Over-the-Top (OTT)

• The Bottom Line: Over-the-Top (OTT) refers to streaming services that deliver content directly via the internet, bypassing traditional gatekeepers like cable companies, and for a value investor, it represents a fundamental reshaping of the media industry's economic moats from distribution to content.
• Key Takeaways:
• What it is: The practice of streaming media (video, music, podcasts) to a viewer or listener over the internet, “over the top” of a traditional cable or satellite box. Think Netflix, Disney+, Spotify, and YouTube.
• Why it matters: This shift has ignited the “Streaming Wars,” forcing investors to re-evaluate where competitive advantages lie. The focus is no longer on controlling physical pipes, but on owning intellectual property and cultivating a loyal subscriber base. It's a classic case of disruptive_innovation.
• How to use it: A value investor analyzes an OTT company by dissecting its subscriber economics (growth, churn, acquisition cost), the durability of its content library, and its ability to generate a high return_on_invested_capital from its massive content spending.

Imagine your home's water supply in the 1980s. You had one option: the city water utility. They owned the pipes, the treatment plants, and the meters. They controlled everything. If you wanted water, you paid your bill to them, and they delivered a pre-set “bundle” of water—no questions asked. This was the world of traditional media, with cable and satellite companies like Comcast or DirecTV acting as the utility. Now, imagine today. The city still maintains the public roads (the internet infrastructure), but you're no longer forced to buy their water. Instead, dozens of companies like Evian, Fiji, and Perrier can now drive directly to your house and deliver their specific brand of water. You can subscribe to a monthly delivery of sparkling water from one, still water from another, and cancel anytime. That is Over-the-Top (OTT) in a nutshell. The “top” it goes “over” is the traditional infrastructure and curated bundles of the old guard. Companies like Netflix, Hulu, and Spotify use the open internet—the public roads in our analogy—to deliver their product directly to you, the consumer. They don't own the “pipes” (the internet connection provided by Verizon or AT&T), but they own what you truly care about: the content that flows through them. This simple-sounding shift is one of the most powerful economic transformations of the last two decades. It has unbundled channels from expensive packages, handed pricing power from distributors to creators, and created a direct, data-rich relationship between media companies and their audiences for the first time in history.

“Our biggest competitor is sleep.” - Reed Hastings, Co-founder of Netflix ¹⁾

For a value investor, who seeks to understand the long-term, durable economics of a business, the rise of OTT is not just a technological trend; it's a fundamental earthquake that has reshaped the landscape of competitive advantages. Here's why it's critically important:

• The Migration of the Moat: For decades, the economic_moat of media giants was distribution. Companies like Comcast and Time Warner Cable had a near-monopoly on the physical cables running into homes. This was an immense barrier to entry. OTT obliterated this moat. The new, arguably more powerful, moat is now built on intellectual property (IP), brand loyalty, and scale. A company like Disney isn't powerful because it owns a cable channel; it's powerful because it owns Star Wars, Marvel, and Pixar. A value investor must now ask: “How durable and beloved is this company's content library?”
• The Rise of Predictable, Recurring Revenue: Value investors, from Benjamin Graham to Warren Buffett, have always prized businesses with predictable earnings. The old media model was lumpy, relying on advertising cycles and box office hits. The dominant OTT model, Subscription Video on Demand (SVOD), creates a beautiful stream of recurring_revenue. Millions of customers paying a small, predictable fee every month provides enormous visibility into future cash flows, making it easier to estimate a company's intrinsic_value.
• A New Playground for Capital Allocation: OTT is a capital-intensive business. Creating a slate of original shows and movies can cost billions of dollars annually. This makes capital_allocation the single most important job of an OTT executive team. As an investor, you must act like a skeptical business owner: Is the company spending its money wisely? For every billion dollars spent on content, is it attracting and retaining enough high-value subscribers to generate a satisfactory return_on_invested_capital? Or is it just burning cash in a race to the bottom?
• Direct-to-Consumer Data Advantage: By cutting out the cable middleman, OTT services gain a direct firehose of data about what you watch, when you watch, and what you skip. This data is a powerful asset that can be used to inform content decisions, reduce marketing waste, and increase customer retention. A company that uses this data wisely can build a significant competitive edge over rivals.

