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Netflix Pulling Away From the Pack

15 Jun, 2015 By: Erik Gruenwedel

Imagine if Triple Crown winner American Pharoah had lapped the field at the Belmont Stakes. That’s what Netflix is doing in a crowded over-the-top video horse race, which features Amazon Prime Instant Video, Hulu Plus, HBO Now, Showtime, CBS All Access, Shout! TV, Acorn TV, Popcornflix, Crackle.com, Sling TV and PlayStation Vue, among others.

Netflix this spring grew its downstream bandwidth market share by 2% to 36.5%, and upped to 33.81% its aggregate peak streaming traffic on fixed line devices (i.e. televisions) compared with the second-half of 2014, according to new data from Sandvine.

Both data points were records for Netflix.

The company is so far ahead, perennial rivals Prime Instant Video and Hulu Plus generated just 1.97% and 1.91% downstream traffic market share, respectively. Prime Instant Video was up a scant 0.06% from the previous period.

Other video services included YouTube at 15.56%, iTunes at 3.36% and Facebook at 2.65%. Sling TV, the over-the-top video service launched by Dish Network in February, accounted for less 1% of downstream traffic.

Hulu’s traffic could increase exponentially should corporate parent Comcast agree to enable the streaming service direct access to its 20 million cable households. That scenario, however, could prove problematic in light of Comcast’s regulatory provisions surrounding ownership of NBC Universal and Hulu.

Regardless, Netflix domestic subscribers don’t seem distracted by the competition. They’re streaming about two hours of content per day, up 18 minutes from 2014, according to BTIG Research analyst Richard Greenfield.

“Given the significant rise in video competition over the past year, it is astonishing that Netflix is continuing to increase its bandwidth share,” Greenfield wrote in a May 29 blog post.

Growth Abroad Continues

Along with expanding its bandwidth, Netflix continues to grow its business internationally. The company most recently said it is bowing service in Italy and Portugal in October. Pricing for the services was not disclosed. Netflix, which is also launching service in Spain, is on an accelerated schedule to be operational in 200 countries by 2017. In addition to a pending launch in Japan, the service expects to add 1.9 million subscribers internationally in the current second quarter (ending June 30). Netflix ended the first quarter with more than 62 million subscribers globally, including 40 million in the United States.

Indeed, Cowen Research issued a note projecting Netflix’s international subscriber base would reach 104 million by 2020. The Wall Street firm contends Netflix foreign subs will hit 22.78 million by the end of the current quarter.

Meanwhile, IHS Technology projects Netflix will have 21 million subs in Western Europe by 2019, up from 3 million in 2013. Holland, Germany and Austria are expected to see the fastest growth rates at 500%. In fact, the research firm said that between 2014 and 2019, Netflix’s annual sub growth rate in Europe will be double the global average and three times higher than in the United States.

In Scandinavia, where 60% of households stream video, Netflix is expected to continue dominating with more than 6 million subs by 2019.

U.K. Group Slams Netflix

Not all of Europe is enthralled by Netflix, however. London-based Broadcasters' Audience Research Board (BARB) in a May report chided Netflix for its “effortless ability to capture headlines” and perennial “glowing analysis” based largely on subscriber growth and enduring first-mover status.

While BARB said 14.1% of U.K. households now subscribe to Netflix, the research firm questions the SVOD service’s self-proclaimed “TV disruptor” moniker as more hype than reality. In fact, BARB said Netflix’s newest comedy series “Unbreakable Kimmy Schmidt,” is actually an NBC reject.

The research firm said Netflix does not rate high among cord-cutters, but instead is just one entertainment option among many. BARB said the SVOD market in the U.K. was actually flat in the fourth quarter, with Netflix sub growth coming at the expense of sub declines at Amazon Prime.

The firm contends SVOD competition in the U.K. will strengthen if YouTube rolls out its own subscription streaming service.

“Digital natives are not huge fans of Netflix,” BARB wrote. “Actually Netflix viewers tend to be found in cable households. They tend to be people who own three or more TV sets and also subscribe to sports and movie packages. They are not, to put too fine a point upon it, inveterate [television] addicts.”

