Cable's Losing Video Customers. Is Netflix to Blame?

A recent report from industry research firm IHS would appear to confirm what Netflix (NASDAQ: NFLX  ) subscribers have known since the day CEO Reed Hastings got into the streaming video business -- cable may not be dead, but its pay-for-video business sure is.

Though the results from the IHS study show a slight improvement compared with Q3 of 2011, it's not something industry heavyweights such as Time Warner (NYSE: TWX  ) or Comcast (NASDAQ: CMCSA  ) are going to be excited about. And it's likely to get worse, not better, going forward.

The results
The only, albeit marginal, improvement for the cable industry is that fewer video subscribers defected in Q3 of 2012 than they did last year. According to the study, 460,000 cable customers left their respective cable provider's video service, compared with 512,000 the year prior. Not really comforting, if you're a cable executive. And it gets worse.

Erik Brannon, a TV industry analyst with IHS, added a bit of salt to the cable industry's wounds, saying, "U.S. cable operators in the third quarter trimmed their video subscriber losses by using heavy promotional bundles as well as service initiatives." When cost incentives and special promotions aren't working, it's time for Time Warner and Comcast to explore alternatives. How long before these behemoths stop talking about streaming their respective video offerings, and start doing it? Not long, with losses like this.

Though not specifically mentioned in the study, you can probably add services such as Coinstar's (NASDAQ: OUTR  ) Redbox kiosks, offering new movies at a $1 a pop, to the list of challenges cable's video services are facing.

Is Netflix to blame?
The short answer is, yes, along with consumers' finances. As Brannon put it, "Subscriber numbers still decreased in the third quarter because the attractiveness of Over-The-Top (OTT) services delivered over the open Internet and an ailing economy also dissuaded a portion of new households from even considering taking a pay-TV subscription."

Does it matter for investors?
Another short answer? Not yet. Netflix, and counterparts including Amazon.com's (NASDAQ: AMZN  ) Prime service, are paying big time for content. According to some, Netflix paid as much as $300 million for the deal with Disney, 50% more than Liberty Media was paying for its Disney relationship. Recouping that kind of investment is going to take Netflix a while. Amazon.com also inked a content deal recently, with former Netflix partner Epix, and you can bet that cost a pretty penny, too.

Streaming content's great for consumers, as are new options on the horizon like the partnership between Verizon (NYSE: VZ  ) and Coinstar, set to begin later this month. The problem for investors is margins. Unless its competition can find a way to improve on the 16.5% margins Netflix "enjoys" from its streaming business, it's going to be a long time before new streaming customers, even those shunning cable video subscriptions, turn into profits.

While Netflix's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2012, at 8:44 PM, mattdavidian wrote:

    Epix and NetFlix still have a deal; Epix is not a "former partner". Epix did make a deal with Amazon, just as they've made a deal with Redbox. When the Amazon deal was announced, I think there was some confusion about the nature of the deal. IIRC, for a while, the NetFlix-Epix deal was exclusive. NetFlix decided they didn't want to pay extra to renew the exclusivity status. Which simply meant Epix could license the same content to other streaming companies. Which they did. This didn't mean that NetFlix lost any Epix content (as they did when the Starz deal expired). It just meant Epix was free to license the same content to NetFlix's competitors.

  • Report this Comment On December 12, 2012, at 10:25 PM, timbrugger wrote:

    mattdavidan,

    That's a great point, and needs to be clarified, thanks! I neglected to add "former EXCLUSIVE partner," as you allude to. Without all the annoying capitalized letters, of course.

    Great call Fool, thanks again. Tim.

  • Report this Comment On December 12, 2012, at 10:48 PM, jb757 wrote:

    Some people do need to save money and realize they don't need all the TV they have. A typical HDTV antenna can bring you all the local channels except the local sports channel but you can do without it depending on which seasonal sports you like. I just need it for the 6-mo. MLB season. So, in my case I can get by without cable video for 3 months at least, perhaps 6 months.

    Netflix and the competition provide all the movie selection and classic TV shows you'll ever want. I typically seldom watch the recycled cable movies. I would miss MSNBC, CNBC, and CNN news programs but their on-line sites would help.

    You can move from one cable company to another in urban areas because you normally get a teaser rate for a year or two, and when it goes up, you switch to the other cable provider and get their teaser rate. This hinders cable growth.

    The article correctly states that Netflix (plus competitors) and finances cause cable companies to lose subscribers. Lost revenue from cable shoppers is also a factor.

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