Fitch: Netflix subs loss evidence of low OTT threat

Subscriber losses at Netflix in third quarter 2011 support international ratings agency Fitch Ratings’ view that OTT television will remain largely incremental to traditional pay-television. Fitch continues to believe that the cable and broadcast television models, and their subscriber bases, will not be significantly negatively affected through at least the medium term. Netflix reported a net loss of 810,000 domestic subscribers in Q3 2011, its first ever loss, attributing it primarily to the price increase implemented during the quarter (and to a lesser degree, the branding issues associated with its proposed and then cancelled DVD spin-off)

In Fitch’s view, the OTT content line-up needs to be significantly larger and more compelling than it is now for OTT television to be a viable substitute for traditional television for a large portion of the population (and therefore a significant competitive threat). Netflix did not raise the prices on its streaming-only service (the price increase was for the combined streaming and DVD service). However, Fitch continues to believe that content acquisition costs for Netflix and other OTT providers will continue to rise due to both library expansion and higher prices demanded by the content providers. While subscriber growth will offset some of the costs, higher prices will be inevitable to retain profitability

Netflix’s subscriber losses show the elasticity of demand for this service. Over time, consumers are likely to tolerate gradual price increases, but Fitch does not believe Netflix will have the ability to raise price to a degree that would allow it to quickly scale its library to compete with cable and broadcast television

Fitch acknowledges the possibility that a new OTT service backed by a cash-rich company could afford to acquire content without commensurate fee increases (ignoring the question of whether or for how long a company would tolerate an unprofitable business model as part of a larger strategy). However, Fitch continues to see several other mitigants to the OTT threat. The largest is that the conglomerate-owned studios are not going to sell their content in such a way that undermines their broadcast and cable network business models. Other mitigants include the demand for real-time sports programming, the ease of use of traditional television, and inevitable higher data prices if consumers replace cable television with broadband-only streaming.

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