Rethinking SVOD Strategy in Tinseltown

With Netflix’s content license liability approaching $10 billion at the end of the first quarter, the SVOD service has been a cash cow to studios and media companies seeking incremental revenue at the expense of a shrinking syndication market and changing consumer behavior toward TV consumption and home entertainment.

IHS said Netflix topped HBO, Amazon Prime, ITV, Pro/Sat1, Discovery, the BBC and satellite operator Sky (the latter two when excluding sports) in 2014 with more than $3 billion spent on original and licensed content.

With that easy money, however, comes an uncertain future to the existing media landscape. Some reports say media giants such as Time Warner, 21st Century Fox, Viacom, CBS and Disney are becoming increasingly concerned at Netflix’s global prowess. Fox boss Rupert Murdoch has made no secret his demand that Hulu Plus become — and quickly — a legitimate contender to Netflix and Amazon Prime.

On the flipside, independent content creators eye Netflix as a vital new distribution channel enabling greater artistic control, global reach and evolution of a new TV distribution model.

Traditional studios have heretofore avoided licensing first-run or second-cycle global rights to Netflix for episodic programing to avoid missing out on future syndication rights on hit shows. Exceptions include Netflix licensing rights to Warner’s “Empire” and Disney’s Marvel properties such as “Daredevil.” Instead, studio heads, including Warner Bros. CEO Kevin Tsujihara, say they spend their time weighing the advantages of affording increased episodic stacking rights to multichannel video program distributors such as cable, satellite and telecom, versus monetization through SVOD.

“In other words, Larry David and Jerry Seinfeld would still need to work if ‘Seinfeld’ was sold originally to Netflix,” analyst Michael Nathanson wrote in a June 10 note.

Indeed, “Seinfeld” in syndication generated more than $3 billion in fees since airing its last primetime episode 17 years ago on NBC. The most-profitable 30-minute TV show in history was licensed to SVOD for the first time, beginning this month on Hulu, for a reported $875,000 per episode, or about $160 million split among the show’s distributor Sony Pictures Television, Warner Bros.’ Castle Rock Entertainment and co-creators David and Seinfeld.

Separately, Netflix has obtained distribution rights to Brad Pitt’s War Machine. This reportedly marks the streaming company’s biggest film acquisition to date. Netflix will concurrently stream and screen the film in select theaters in 2016.

Stock Split

Meanwhile, Netflix shareholders June 9 voted to allow the board to issue up to 5 billion in new shares from its current 170 million shares — a move many say is the first step toward a stock split. CEO Reed Hastings in May said he would formally ask the board to vote for a stock split, which typically is initiated by management in an effort to keep the stock attractive to investors. After a split there may be twice as many shares, but the market cap remains the same.

Investors reacted sending Netflix shares to a 52-week high June 10 at $692.79 per share. Wall Street firm UBS elevated its target price to $722 a share from $600. 

Longtime Netflix bear Michael Pachter with Wedbush Securities in Los Angeles, contends investors wrongly continue to inflate the SVOD service’s stock based largely on subscriber growth; not profit and cash flow. The analyst gives the Netflix stock an “underperform” rating with a share price at $270 – the lowest valuation on Wall Street.

"I'm wrong on the share price, and I'm going to be wrong as long as investors suspend disbelief and are willing to pay for subscriber growth only,” Pachter told CNBC.

Ad Scare

If anything can cause Netflix to stumble, it is the service itself.

When word spread online it was testing ad spots bookending original programming for proprietary shows and movies, management went into overdrive to thwart scuttlebutt Netflix was about to embed advertising in all programing — a move Hastings and other executives have long said they wouldn’t do.

“We are not planning to test or implement third-party advertising on the Netflix service,” wrote spokesperson Anne Marie Squeo in an email.

What Netflix is doing is embedding trailers of proprietary programs in front (and at the end) of original shows such as “Bloodline,” in select markets. In a Facebook post, Hastings reiterated Netflix’s longstanding stance against advertising: “No advertising coming onto Netflix. Period. Just adding relevant cool trailers for other Netflix content you are likely to love.”

“We test hundreds of potential improvements to the service every year. Many never extend beyond that,” Squeo said.

About the Author: Erik Gruenwedel

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