Cannibalizing Premium TV?

4:45 PM -- Today's deal between Netflix Inc. (Nasdaq: NFLX) and EPIX could end up stealing premium subs and revenues from cable operators, despite some release window concessions that are there to help preserve the traditional pay-TV business model. (See Netflix Makes EPIX Deal.)

No one's willing to say that this latest broadband video deal will accelerate a relatively small cord-cutting trend. But it could create some potential for "cord-shaving" -- that is, cause some consumers to cut back on premium cable subscriptions to the likes of HBO, Starz Entertainment LLC , Showtime Networks Inc. , and EPIX, because they can get access to some of that through Netflix.

"I think that these types of deals don't portend cord-cutting," says Will Richmond, president and founder of Broadband Directions LLC, noting that Netflix doesn't offer sports and other forms of live programming. "But cable operators should be concerned about the premium side of the business."

However, there's no data yet suggesting Netflix's premium play is directly harming sub growth at Starz, which has been offering its Web-based Starz Play" service on Netflix for nearly two years.

“Starz has not seen any empirical evidence of cord-cutting or a loss of traditional Starz pay TV subscribers as a result of the nearly two-year old Netflix affiliation relationship,” said Eric Becker, executive director of corporate communications for Starz Entertainment

And that could be good news for EPIX, which is gaining distribution thanks to Netflix but could likewise be putting some of its affiliate potential with cable-, telco-, and satellite-TV operators at risk.

Starz, by the way, ended the second quarter of 2010 with 17.3 million subs, down from 17.5 million (3 percent) in the year-ago quarter, but up by 200,000 units versus the first quarter of 2010. Extending that further out, Starz's subscriber base has remained relatively flat since it announced the Netflix deal -- it ended the third quarter of 2008 with 17.4 million subs.

And Starz has generally blamed the poor economy, rather than cord-shaving resulting from its relationship with Netflix, for any subscriber swings.

"Despite continued levels of economic uncertainty for consumers, the value proposition of our channels and services has proved reliant in the marketplace, and has driven our business performance," Starz Entertainment CEO Chris Albrecht said on yesterday's earnings call.

— Jeff Baumgartner, Site Editor, Light Reading Cable

DCITDave 12/5/2012 | 4:27:14 PM
re: Cannibalizing Premium TV?

This debate drives me crazy. (Ooh Ooh Ooh!)

So long as the climate is right for cord cutting, the cable companies will be forced to be more creative.

What I think matters here is that Starz is taking a gamble that giving consumers a variety of ways to consume their content will ultimately pay off somehow. And it seems like a smart bet.



brennok 12/5/2012 | 4:27:13 PM
re: Cannibalizing Premium TV?

All my friends cancelled the premium channels that could once they got Netflix especially with streaming through TiVo or the 360. The only reason I have any movie channels is because they constantly have them for free for 3 months regularly. Even then we only watch the original series and not the movies. We can  get by on Netflix at 2 out for 13.99 versus the premiums for $35 a month.

Now if the premium channels had one or two channels just with original programming I would be more interested if they offered them at a lower price minus all the movie channels.


Jeff Baumgartner 12/5/2012 | 4:27:13 PM
re: Cannibalizing Premium TV?

I think your subject line gives us all a new term to use for cord-cutting crowd.

The subscriber trends seem to show that Starz isn't getting hammered because of the Netflix affiliation, but it's still too early to tell if they have gotten much of a payoff from it yet.  But it will be more telling when Starz and Netflix decide to reup their deal or part ways once the original contract is done.



Stevery 12/5/2012 | 4:27:10 PM
re: Cannibalizing Premium TV?

I think it is a good bet that cable revenues will remain flat to modestly down regardless of the cannibals:  The price of premium TV will drop and premium internet will rise.

Cooper10 12/5/2012 | 4:27:09 PM
re: Cannibalizing Premium TV?

Agree that Netflix is already a viable substitute for a traditional premimum channel subscription, and making inroads toward being a viable substitute for a pay TV subscription with their TV series content.

That said, they've also just ensured that their content licensing becomes that much more expensive going forward, which will put pressure on their pricing and margins.  HBO, Showtime, and Starz largely haven't cared too much that Netflix was securing streaming rights for older library movies - that wasn't where their programming strategy was focused, and they have even licensed their older library content to Netflix as well.  However, Netflix is now intruding on their core programming strategy of major studio releases in the traditional pay TV window (there will be some debate how material a 90 day delay is...), and it would be naive to think that Netflix isn't having similar discussions with some of the production houses that create original series for the premium networks.

The logical response for the premium networks will be to step on Netflix's air hose - they'll increasingly negotiate for exclusivity on streaming rights for content in the pay TV window AND library content from the studios, and also reconsider their strategy of licensing past seasons of their original series to Netflix.

Probably still a good move by Netflix, but they've now moved to a new level of competition for content.

Lrmooney 12/5/2012 | 4:27:07 PM
re: Cannibalizing Premium TV?

Maybe TWC is on to something as they increase the volumn on the need for smaller programming packages for customers.

rjmcmahon 12/5/2012 | 4:27:05 PM
re: Cannibalizing Premium TV?

I've noticed that cable in my area has been raising the price of internet (unicast) access.  As the bit distributor they can get their money on content subscriptions for the broadcast media and on bit distribution for the unicast media.   As more media moves from broadcast the unicast I'll expect the end user unicast rates to increase to make up for the loss of broadcast revenues.  And since mobile/wireless is being deemed as needing no common carriage regulations, the phone companies will focus there and let PSTN wireline go the way of terestrial radio/TV, i.e. facilities based competition is a sham.

Jeff Baumgartner 12/5/2012 | 4:27:05 PM
re: Cannibalizing Premium TV?

Good reminder. Will be interesting to see how low they will go with that strategy once it manifests into some real offers.  How about $12 per month for the lowest tier of digital, one premium channel, plus VoD, and whatever the subscription allows for TV Everywhere streaming?  Just wonder , though, if they could do that without being upside down on it. But it sounds like a solid value, anyway. JB

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