30 Comments

Summary:

Netflix execs may insist publicly that they’re no threat to cable, but there’s plenty of evidence that the company’s subscription service and pay TV offerings are squarely competing for the eye balls and subscription dollars of the very same audience. In other words: It’s on!

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Ask Netflix about cord cutting, and it’ll tell you: “It’s not happening, it’s not anything we are causing, cable and Netflix are complementary.” Then take a look at the actions of service operators, cable networks, consumers and even Netflix itself, and you’re going to see a decidedly different picture: Cable and Netflix are competing for the same eyeballs, the same money and the same TV real estate, and the fight is getting tougher by the day.

Not convinced yet? Then consider this evidence:

Consumers are ready to jump ship. Netflix users that stream the company’s videos to connected devices are twice as likely to at least downgrade, if not outright cancel their cable TV subscription than they were just a year ago, according to a new study from The Diffusion Group (TDG). Thirty-two percent of these Netflix users are thinking about calling their cable company. “Despite its rhetorical positioning, both Netflix and Pay TV operators have long been aware that there will come a point at which its services are not only dilutive to regular TV viewing, but antithetical to Pay TV subscription levels,” said TDG’s Michael Greeson. In other words: In the long run, Netflix will inevitably lead to cord cutting.

Content licensing is getting more competitive. Netflix Chief Content Officer Ted Sarandos revealed recently that Netflix is now at the table for pretty much any TV licensing deal. So why aren’t Netflix customers buying more content? Because some of the networks simply don’t like to share. Netflix would prefer cheaper, non-exclusive licensing deals, which would make it possible to get more bang for its buck. However, HBO and increasingly Showtime are insisting on exclusive content to prevent subscribers from jumping ship.

Many observers thought Netflix wanted in on this game when the company bought the rights to its first-ever exclusive show House of Cards this spring. Sarandos, however, said that it was exactly the other way around: Netflix was getting concerned that it would get shut out of too many deals for attractive serialized content, which is increasingly going exclusively to programmers like HBO, so it saw itself forced to act.

Cable companies castrate their TiVos. A number of cable companies now offer their customers TiVo-branded DVRs that offer access to all kinds of additional online content. But TiVo users who buy their devices at retail will be able to watch videos from Netflix and Hulu Plus with these machines, while customers who rent the same DVR from their cable company won’t have access to these two services. The logic? Netflix could get people to ditch their premium channels and ignore cable VOD.

Netflix is dominating every screen. Network operators are trying to bring TV everywhere, but they often must feel like the hare racing the porcupine: Wherever they look, Netflix is already there. The company’s service is now available on more than 250 devices, and Netflix is getting more aggressive about dominating every single screen. The latest ploy is a dedicated Netflix button on your remote control, which puts it in direct competition with your cable guide. That raises the question: Do you want to browse through thousands of channels, or simply access Netflix?

Incumbents are putting a cap on it. If you’re a network operator, how do you keep your customers from canceling premium pay TV services to watch everything online? Canadian ISPs seem to think that bandwidth caps are the answer, and they’ve been enforcing strict data diets for years. ISPs that charge consumers up to $2.50 per GB once they exceed caps as little as 2 GB per month have been a real problem for Netflix north of the border, forcing the company to default to SD-quality streaming for all Canadian customers.

There’s been some movement with regards to bandwidth pricing in Canada in recent months, but the conditions are telling: Shaw recently introduced generous 1TB caps and even unlimited data plans, but those are reserved for customers who have a pay TV subscription as well. Bandwidth caps in the U.S. are generally higher, but not really that generous either, especially if you’re a heavy Netflix user.

Image courtesy of Flickr user familymwr.

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  1. Great piece.

    Aren’t ISPs that are also content providers violating competition law by capping or throttling bandwidth?

    1. Jack,

      Great point. People fail to see this yet its happening all over the US.

