Netflix executives practically had party hats on during their earnings call on Monday. The reason? The company topped 50 million subscribers for the first time. Comcast, meanwhile, was similarly pleased to report that it had expanded, but not by convincing new subscribers to sign on—by moving forward with its deal to acquire Time Warner Cable.
Domestically, consolidation is the name of the game for traditional TV subscription services. But while techies are quick to pit hated cable companies against beloved digital video pioneers, Netflix's sub gains are mostly coming from the international sectors of its business, which it promised to launch more of in the near future.
CFO David Wells wasn't shy about it, either. "We stayed flat for a while, so I think I am pretty solid on telling folks, look in Q4 and in Q1, we are going to start using cash a little bit more as we expand internationally and as we grow our content spend," he told investors. "And in the future, it will really depend on our international, on the pace of our international expansion, so I think I feel good about the level we are at now and it will really depend on our future plans."
Meanwhile, on Tuesday, Comcast CEO Brian Roberts told his investors that he feels "our plate is quite full" with respect to the size of the portfolio, especially given the predicted closure of the company's deal to acquire Time Warner Cable, but it's a timely transaction whether or not it's the last of its kind for Comcast. The cable sub side of the business shed 144,000 subscribers this month (despite consumer retention tactics that have earned Comcast some serious criticism in the recent past for which the company has sort of apologized). And, while churn rates have been variable across the industry, almost everyone agrees that the market is at least mature, though some go so far as to call the trend a secular decline.
Part of this is simply economics: Pew notes that millennials have lower levels of income than either Gen-Xers or baby boomers, so industries that rely on discretionary spending, such as video subscriptions, are likely to remain flat at best. The question isn't really which technology is better—digital video tends to provide a better and more reliable user interface, cable tends to provide more content—but rather how much of the industry the slowing of growth affects.
The answer seems to be all of it.
While cable operators seem to be limited to their geographic footprint, or the geographic footprints of domestic companies they can easily acquire, content publishers have been quick to get in on fresh fiber-optic pipe being laid abroad. A+E Networks, Discovery Communications and AMC have all been very aggressive in distributing both individual shows and free-to-air channels, and it's becoming a way to boost the bottom line as a decline in subscribers translates into what we can definitely call a secular decline in ratings averaged across television (Joe Adalian helpfully breaks down the broadcast season here; Nielsen data provided to us charts a steep decline in overall cable viewership from 2011 to 2012 and from '12 to '13).
And it's becoming a big part of the ad business, too. "The biggest upside internationally resides on the advertising front and with more viewers watching our content than ever before, both from subscriber growth and a more robust programming offering," said Discovery CEO David Zaslav. "We are uniquely positioned to capture a greater share of our rapidly growing Pay TV ad market."
That doesn't mean that some actors can't do well in a down market—indeed, quality tends to win out, so the real winner is a consumer who doesn't mind paying the incrementally rising prices in cable, because he's seeing better and better shows. But it does mean that if you don't want to bet big on your shows hitting, uninterrupted, year after year, you have to find new areas for expansion. One question that remains unanswered is how aggressively cable operators will become about trying to buy those international businesses—not the programs, but the pipelines themselves.