Saturday, December 29, 2012

Netflix: Cable Deal Might Boost Margin, Cut Churn, Says Barclays

Barclays Capital‘s Anthony DiClemente today reiterated an Overweight rating on shares of Netflix (NFLX), posing the question of whether the company is turning into the equivalent of a cable network, referring to an article yesterdayby Yinka Adegoke and Lisa Richwine of Reuters that claimed the company has had meetings in recent weeks with U.S. cable operators about carrying Netflix’s streaming video service.

DiClemente writes that a deal with operators “could help NFLX increase its subscriber base substantially, lower subscriber acquisition costs, and enhance overall company profitability longer-term.”

Probably, the average revenue from each incremental subscriber would be lower through such a deal, he writes, given that Netflix would likely have to continue to offer the retail $7.99 per month subscription. Taking out a 50% share for the operators, Netflix would make just $4 to $5� a month.

But the cost savings would mean Netflix’s pre-tax profit could be higher than it is now, more like the 35% Ebitda margin that HBO currently enjoys.

Also, much like HBO is used as a promotional tool to retain video subscribers, we believe NFLX could serve a similar purpose, reducing subscriber churn.

Last year, Netflix’s Ebitda margin was just 13.7%, and it is expected to fall to just 1% this year, by DiClemente’s estimate.

Netflix would, however, need to beef up its content offerings:

If NFLX is going to more closely resemble a cable network, we believe it will need to acquire more exclusive content and also push more into the development of original programs to stay competitive.

Fin

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