substitute the two services. We believe that the pay TV subscriber base will continue to face pressure from on-demand alternatives, including SVOD and online video.

Social Video – FB is seeing significant success with video content consumption by its users. A company blog mentioned the amount of videos shared by users and brands increased over 300% over the past year, while the number of video posts per U.S. user nearly doubled. Its new design for Video Pages and recent acquisition of Quickfire Networks point to continued development in this area for mobile video in particular. Separately, TWTR is also stepping up its plans in video, with a new video feature reportedly "weeks away". TWTR's plans include auto playing 6-second ad previews potentially combined with the ability to charge advertisers only for fully viewed ads (if previews are clicked on). TWTR also has an un-monetized video platform in Vine.

DVD Declines – In 2014, US spending on home entertainment fell 1.8% to $17.8 billion, as increases in digital spend did not offset declines in physical DVD sales, according to Digital Entertainment Group. In 4Q14, the decline in spending accelerated to 4.1%, with DVDs falling 16%, physical rentals shrinking 8.5% and digital increasing 16%. While this confirms the well-known shift to digital media, we believe there is also an increasing shift to renting vs. owning and that SVOD services play an important part in this consumer transition.

4K Momentum – The CES conference continued to showcase 4K, as more suppliers announced plans to incorporate 4K into their products. Roku is the first OTT device maker to announce its support and said it is working with hardware partners for a Roku powered 4K TV as well as with NFLX to provide 4K content. Separately, DISH was the first MVPD to launch a 4K set-top box. We view these offerings as critical to accelerate the adoption of 4K, and OTT offerings in particular may be early sources for 4K content. However, data and UBB constraints may be magnified with 4K, given the significantly higher data-rates needed.

Gaming Updates – Sony announced a subscription option for its streaming service PlayStation Now, which will allow gamers to play games from a library on an unlimited basis for $20 per month (or $45 per quarter). Subscriptions will only be available to PS4 owners at first, but Sony expects to broaden support over time. Separately, over half (53%) of US video gamers preferred to buy console games on disc, vs. 22% digital, according to MarketCast. Physical still accounts for 82% of console game purchases, which should support retailers in the near term. Lastly, ESPN is considering entering the daily fantasy sports market, according to SportBusiness Daily. This could potentially be a strong competitor to ZNGA's NFL game.

Tony Wible can be reached at twible@janney.com.

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