3 Charts That Have Cable Executives Up at Night

Netflix (NASDAQ: NFLX  ) shares have risen over 20% as the company rode a wave of announcements. The fourth-quarter and full-year results were positive and the company soon announced it had raised $400 million through bonds. Netflix then said it planned to spend $3 billion on new content this year while simultaneously revealing the third season renewal of popular original show "House of Cards." That's an impressive list of news items before the second week of February. 

But how have membership numbers for Netflix grown over the years? Should Time Warner Cable (NYSE: TWC  ) and Comcast (NASDAQ: CMCSA  )  - the top two cable providers in the country- worry more about the competition? 

Subscriber growth 
Netflix reported the net addition of over 2.3 million domestic streaming members in the fourth quarter -- 14% year-over-year growth that brought the number of paid subscribers in that segment up to 31.7 million. International streaming had a net addition of 1.7 million members -- a 6% drop from the prior year's quarter, but that's because the fourth quarter of 2012 featured a larger-scale regional launch in Europe.

Domestic DVD members have declined steadily over the past two years. 

Source: Company filings 

The international segment holds the most growth potential. Netflix remains tight-lipped about performance in specific countries. However, the company has deeply invested in promoting its international presence and that's eating into the segment's contribution margin. 

Contribution margin 
This metric involves dividing profits by revenues to demonstrate the profitability of each segment for easy comparison. Here's a look at the segment contribution margins over the past two years: 

Source: Company filings 

The international segment has improved but its margins will stay low until Netflix has more of an overseas presence. The DVD margin shows why the company keeps the segment around -- its margins remain steady despite the dropping membership numbers.   

Comparison to cable 
Cable providers such as Time Warner and Comcast have experienced drops in subscribers partly due to the increasing popularity of Netflix's streaming service. 

Time Warner Cable's fourth quarter included a net loss of 214,000 video customers, which was an improvement on the previous quarter's number but still the second-highest subscriber loss in the past three years. The drop left Time Warner with about 12 million video subscribers. Comcast fared better by adding 43,000 video subscribers in the fourth quarter but subscriber count was still down 305,000 for the year. The company ended the year with about 22 million video customers. 

Here's a look at the net additions-or losses- for the three companies. Note that I use paid subscribers for Netflix to remove subscribers in a free-trial period. 

Source: Company filings 

Time Warner Cable and Comcast do have more subscribers than Netflix once the Internet and voice segments are added. But it's important to note that it costs more for the cable companies to lose a customer than it would cost Netflix. Time Warner Cable and Comcast make over $200 in revenue from each video subscriber. Netflix earns about $23 per subscriber. So the subscriber losses for the cable companies can add up to a financial problem quickly. 

Netflix won't single-handedly put cable companies out of business. However, as Netflix's original programming improves and the service signs more agreements to stream content, the cable companies will have more cause to worry. 

Foolish final thoughts 
Netflix has found firm footing in the domestic streaming market, and it still has room to grow as the company continues to add original content. The company now has to focus on greater international penetration to improve the contribution margin of that segment. Expect the DVD service to hang around as long as its margin holds steady. 

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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 February 09, 2014, at 11:10 AM, sabebrush6 wrote:

    Where's the one showing me dropping my subscription ?

  • Report this Comment On February 09, 2014, at 12:47 PM, LadyMantle wrote:

    There are many Americans, perhaps 50%, who have no knowledge of smart TVs, broadband internet and have never even heard the word "streaming." These people are the last vestiges of the cable TV industry. As their dollars continue to buy less, they will drop their cable subscriptions (unknowing that Netflix even exists) just because they cannot afford a cable subscription that costs as much as a car loan. So, yeah, Netflix has a lot of potential subscribers but unless you are a computer junkie, they probably never heard of it. Netflix does not advertise in run-of-the-mill media.

    If most Americans knew all you needed was a broadband internet connection, a Roku box, a LED HDTV and a Netflix subscription (that would set you back $7.99/mo) and you could have the best that TV had to offer, they probably would not believe you. As long as TWC and Comcast can keep these people in the dark, they have customers. You see all kinds of satellite dishes still remaining on buildings all over America. You do not need any of this equipment any more but the cable companies are not going to tell you that.

  • Report this Comment On February 09, 2014, at 2:13 PM, BethAnn2 wrote:

    The whole Netflix will replace cable thing is a myth. You can't get live SPORTS programming on Netflix or any other streaming service. Funny how Motley Fool never mentions Netflix's competitors in the streaming sphere, such as Hulu, either. I wouldn't rush off to buy Netflix stock. They don't have that much good programming and can't afford it as long as their subscriber fees remain so low. There is also the problem of their bandwidth consumption.

  • Report this Comment On February 09, 2014, at 10:51 PM, glenns45 wrote:

    Netflix is not the stock to own long term, it will be the content producers and suppliers such as Disney and Lionsgate.

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