The inclusion of a Netflix app on cable set-top boxes could unlock one of the few demographic segments that have so far been relatively immune to the Netflix streaming video phenomenon, and help solve what some critics have said is a sluggish growth outlook for the SVOD pioneer, according to Morgan Stanley media analyst Ben Swinburne.
Netflix stock took a 15% nosedive in April after it said it expected to add about 2 million international subscribers in Q2, well below analysts’ estimates of a 3.45 million subscriber increase and about 500,000 U.S. net subscriber additions, below the 550,000 additions Wall Street anticipated. The stock has rebounded somewhat since that time – shares were trading at $100.59 per share in morning trading Monday – but are still down about 12% since the beginning of the year.
In his note, Swinburne said that integrating the Netflix app into cable set-tops – something that Suddenlink Communications and others have done via TiVo boxes – at larger operators like Charter and Comcast could help boost Netflix subscriber growth, especially with older customers.
“We think Charter and perhaps even Comcast could move to integrate Netflix into their video offerings,” Swinburne wrote, adding that many U.S. households that don’t subscribe to Netflix generally skew older and are much less aware of Netflix programming.
“However, they watch more TV than the average and have higher pay-TV penetration highlighting the potential of set-top distribution in the U.S., the analyst added.
Swinburne pointed to U.K. data, which showed that Netflix usage increased after it inked set-top distribution deals with Virgin Media's TiVo platform and video service provider TalkTalk.
“At two hours daily of viewing per member, cable operators - increasingly more ISPs than MVPDs – have [a] growing reason to bring Netflix into the tent,” Swinburne wrote. “While they may lose some PPV [pay per view] revenue (already declining for many MVPDs), operators could pick up leverage over programmers on content costs as a result of providing their customers with Netflix.”
Charter, which is in the middle of a two-year process to integrate its recent purchases of Time Warner Cable and Bright House Networks, has said it is open to including the Netflix app, as well as other SVOD services like Hulu and Amazon, on its set-tops.
“Most people who buy Netflix buy cable or satellite; they see it as a premium service,” Rutledge said at a MoffettNathanson conference last month.
On the international front, despite the falloff in net adds given the recent rollout sof service in what Swinburne estimated were about 350 million homes, he still sees upside for Netflix, but suggests that investors should be patient.
“In time the model works,” Swinburne wrote, adding that he expects Netflix will have nearly 80 million international subscribers by 2020, up from about 40 million today.
