Will Verizon’s Streaming Video Service Catch On?

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Verizon (NYSE:VZ) is preparing to launch its free, ad-supported streaming video service called Go90 later this month. Adoption of the new application will be closely watched by investors, given that the company has dedicated considerable resources to building its streaming video and mobile advertising capabilities, via a series of acquisitions over the last two years at a cost of roughly $5 billion. There is a larger trend to watch here as well; the service should provide an indicator as to how combining an ad platform with a wireless carrier pans out. Below we discuss Verizon’s growing interest in mobile content and advertising and the prospects of the new streaming application.

We have a price estimate of $56 for Verizon’s stock, which is 20% ahead of the current market price.

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What’s In It For Verizon?

Advertising spending is moving away from traditional media such as newspapers and TV, onto the Internet and mobile devices. Total digital ad spending is expected to increase 15% to $58.6 billion in 2015, according to research firm eMarketer, and mobile ad spending is expected to rise 50% to $28.7 billion. There has also been a shift in consumer media viewing habits, away from TVs and desktop PCs onto mobile devices, with a number of people cutting the cord in favor of streaming video. These are trends that Verizon is looking to cash in on, as its bread-and-butter wireless business faces increasing saturation and high customer acquisition costs. Verizon has been building up its application development and advertising capabilities over the last two years through a series of acquisitions such as the OnCue Internet TV service (which likely provides the backbone for the new platform), AOL (programmatic advertising and content) and Edgecast (content delivery network). We will likely see many of these capabilities on display in Go90.

Verizon has a few things going in its favor with the new service. Although Verizon has indicated that the service will be freely available across carriers, it will likely count on its own subscribers – roughly 109 million – to drive initial adoption. For example, the carrier could potentially install the application on every Android-powered smartphone that it sells via its retail channels. There is also the possible incentive of sponsored data for Verizon users– which allows advertisers to subsidize the bandwidth cost of consumers’ video consumption. This could allow it to get a leg up over its streaming video rivals, since video is a big bandwidth hog. On the advertising side, the company could eventually leverage the ad measurement and targeting capabilities that it acquired with AOL, along with its massive customer database to create better targeted mobile ads.

Content Will Decide The Uptake

While Verizon has done much of the groundwork on the technology side, content will ultimately determine the uptake of the service. Verizon is targeting the service at millennial viewers, which is probably the right decision since these viewers represent a prime demographic for marketers. Moreover, according to data from Ericsson AB, these viewers spend roughly 60% of their video watching time on mobile devices. The carrier has signed deals with 15 of the top 30 cable networks to offer specific programs. [1] The carrier will also offer some NFL games, college sports games and content from outlets such as AwesomenessTV and Vice Media.

However, competition in the streaming video space is mounting, and there are indicators that Verizon’s offering could be strangely positioned. On one hand, there are well-entrenched providers such as YouTube and Facebook, which count as the de facto destinations for casual online video content, and much of the content on Go90 may be available through these channels as well. On the other hand, viewers are also increasingly interested in more premium streaming content that is offered at a lower price point than pay TV, and Verizon isn’t really addressing this market with Go90. For example, Dish Network’s Sling TV offers close to 25 networks, including ESPN and AMC, streamed to any Internet-connected device. AT&T is also likely to double down on the mobile premium content space, as it inherits big-ticket content deals – such as the NFL Sunday Ticket – via its recent purchase of DirectTV. Therefore it will be incumbent on Verizon to offer something to differentiate itself on the content side if the Go90 service is going to see widespread adoption. 

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Notes:
  1. How a Silicon Valley Project to Reimagine TV Became a Verizon App, WSJ, September 2015 []