Analysts Chime in on Netflix-Virgin Media Pay TV Deal

John Malone Sun Valley 2011 - H 2013
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John Malone Sun Valley 2011 - H 2013

TV distributors increasingly see the streaming video service as "another network and less as competition," says one observer.

LONDON – Analysts on Tuesday weighed in on Netflix's first-ever integration deal with a major pay TV company, Britain's Virgin Media, saying it could have ripple effects on other TV distributors and cord-cutting.

Some also saw it as symbolic of pay TV companies' changing view of the streaming video giant, whose stock hit an all-time high in early Tuesday trading.

Virgin Media, owned by John Malone's Liberty Global, said its subscribers will be able to access a Netflix app via TiVo set-top boxes that 1.7 million of its homes have, starting with a pilot launching this week.

Some analysts have suggested in the past that pay TV operators around the world could start integrating and streaming so-called "over-the-top" broadband services like Netflix instead of competing with them.

"This is consistent with over-the-top friendly comments from Liberty [Global] chairman John Malone and CEO Mike Fries," said Wunderlich Securities analyst Matthew Harrigan. "Virgin's relative video margin and absolute financial contribution has historically lagged that of U.S. [pay TV companies] given BSkyB's legacy video lead in what is likely the most technologically innovative global TV market."

He suggested that a similar approach by Liberty Global-controlled cable firms is now "plausible in continental Europe." Explained Harrigan: "The margin economics for Virgin, and potentially for continental European markets, make sense if consumer preferences toward Netflix influence broadband purchase and bundling decisions."

Meanwhile, Janney analyst Tony Wible on Tuesday said in a report that the positive impact for Netflix is likely more symbolic for now.

"While a great headline for Netflix, we do not believe there is an immediate financial benefit to Netflix," he wrote. "The main benefit to Netflix will be lower churn driven by the increased utilization of the service because it is as easy to access as linear or recorded TV."

He argued that the Virgin deal shows a shift in perception of Netflix. "[It] is viewed increasingly as another network and less as competition" for pay TV companies, Wible wrote.

Overall, Wible concluded: "This news supports our thesis of [pay TV firms'] shifting emphasis from traditional video toward broadband services. This could further pressure the [companies'] video business, but also positions them well in case of broader adoption of usage-based [broadband] billing."

Ted Hall, senior analyst at Informa Telecoms & Media, said: "In treating Netflix as an 'Internet TV network,' Virgin Media argues that it is simply expanding its content offering -- with key shows including House of Cards, Breaking Bad and Arrested Development now brought into the fold -- and positioning TiVo as the market's leading connected-TV platform."

But he also cautioned of potential negative effects, such as increased cord-cutting.

"The danger for Virgin Media is that its customers will find Netflix to be a revelation that they would not otherwise have stumbled upon, opening their eyes to a low-cost subscription TV service that satisfies their core entertainment needs," Hall said. "Rather than strengthening the appeal of TiVo, the addition of Netflix could in fact do the opposite and encourage customers to cut the cord and settle for a cheaper combination of broadband, Netflix (via other devices) and free-to-air TV."

Virgin Media could negate this risk by offering Netflix at a discounted rate as part of its bundled service offering, he said.

Twitter: @georgszalai