Analyzing an OTT business is less about traditional media metrics and more about the principles used to evaluate software-as-a-service (SaaS) companies. It requires focusing on the health of the subscriber base and the efficiency of content spending.

A value investor should approach an OTT company with a multi-step investigation:

1. Step 1: Identify the Business Model. Not all OTT is the same. The main types are:
   • SVOD (Subscription Video on Demand): The Netflix model. A flat monthly fee for unlimited access. This is the most common and often the most attractive due to its recurring revenue.
   • AVOD (Advertising-based Video on Demand): The YouTube or Tubi model. Content is free to the user, supported by advertising. This model's success is tied to the size of its audience and the health of the ad market.
   • TVOD (Transactional Video on Demand): The Apple iTunes or Amazon Prime Video rental model. Users pay per-view for a specific movie or show.
2. Step 2: Scrutinize the Subscriber Economics. This is the heart of the analysis. You need to understand the key unit_economics:
   • Subscriber Growth: Is the company still adding new users at a healthy clip? Is it expanding internationally?
   • ARPU (Average Revenue Per User): Is the company able to raise prices over time without losing customers? A rising ARPU is a strong sign of pricing_power.
   • Churn Rate: What percentage of subscribers cancel their service each month? A high churn rate is a leaky bucket; the company must spend heavily on marketing just to stand still. Low churn is the hallmark of a beloved service with a strong content moat.
   • LTV/CAC (Lifetime Value / Customer Acquisition Cost): While companies don't always disclose these figures, you can estimate them. How much profit will an average subscriber generate over their entire “lifetime” with the service? And how much does it cost in marketing to acquire that subscriber? A healthy business has an LTV that is many multiples of its CAC.
3. Step 3: Evaluate the Content Moat. This is more qualitative but just as important.
   • Originals vs. Licensed Content: Does the company own its key franchises (like Disney), or is it renting content from other studios that can be pulled back at any time (like Netflix in its early days)? Owned IP is a far more durable asset.
   • Breadth and Depth: How deep is the content library? Is there something for everyone in the family? A deep library reduces churn.
   • Cultural Relevance: Is the service producing “water cooler” shows that become part of the cultural conversation? This creates immense free marketing and strengthens the brand.
4. Step 4: Assess the Competitive Landscape. The “Streaming Wars” are real. Within your circle_of_competence, you must honestly assess if the company you're analyzing has a path to becoming one of the few long-term winners, or if it's destined to be a niche player or an acquisition target.

Let's compare two hypothetical OTT companies to illustrate these principles: “Crown Jewels TV” and “FadFlix”.

This example shows that just being an “OTT company” isn't enough. A value investor must dig deeper to separate the future kings from the court jesters. Crown Jewels TV is building long-term value, while FadFlix is engaged in a high-risk, low-margin battle for temporary attention.

• High Visibility: The subscription model provides a clear and predictable stream of revenue, making financial modeling more reliable than for companies dependent on advertising or one-off sales.
• Global Scalability: Unlike a physical retailer, a streaming service can sign up a new customer in a different country with virtually zero marginal cost, allowing for incredible operating leverage as the business scales.
• Powerful Network Effects: The more subscribers a service has, the more it can spend on content, which in turn attracts more subscribers. This creates a virtuous cycle that can solidify a market leader's position.

• Intense Competition: The “Streaming Wars” have led to a massive increase in competition. This can compress margins and force companies into a “cash burn” phase for years, destroying shareholder value if not managed correctly.
• Astronomical Content Costs: The need for a constant flow of new, engaging content creates a “content treadmill” that requires enormous and perpetual capital investment. A few big flops can have a significant impact on profitability.
• Subscriber Fatigue: As dozens of services launch, consumers may become overwhelmed by the number of subscriptions they manage. This could lead to higher industry-wide churn rates as people “hop” between services rather than subscribing to many at once. An investor must consider this long-term risk before paying a high price for any OTT stock, always insisting on a margin_of_safety.

• economic_moat
• disruptive_innovation
• recurring_revenue
• capital_allocation
• return_on_invested_capital
• unit_economics
• pricing_power