Stan is Nine’s $800m asset, and should partner with Disney on an ad-funded tier to transform media

Nine's Stan should introduce an ad-funded tier in partnership with Disney, CHEP'S Ben Shepherd proposes, creating a product at a truly disruptive price point for consumers, allowing Nine to access the best partner in the world, and giving Disney a running start in the local market. Its a win/win/win, Shepherd argues, and could be one of the most transformative partnerships in Australian media.

Next Thursday, Nine will release its FY19 results to the market. In the rapid evolution of the domestic iteration of the ‘streaming wars’, Nine is perhaps the most interesting party in terms of its impact over the next two to three years.

Stan is the most intriguing asset right now. In its present form, it is basically a domestic version of Netflix, both in terms of pricing and monetisation. But things get really interesting when you consider what it could look like in 12-24 months, as a unit of Nine, as a stand alone business, as a joint venture entity or as a 100% M&A target for a global player.

Stan’s valuation

To appreciate Stan’s importance in this discussion, it is important to start with its value. My view is that Stan is worth between $750-800m ($776m to be precise) as a standalone asset. This is based on an average revenue/valuation ratio of comparable companies of between 4.0-4.4.

By my estimate, on subscriber numbers and average revenue per user (ARPU), Stan should be on track for accounting rate of return of $184.8m. Goldman Sachs believes Stan is valued at $756m.

External market factors with likely impacts

The Disney+ launch could impact Stan in two ways – it adds another competitor for subscription revenue and share, and it has catalogue impacts on the Stan service.

If Disney decided to launch Hulu, it would compound these issues – more competition and a throttle on content supply.

The CBS/Viacom merger (expected to be confirmed this week) adds volume to the nascent Ten All Access, and if the reports of Lionsgate being a possible acquisition target of the CBS/Viacom rollup is true, this would give this service more depth. Any CBS/Viacom/Lionsgate movements impact Stan around content licensing (Starz and Showtime are key content sources) as well as some competitive clutter.

Not-so-obvious external market factors with potential impacts

Stan is well-positioned to impact any of the above issues given its position in market and historical value proposition.

It has three years of content refreshment and strong product – in short, it has done the hard yards. It will be very hard for a pure play streaming video on demand (SVOD) service, at the usual price points, to unseat it both in terms of value and quality.

However, if Hulu or CBS/Ten/Viacom were to offer a market disruptor in the form of an ad-funded monthly service at $5 or $6 a month, it could reframe market perceptions and create an event where people may look closely at alternatives.

Stan has plenty of options

Stan has an absolute plethora of options, all of which are pretty positive.

It can keep doing what it’s doing – remain an ad-free, wholly-owned part of Nine, and will likely keep growing. My estimate is that, by FY22, it’d be a $336m annual revenue business with 2.4m fully paying subscribers. This also factors in one more price rise in that time period, of around 10%.

Secondly, it can look to spin out of Nine as its own listed entity, use proceeds from an IPO for an injection of capital, and aggressively hunt overseas deals with key providers (Sony, NBCU, AMC, CBS/Viacom, Starz) as well as local productions. Nine could retain 70% of the business. It would have a relatively clean run in on the ASX as there are no comparable offerings available on the local stock market. My belief is Stan is big enough to be its own entity now.

Thirdly, it could seek a 50/50 partner at its current $750-800m valuation and remain ad free. Disney would be the likely partner here. It would secure a large chunk of content (Nat Geo, A&E, Fox, Disney TV, ABC), and likely would be a value accretive exercise for both parties. It would give Disney a jump off for Disney+ and would create a hypothetical skinny bundle of Disney+ and Stan for under $20. Disney would highly value the ability to reach the 1.5m+ Stan subscribers. And for a company with a USD$250bn market cap, a AU$400m cheque is an easy one to write.

On the same track, CBS/Viacom would look to roll in Ten All Access to Stan and consolidate this content as a Stan branded product. This would put Stan head to head against Disney+ as well as Netflix, but would shore up a bunch of content it currently relies on across the CBS/Viacom/Lionsgate assets. A rolled up CBS/Viacom/Lionsgate would be a USD$32bn proposition at current valuations – so a relative minnow to the Disney behemoth.

