Is Netflix the next Cable model?

Are we living the Netflix effect … Over the last few years, a lot of ruckus has occurred in the television and movie space. First came Netflix, which revolutionized the way people enjoy movies at home. This sent cable companies scrambling, as they were previously the major player in delivering content to people’s homes. To combat the threat of Netflix and other streaming Internet companies, Cable providers started offering services like “On Demand” and even started buying media companies to generate their own content.

In Canada, Bell Cable (BCE) has even been refused the purchase of Astral Media due to anti-trust laws on content ownership. The competitors were quick to bring the anti-trust matter to prevent the purchase. On the other hand, all three competitors (Shaw Communication, Rogers, and Telus) have also been purchasing media assets for more content on their cable network but also on the internet. Cable companies even own sports team to complement the content to their network. As you can see, Netflix is changing how we watch movies and TV shows and the telecoms are paying attention Is there a new subscription model? Another way to generate revenu from advertisement?

So, have cable companies adopted the Netflix model? Will they go down that path? What will this do to Netflix in the coming years?

Note that I don’t own Netflix (NFLX) and I do not have interest in the company. It falls outside my dividend investing strategy. Nonetheless, it is part of the digital content distribution that competes directly with the telecoms in Canada.

The Pros of Netflix

The original reason that people started using Netflix was convenience to see the content they wanted, when they wanted. Netflix allowed customers to rent DVDs via mail, so they didn’t have to leave their homes to watch shows, and could watch the ones they wanted. Then Netflix offered streaming movies and shows, which changed the game again and even offered more convenience to customers.

Did I mention that it’s really cheap for what you get? $7.99 with Netflix vs $34.90 with Shaw Communications for example. What you pay with a cable provider is the exclusivity of the latest offering not including specialty channels.

As you can see below, many investors see potential in Netflix. Forget the massive drop form speculators, I’ll show you how it compares with the telecoms later. Netflix is not a dividend stock and therefore not on my radar but it doesn’t change that it is a good indicator on how the business is perceived.

Netflix 5 Year Graph

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What’s Holding Netflix Back

There are several big buckets that are holding Netflix back and even causing growth to struggle.

First is pricing – Netflix offers a flat set of pricing for both its DVD by mail and streaming options. However, there is now price competition from competitors like Red Box, where you can rent new releases for as low as $1. Plus, Red Box is also going to be competition with Netflix in the online, streaming video space soon.

The second is increased competition. While Netflix was clearly first to mass market in the space of remote DVD rental and streaming movies, it now is facing a lot of competition: cable companies with On Demand, Hulu, Amazon, other streaming sites, and more. This is continuing to put pressure on the company.

With competition comes the need to be inventive and have popular products. The biggest gripe of Netflix customers has been the lack of new content on its streaming services. If you want to watch a New Release movie, you can’t count on Netflix to have it for customers, while its competition is offering same day as DVD new releases. This is a big problem for the company and it seeks to negotiate further contracts with movie studios.

Where Cable Companies Can Take Advantage

Cable companies have a very specific advantage when it comes to Netflix and other streaming movie sites – for many people, Cable companies also provide Internet access. As such, why should customers have to pay for an additional service when cable companies offer both Internet and access to media? Cable companies are starting to realize that with services such as On Demand.

However, the second thing that the Netflix revolution has highlighted is that customers want to watch shows and other media when they want to – not just when they are available on DVD or during their scheduled time on television. This is what has made DVR wildly successful for cable companies as well.

I think that the future of cable and television in general is that there will be a continued move to on-demand programming where customers of cable companies will be able to access more than just movies and specific national shows, but also be able to watch their local news and other programming on-demand as well.

As you can see below, the performance of the telecoms in Canada and the US really lags behind Netflix which continues to highlight the interest in the business model. It’s not to say that the telecoms don’t have a good business – I consider them utilities since they provide the internet on which Netflix thrives. Note that DISH (Dish Network) exhibits the same behavior with a flat line around 0% return.

Netflix vs Telecoms

On Demand Content – Netflix vs Telecoms

Some may think that Netflix Canada sucks because of the different choices we have and there isn’t much we can do to even out the distribution deals since they are all done per regions. However, when you compare Netflix with the telecoms, the telecoms don’t really have better choices and the prices are much higher. Higher prices lead to provide consumers with the latest offering.

One key point that Netflix has not taken advantage of yet is advertisement. They have a large and growing amount of users paying a relatively small subscription price and Netflix could increase their revenue if they were to add advertisement. Can they find a way to introduce advertisement without impacting the experience? It’s one of the major key question for on demand content.

Readers: Are you a Netflix subscriber? 

Image courtesy of cooldesign / FreeDigitalPhotos.net

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