Analyst: Content Deals With Netflix 'Increasingly Likely to Trigger A Loss in Ratings,' TV Ad Revenue
Janney's Tony Wible warns of a tipping point that will give distributors, particularly the online streamer led by CEO Reed Hastings, a leg up on content producers, leading him to upgrade Disney's stock and downgrade Time Warner.
NEW YORK - Janney Montgomery Scott analyst Tony Wible on Monday warned of a changing balance of power in the online content licensing space, saying that content may not be king in the future.
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"Some content producers are increasingly beholden to Netflix as they have extended payment terms that enable it to buy more content than it could otherwise afford," he wrote. "A handful of media companies have become overly dependent on digital licensing deals that increasingly have the potential to disrupt ad revenue for all players, including those that have been reluctant to license content to Netflix," led by CEO Reed Hastings.
In his report entitled "IPTV Tipping Point?," Wible upgraded his stock rating on Walt Disney to "buy," while downgrading Time Warner to "neutral," arguing that the latter could see some challenges in its TV networks business. "In essence, we believe we are nearing a tipping point where distribution is gaining an edge over content," he concluded.
Wible sees a vicious circle in media companies' pricing digital deals on a fixed price basis, "while risking the loss of variable priced ad revenue." That enables a competing network "that is increasingly likely to trigger a loss in ratings, which in turn reduces ad revenue and increases their dependence on digital licensing," he said, comparing the situation to DVD's growing dependence on cheap rentals to compensate for the loss of DVD sales.
Wible estimates that major networks are at risk of losing almost $9 of ad revenue per home per month, "while only recouping 35 cents-75 cents of monthly revenue on digital licensing deals." In aggregate, networks stand to lose $2.6 billion in ad revenue based on Netflix's estimated 2012 subscriber base, he said. Entertainment industry executives have said that they have not seen any evidence that the availability of their content on Netflix has affected TV ratings.
But Wible concluded: "Most companies look at IPTV in the wrong light and need to see that they are selling blocks of entertainment time rather than specific shows that they can protect with windows."
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The analyst then discussed the likely effect on entertainment giants. "We believe Disney will be more insulated from the aforementioned IPTV risk with its sports programming and park diversification," Wible argued.
Meanwhile, "Time Warner is more reliant on growth in its media networks this year due to expected declines at the studio and publishing business," but its ratings have been challenged, he wrote. "TNT/TBS are more exposed to the aforementioned IPTV threat, especially if Netflix is integrated into the [pay TV] ecosystem."