Strategically, it’s unlikely a CBS/VIacom/Lionsgate rollup would want to drop $400m in a small market when it could continue for the next three years by licensing its content and seeing guaranteed cheques for no outlay.

Lastly – Disney buys Stan outright and relaunches it as Hulu, following the same strategy it is undertaking in the US and other markets with a Disney+/Hulu bundle. This would also allow Disney to position Hulu as both an SVOD and a modern cable bundle, through incremental add-ons for services such as HBO, CBS, ESPN, Kayo etc.

What should happen: Stan needs to introduce an ad-funded tier to fuel its growth

If I was sitting at Nine, I would look to bring on Disney as a 50/50 joint partner in Stan. Disney pays $390-400m for this and the arrangement remains that of equals.

Disney+ would remain wholly owned by Disney.

Stan then incorporates Hulu content as well as Disney-owned key assets. My belief is that, under this scenario, the CBS/Viacom/Lionsgate content would likely also remain on Stan.

Stan keeps the current ad-free tier but introduces a new, ad-funded $5-6 product. This could be sold individually, as well as bundled with Disney+ for under $15: $5-6 for Stan ad-funded and $9-10 for Disney+ (no ads).

Stan’s strategic priority is to hold current ad-free subscriptions and aggressively seek new-to-category subscribers at the $5-6 tier. My view is that in year one, this could generate 1m new subscribers and, by FY22, it could have 2.3m total subscribers, giving Stan a total subscriber base in excess of 3.8m.

Source: Ben Shepherd. Click to enlarge

This implies current ad free subscriptions remain at low to no growth, with growth driven by the ad-funded lower tier.

Theoretically, an ad-funded tier provides a dramatic scale up of subscriber growth with a subsequent improvement in ARPU. Due to the low sticker price of Stan ad-free, an ad-funded model at the parameters I set out in the model (50% sell through, $40 cost per thousand viewers) requires an annualised consumption per household of the ad-funded services of 114 hours per year (just over two per week).

Source: Ben Shepherd. Click to enlarge

This adds 2.4m people to the platform over the three years, with ARPU per subscriber increasing by $26 per year.

The flow on in the key revenue indicators is strong.

Source: Ben Shepherd. Click to enlarge

Stan’s total revenue would move from around $180m in FY19 to just under $600m in FY22. Subscribers would tick over 4m total and advertising revenue would push past $200m in this time.

Ad revenue would originate from the new Stan aggressively chasing both Seven/Ten and Foxtel’s existing linear TV revenue, demonstrating it could provide both the quality, context and audience in an addressable way. Nine could sell this inventory with minimal incremental cost and as a positioning, it would move Nine completely away from Seven, Ten and MCN in terms of its ability to compete across screens.

Nine, Disney and consumers have the most to gain

The biggest winners from this situation would be Nine, Disney and consumers. Consumers get a product at a price point that is truly disruptive. Nine gets the best partner in the globe, and Disney gets a running start into the Australian market. It’s truly a win/win/win and could become one of the most transformative partnerships in Australian media, one that will shape the future of TV and streaming in this country forever.

Who has the most to lose? Basically, everyone else. An ad-funded Stan is a huge disruption to a TV market already facing headwinds. At $5-6, an ad-funded Stan makes Foxtel’s over the top options look seriously expensive and would provide a large incentive for households currently with Foxtel to consider cutting the cord, getting Disney+ and Stan and saving across the year anywhere from $400-$1,000.

It would leave Seven isolated as a pure play broadcaster without a dog in the SVOD race.

For CBS, it would provide a competitor it would be unlikely to match, which would mean, for the next few years, it would need to be a content player as opposed to a direct to consumer viable option.

Netflix, in my view, would remain largely unaffected. It has a large user base and solid goodwill with its customers. It would take a large event to erode this. Netflix is in most households now and will likely remain the base option for these households.

Let the games really begin.

Ben Shepherd is the chief media officer at CHE Proximity


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