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.

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