Netflix: The New Arch-Frenemy
The Albanian Army is coming everyone, watch out!
We’re only into week 1 of big media companies reporting their quarterly earnings and the most prominent name hasn’t been CBS Corp, Time Warner Inc, Comcast Corp, and Viacom — instead it’s all been about Netflix.
Pretty much on each of these companies’ conference calls, the $4 billion company from Los Gatos, California was a key reason for a boon to the bottom line by supplying ‘found money’ by digital licensing of shows that would have been gathering dust on a shelf somewhere in Hollywood. But also on the calls for several of the same companies, Netflix was seen by analysts as a threat to their future. Let’s not forget the four who reported this week have combined market value of over $160 billion.
At CBS on Tuesday, which most people see as a broadcast and billboards advertising company, the first quarter was given a nice bump from its licensing of old CBS shows like”‘Cheers” but also by newer cable shows like Showtime’s “‘Dexter” and “Sleeper Cell”. Here’s the ever ebullient CBS CEO Les Moonves telling analysts on Tuesday how great Netflix and other copycats are:
“Content is forever and quality content never goes out of style. Nowhere is this more evident than the way we monetize our content digitally. In addition to the deals we struck with Netflix and Amazon, other online video distributors are looking to license our library content. These deals are having a big impact on our financial results, adding meaningful, very high margin dollars to our bottom line”
It was similar over at Time Warner Inc on Wednesday, where the now infamous Albanian Army quip was originally shared by CEO Jeff Bewkes. Asked to spell out the impact of subscription video on-demand services like Netflix going forward, Bewkes essentially said it’s a beautiful thing:
“We had recognized in the quarter we had about $75 million of SVOD money. And based on the deals that we have already got to date, that we have already contracted to date, we would anticipate this year 2012 to recognize somewhere in the area of about $200 million. And we have got constructive discussions ongoing with numerous other parties as more and more entrants seem to be interested in acquiring the types of shows that we have.”
Asked about the impact of digital deals like Netflix’s on profit margins, Time Warner CFO John Martin said:
“It depends on the deal, but generally speaking, considerably, considerably higher than the margin that is the average margin for the overall segment, which is in the low teens.”
But it started to get more nuanced on the Viacom call. On Thursday, its top executives had to fend off question after question about its rather profitable Netflix relationship, which has been blamed for a 30 percent drop in ratings at its Nickelodeon children’s network.
CEO Philippe Dauman had to push back and dispute proprietary research from Bernstein Research. Based on set-top data, the research firm said Nickelodeon ratings were being cannibalized most significantly in Netflix homes. Dauman disagreed:
“Since we get the streaming data on our (Netflix) content, I can tell you that the time spent on Nickelodeon content on Netflix is approximately 2 percent of the time spent on our Nickelodeon channel,” said Dauman. “It would have a minimal impact here.”
Comcast had a good quarter mainly due to its cable distribution business, but also with a much improved showing from from its NBC Universal unit which has been working with Netflix for a few years. But on the Comcast call a more worrying issue with Netflix was brought up by one analyst in response to recent Facebook postings by Netflix CEO Reed Hastings. Hastings has complained that Comcast is giving preference to its own online video service while putting a cap on Netflix streaming video users. Comcast Cable chief Neil Smit took the question:
“Right now, we don’t have plans to introduce any usage-based pricing. I think our goal is to provide the best [high speed Internet] experience, and I think by the results that we continue to offer in [high speed Internet], it is clear that customers are pleased with our thresholds.We review various forms of pricing and structures all the time.We put the instrumentation in place, should we decide to go to a different form of pricing. I think Netflix articulated in their earnings call that our data thresholds don’t really impact their Netflix users at this point.”
So there you have it. Is that clear? Reed Hastings’ (left) company is the cable industry’s savior giving away buckets of cost-free dollars to friendly content partners and is also the great threat of cord-cutting. We’re not certain how this ends or who wins but after that Viacom call on Thursday shares ended down 7 percent at $76 about a quarter of its value before its self-inflicted descent started last July.
Even you don’t subscribe to the view content is king, you have to start to believe content can be a kingmaker.