Netflix Inc. (NFLX) subscribers in Canada will now be forced to watch Netflix’s videos at a much lower picture quality due to the enforcement of caps in bandwidth from Canadian Internet Service Providers (ISPs).
The default video quality will now be set at 625 kbps, which Netflix has termed as “good” settings. Subscribers selecting the “better” settings would get a maximum of 1300 kbps in video stream and the “best” quality video would come at up to 4800 kbps. For selecting the two higher versions that transmit more data, the charge would remain at C$7.99 per month for any video size.
Netflix, in an email to its subscribers, confirmed that streaming of a film or television typically for thirty hours consumes 31 gigabytes of data, which would now be reduced to only 9 gigabytes.
We believe that this curtailment in the streaming quality in Canada would hurt Netflix and would be a step backward for the company as the online movie industry is vouching for better video quality at more affordable and competitive prices.
However, Netflix continues to do reasonably well in the U.S., offering significant competition to pay TV channels, as well as companies in the mail order business. Moreover, online video streaming is really catching fire, with hours of viewership increasing significantly over the past year. This is the reason Netflix has been gaining popularity with content providers.
For instance, Netflix recently entered into a multi-year licensing agreement with Paramount Pictures, a division of Viacom Inc. (VIA) in Canada. The deal not only enables Netflix to expand in Canada but will also add to the long list of old and new movie titles from Paramount Pictures in its library. The deal is expected to provide a first hand experience of the movies produced under the Paramount banner to the Canadian subscribers of Netflix.
According to the 5-year agreement, Netflix will be able to stream classical hits as well as new movies that Paramount Pictures produces and gain access to Paramount’s library of 350 films.
Of course competition is clearly heating up, with larger players beginning to show interest in this emerging market of online video streaming. But we continue to believe that the monitoring of partnership opportunities with big Hollywood studios and extraction of strategic agreements with cable companies would enable Netflix to maintain a diversified and upgraded catalog, thus improving its image and driving subscriber growth over the long term.
The fact that Netflix has been troubled with streaming delays from various pay channel providers is worrisome and now this cap on bandwidth that could hamper quality is a real concern. Particularly so, since other ISPs could follow suit. Thus we have a Neutral recommendation on Netflix shares in the long term (3-6 months).
Currently, Netflix has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.
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