Noting a report by Reuters that Netflix has been in discussions with MSOs to possibly offer its service as part of a cable package sold to consumers, Barclays Capital analyst Anthony DiClemente (pictured) sees both plusses and minuses to the idea.
“If NFLX were to become a wholesaler of content, we believe its service would still have to be offered on a retail basis at $7.99, likely lowering the ARPU that NFLX would get for those incremental subscribers. However, we believe a partnership with the distributors could help NFLX increase its subscriber base substantially, lower subscriber acquisition costs, and enhance overall company profitability longer-term,” the analyst told clients.
Why would Netflix do cable deals? To expand its footprint.
“We believe distribution agreements with the cable providers could materially increase NFLX’s subscriber base in a relatively short-period of time. The question for NFLX, however, is how to reach greater scale without sacrificing all the economics to its cable partners,” DiClemente explained. Even when distributed through a cable provider, we believe the service would still have to be offered to the consumer at $7.99, matching the current retail price available on NFLX’s own website. And for the distributors to maintain a roughly 50% gross margin for their video business, we expect NFLX’s ARPU for those new subs would likely be in the $4-5 range.”
But wholesaling can still be a good business.
“By selling content on a wholesale basis, we believe NFLX could increase its overall profitability, as the distributors could shoulder marketing costs and up-sell NFLX to their current subscribers-partly why HBO enjoys roughly 35% EBITDA margins. Also, much like HBO is used as a promotional tool to retain video subscribers, we believe NFLX could serve a similar purpose, reducing subscriber churn,” the analyst said.
But if Netflix is going to look more like a cable network, DiClemente said it would need to acquire more exclusive content and move into development of original programming.