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Netflix CFO Expresses Concern Over Broadband Consolidation

20 May, 2014 By: Erik Gruenwedel

Netflix CFO David Wells

On the heels of pending mergers between Comcast and Time Warner Cable, and AT&T and DirecTV, Netflix’s biggest worry isn’t the prospect of emerging competing over-the-top video services, instead, it’s delivering video into consumer homes, CFO David Wells told an investor group.

Speaking May 20 at the J.P. Morgan Global Technology, Media and Telecom Conference in Boston, Wells said the regulatory process on the Comcast/TWC merger is ongoing, while it remains “early days” in the AT&T and DirecTV union. Regardless, the mega mergers could have significant impacts on Netflix's busienss model.

“We’re mostly concerned about consolidation on the broadband side, not necessarily on the video side,” he said.

Indeed, CEO Reed Hastings, in several blog posts, has called for the Federal Communications Commission to impose stricter “net neutrality” provisions. Hastings has been particularly vocal after he felt Netflix had been forced to pay addtional "taxes" to ensure faster steaming speeds of its content to Verizon and Comcast subscribers.

Meanwhile, Wells said AT&T’s claims that it would have new 15 million new broadband households after the merger “would be a plus” for Netflix. The SVOD pioneer contends the addressable streaming market in the United States is from 60 million to 90 million homes. Netflix currently has about 34 million subscribers in the U.S.

Wells reiterated that the proposed Comcast/TWC union underscores the reality that cable modems remain the dominant distribution technology for Internet connectivity into homes. The CFO said Comcast’s ability to control broadband service to 60 million homes, produces a scenario of economic scale combined with dominant technology.

“You get concerned about concentration of market power there,” Wells said.

The CFO said subscriber reaction to the new $9 monthly price was “as expected” with what he characterized as a “small reaction” from subscribers. Wells said grandfathering current members to the higher price point within two years would be consistent across all Netflix markets, except those with excessive inflation, such as Brazil, where subs would see a price hike after one year.

“There’s some mixed [internal reaction] in terms of whether we raise the two stream plan. We’ll learn from that in some markets in terms of the [price] elasticity as well as the substitution [effect] for the one-stream plan,” Wells said.

In addition to the $8.99 plan, Netflix offers a four-concurrent streaming plan for $11.99 a month. The service is also testing a three-concurrent stream plan, in addition to standard-definition and high-definition variations.

Wells said the price increases would help grow margins and help pay for escalating content spending. The CFO said the company’s goal is to increase margins by as much as 30%.

“We think we can hit that over the next four quarters,” he said. “It also gives us enough time to season the price increases … and how people will accept whether the one-stream, two-stream or four-stream plans.”

Wells said management’s biggest surprise to date regarding international expansion has been Netflix’s ability to compete against established entertainment distribution channels — notably in the United Kingdom.

“It’s a very competitive market; [yet] we’ve been able to grow [market share], and we are pretty happy with the trajectory and our content offering in the market,” he said.

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