Skimpy content keeps Netflix, OTT from seriously threatening pay-TV

Michelle Clancy ©RapidTVNews | 11-11-2011

While companies like Netflix and Hulu have the potential to be serious media contenders, the content roster from over-the-top (OTT) television platforms is not as broad or compelling as the line-up provided by traditional pay-TV companies.
This sitiuation, according to research firm Fitch, presents a serious obstacle to market domination despite the industry hype about cord-cutting.
The acquisition of a vast and compelling internet and video catalogue remain key to attracting additional OTT customers, and consequently becoming a viable competitive threat for the likes of Hulu and Amazon.
Current OTT line-ups pale in comparison to those of traditional pay-TV providers who pay large affiliate fees to content creators/owners, such as Time Warner, CBS and Viacom. Fitch Ratings said it believes content owners remain well-positioned amid the rise of OTT platforms and are benefiting from the high margin incremental revenue streams associated with licensing their previously released content into the new OTT window.
The content conundrum is more piquant for some providers. For instance Netflix last month posted its first quarterly loss since its inception in 1997. The company spiked subscriber fees by as much as 60%, precipitating an exodus of over 800,000 customers during third quarter 2011, Fitch pointed out. Netflix said it expects to recover some of its U.S. customer base, and has recently branched out business to the UK and Ireland. Fitch believes that while subscriber growth will offset some cost, increased prices will be inevitable to retain profitability while building its library.
In general, adding content is expensive and could take time. Consumers would likely be able to absorb a gradual rise in subscriber fees, but Fitch believes many would discontinue membership if costs were to spike as they did at Netflix. Fitch feels Netflix lacks the capacity to increase prices to a level allowing for a quick expansion of its library, leaving it a weak competitor versus cable and broadcast TV companies.
Fitch acknowledges that a new OTT service backed by a cash-rich company (i.e. Google's recent announcement of the creation of 100 YouTube channels populated with professionally produced original programming) could become a viable competitive threat if successfully implemented. Still, Fitch believes conglomerate-owned studios would not sell their content, a requirement of most customers, in such a way that it would undermine broadcast and cable network business models.