    2. To answer your question…no. Because there is no law (nor should there be) that says a company must give free piggy back rides to competitors.

      I love how idiots like to talk about cable companies are tying to hang onto a bad business model but then they ignore the fact that Netflix’s ENTIRE streaming business model is DEPENDENT on cooperation from a competitor. That is the dumbest business model you can possibly have. It would be like Target asking Walmart if they can set up a some merchandise in Walmart some,and use some Walmart employees to sell them with all the proceeds going to Target.

      1. Except the consumer has already paid for the service and should be free to use it as they see fit. If I pay for my internet I don’t want anybody telling me what i can do on it.

        It seems it would be comparable to the internet provider only allowing you access to certain sites and everything thing else is unavailable.

        If somebody want to have a 1TB cap and is willing to pay for it then it’s in the companies best interest to allow it.

      2. I don’t think you comprehend the game …

        To use your example, most cities in the US would have only two retailers: Wal*Mart and Target. Both stores would offer basically same stuff for the same price and prices would continue to rise year after year faster than inflation. If you went in either to buy say, a box of cereal, you couldn’t get a decent price unless you bought a pair of socks, disposable diapers, and a silk scarf as well.

        Broadband is served up in most U.S. cities by a Duopoly: the phone and cable companies. As it is my city, customers have to bundle, purchase services they often don’t need or want, and go on contract to get a decent price on broadband. There’s no other option as there’s no true competition. And don’t me started on the level of customer service…

        The “Invisible Hand” works wonders in a truly competitive marketplace where consumers have real alternatives. But when the hand’s in cuffs, a well drafted law or regulation can work wonders.

      3. By your logic, virtually all software application companies have similarly bad business models because they are entirely dependent on cooperation from a competitor, namely the company who developed the OS (who are also in the software application developing business). This seems like exactly the same situation that led to United States vs. Microsoft.

        FYI, unless you are an expert on anti-trust law, you might want to hesitate before throwing around the “idiot” label at people you disagree with. If you are an expert, you’d still do better clarifying issues and nuances…

    3. No, they aren’t violating any laws, nor will they be under any ‘net neutrality’ context. Throttling and caps apply, equally, to all Internet traffic. Cable’s digital voice and streaming / PPV activity will be unaffected by said caps, because they are not Internet-based.

      Netflix, et al, either have to sit down with the last-mile providers and negotiate traffic rights, or they have to build their own facilities. No amount of legislation will change that, nor should it.

      As for the premise of the article, there is a huge difference between content available on cable channels versus Netflix streaming. Unless you’re satisfied with the piddly selection of titles available from Netflix, and you don’t watch current content, no one is “cutting the cord” for Netflix.

  2. I used to have a cable TV from COX but they pissed me off, so I disconnected. Right now I am thinking about switching to Netflix. I am gonna get a pc with a video output and simply stream the video to my TV.
    I’ll give it a try.

    1. James, just get a PS3 and forget the hassle of a PC. The PS3 does Netflix and can house your music for your stereo, house your photos, Blu-ray and it has the best games.

    2. Forget the PS3 comment. You would not wish to hobble yourself with a console system. Granted, a gaming PC will cost you more than a console system, however, if you are mostly concerned about streaming video, a media capable PC can be had for about the same price as a PS3, and will allow you to do so much more.

      1. just buy a Roku player, the simplest way to get Netflix and other streaming videos to TV

  3. killtheCableBill Tuesday, June 14, 2011

    Great Article but what about #Hulu and #OTA? (#Netflix + #Hulu + Antenna) Vs Cable ….short answer: Cable Loses.

    1. Cable loses? On what planet do you live? Hulu has largely been a huge bust in terms of getting people to drop cable.

    2. This was my calculation.

      Well, it was more like: Comcast pissed me off (too expensive) so I cut the cable and used Boxee and/or Hulu on my laptop. Then got an antenna and Netflix with Hulu+laptop to watch NBC and Comedy Central shows.

