Is Netflix to Blame for the Drop in US Pay-TV Subscriptions?

According to a recent publication by iSuppli, a market research firm, the U.S. pay-TV subscriptions fell by 380,000 in Q2 2011 after two previous quarters of healthy gains. ^[1] The reduction was primarily driven by subscriber losses from cable companies like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). There are a couple of conflicting inferences that we can draw from this data. We conclude that while cable companies might continue to blame lower cost Internet based options like Netflix (NASDAQ:NFLX) and Hulu, these declines most often point to larger macro conditions driving these subscription data.

Fingers Wagging at Netflix

When subscriptions fall, the fingers point at alternative video service providers like Netflix, Hulu and others. This is only partly fair. Netflix has also experienced a slowing in its subscription growth which could be natural as the US market is getting more penetrated or because customers overall are cutting subscriptions to pay-TV options due to tighter budgets.

In addition, Starz decided to take its content off Netflix’s platform once the current deal expires showing the rising tensions and prices between some content providers and distribution outlets like Netflix. During such times, data depicting overall losses of pay-TV subscriptions is further likely to alarm content owners and pay-TV service providers with respect to the threat of Netflix and others. One way to challenge theses players is by making content more expensive, which will reduce Netflix’s offering and slow its growth.

Might Not be Competition Related

Looking at pay-TV subscription trends, it seems that they are more correlated to the economy rather than Netflix’s expansion. Netflix was expanding quickly in the quarters before Q2 of 2011 while pay-TV subscriptions climbed as well. The recent slowing could be more of a factor of customers willingness to spend based on their own budgets.

It may be the case that in case of weak economy, customers would drop pay-TV subscriptions like cable to save money and so there decision to subscribe to Netflix has nothing to do with the drop in subscriptions. In other words correlation doesn’t imply causation.

Just because cable companies are experiencing a decline in subs, there is a good chance Netflix has little to do with it. Even if Netflix is helping accelerate this process, these declines would have come as users cut expenses regardless.

Our price estimate for Netflix stands at $221, roughly in-line with the market price.

See our complete analysis for Netflix’s stock.

1. US Pay-TV Subscriptions Decline by 380,000 in Q2, iSuppli Research, Sept 2 2011 [↩]