What Silicon Valley Is Doing To Hollywood

• Three new Internet-based video streaming models are challenging the traditional cable network model.
• The Internet has lowered the barrier to entry in the media world, increased the value proposition for advertisers, and given consumers an unprecedented number of options.
• Citi sees traditional cable networks as the biggest losers from the transition.

A new report by Citi analyst Jason Bazinet discusses the major changes that the Internet has had on the movie and video business. The Internet has disrupted Hollywood perhaps like nothing else in history, and the transition is still underway.

Three flavors
Netflix Inc NFLX has pioneered Internet video since it began its transition from DVD-mailing to streaming back in 2008. In subsequent years, three types of Internet video business models have been established.

The first model type is the subscription on-demand model that is used by Netflix, Hulu and Amazon.com, Inc AMZN. These companies typically charge around $10 per month for content.

The second model type is Web-based services that offer streams of traditional cable network content. Dish Network Corp DISH and Sony Corp (ADR) SNE currently offer this type of service.

Finally, services like HBO Now, Showtime and CBS Corporation CBS’s CBS All Access provide access to a single channel of online content.

Internet changes everything
For incumbents in the media space, new Internet competition seems to be attacking from all sides. Thanks to the Internet, there is now a much lower barrier to video entry. Advertisers are now offered a better value proposition and the ability to target audiences like never before. Finally, consumers now have more flexibility and options than ever before.

How to play it
Citi sees most of the growth in the Internet media space coming at the expense of the traditional cable networks. Names that are most exposed include Viacom, Inc. VIAB, Discovery Communications Inc. DISCA, Scripps Networks Interactive, Inc. SNI and AMC Entertainment Holdings Inc AMC.

Disclosure: the author holds no position in the stocks mentioned.