      1. cable loses? Let’s do the Math on this:

        HuluPlus = $8
        Netflix = $8 for streaming only
        Antenna = free
        Total = $16…

        BUT does that really compete with cable? What about DVR? What about non-broadcast television that’s not on the web? What about sports? So we need to add in a few more costs…

        Sports (like MLB TV) = $10/month ($120 for the full year/12)
        Tivo (to record) = $20/month
        Non-Broadcast TV Rentals (e.g, Top Chef, Portlandia) = 2*2 = $4

        New Total = $54

        This would be actually CHEAPER than cable. While many reading this may say “well, I don’t need all those purchases” the average american watches 4.5 hours of TV a day. Do you think you can stream 4.5 hours of Netflix everyday? No way…

        And as a full disclosier: I don’t have cable and just use Netflic and Hulu, but I also don’t fit the mold of a cable subscriber (low-20s, high-tech). I did have cable at one point, but realized it made no sense as I watch ~2 hours of TV a week. I think too many people are considering “cord-cutters” to be the natural churn of a cable operator. Until we start seeing families of 4 cutting the cord, I think we are some time away from the downfall of cable companies.

  4. You are sorely mistaken with the comment about cable companies castrating their tivos functionality. The real reason cable co’s tivos don’t have Netflix and hulu is because those companies distribution deals with the content owners specifically prohibit them from being on MSO’s set top boxes. Companies like Starz would kill their existing golden goose (existing subscription deals and revenues) if they allowed the same content thru tivo at those reduced rates. As with any of these things, FOLLOW THE MONEY to understand what is fact and what is fiction.

    1. Duncan, Please layout the money trail…break it down for us.

      1. If I must (apparently you don’t know much about the existing content/pay TV industry…).

        Content owners and broadcasters currently receive BILLIONS of dollars annually from distributors like cable and satellite providers. Their contracts often require them to pay the content owner for EVERY subscriber they have on their systems regardless of whether the customer uses the product or not (the whole ala carte debacle comes into view here… which again, is the content owners driving the requirements, not the cable and satellite providers).

        When these content owners licensed their content to Netflix, Netflix was a nobody and was viewed as another (SEPARATE) distribution channel. All potential upside and a way to dip their toes into the online distribution channel with little or no risk to their existing revenue streams. Particularly when they contractually precluded Netflix from allowing the same content to get back onto a cable provider’s set-top box. Why would they want their content to get to the same consumer for which they are receiving dollars per year for only pennies per year? It kills their existing BILLIONS of dollars of revenue. If it is additive, its fine. But when it becomes a replacement, it kills their business.

        Now that Netflix has become somebody and genuinely represents a threat to their existing revenue streams, you can sure as h*ll bet that Netflix isn’t going to get the sweet deals they once did for content when renewal time comes around. There have been many comments to that effect made already if you follow this industry at all.

  5. Rogers, Canada’s largest ISP, cut bandwidtch caps by 20-33%, depending on your package, the week Netflix Canada was announced.

  6. Unfortunately reality doesn’t match your narrative.

    Shaw does offer their plans without TV.
    http://www.shaw.ca/Internet/newpackages/

    And the CEO of Rogers Cable just said that Netflix is not the competition.

    http://www.theglobeandmail.com/globe-investor/netflix-not-a-competitor-rogers-ceo/article2059003/

    Nice try at spin Janko. Next time try a little research first. Oh wait, you don’t really want to tell the truth. You want to push your agenda to the “screwed and angry” consumers. Pathetic.

    1. Jack, thanks for letting me know about those Internet-only unlimited data plans. I’ve corrected the story to reflect it. As for not doing my research: Three weeks ago, when Shaw first introduced its new pricing, it still insisted that “(t)hese broadband packages will come bundled with TV,” and only offered limited plans on a standalone basis.

