Why Netflix is Not "Toast"

On-demand video might affect the DVD rental business someday, but apparently not this year. Netflix just revised first quarter and full-year 2008 guidance. For the year, Netflix expects to have 8.9 million to 9.5 million subscribers, up from the prior forecast of 8.4 million to 8.9 million subs. It expects revenue of $1.345 billion to $1.385 billion, up from $1.3 billion to $1.35 billion. It expects unchanged GAAP net income of $75 million to $83 million. But GAAP earning per share will be higher. The new forecast calls for $1.18 to $1.30 per diluted share, up from $1.12 to $1.24 per diluted share.

On-demand viewing is convenient, to be sure. But there are countervailing values as well. On-demand purchases introduce an element of uncertainty into monthly budgeting of expenses. On-demand rentals can be cash transactions, with no later unexpected financial impact. It's an underestimated value for physical rentals rather than on-demand purchases.

Flat rate is important for many consumers. So is the "unlimited" number of titles one can buy on some Netflix plans. That adds more value. Think of how parents view texting charges. Why do so many people buy relatively large plans? Because they don't want overage charges.

On-demand viewing leads to "overage" charges. Flat-rate or "cash on demand" services eliminate that uncertainty.

Citizens Sees Slowdown in California and Arizona

It's just another small data point, but Citizens Communications says it does detect a slowdown in sales it believes is related to economic sluggishness in areas serving about 12 percent of its customers.

"We do see a slowdown in the economy in our California and Arizona markets," says Maggie Wilderotter, Citizens Communications CEO. And it seems to be housing related.

California and Arizona are "the only two markets that we have that have definitely had the housing issues," Wilderotter says.

"So, from the gross add perspective, what we have seen is a slowdown in gross adds out there, but it is not about the competition necessarily getting them," she notes.

"It is also about housing remaining vacant at the moment until inventory starts to get absorbed," Wilderotter says.

So what might be notably different about this particular dip in economic growth, compared to earlier slowdowns the telecom and cable industries have weathered, is the overhang of unsold homes whose owners might be disconnecting services.

That doesn't mean disconnection or downgrades at the primary residence, but at the second or investment homes.

So far, though, Citizens hasn't seen anything material in terms of bad debt on the small business side of its business. That's important, as small businesses represent roughly 50 percent of company revenues, and about 92 percent of our business customers.

Slowdown Coming, But It Won't Affect Us, Execs Say

Though Goldman Sachs analysts now forecasts that U.S. IT spending outlook for the remainder of 2008 will slow perhaps two points compared to 2007 levels--meaning growth will come in at fiver percent rather than seven percent--IT suppliers predictably say the slowdown won't hurt their firms.

Executives "said that while they’ve seen some small impacts from the U.S. economy with respect to IT spending, there is little to fear in the bigger picture," reports eWeek reporter Reness Boucher Ferguson.

The good news for IT suppliers is that a decline this time is simply a slowing of the rate of growth, not an actual negative downturn. The rationale is that IT spending in recent years has tracked fairly closely with gross domestic product, growing just a bit faster than GDP.

Of course, what else would you expect a CEO to say? It's a bit like running into associates in the hall at a trade show, and asking them how business is. No matter what the reality, the answer always seems to be that "business is great."

And since GDP is forecast to grow at about 3.5 percent for 2008, IT spending should come in above that rate.

IT spending is a different thing from communications spending, to be sure. There is no linear extrapolation from the one to the other. But neither are the two types of spending completely uncorrelated. A deceleration from seven percent growth to five percent growth isn't a disaster by any means.

Dish Network Reports Slower Growth

Dish Network experienced slower subscriber growth during 2007, though it is hard to separate out the impact of better performance on this score by competitors, internal issues, slower housing starts and macro economic factors. “During 2007, our subscriber base continued to grow, but at a slower pace than in previous periods,” the company says.

“We believe that our slower subscriber growth was driven in part by competitive factors including the effectiveness of certain competitors’ promotional offers, the number of markets in which competitors offer local HD channels, and their aggressive marketing of such advantages," the company says.

In part, Dish Network was hampered by a delay in the launch of new satellites to support high-definition services. The company argues that the delay lead to gains by competitors better equipped to deliver lots of HDTV signals.

Dish executives also say subscriber growth was affected by worsening economic conditions which included a slowdown in new housing starts.

But there also were "operational inefficiencies" as well, and piracy and other forms of fraud seem to have been issues as well. All of those developments "affected both the growth of new subscribers and the churn of existing customers," Dish says.

Although video entertainment traditionally has been viewed as "recession proof," that thesis might be tested this year if there in fact is an economic slowdown underway, or starting. The problem is that economists need six months worth of data to declare that a recession started, six months earlier. We might not know for sure until the summer or fall whether that is the case.

Any one of the aforementioned developments could lead to slower growth. The problem is that it isn't clear how important each of the factors was. Given the number of new HDTVs being sold, it is conceivable that relative lack of HDTV programming alone could account for slowing growth, even if the other forces were not at work.

To some extent, the satellite delay is simply bad luck. But the fraud issues ought to be largely under Dish Network's control.

Neither are housing starts under company control. The issue is that more weakness likely will follow, not because of housing starts, but because in many markets owners seem to be selling second homes bought largely as investments. In the interim, it is likely many of those locations will be disconnecting some services.

If a slowdown in growth continues, it will be tough to figure out, in retrospect, what actually caused the slowdown, as several forces are operating at once, at least at Dish Network.

Verizon to Hold "Open Network" Conference for Developers

Verizon Wireless will convene an Open Development Device Conference on March 19 to acquaint developers with its version 1.0 of the technical specifications for wireless devices that will work on its “Any Device, Any App” network-only service option.

The conference will discuss the certification of devices that users can use on the Verizon network, without having to buy a device directly from Verizon.

Broadband Penetration: How You Count Makes a Difference

Comparing broadband penetration across country boundaries is a tricky matter. It makes most sense to measure some services or products, such as cable TV, broadband access, TVs, HDTV, IPTV or telephone lines, on a "per household" basis, since that is how the service tends to be consumed.

Other services or products, such as mobile phones, MP3 players, Skype, smart phones or notebook PCs, might more accurately be counted on a "per user" basis.

The difference in broadband penetration, for example, can vary dramatically by the size of a household. In countries where households tend to be larger, for example, "per capita" and "per household" penetration will show a weaker correlation. Countries with lower household size will show a higher correlation between the two measures.

The latest ECTA data shows broadband penetration "per capita." So where we might be used to seeing "household" penetration figures in the 50-percent range, counting on a per-capita basis leads to penetration in the 15 to 35 percent range.

Planning on Buying a New Phone?

ChangeWave Alliance surveys suggest demand by consumers for new mobile phone has been weakening since July 2007.