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Analysts follow Rethink TV lead in predicting Netflix to trounce US cable

Netflix has just posted a record quarter worldwide confirming bullish predictions of continued ascendancy in SVoD over the coming years even in the face of strengthening competition as Disney+, Apple Plus, WarnerMedia and Comcast’s NBCUniversal join the fray.

All this begs the question challenging analysts in the field of whether, and if so, Netflix will sustain this growth as these other heavyweights raise their streaming game as more direct competitors? This will be a double whammy for Netflix in that it will lose a lot of licensed third-party content that fueled its early growth as well as helping to sustain current success, while at the same time facing strong new competitors peddling some of those assets. This competition is well on Netflix’ radar screen now that Disney+ has been set for debut on November 12.

The impact of such competition was brushed aside by CEO Reed Hastings in his letter to shareholders about the Q1 results with the insistence it would have no material impact on its growth. This line seems to be shared by analysts such as Leichtmann Research in New Hampshire with its assertion that Netflix will have 86 million subscribers by the end of 2014, by then twice as many US subscribers as the country’s biggest cable companies combined.

This concords with the recent report from our research arm Rethink TV entitled “Disney, AT&T, Comcast stumble in the Netflix slipstream – Revenue forecasts to 2024,” which also predicts Netflix will largely shrug off the impending streaming competition, at least in terms of subscriber numbers. We were slightly more circumspect since it is clearly fatuous to assert that competition from heavyweights like Apple, Disney and Warner Media will have no impact at all on Netflix subscriber numbers. Clearly it will and so we have forecast Netflix to reach 75.6 million subscribers in the US by 2024 and 185.4 million worldwide. These are still healthy totals but reflect a slowing down in growth both as markets become more saturated and competition intensifies.

The Rethink TV report did though pre-empt Hastings’ comment by predicting that overall growth in SVoD would be sustained by the continuing churn from more expensive pay TV packages, especially in the US. As Hastings put it in his shareholder letter, “we don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings. We believe we’ll all continue to grow as we each invest more in content and improve our service and as consumers continue to migrate away from linear viewing (similar to how US cable networks collectively grew for years as viewing shifted from broadcast networks during the 1980s and 1990s).”

Hastings then pointed out that Netflix still only satisfied a small portion of continually growing demand for TV, noting that it only accounted for 2% of mobile downstream traffic, compared to 37% for YouTube. Of course, it is a different story for fixed networks, to the extent that Netflix accounts for 15% of global downstream Internet traffic and 19% in the US. Even so, Hastings’ argument that there is plenty of growth in store to share among all the big participants holds water.

Our reasoning is that following further churn from legacy pay TV in the US and to an extent Europe, the typical household will settle down on three or four SVoD subs. Two of these will usually by Netflix and Amazon Prime as the latter will be shored up by the other goodies on offer including next day delivery of products ordered online. In addition, many households will have a more dedicated sports package that will also increasingly be streamed in many cases, with pay per view quite likely figuring more. This will leave just two SVoD slots for the rest to fight for.

To hold this position, Netflix does face some challenges, above all rising costs of all content including originals, as well as reduction in supply of licensed content as producers strip that back to their own streaming offerings. After all NBC’s The Office is the most streamed series on Netflix and licensed content still accounts for over 60% of its viewing.

Against this, Netflix has been very canny at establishing roots in target markets such as India that means it can produce content much more cheaply at present than say Disney, which is still very US-centric. But this does lead on to the next question, which is whether Netflix will stick to its current unique position among the giants of eschewing both advertising and live sports. We think the answer is no in both cases, but the question is when the U-turns will happen. Netflix has already relented on two previously held positions of maintaining consistent pricing worldwide and declining to reveal details of content consumption to avoid helping competitors.

It has been forced to cut prices by at least half in key markets such as India and Malaysia where ARPUs are exceptionally low by global standards and even linear pay packages were a lot cheaper than its basic streaming package. Then Netflix has announced an opening up over data with a pledge to reveal more information about viewership of its programming. Chief content officer Ted Sarandos has promised Netflix will release more specific and granular data over the next few months, first to producers, then members, and finally the press. There have already been signals of this, with data tasters around titles such as Bird Box, The Highwaymen and The Umbrella Academy.

Regarding advertising, Netflix will come under growing pressure to experiment with AVoD in those countries where that is the prominent model and source of revenue, as in India. Otherwise Netflix could be cutting off its nose to spite its face, as the old English proverb goes. For Netflix, sticking entirely to SVoD has worked so far because of the antipathy to advertising in the markets where it has operated, but the dynamics are different in some of its new markets.

The live sports conundrum is harder to answer, although all its rivals are now poking their fingers increasingly into that pie. Disney has become a substantial force partly through its ownership of ESPN and then recently as a result of its acquisition of 21st Century Fox, owner of Star India and Star Middle East. The latter two between them hold rights to Indian cricket both domestically and internationally until 2023, having forked out a total close to $3.5 billion. This is driving rapid growth for Star India especially because of the huge popularity of cricket in the country. Then Comcast has a big presence in sports through Sky and AT&T via DirecTV, while Amazon has bought rights to some English Premier League football and US National Football League games.

If Netflix does fulfil our growth forecasts and accumulate revenue, there will come a time in a few years when live streaming could offer the only outlet for continued further expansion. On the other hand, it is not certain how the global sports TV market will evolve amid growing signs major leagues and rights holders will look to go direct to their consumers. For this reason, Netflix has hinted that if it does invest in sports it would be directly at the grassroots level rather than joining in the mêlée for inflationary premium rights.

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