Broadband Cable Association of Pennsylvania


February 18, 2014

Netflix Inc.'s effort to secure a place for its video-subscription service on Time Warner Cable Inc. set-top boxes is on hold now that the cable operator is being sold, people with knowledge of the matter said. The discussions are unlikely to progress before Time Warner Cable's $45.2 billion acquisition by Comcast Corp. is completed, said the people, who asked not to be named because the matter is private. Comcast, which isn't as far along in its own talks with Netflix, is focused on increasing film downloads and rentals with its new X1 set-top box platform, they said. "They will not be in any kind of rush to let Netflix on their cable box and cannibalize their business," said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas who has a neutral rating on Netflix.

A deal with Time Warner Cable would put pressure on other pay-TV providers to offer Netflix as well. The video-streaming pioneer, with 44.4 million online subscribers, has pitched its Web-based trove of original shows, movies and older series as a must-have for pay-TV providers who increasingly poach each other's viewers for growth. It has signed two European cable services and is trying to reach deals with smaller U.S. outfits that use TiVo Inc. set-top boxes. Discussions have included the possibility of Netflix paying fees to pay-TV providers, Chief Executive Officer Reed Hastings said in an interview in late January.

While Los Gatos, California-based Netflix can continue to grow without such deals, access on cable TV systems would make viewing easier by eliminating the need to toggle between cable and Internet services, Hastings said. "Consumers already use Netflix on the smart TVs, their Apple TVs and their Rokus," Hastings said last month. "For us, it's not a financial decision, it's a customer-pleasing decision," he said. Jonathan Friedland, a spokesman for Netflix, declined to comment on the Comcast-Time Warner merger, as did Maureen Huff, with Time Warner Cable. Steven Restivo, a spokesman for Comcast, said the company continues to talk to application providers about joining the X1 set-top box platform. Comcast, already the largest U.S. cable company, has said it expects the deal to absorb No. 2 Time Warner Cable to be completed by year-end.

The X1 platform, which delivers content via the cloud, could evolve into an larger threat for online services like Netflix and offerings such as Apple Inc.'s Apple TV set-top box. It can be updated to duplicate many of their features, such as suggestions of what to watch, reviews and social tie-ins to Twitter or Facebook. Comcast has more than 1,000 engineers working on software improvements for X1, said Sam Schwartz, chief business development officer for the pay TV provider, which finished 2013 with 21.7 million video subscribers and could grow to 30 million by purchasing Time Warner Cable. "It out-Netflixes Netflix," said David Bank, an analyst at RBC Capital Markets who follows media companies including Walt Disney Co. and Time Warner Inc. Netflix slid less than 1 percent to $432.08 at 9:37 a.m. in New York. The stock, which almost quadrupled last year to lead the Standard & Poor's 500 Index, had advanced 18 percent this year through last week. Time Warner Cable dropped less than 1 percent to $145.59.

To take on Netflix directly, Philadelphia-based Comcast would have to spend lavishly, building a library of shows it could sell for a monthly fee. Netflix has rights to $7.2 billion in content over the next five years, including movies from Disney and original shows like "House of Cards." Instead, Comcast is promoting X1 as technology that melds conventional TV with Web services, such as traffic and weather, along with film and TV rentals and purchases. Those services could include Netflix. Late last year, Comcast began offering X1 subscribers online downloads of movies days or weeks before the DVDs reached stores. Comcast became the largest seller of "Despicable Me 2" over Thanksgiving, the company said last month. It's also seeking streaming rights during the pay-TV window that typically starts six months after the DVD release, the Wall Street Journal reported last week.

The company also has been working to expand its on-demand catalog of TV shows for current and past seasons, letting people catch up on programs at the touch of a button. "The better Comcast does in advancing this aim, the more potential competition there is for subscription video on demand players like Netflix, Hulu and Amazon Prime," said Michael Nathanson, an analyst at MoffettNathanson Research LLC. Time Warner's set-top boxes use traditional hard drives, making them more difficult to update with new features. The second-largest cable company has been trying to expand its higher-margin Internet service, making Netflix an attractive fit, according to Michael Pachter, an analyst at Wedbush Securities in Los Angeles.

