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Analyst: Disc Subscriber Concerns Undermine Netflix’s Streaming Future

15 Apr, 2013 By: Erik Gruenwedel

The SVOD pioneer — in the near term — is supported by increasingly fractured disc-subscriber base

Competitive pressures on Netflix’s 8 million disc subscribers continue to undermine the subscription video-on-demand pioneer’s aggressive push to expand operations globally, according to B. Riley & Co. analyst Eric Wold.

The Los Angeles analyst said increasing competition from bundled subscription services — notably Redbox Instant by Verizon — poses a risk to the Netflix’s domestic subscriber growth, which could negatively impact both operating leverage as well as its ability to self-fund international growth plans.

Specifically, Wold believes Redbox Instant’s ability to offer new releases on street date and unlimited streaming at $8 a month could trump Netflix’s superior disc library. He said the DVD business is driving 64% of Netflix’s 2013 contribution profit projection, which he views as the key risk to its overall profit trends and the continued ability to self-finance international growth.

“While Netflix has a seemingly unbeatable lead with its domestic streaming offering, we believe investors need to focus more on the risk to the DVD segment, which is expected to generate the majority of the company’s profitability and is, in our opinion, the most at risk of competitive pressures,” Wold wrote in an April 15 note.

The analyst contends indifferent reviews for the April 19 release of Netflix’s original horror series “Hemlock Grove” could undermine viewing, compared with the Feb. 1 release of critically acclaimed political series “House of Cards,” which spurred binge viewing.

Notably, The Hollywood Reporter wrote, “'Hemlock' isn’t scary. It isn’t creepy. It barely makes sense, much less sense you want to decode.”

Wold said the positive buzz surrounding “Cards” likely drove streaming sub gains and limited churn somewhat during the first quarter.

“However, with the series coming to DVD June 11 and initial reviews for 'Grove' looking lackluster, it will be interesting to gauge the impact from original programming during Q2,” he wrote.

Meanwhile, BTIG Research analyst Richard Greenfield initiated coverage on Netflix, saying the service is almost universally accepted as a value-proposition for both consumers, content holders and CE manufacturers.

Greenfield estimates the domestic subscriber base has now reached 29 million with the price value of a Netflix subscription increasing “dramatically” throughout the past two years as it invests heavily in streaming content.

He noted that HBO continues to attract subs willing to pay $15 month while watching just a few original series and occasional movies. By comparison, Greenfield said Netflix offers a “24/7, 365 days/year anywhere you are babysitter” — a godsend to young parents.

“While it is far too early to call Netflix’s original programming push a success, they are trying to reach a point where consumers know that there will always be something new and interesting coming that requires a Netflix subscription, in addition to top-tier syndicated programming and a sufficient movie selection,” Greenfield wrote in an April 15 post.

Netflix reports first-quarter results April 22.

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