Can Netflix still win when cable TV loses?

By Felix Salmon
September 15, 2011
Ryan Lawler makes a very important point: even as the number of people living in poverty continues to rise, and median incomes have gone nowhere since 1996, the price of cable TV just goes inevitably and inexorably upwards.

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Ryan Lawler makes a very important point: even as the number of people living in poverty continues to rise, and median incomes have gone nowhere since 1996, the price of cable TV just goes inevitably and inexorably upwards. Which is a nasty dynamic, since cable companies make a huge proportion of their money by selling their service to the poor. A whopping 40% of US households spend all of their income on food, shelter, transportation and healthcare, leaving nothing for the modern necessities of cable TV and phone service.

While Gawker’s Ryan Tate sneers at “Netflix’s entitled yuppie customers”, then, the reality is that a huge reason why the Netflix stock price was so bubblicious to begin with is that investors could see that it was vastly cheaper than cable TV. And that’s a value proposition which is very compelling when you’re struggling to make ends meet.

So the implosion of Netflix, today, is interesting because it seems to indicate that Netflix’s recent unilateral price rise has significantly slowed its subscriber growth — or even possibly put an end to it altogether. No longer does it seem sensible to bet on Netflix supplanting the cable operators as the video provider of choice to cost-concsious America. And that, it turned out, was a large part of what was embedded in the share price.

Netflix is still a formidable competitor, and the likes of Google and Hulu have a lot of work to do before they can credibly challenge it as a cable alternative. In fact, right now nothing is a true cable alternative — and the cable companies are desperate to keep it that way.

Which is why it’s important to note this, from the LA Times report on how the Netflix/Starz deal fell apart:

Representatives for the cable network owned by John Malone’s Liberty Media were insistent that Netflix create a new “tier” for subscribers who wanted its movies at a higher price than the $7.99 it currently charges for online video. That would have put Netflix more in line with the pricing of cable and satellite companies, a step the video company apparently wasn’t willing to take.

Essentially, Starz wanted to turn Netflix into another cable company, and Netflix said no; the logic on both sides is impeccable. Starz makes its money from cable companies; it has no interest in seeing them disrupted. Meanwhile, Netflix makes its money from not being a cable company; it has no interest in getting into that business.

Over the long term, I’m sure that video programming is going to stop rising in price and start falling in price. The large number of poor people in the US demand it, as does the enormous rise in free video content. Even bloggers are getting in on the act now. And technologies like AirPlay are making it ever easier to watch live events on a TV without cable service. The cable TV companies are going to be the losers here; the big question is who will be the winners. Up until now, there’s been a lot of money riding on Netflix. But maybe, after today, that’s not such a foregone conclusion after all.

Comments
20 comments so far

Nah, it wasn’t sneering; in the very next breath I wrote of the entitled yuppies, ” we totally get that [their anger], because it was slimy of Netfix to dress up a 60 percent increase on its most popular plan as a cut.”

And then I called myself an “obnoxious judgmental techie.” Compared to me, an entitled yuppie is a breath of fresh air!

To your real point:

“the reality is that a huge reason why the Netflix stock price was so bubblicious to begin with is that investors could see that it was vastly cheaper than cable TV.”

Netflix is still far and away cheaper than cable, even if you opt for the $16 DVD + streaming plan (which, prior to the price hike, was most popular). Felix, can you name a single cable offering that is that cheap? How about one that’s $32, twice as expensive? My directv bill, with no premium stations, is about five times Netflix’s $16 plan.

The whole point of my post was that Netflix is still a bargain. Which you don’t seem to dig into here. Someone should, though, it would be neat to see the median cable TV vill in the U.S. (decoupled from internet).

Posted by RyanTate | Report as abusive

“Which is a nasty dynamic, since cable companies make a huge proportion of their money by selling their service to the poor.”

HUH?!? Cable TV isn’t even remotely a necessity. Anybody who can afford to pay for expensive luxuries is by definition not poor.

Posted by TFF | Report as abusive

Our total cost for telephone, internet, and TV from 2007-2010: $4119 or $85.83/month. We just got a shared pay-as-you-go cell phone for emergency use, so that will rise to around $90/month. Didn’t feel that premium internet service would be worth the cost. Didn’t feel that spending more than $10/month on a cell phone made sense. If we couldn’t afford $90/month, we could (and would) cut that by two thirds. These are the decisions that REAL people make in their lives.

So I’m supposed to feel sorry because cable TV is a NECESSITY for welfare queens? Next thing you know, you’ll be telling me that their unlimited cell phone plans at $40/month are also a NECESSITY? And that everybody in the family needs one for their personal use?

Look, it is a free country. People can spend their hard-earned money on whatever they want. But anybody who describes cable TV as a “modern NECESSITY” is so far divorced from reality that it isn’t even funny!

Reality bites. It will be biting us very hard in the very near future. And you had darn well better learn the difference between a NECESSITY and a LUXURY before that happens. Please don’t ask me to feel sorry for somebody who is too stupid to figure that out.

