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Report: 'No Reason for Netflix to Exist in the Future'

6 Aug, 2012 By: Erik Gruenwedel

Despite being slow out of the gates, TV Everywhere platforms offered by cable, satellite and telecommunications operators portend a death knell for subscription video-on-demand services such as Netflix, according to a new report.

Media companies such as CBS Corp., Time Warner and Viacom have recently boasted license agreements with Netflix that generate significant incremental revenue and fatten the bottom line. The huge increase in TV content price inflation has caused Netflix’s content amortization costs to increase from 12% of revenues to 50% of revenues, according to the “TV Everywhere Stock Report,” release by the National Inflation Association.

It should be noted that while the NIA characterizes itself as an organization aimed at educating consumers about hyperinflation, it also offers profiles on public companies (including technology) it believes can prosper in an inflationary environment.

Netlix is spending billions this year licensing premium content — excluding monies spent creating original fare — from third parties. The SVOD pioneer spends about 17 cents per hour in content streaming costs, compared with 54 cents per hour on content spent by cable and satellite TV operators.

By comparison, it spends about $300 million annually on disc rights and $225 million on content delivery network fees. As the number of people streaming content via Netflix increases, license fees will climb accordingly.

“We think content owners ultimately value their content based upon the number of views, and as Netflix grows its subscriber base and overall viewing hours, it is inevitable content costs will continue to rise,” Pachter wrote in a recent note.

But Netflix is currently limited to charging subscribers $7.99 a month for unlimited streaming — a price ceiling it isn’t about break following the blowback it received last year after instituting a 60% price increase for its popular hybrid disc-streaming rental plan.

With TV Everywhere designed to offer authenticated subscribers access to repurposed and original programming on demand away from the cable set-top box, Netflix’s ubiquitous access on hundreds of CE devices loses its competitive advantage, according to the report.

Indeed, 38% of former premium TV subscribers who recently cancelled their services say they would once again subscribe to premium TV if the provider offered a TV Everywhere feature or service.

NIA said cable companies have also begun to present subscribers online usage based meters allowing them to track their broadband data usage — which often is a result of video streaming. Time Warner Cable customers in select markets now have the option of saving $5 per month by signing up for a plan that allows them to consume no more than 5 gigabytes of broadband data per month. If they go over, they are charged an additional $1 for each gigabyte over the limit.

TWC has to offer rebates since it believes most of its customers who cancel TV service and keep broadband services, are likely signing up with over-the-top (OTT) video companies like Netflix, according to recent statements by CEO Glenn Britt.

Regardless, the NIA report said if Netflix isn’t able to up its content offerings on par with premium TV channels due to revenue limitations, its future could be in jeopardy.

“If Netflix is going to keep their monthly subscription fees near their current low levels without implementing the same price increases that cable TV companies have been forced to pass onto their customers, Netflix in the near-future will only be able to offer older movies and TV shows that are no longer in high demand,” the report reads. “There will be no reason for Netflix to exist in the future.”

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