You watch streaming media. Does that mean you should buy streaming media stocks?
Consumer eyeballs are mesmerized by streaming video. And there's plenty of it to watch, produced by everyone from celebrities to the neighborhood geek. For the first half of 2015, YouTube consumption vaulted ahead by 60 percent over the year before, a significant factor in the growth of parent Google (ticker: GOOG, GOOGL).
But as with all seismic shifts, the breakneck growth of streaming video is creating big winners and big losers. Here's how to read between the pixels and detect key investing trends.
"In general, it's the newer companies -- Facebook [FB], LinkedIn [LNKD], Netflix [NFLX] -- that are benefiting from this trend," says Craig A. Huber, media analyst at Huber Research Partners in Greenwich, Connecticut.
Companies that launched with digital DNA still have to run fast to keep up with rapidly evolving technologies and consumer expectations. "Netflix has 42 million households in the U.S., and its $8 to $9 monthly price is a bargain," Huber says. "You get all these great movies and original content, and it changes the whole ecosystem. Viewers become comfortable watching great content with no commercials. Why would they ever go back? Netflix is a death knell for cable networks and broadcast TV. One of those guys should have bought Netflix a long time ago, but now it is too late."
Laura Martin, senior analyst for entertainment and Internet with Needham & Co., an investment bank and asset firm in New York, says the distribution channels are largely built out. Cable and wireless companies provide the infrastructure; nothing shows up on a screen unless mobile devices, computers and televisions are connected to streaming and Internet services.
In fact, companies that "own the last mile" have a nearly guaranteed source of income, Martin says, though these services will likely become commodities and will face price pressures. "Now the fight is over content. Digital media consumption is growing in triple digits."
Chasing revenue . That's why Amazon, Facebook and Apple (AAPL) are tiptoeing into original content, analysts explain. These and other companies want a slice of the video pie that Google largely owns via YouTube. Even relatively new companies are aggressively rolling out video services. Twitter (TWTR), for instance, originally founded as a microblogging text-based service, is now pushing its Vine, a micro-video social media feed.
The challenge is how to capture revenue from a seemingly endless stream of video content. "The focus for the next three years will be on how content companies will get money," Martin says. "The Internet has taught consumers that content is free."
Subscriptions are one model, but Martin also believes embedded e-commerce is a promising concept, because it lets consumers immediately buy what they see on the screen.
"Investors have patience for three to five years. The digital media ecosystem can be healthy if new content makes money. Otherwise, it could be the new Netflix, with 90 percent of content from television," Martin says.
Huber projects the total U.S. digital ad market, desktop and mobile to reach $58 billion this year -- about 24 percent of all U.S. advertising. In 2010, he says, digital accounted for about 11 percent of all U.S. advertising expenditures and was mainly confined to desktop computers. "All the growth is going to mobile," he says.
Old media, fading brands. Traditional media companies -- those started in the print era, such as newspaper and magazine companies -- are struggling today to keep raking in revenue from their fading print products while persuading advertisers and consumers to advertise online.
They "talk all day long about digital and mobile," says Huber, but are still struggling to figure out how to profitably convert their heritage to digital revenue. "The traditional print part of their business has been hurt much more than they've picked up in digital."
Champagne or bubble? With all this froth, a bubble might be in the making, says Elle Kaplan, CEO and founder of LexiON Capital, a wealth management firm in New York. "History often repeats itself, and we can see many commonalities between some of today's digital media companies and the businesses in the dot-com bubble.
"For many companies like Twitter, there are massive business valuations based on their user base, while the company is still not displaying a sustainable revenue model or turning a profit," Kaplan says. "Millions of users tweeting or logging in mean nothing in the long run if you can't draw revenue from them. Investors seem to be catching on for some companies, and we could see a bubble if the trend continues."