Analyst: Netflix's Fall From Grace Boosts Pay TV Networks

5:44 AM PDT 10/26/2011 by Georg Szalai

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"Netflix's execution missteps possibly open the door for Dish's Blockbuster offering to take share," notes Morgan Stanley's Benjamin Swinburne.

NEW YORK - Pay TV companies are the winners of Netflix's fall from grace after its recent missteps, while slowed subscriber and financial momentum could limit the upside for content companies that have benefited from online distribution deals, a Wall Street analyst said Wednesday.

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In a report entitled "Netflix, the morning after...," Morgan Stanley's Benjamin Swinburne evaluated the impact of Netflix's reduced financial and subscriber momentum, which on Tuesday led to a 35 percent decline in the company's stock.

For cable and satellite companies, it was "a day in the sun," he argued. "For those on the wrong side of the cord cutting debate the last several years - the cable/satellite/telco operators, Netflix's subscriber slowdown and escalating content costs are a source of relief."

It is probably the most bullish for DirecTV and Dish Network since they are pure-play video firms, Swinburne argued. "In the case of Dish, an emerging competitor to Netflix, Netflix's execution missteps possibly open the door for Dish's Blockbuster offering to take share," he suggested.

However, for big entertainment companies, the slowdown hurts the bull case, the Morgan Stanley analyst said. "Online video distribution revenues appear to be the next opportunity for content owners to monetize existing content," he explained, arguing that this high-margin business is likely worth more than $1 billion this year, primarily thanks to Netflix.

"While we continue to see others, led by Amazon, enter the space, the risk around Netflix as a distributor that can continue ramping its programming investment has no doubt increased," Swinburne said. "The margin of error has lowered, throwing some cold water on the online video distribution bull case for content owners."

Email: Georg.Szalai@thr.com
Twitter: @georgszalai