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Cable SVOD: Friend or Foe to Netflix?

8 Mar, 2012 By: Erik Gruenwedel

Netflix (and Hulu Plus, Amazon Prime) and multichannel video program distributors (cable and satelliteTV) have historically blended like oil and water. Netflix, with its trailblazing $7.99 monthly all-you-can-watch subscription video-on-demand streaming service, was considered poison to MVPDs seeking to lure and retain subscribers with pricier bundled pay-TV programs.

So when Netflix CEO Reed Hastings Feb. 29 told an investor group he was receptive to bundling the streaming service with third-party cable/satellite/telco operators, it signaled either a coronation of the Netflix business model and wider adoption of SVOD, or veiled desperation by Hastings seeking to thwart competition through outsourcing.

After Comcast last month bowed Xfinity Streampix, a bundled and standalone SVOD platform (with limited content), Hastings singled out the offering as a direct threat. When Reuters March 6 reported the CEO was in discussions with select cable operators, the drums of encroaching SVOD competition appeared stronger.

“I think the threat is real,” said Eric Wold, analyst with B. Riley & Co. in Los Angeles.

Comcast is marketing Streampix as a premium add-on for $4.99/month, along the lines of their other SVOD add-ons such as Disney Family Movies $5.99/month, WWE Classics $7.99/month, Howard TV $10.99/month, Bollywood Hits $12.99/month and The Jewish Channel $6.99/month, according to BTIG Research analyst Richard Greenfield.

Hastings, at the investor event, said cable (and satellite/telco) operators have a unique competitive advantage over Netflix: They control the pipes delivering high-speed broadband Internet connections (including SVOD) into households. Combined with a nationwide infrastructure, their increased content selection and possible loss-leader pricing wields a powerful lineup.

“Why bother subscribing to Netflix?” Hastings said.

Wold said Comcast Streampix and Verizon/Redbox escalate competition well beyond what Amazon Prime or Hulu Plus threaten to bring. While Netflix has a sizable content lead over new SVOD entrants, Comcast’s 22 million subscribers could easily be swayed by a free or discounted streaming subscription vs. the $8/month they were paying for Netflix (especially with Disney content now on Comcast).

Indeed, Comcast said a catalyst driving rollout of Streampix was the fact that 20% of its subs also subscribe to Netflix.

Wold also believes the combo physical/streaming plan to be offered by Verizon/Redbox will likely be priced well below the $15.98 month price that Netflix currently charges hybrid subs.

“At a minimum, I see these moves pressuring Netflix’s subscriber acquisition costs (SAC) and more likely drawing away subscribers,” Wold said.

Michael Pachter, senior analyst with Wedbush Securities in Los Angeles, said MVPDs have no choice but to embrace SVOD with or without Netflix. With cable/satellite/telco companies watching increasing numbers of $85/month customers not renewing, their contracts results in losses of $1,000 a year per lost subscriber, according to Pachter. He said an increased mindset among consumers that Hulu Plus or Netflix is good enough represents a huge loss. The cable company has to compete to keep that from happening.

“I’m not sure if many people quit Netflix, but it’s going to keep people from cutting the cable cord,” Pachter said. “Everyone who has something to lose from Netflix growth will have a competitive SVOD offering, and ultimately, Netflix will stop growing.” 

Meanwhile, Richard Greenfield, analyst with BTIG Research in New York, downplayed the threat of Streampix since users are required also to be Comcast subscribers. Greenfield said the SVOD platform is targeted toward Comcast’s lowered tiered subs who might be tempted (foolishly) to drop Netflix for a cheaper SVOD service — despite the fact that it offers decidedly less content.

The analyst said Netflix enjoys a clear advantage over Streampix in brand recognition, content offerings, user interface and access. Netflix can be viewed on the TV via 700 consumer electronics devices compared with Streampix, which is accessed on the TV through a cable box or Xbox 360 (later this year).

“[It’s] a joke so far,” Greenfield said.

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