Trying to get one's head around the true competitive dynamic between pay-TV operators and new "over-the-top" entrants is surely one of the most vexing exercises video industry executives face these days. The media's coverage only exacerbates things: when the pay-TV industry contracts for a quarter, the headlines imply cord-cutting is sweeping the nation, then when the pay-TV industry reverses and makes a small gain, the headlines suggest all is fine again in pay-TV land, and that Netflix is just a nice little complimentary service.
So it was again this week, as industry analysts released their Q1 pay-TV subscriber estimates showing that pay-TV operators as a whole eked out an increase of around 450K-500K subscribers. While that was a better showing than the past 2-3 quarters when the industry shed subscribers, it was also slightly worse than Q1 '10. Regardless, the first quarter is a seasonally-strong quarter for pay-TV, and so the gains must be tempered by what follows in subsequent quarters. The good news is that the economy is improving which can only help budget-minded households better afford expensive pay-TV services.
The bad news though is that over-the-top services, led of course by Netflix, have huge momentum. Consider this: even though the pay-TV industry grew subscribers in Q1, if you add up all the industry's gains for the last 6 quarters from Sanford Bernstein analyst Craig Moffett's report, the gain was just over 1 million subscribers. Contrast that with Netflix, which over the same period gained approximately 12.2 million, a whopping 12 times more subscribers since Q4 '09 than the entire pay-TV industry.
On the one hand, the fact that the pay-TV industry didn't lose millions of subscribers during the period supports the view that Netflix is not a cord-cutting catalyst. That seems to have become the mantra of Netflix CEO Reed Hastings, who since announcing the company's blowout Q1 report 2 weeks ago, has bent over backwards to tamp down competitive fears (this week he was quoted as saying the company would not pursue current season TV programs that would put it in more direct competition with pay-TV, calling that scenario "Armageddon" and "World War III" and that the company "wouldn't survive that battle.") Hastings is emerging as the anti-Trump; rather than crow about his company's competitive ascendance, he's soft-pedaling the implications as much as he can.
But despite Hastings' modesty, the numbers don't lie. The past 6 quarters show the strength of Netflix's value proposition - low price, high-quality, maximum convenience, user-friendly, etc. Is Netflix it complimentary to pay-TV? For some people, yes. But for plenty of others, no. Some of these people already realize this, while others don't yet. Think of cell phones as a good analogy; once they too were once considered complimentary to land lines. Now land-lines are dropping rapidly, and are virtually non-existent for young people whose needs are fully met by their iPhones, Droids, etc.
Over time, as I've argued before, for consumers that are entertainment-oriented, budget-minded, or both, Netflix is going to emerge as a significant source of competition for pay-TV operators. Why? Because it's inevitable that when new choice is introduced, consumers fragment, gravitating to services that best meet their needs. That's an immutable law of the free market. For pay-TV operators, though TV Everywhere is a good start, much more needs to be done to stanch this impending fragmentation.
Bottom line: current headlines or positioning aside, longer-term Netflix will become a meaningful competitor for a chunk of existing pay-TV subscribers and "cord-never" young people for whom a pay-TV subscription is far from a given.
VideoNuze is the authoritative online source for original analysis and news aggregation focused on the burgeoning online video industry. Founded in 2007 by Will Richmond, a 20-year veteran of the broadband, cable TV, content and technology industries, VideoNuze is read by executive-level decision-makers who need to get beyond the standard headlines and achieve a deep understanding of online video’s disruptive impact.