      Check this handout for details:
      http://www.dslreports.com/r0/download/1656897~7e9ed6491999d8a5ab758d5dc0a769a3/_mnt_sdcard_Internet%20Handout%20May%2025.pdf

      Or see for yourself in the Google cache of the pricing document, which has since been taken down:

      http://webcache.googleusercontent.com/search?q=cache:RqD7u1E1xZ0J:shaw.ca/newpackages/%3FWT.mc_id%3DC995A2047S98+http://shaw.ca/newpackages/%3FWT.mc_id%3DC995A2047S98&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

      I’ll get in touch with them ASAP and see what prompted the change of heart.

  7. Netflix is DOMINATING every screen? What the fuck are you smoking? Tehre are about 1/10th as many Netflix subscribers as there are cable subscribers. So..in the one screen that cable companies care about the most, it is not even a contest.

    That is like saying that Apple is dominating the desktop computer market.

  8. Content is still the king and MSO still control a major chunk of it through existing relationships. Netflix is good since it is driving competition with service providers launching content portals and enabling apps for consumption across multiple screens. The landscape will become interesting once Cable and Telco’s play their trump card and start charging for priority bandwidth

  9. One problem I have with cable is the outdated concept of channels. I would prefer to subscribe to networks or individual shows that are VOD. The way things are now, most of the shows I want to see are scheduled to air in the same time slot.

    Sure I can record two on my cable DVR, but often that still leaves three other shows I might want to watch.

    The recipe for success is simple. Give me the shows I want to see when and where I want to see them. If it is cheaper, then that is just gravy.

    1. Shock, millions of people agree with you. The great thing is we are at the beginning of the “TV Now” movement.

  10. Stop defaulting to set bitrates and resolutions. Let the consumer choose.
    Mobile user are really screwed by tiered plans (caps) at $11 dollars a gb. At least test transcoding to consumer set resolutions from 128×96 on up .
    Your standards are what’s clogging the internet.
    I’m perfectly satisfied to stream video at 110 kbits/s to my galaxy tab.
    That amounts to 49 mbytes per hour or about 50 cents an hour on verizons $35/3GB plan

  11. I wold rather access Netflix than browse through hundreds of channels.

  12. Feel free to vote on this Hacker News “Are You A Cable TV Cord Cutter,” poll I created http://news.ycombinator.com/item?id=2658737 .

    Im very interested to see how many inventors and early adopters have done just that. Hacker News is definitely a place where inventors and early adopters of the marketing cycle hang out. Great site, been using it since it’s inception.

    cheers,
    paul

  13. This crap wouldn’t be happening if companies weren’t allowed to provide both TV and internet services. They should have been kept separate, then there would be no incentive to curtail internet usage.

    As for cord cutting; If you know where to look, you can find virtually any movie or TV show for free. For about $13 a month, you can have them from a risk-free source.

    The only reason I have TV service at all is that it was a package deal and the guy I’m renting to watches it. Except for a couple times during really bad storms, I haven’t actually turned my TV on in a couple years.

  14. Richard Bullwinkle Thursday, June 16, 2011

    You raise some good questions Janko. Both sides have strong advantages here. Netflix plays easily on many connected devices and can be inexpensive. But cable has ALL the current content — no waiting, hunting or missing current TV series. As cable moves more into TV Anywhere (which may be in part a reaction to fears about Netflix), broad carriage agreements might make it very hard for Netflix to compete for the customer who can’t wait for next week’s episode of their favorite show, the season premier of Dexter, or whatever. In general, cable will have all of those first, easily, and on one tidy bill. Some of those shows will never come to Netflix, and users will have to wait as much as a year for other shows. For some Netflix users, the wait is worth it for the smaller price and broad range of playback devices. But for the many content lovers who want to see the show as soon as it comes out, cable (and satellite) is worth the price, especially as TV Anywhere services get better.

    -Richard Bullwinkle
    Chief Evangelist, Rovi

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