Why cable companies are losing subcribers to the Netflix boom

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Market share gains

Netflix has had great success attracting new customers. It grew to over 31 million domestic subscribers in the most recent quarter. To put that scale in context, there are approximately 110 million households in the United States. In other words, Netflix has achieved a 28% penetration into domestic households. This is also roughly the same size as the subscriber base of HBO, arguably the leader in original programming. With its convenient online video platform, low price point, and original content, the appeal of the Netflix product has clearly won over many consumers.

As we noted in Essential trends investors should watch when evaluating Netflix, an important driver of Netflix’s success is the increasing willingness of price-conscious consumers to disconnect their cable TV subscriptions in exchange for a cheaper option.

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The chart presents the cable TV industry’s steady loss of video subscribers. In fact, the industry is on pace to lose 1.5% of its video subscriber base in 2013. Many of those that disconnect their cable opt instead to keep a broadband data-only subscription. With their broadband access, they can subscribe to over-the-top (or OTT) services such as Netflix to satisfy their entertainment demands while greatly reducing their monthly bill.

Another way to view this trend is that Netflix is winning market share away from cable TV competition. Consumers have a limited number of hours per day to view programming. As consumers shift their viewing away from cable TV, Netflix and other OTT services have gained a greater share of this viewing time. Indeed, in a recent letter to investors, Netflix CEO Reed Hastings said, “We compete very broadly for a share of members’ time and spending.” Clearly, Netflix is competing very effectively for the time being as the company effectively disrupts the traditional TV viewing model.

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