Posted by TFF | Report as abusive

Netflix SEEMS like a bargain to cynical folks, if only because on the surface, its costs are a paltry fraction of cable / satellite. However, its breadth of programming falls well short of that of cable / satellite, and it at best, only serves as a supplement to cable.

There is no live programming — of one of the biggest complaints you’ll read about people who cut the cord, is the lack of ability to watch live sports. I know this to be true, because this was the first thing I complained about when I cut the cord 4 years ago. Then there is very little current-season streaming content.

Now of course, there’s always going to be those who insist that people who can’t afford such luxuries, shouldn’t complain about the price. But that’s wrong-headed.

Netflix’ play was to appeal to these very people who wanted quality on a bargain price. That’s no different than when Target found itself overwhelmed by fans of Tissoni, and why you can find Calvin Klein and Coach products at Costco. By raising prices – don’t forget this was the second price increase in less than 12 months – Netflix is at odds with a good chunk of its audience.

And of course, Reed Hastings’ response after the price increase, was viewed as indifference to its customers’ pain in deference to growth and profit. I’ve previously pointed out, when competition came calling, Netflix was quick to respond with price cuts and quality increases, but as competition waned, it also quickly responded with price increases. One can only hope that Google is able to buy out Hulu with their purported long-term content lock-in, and provide serious competition for Netflix.

Posted by GRRR | Report as abusive

“However, its breadth of programming falls well short of that of cable / satellite, and it at best, only serves as a supplement to cable.”

Wouldn’t it be more comparable to a public library? Except perhaps with a better selection and door-to-door convenience?

“Now of course, there’s always going to be those who insist that people who can’t afford such luxuries, shouldn’t complain about the price.”

I mind less as long as they are acknowledged as luxuries… Is a free country, you are welcome to complain about whatever you like. But as you point out, prices will rise when the service is viewed as a necessity and fall when there is competition.

Posted by TFF | Report as abusive

Netflix has become too greedy. I stopped using them and started using TVDevo for streaming TV and Movies. Also use Redbox for $1 per movie.

Posted by meganbrod | Report as abusive

Note to TFF….public libraries are FREE, not x dollars per month.

But the bigger problem that all content providers are facing is the proliferation of high-quality, low-cost (or free) content. Compared to a few years ago, there are a lot more ways for me to cheaply stimulate my brain than there were a few years ago. Be it reading library books/magazines/newspapers/blogs or watching TV/movies/etc. online, I find myself rarely having time to watch anything on the good old boob tube, be it actual TV or DVD’s.

Consumers want to be able to watch anything, in any format, on any device, at anytime…and the sooner content providers start figuring that out, the better.

Posted by mfw13 | Report as abusive

“Note to TFF….public libraries are FREE, not x dollars per month.”

Understood. With Netflix you are paying for the convenience, selection, and interface. (Though inter-library loan extends the selection your library can offer.)

“I find myself rarely having time to watch anything on the good old boob tube, be it actual TV or DVD’s.”

We ditched the TV nine years ago, haven’t missed it. But even when we had one, it wasn’t used much. TV viewing is based on habit at least as much as on any real attraction of the product.

“Be it reading library books/magazines/newspapers/blogs or watching TV/movies/etc. online”

Note that the first four have been around for decades. :) Only the blogs and the online streaming content are truly new.

Posted by TFF | Report as abusive

what Netflix knows that it will never compete with cable,especially when your cable company is your isp, which is a requirement for netflix.

Posted by hazmat456 | Report as abusive

While I whoeheartedly agree with all the commenters who note that cable TV is not a modern necessity (and in doing so disagree just as wholeheartedly with Felix), let me note that growing up in the 1960s/1970s, we had broadcast TV with three networks, PBS, and a UHF station or two, for the cost of the TV (granted TVs were relatively more expensive, and used vacuum tubes). But virtually all homes had TVs. There were few extras in my home at the time, but the TV was one of them.

Today, with the government reclaiming the VHF analog spectrum two years ago, cable (or satellite) is a necessity to have live TV at all. I believe that there are subsidies available for the poor. We can debate if live TV is a necessity, but because it was free in the past, if we accept that premise, then cable TV must be a necessity today.

Posted by Curmudgeon | Report as abusive

I recently had a conversation with a US NC resident about pricing of cable and land line telephone there. It’s ridiculous. It’s 200-1000% of fees in Germany or Skandinavia or most EU countries.

Cable companies have become regional monopolies that like all underregulated monopolies destroy price discovery. I can’t comment on Net Flix as I have not researched the stock, but currently access to them is limited by cost of cable internet access or mobile phone data streaming. Those two bottlenecks can exert pricing power over access to Net Flix content. Both need to be taken into account before you can calculate the full cost of having access to NF for poor households.

Posted by Finster | Report as abusive

Finster, the lower population density in the US is a big part of the reason why cable/telephone are so expensive. Only Sweden, Finland, Norway, and Iceland have a lower population density — and I wouldn’t be surprised if there were government subsidies for telecom in at least some of those countries.

Agreed that the unregulated monopolies are also a piece of that, however.