With more cable providers offering on-demand access to older TV shows, Netflix is trying to differentiate itself by producing original programming such as "House of Cards" and "Orange is the New Black." Its paying U.S. subscribers surpassed HBO last year. To pay its rising content costs, Hastings said in January he is considering three different pricing tiers for its unlimited-viewing service, a departure from the $7.99 per month price it has had since July 2011. Netflix could still benefit from a combined Comcast-Time Warner. Federal regulators scrutinizing the deal could demand conditions that benefit independent Web services, such as barring Comcast from charging online companies for access to its Internet subscribers. Comcast agreed through 2018 to abide by so-called net neutrality rules as part of its deal to purchase NBCUniversal and said a combined entity would adhere to the same conditions. "If it's a condition of the merger, then of course they'd abide by it," said Pachter. Bloomberg

Warren Buffett's Berkshire Hathaway Inc. joined the investment frenzy around cable companies, disclosing on Friday that it scooped up shares in John Malone's international holding company Liberty Global PLC in the fourth quarter. Berkshire also said it sold its stakes in Dish Network Corp. and GlaxoSmithKline PLC in the period ending Dec. 31.

The disclosures were among many big positions disclosed on the quarterly date when investors who manage more than $100 million must report their holdings to the Securities and Exchange Commission. Berkshire's position in Liberty was 2.95 million shares, valued at $263 million at the end of the fourth quarter. Liberty Global, a Europe-focused cable operator, is separate from Mr. Malone's U.S. investment company, Liberty Media Corp. Berkshire cut its stake in the U.S. firm, Liberty Media, by about one million shares. It now owns about 4.5 million shares that were valued at $775 million at the end of the last quarter.

Mr. Buffett typically chooses investments of $1 billion or more, meaning the Liberty Global pick was likely the work of one of Berkshire's two investment managers, Todd Combs and Ted Weschler. Berkshire had a U.S. stock portfolio of nearly $105 billion at the end of the year. John Paulson also dove deeper into the cable fray. His firm, Paulson & Co., increased his investment in Time Warner Cable Inc. from $446 million to $810 million at the end of the fourth quarter. It isn't clear that the billionaire's firm still owns the shares, which surged after Comcast Corp. bought Time Warner on Wednesday for $45.2 billion. Wall Street Journal

Hon Hai Precision Industry Co. , the top global contract manufacturer by revenue, intends to list its cable and connector unit in Taiwan next year as it seeks funds for overseas expansion and new technologies.

The unit's chief executive, Sidney Lu, said in a recent interview that the cable and connector unit plans to invest in manufacturing facilities in Harrisburg, Pa., amid efforts to expand into the automotive industry in the U.S. Mr. Lu declined to disclose how much the Taiwan-based company, also known as Foxconn, plans to raise in the initial public offering of stock. Hon Hai assembles iPhones and iPads for Apple Inc., and has other clients including Sony Corp. and Hewlett-Packard Co. "Some car makers in the U.S. are looking for domestic suppliers. This is a good push for us," Mr. Lu, 55 years old, said at Hon Hai's headquarters in Taipei.

He said the new manufacturing site in Pennsylvania would target the North American market and employ several hundred people. Cable and connector manufacturing is largely automated. The unit, called Foxconn Interconnect Technology, already has set up a small research-and-development team in Pennsylvania. It also has manufacturing sites in China, as well as in Texas and California.

Cables and connectors are key components found in consumer electronics such as personal computers, smartphones, tablet computers and game consoles. Hon Hai Chairman Terry Gou founded the company in 1974, when it began making plastic channel-changing knobs for black-and-white television sets. The company expanded into the PC industry in the early 1980s with the production of connectors, the relatively simple but ubiquitous parts that join components in a computer.

Strong demand for consumer products, including smartphones and tablets, have been driving FIT's growth during the past few years but prices are coming down as the market has become saturated, Mr. Lu said. HSBC analyst Jenny Lai said she estimates the cable and connector unit currently contributes only 2% of Hon Hai's total revenue but it could account for 15% to 20% of the group's earnings, as cables and connectors carry substantially higher profit margins. Last year, Hon Hai posted revenue of 3.95 trillion New Taiwan dollars (US$131 billion). She also said FIT is expected to post double-digit revenue growth this year by expanding into new markets such as automotive, cloud services and networking.

FIT is the world's fourth-largest cable and connector maker by revenue, after Switzerland-based TE Connectivity Ltd. and U.S.-based Amphenol Corp. and Molex Inc. Mr. Gou has said he aims to make FIT, with annual revenue of about $3 billion, No. 1 in a few years. Hon Hai has been diversifying its business line and customer base as revenue from PCs and phone manufacturing slows. Earlier this month, the company said its January revenue edged up 0.3% from a year earlier to NT$314.55 billion. Hon Hai has been expanding into automotive components and is planning "big projects" with BMW AG and Volkswagen AG 's Audi luxury unit, Mr. Gou said last month. Hon Hai's Innolux Corp. unit makes displays for U.S. electric-car maker Tesla Motor Inc. Wall Street Journal