Netflix Puts Skids on Kids’ Nets: Analyst

No kidding around: Netflix’s over-the top
video service is pulling viewers away from children’s
cable-TV programming, according to one Wall Street

Netflix, which now has 23.4 million streaming customers
in the U.S., depressed ratings for kid-oriented networks
from Viacom and The Walt Disney Co., along with syndicated
TV shows, in the first quarter, according to an analysis
by Sanford Bernstein. As a result of the research, the
firm cut its forecast for Viacom’s 2013 earnings by 3.8%.

Sanford Bernstein senior analyst Todd Juenger, a former
TiVo advertising executive, used data obtained from
TiVo digital video recorders to compare usage of households
with Netflix and those without.

“Turns out, Netflix Streamers watch just as much traditional
TV as Non-Streamers,” he wrote in a report last
week. “However, there is a significant share shift among
Streamers. Kids’ networks (not just Nickelodeon) and syndicated
shows are getting severely whacked.”

In the first quarter, TV ratings among TiVo/Netflix
homes in the sample grew by 2% year-over-year for Viacom
networks and 6% for Disney’s. However, for non-
Netflix TiVo subs, the ratings increases were 6% for
Viacom and 11% for Disney, according to Bernstein.


Viacom and Disney will likely “pull their premium kids’
programming from Netflix ASAP,” Juenger speculated in
the report, titled “Kids’ TV Under Attack; Netflix Holding
the Smoking Gun.”

If the media
companies withdrew
their childrenoriented
from Netflix, it
would cost them
each about $75
million in revenue
starting in fiscal
year 2013, he added.
At the same
time, Juenger
wrote, by “limiting
the depth of
Netflix’s kids’ programming
this would make
the Netflix offer
less compelling.”

Juenger cut
his already below-consensus
fiscal-year 2013
estimates for Viacom
from $4.51 to
$4.34. He did not
change his forecast
for Disney, estimating
the maximum impact of Netflix streaming is
less than $0.04 per share and Disney “has many operational
alternatives, as they are currently winning the
kids’ TV war.”

Viacom and Disney declined to comment on the report.

Viacom’s domestic ad sales declined 3% in its fiscal
quarter ended Dec. 31, 2011, which the company blamed
in part on a ratings drop-off at Nickelodeon. Previously,
Viacom CEO Philippe Dauman had asserted that
Nielsen ratings figures showing a double-digit decline in
Nick’s ratings were an
“anomaly” that needed
to be corrected.

On the other hand,
according to Bernstein,
some categories
of TV — broadcast,
movies, general-entertainment
originals and
news — have shown
higher ratings in Netflix households.

For example, AMC’s
Q1 ratings in TiVo/
Netflix households
soared 86% versus
71% in non-Netflix
TiVo households. Netflix provides past seasons
of AMC shows
including Mad Men
and Breaking Bad,
which fuels “catch-up”
viewing and ultimately
pushed more tunein
to AMC’s linear TV
broadcasts, Juenger said.

The data Bernstein used in the report came from
TiVo’s PowerWatch service, which relies on an opt-in panel
of about 35,000 subscribers. The TiVo data does not measure
premium networks such as HBO and Showtime, “so
the question of how Netflix impacts viewing of those networks
will have to remain an unresolved mystery for now,”
Juenger said.

Netflix has pursued a strategy of adding full past seasons
of TV shows, which “is not only a great experience
for Netflix members, but can help build the audience for
new seasons,” CEO Reed Hastings and chief financial officer David Wells wrote in a letter to shareholders last week
discussing first-quarter earnings.

Netflix added 1.7 million streaming-only video subscribers
in the U.S. in the first quarter, to stand at 23.4 million
total domestically (including subs who also have DVD
plans). The company reported revenue of $870 million, up
21% year over year for the period, and a net loss of $5 million
versus net income of $60 million.

The company’s shares fell 14% on April 24, after Netflix
said domestic net additions in the second quarter would
slow down because of quarterly “seasonality.” Netflix expects
to add 200,000 to 800,000 net streaming subscribers
in the U.S. in the current quarter, and add a net 7 million
for the full year (the same as in 2010).

Netflix continues to represent the largest single component
of downstream traffic over wireline broadband
networks in North America during primetime hours, according
to bandwidth-management equipment vendor
Sandvine. The service’s streaming-video traffic climbed
30% over the past six months, Sandvine said in a report
last week.


Netflix claimed members watched a record amount of
streaming in the first quarter, but did not provide details.
In the fourth quarter of 2011, customers streamed more
than 2 billion hours of video, the company said.

Meanwhile, Netflix confirmed it is pursuing partnerships
with Internet-service providers, major retailers, pay
TV operators and others similar to the deal the company
struck with Apple to let Netflix users pay through their
iTunes account.

In some cases “it may make sense for us to let them bill
on our behalf,” Hastings and Wells said. However, they
added, “We’ll take it slowly; we must make sure we’ve got
the right customer support and financial integration, while
maintaining a direct relationship with our members, to ensure
the member experience is actually simpler.”

Netflix’s deal with Starz Entertainment, which expired
in February 2012, covered 15 Disney titles in the
pay TV window, as well as catalog films. According to
Hastings and Wells, “There was no discernible change
in churn or viewing levels. Instead, the trend towards
watching episodic TV, like Breaking Bad, on Netflix
continues to grow.”

Regarding its original programming strategy, the Netflix execs said that “was a strategic experiment,” adding
that they are still uncertain about “when or whether we
will take it beyond 5% of our large content spend.”