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

By Tim Brugger - Dec 12, 2012 at 7:30PM

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According to a recent report, cable operators continue losing video subscribers.

A recent report from industry research firm IHS would appear to confirm what Netflix (NFLX 2.90%) 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 (TWX) or Comcast (CMCSA 2.68%) 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 (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's (AMZN 3.15%) 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. 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 (VZ 1.75%) 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.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$179.95 (2.90%) $5.08, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Coinstar, LLC Stock Quote
Coinstar, LLC
Comcast Corporation Stock Quote
Comcast Corporation
$40.29 (2.68%) $1.05
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$51.64 (1.75%) $0.89
Time Warner Inc. Stock Quote
Time Warner Inc.

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