Analyst: Netflix Could Become Cable Cord Cutter15 Apr, 2010 By: Erik Gruenwedel
With Netflix’s recent studio distribution deals including access to television shows, the online DVD rental pioneer’s vaunted streaming service could entice subscribers to opt away from monthly cable bills, an analyst said.
Eric Wold with Merriman Curhan Ford in New York said Netflix’s deals with 20th Century Fox Film Group, Warner Home Video and Universal Studios Home Entertainment would offer subscribers streaming access to repurposed episodes of "Bones," "24," "King of the Hill," "Prison Break" and "Arrested Development," among others.
“With Netflix offering free streaming to any subscription plan that is $8.99/month or greater, we believe [it] could easily begin to eat into the estimated $66 billion [cable] market for basic and premium home subscriptions,” Wold wrote in a note.
The analyst, like others, believes Netflix’s access to enhanced studio content for streaming will retain subscribers seeking alternative DVD rental options due to the inherited 28-day window for new release movies.
With Netflix receiving improved financial terms (from 25% to 50%) in exchange for the delayed shipments of new release DVD and Blu-ray Disc movies, its gross margins will improve and drive increased earnings since Netflix amortizes the cost of a new release DVD over one year, compared with three years for catalog titles.
“We have to believe that a good portion of these DVD cost savings will drop to the bottom line,” Wold wrote.
The analyst said a 5% reduction in his subscription cost assumption would drive fiscal year 2011 gross margin projection to 39.6% from 36.9%, with every 1% increase in gross margin potentially adding an incremental $0.28 in fiscal year earnings per share.
Los Gatos, Calif.-based Netflix reports first-quarter results April 21.