Posted by TFF | Report as abusive

How about a story about why NFLX is 90% institutionally owned? What people don’t realize is that Netflix is using the price increase to show the studios and networks that we would rather have streaming than DVDs. They are trying to kill the DVD.

If cable was serious about keeping subscribers, they would offer channels a la carte. Better yet, why can’t I just pay ESPN directly? Cable is just a middleman.

Posted by joshh | Report as abusive

Felix loves to post open wagers so I’ll put one out there for him.

Five years from today NFLX will have twice the customers paying twice the current price.

Wager = full course dinner for yourself and a guest with my wife and I at the restaraunt of your choice in Portland, ME. (We’ve got half a dozen that have earned national props!)

I think people vastly underestimate the value of “free” childerns content on demand. I think half of the kids stuff on NFLX is from Public broadcasting an so was free at one time. The ability to flip through 100 options an pick something kid at the moment of our choosing is massively underpriced at $9/month.

P.S. @joshh I will dance in the streets the day I can pay ESPN $10/month instead of paying Comcast $80!

Posted by y2kurtus | Report as abusive

“I think people vastly underestimate the value of “free” childerns content on demand.”

y2kurtus, the better question is whether or not Netflix has an unassailable moat? They are (rightfully) attempting to shift their business to streaming, yet in doing so they will face increasing competition from other streamers.

Even after this decline, they are trading at a 40 P/E. If their business takes seven years to mature, then they will need to increase profits by 6-8 times over that period. All while abandoning the established revenue stream and shifting to a new business model, under pressure from Google, Amazon, the studios, the networks, and anybody else who hopes for a piece of the action (Walmart?).

They might pull it off, but it is a major challenge. Remember that “value” is determined not merely by utility but also by competition.

Posted by TFF | Report as abusive

@ TFF “y2kurtus, the better question is whether or not Netflix has an unassailable moat.” I don’t own any NFLX (or anything else with a 40P/E)… but as a customer I find their selection of content pretty rich for the price. I’ve only been a customer for 3 months but there has never been a moment that my wife and I could not find something that the kids wanted to watch or that we wanted to watch.

The Moat is clearly not unassailable… anyone who owns content can stream. I would be shocked if big content owners like Disney did not get into a streaming business in a big way. Walmart’s moat comes from it’s scale. Ditto Amazon. I can say with confidence that in 5, 10, and 20 years that Walmart will still be the #1 retailer in the U.S. and that Amazon will still be the #1 online retailer.

First mover advantages can be pretty tough to overcome. Warren Buffet once boosted that that if god offered him 100 billion dollars and told him to wrestle #1 global cola share away from Coke that he would give the lord his money back… for it simply could not be done.

Posted by y2kurtus | Report as abusive

@y2kurtus, nice try. For one thing, I’m afraid I don’t get to Portland ME very often, least of all to collect on bets. And for another thing, doubling in 5 years is a growth rate of less than 15% per year — very low indeed, by Netflix standards. I’m not saying for a minute that Netflix’s audience is mature and will grow no further. But I’ll tell you this: if Netflix’s audience and cost have both doubled in five years’ time, the share price will be significantly lower than it is today.

Posted by FelixSalmon | Report as abusive

“I can say with confidence that in 5, 10, and 20 years that Walmart will still be the #1 retailer in the U.S. and that Amazon will still be the #1 online retailer.”

Right. And those positions offer them a platform from which to market DVD lending and/or streaming. Would also look for competition from Google (infrastructure is in place), Microsoft (XBox TV?), or Apple (could push through iTunes store?). If the business is profitable, and content streaming certainly SHOULD be profitable, then others will look to elbow in.

“First mover advantages can be pretty tough to overcome.”

Are they selling the brand? Or are they simply a retail outlet with some easily replicable technology? Is there any reason for customers to stick with Netflix once somebody else offers a comparable product at a superior price?

Posted by TFF | Report as abusive

Netflix competes with cable who provide the pipe for them to function. They are trying to capitlilize on hollywood selling content for less. Why is everyone surprised they are taking a hit.

Hollywood and the cable companies have a vested interest in killing netflix, at least short term. Even if the 1.94 billion dollars that hollywood wants for it’s content is cut in half it’s almost 200 million more than netflix made last year. I think we are just starting to see the result of the war on netflix. Don’t underestimate hollywoods ability to destroy anyone that threatens thier old business model. Like it or not they control the content netflix needs to survive. With DVD’s there are options to bypass them. Streaming doesn’t have that option.

Posted by samuel_c | Report as abusive

netflix doesn’t have enough new content to be a direct competitor to cable. It’s a niche add-on for most people. Thus the outcry over the price increase. Most people that use netflix aren’t ditching cable they are using them both. If you have to give up one, I suspect most will give up the one with the old content. It’s awesome its cool but you still can’t pay to watch a new movie. that’s gonna be the sweet spot if Hollywood will come to its senses. Sell the old stuff cheap as a buffet and offer new releases on a pay per view. If netflix can’t negotiate that they’ll die. I believe hollywood wants them to die so this could be a long slow death.

Posted by samuel_c | Report as abusive
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