Netflix ‘Monetization Gap’: Streamer Earns Less Per Hour Viewed Than Most TV Networks, Study Finds

RBC analysts suggest Netflix has strong pricing power relative to traditional media companies

Netflix in 2015 generated less than half the profit per hour of viewership of many TV networks — while its users watched more video on a daily basis than each of the major media conglomerates’ combined networks, according to a study from RBC Capital Markets.

The gap suggests that Netflix has plenty of pricing power left in its quiver, relative to other media companies. And while Netflix’s subscriber growth in the U.S. has slowed in the last two quarters, the company has still been on a healthy growth curve in adding net subs as TV networks are flat to declining in total audience reach.

In short, RBC is bullish on Netflix’s prospects to become far more profitable.

“Were Netflix to over time close both the household and the profitability gap between it and most key media networks… it could experience dramatic growth in its U.S. profitability – to levels 5X to 10X greater than its U.S. 2015 contribution profit,” RBC analysts Steven Cahall, Mark S. Mahaney and Dylan Haber wrote in the report issued Thursday. The firm maintained its “outperform” rating on Netflix stock.

At the same, Netflix’s low cost and perceived value compared with pay TV is precisely what has led to its remarkable rise — and it will be extremely careful not to upset that apple cart by hiking fees. Also, the data could be interpreted as showing that, even if Netflix is arguably underearning compared with media conglomerates, some TV networks may be overvalued with respect to their viewership. A caveat here is that the study relies on Nielsen data for TV, not including online and mobile viewing on networks’ digital platforms (which if factored in would lower their earnings-to-viewing numbers).

In 2015, Netflix reported $1.38 billion in contribution profit for its U.S. streaming business (about $33 per sub), up from $936 million ($24 per sub) the year prior.

Netflix earned 5 cents per hour viewed last year in the U.S., per RBC’s estimates. That’s about what NBC and ABC pulled in. But it’s far behind ESPN at 35 cents — the most profitable of the networks analyzed — and trails TNT, TBS, MTV, FX, AMC, CBS, Fox News Channel, Discovery, CNN, USA Network, Comedy Central, CBS, HGTV and Nickelodeon. Among the networks analyzed, only Fox, Investigation Discovery, and Fox Sports 1 earned less than Netflix per hour viewed.

“In terms of monetization, NFLX materially lags media networks with revenue and EBITDA per viewing hour at just a fraction of the level of most media networks,” the RBC analysts said. EBITDA refers to earnings before interest, taxes, depreciation and amortization; the RBC analysts also excluded corporate overhead such as sales, general and administrative costs, and R&D spending. For the broadcasters, the estimates included syndication and content-licensing revenue.

Source: RBC Capital Markets, SNL Kagan, company reports

Again, it’s with noting that the comparison is somewhat skewed because the figures for TV networks don’t include viewing on digital platforms. The RBC analysis of profitability per hours viewed doesn’t include premium cable networks HBO, Showtime or Epix, because the data for TV networks is based on Nielsen’s “24-hour household” metric, which is derived from ratings that do not track non-ad-supported nets. RBC estimated minutes of viewership per day per U.S. subscriber based on the company’s reports of total hours streamed.

When measured by profitability on an annual per-subscriber basis (not considering time spent viewing), Netflix was No. 2 with $33 of EBITDA per sub, behind HBO at an estimated $44.40 per subscriber. CBS came in at $31.84 and ESPN was at $21.95, according to the RBC report.

But Netflix users watch substantially more video than any single TV network: nearly two hours per day (117 minutes), according to RBC calculations. That’s more than Fox (53 minutes per day), CBS (50 minutes), ABC (41 minutes) and NBC (39 minutes).

Given that Netflix is America’s most-watched “network” by a long shot, it would have leverage to continue to raise prices down the road (and boost profit margins). Netflix is in the process of shifting all U.S. subscribers to its standard $9.99 monthly plan, which provides two HD streams. That change, which increases the price for some older subs by $2 monthly, has led to higher cancellation rates than Netflix anticipated.

Other research has indicated Netflix may have leeway to hike the price of its subscription plans. While 29.3% of consumers said they would not pay any more for Netflix than they do currently, 39.1% said they would pay $12-$15 and 21% were willing to pay $16 or more, according to a survey conducted in the second quarter by TiVo’s Digitalsmiths.

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