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Netflix has been consistent in stating that it does not intend to compete against the pay-TV companies such as Comcast, Time Warner Cable, DirecTV, etc. The argument that it put forth to support its claim revolved around its content being complementary to what people watch on cable. However, that is changing as the company has made it clear that it intends to continue to push for original programming. Further, there is a chance that Netflix’s push for Smart TVs might create some conflict with the cable companies in the future making it more costly to acquire content and more difficult for itself.
Netflix stated during its recent earnings announcement that its improving integration with smart TVs will act as a new catalyst for growth. [1] However, we feel there is a chance that it may lead to conflict with cable companies.
Firstly, TV is not portable and therefore the only reasonable time for viewing Netflix on TV would be when an individual is back home from work during weekdays, or anytime on weekends. This is the “prime time” in media terminology and is the best time for the advertisers to engage the viewers. If someone was to watch Netflix on their smart TV, they may have to give up some of the prime-time viewing and that could cause friction with advertisers. This is not going to happen anytime soon as Netflix’s content can be consumed anytime and is not fresh enough to give up prime time viewing.
However, Netflix’s content strategy indicates that it is ultimately going to have a significant amount of original programming which might be more appealing. One might argue that the conflict will not arise as customers can wait for weekends to watch Netflix’s content on their TVs or might record the prime time shows on DVR and watch them sometime later. However, not everyone may be that organized about their viewing schedule.
We feel that at some point, this conflict will emerge more prominently, and the issue might percolate down to how media companies manage their content. If advertising gets affected as a result of the effect on prime-time viewing, media companies are going to increase their content licensing prices to recoup those lost revenues. Such a situation would imply higher costs for Netflix and make it difficult for the company to continue acquiring lucrative content.
Our price estimate for Netflix stands at $110, implying a premium of about 25% to the market price.
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Notes:
- Netflix’s Q1 2012 earnings transcript, SeekingAlpha [↩]
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