Woe unto Netflix (Nasdaq: NFLX) and, once again, the American consumer. With the streaming media company continuing to take a beating in the market (the stock closed at $64.53 Wednesday, down 4.5 percent), there's more bad news on the horizon, according to one Wall Street analyst.
Bernstein & Co.'s Craig Moffett predicts that pay-TV operators, looking to cash in on America's surging love affair with services like Netflix, Hulu and other bandwidth-dependent operations, may soon institute the oft-discussed, but seldom instituted, charges for bandwidth consumption.
Bernstein posited that Time Warner Cable (NYSE: TWC), Charter Communications (Nasdaq: CHTR) or Cox Communications is likely to be the first to pull the trigger. AT&T U-verse (NYSE: T) and Suddenlink Communications have had mixed results in their own trials at measuring usage, but they have decided to push forward with some, for now, pretty generous caps. Canadian cableco Rogers Communications has been successfully charging consumers for usage since 2008.
Moffett said the strong likelihood that operators eventually will start charging is among the reasons Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) have been slow to pursue an online video business of their own.
"You can't simply assume just because you can buy the content more cheaply, you can offer a product that's cheaper to the end user," he said.
Pay-TV operators have been steadily losing subscribers over the past several quarters, and Credit Suisse analyst Stefan Anninger this week wrote that pay-TV execs who've been blaming a struggling economy for increased cord cutting and cord shaving, as subscribers tighten their belt might be in for a bit of a shock as younger subscribers, especially those in the Echo Boomer generation, never subscribe to pay TV.
Calling those C-level execs "Pollyannaish" for not recognizing the generational shift to entertainment on the Internet, Anninger said young consumers " are growing up in an Internet-based video culture in which the mantras of 'why would I pay for TV?,' 'pay-TV is a rip-off' and, 'I can find that for free on the web' are getting louder."
"We fear that some of these consumers will find pay-TV far less relevant to their lives than do today's adults," he wrote.
TWC chief exec Glenn Brit hasn't shied from saying the cable company is moving rapidly away from its once-core business of pay-TV, and more aggressively toward a model that more closely resembles that of a traditional Internet service provider. The company has tried-and abandoned-efforts to charge for usage. Back in 2009 consumer complaints prompted the company to shelve that idea.
But Britt maintains that it eventually will happen.
Moffett says cable operators are seeing their video margins shrink as programming prices increase about 10 percent annually--they're about 60 percent right now. The broadband business, he said, carries gross margins of nearly 95 percent.
If you're counting beans, it's obvious that broadband has to be your new focus. But are operators really willing to once again go down the path of consistently raising prices for services?
Consumers haven't exactly staged a revolt, but they are becoming more savvy, as Verizon recently noted in a blog posting announcing a new initiative in the Washington, D.C. area to attract Echo Boomers to its FiOS services: "This young, mobile and tech-savvy group regard the Internet and TV as their primary source of entertainment and information," Verizon said. "Our campaign will weigh heavily on social media as we seek to reach these hip, young trendsetter who live for the moment, want a borderless lifestyle, enjoy technology and often spend more than half their day surfing the Web."
Usage caps? It's a great idea to drive revenue... and to drive away customers.--Jim