Pay-TV Companies Plot Revenge Against Netflix

Published Wed, Feb 22nd, 2012   Justin Fritz, Executive Editor

During its last earnings call, Netflix (Nasdaq: NFLX) CEO, Reed Hastings, made it clear that the company isn’t trying to compete with pay-TV offerings from cable and satellite companies. Rather, it sees itself as a complimentary service to existing packages.

Of course, that hasn’t stopped pay-TV customers from ditching television bundles in favor of Netflix’s lower-priced streaming option. Consider that Comcast (Nasdaq: CMCSA) alone lost 459,000 subscribers in 2011. And it looks like that number will only increase this year…

In 2010, a survey by Diffusion Group found that 16% of Netflix customers were toying with the idea of cutting the cable cord. While in the same survey in 2011, that number doubled to 32%.

However, two pay-TV providers are attempting to stem the loss of subscribers by offering on-demand video services of their own.

Here’s a quick rundown of each – and why the plan threatens to force Netflix’s growth to a screeching halt…

• Big Red Meets Redbox: Two weeks ago, Verizon (NYSE: VZ) announced that it’s teaming up with Coinstar (Nasdaq: CSTR) and its Redbox DVD rental kiosks to create a video service that completely mirrors Netflix’s model. Meaning it will be available nationwide and subscribers will have access to both streaming video and DVD by mail offerings. No word yet on pricing or a launch date.
• Comcast Reveals a New Streaming Video Model: Comcast announced yesterday that it’s launching a new internet-video service this week called Streampix. This is also a subscription-based service, but the catch is that it’s only available to current Comcast Xfinity subscribers. Most customers can purchase the plan for $4.99 a month (three bucks cheaper than Netflix). But customers with more expensive bundles that include high-speed internet get the added service at no extra charge.

Through agreements with Disney-ABC Television Group, NBCUniversal, Sony (NYSE: SNE) Pictures, Warner Bros. Digital Distribution and Cookie Jar Entertainment, Comcast plans to stream many older television shows and movies that Netflix currently offers. That includes hit shows like “30 Rock” and “Lost.”

Throwing a Wrench in Netflix’s Growth

Should Netflix be worried?

Investors certainly think so. Even Netflix’s new agreement with independent film studio, Weinstein Co., couldn’t keep its stock from dropping almost 4% yesterday. And their fears are certainly valid.

As I mentioned last month, with more players joining the internet video fray, the increased competition threatens to slow Netflix’s recovery this year. And even though Marcien Jenckes, General Manager of Video Services at Comcast, says, “It is not at all our intention to compete with Netflix,” that doesn’t mean Netflix won’t end up taking a hit.

Like analyst, Nat Schindler, says:

“Although Netflix has a sizeable and likely insurmountable lead on its competition in terms of both content and users, competition in the streaming media industry is heating up and making incremental growth going forward harder.”

Sure, Netflix’s superior streaming library should allow the company to maintain its crown in the short term. And the new services likely won’t stop those who plan on ditching pay-TV completely in order to save money each month.

But since Comcast’s new service provides a free added benefit to some of its customers, it’s definitely going to make users think twice before adding Netflix to their monthly bill.

What’s more, if the company decides to invest heavily in Streampix and build a formidable streaming library of its own, Comcast customers will have no need for Netflix’s “complimentary” service at all.

At that point, look out below.

Good investing,

Justin Fritz