Broadband Cable Association of Pennsylvania

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October 22, 2013

Chicago Mayor Rahm Emanuel hopes to pump $13 million more into city coffers next year by raising amusement taxes on cable TV services and boosting zoning permit fees for large construction projects, City Hall officials said Monday. The increases are part of a series of tax and fee hikes expected to be part of the 2014 spending plan that Emanuel will present to the City Council on Wednesday. The estimated budget hole is $339 million and so far, City Hall has confirmed about $23 million in new money.

On Monday, the Emanuel administration said $9 million would come from taking away some of a tax break given to cable TV companies. Cable firms would pay 6 percent instead of 4 percent in amusement taxes - a cost the companies typically pass on to customers, said Kelley Quinn, a spokeswoman for the city Budget Department. Another $4 million would come from increased zoning application fees for construction projects of more than 10,000 square feet, and higher fees for anyone who opts to file paper zoning applications would bring in another $4 million. A 75-cent-per-pack boost in the cigarette tax would bring in about $10 million, part of which would be used to increase the number of free eye exams and glasses for low-income students in Chicago Public Schools who fail vision screenings. Emanuel reiterated Monday that he will not call for increasing property, sales or fuel taxes, but offered no additional details.

The tax break on cable TV service has existed in part because the city can't charge an amusement tax on satellite TV under federal law, and cable companies pay franchise fees. The mayor would spend $2 million from the cable tax hike to expand the city's Night Out in the Parks movie, concert, dance and circus offerings that have already grown more than threefold under Emanuel. Chicago Tribune

Netflix Inc. added 1.3 million U.S. customers in the third quarter, continuing on a pace to surpass Time Warner Inc.'s HBO in paying viewers-even as questions remain about the streaming video provider's profit-growth potential.Netflix ended the quarter with 29.93 million paid domestic users. HBO-which Netflix has sought to emulate with original programming-had 28.96 million U.S. subscribers as of June 30, the latest data available, according to SNL Kagan, CBS Corp.'s Showtime pay-TV service had about 23 million. Despite its steady user growth and increasingly high profile in Hollywood, helped by its push into original TV series like Emmy-winner "House of Cards," Netflix still isn't making big profits.

Wall Street doesn't appear too concerned about Netflix's slim profits so long as it generates growth and continues to stockpile high-quality content. The stock was up almost 10% in after-hours trading Monday in the wake of the earnings result, on top of a 6.4% gain during the regular session. Based on Netflix's 4 p.m. closing price on Monday of $354.99, the company's shares are up 282% since the beginning of the year. The stock's ratio of price to estimated earnings over the next 12 months is 144, according to S&P Capital IQ. The comparable figure for HBO's parent company, Time Warner, is about 17.

Netflix Chief Executive Reed Hastings said he was worried about investor euphoria over Netflix. "We have a sense of momentum investors driving the stock price," he said on a conference call. "There's not a lot we can do about it." For the fiscal third quarter, Netflix posted net income of $32 million, or 52 cents per share, up from $8 million, or 13 cents per share, a year earlier. (The midpoint of the company's guidance was $26 million in profit.) HBO, by contrast, generated more than $1.6 billion in profit for Time Warner last year. Netflix's free cash flow in the quarter was $7 million. Netflix revenue grew 22% to $1.1 billion.

HBO generates greater profits in part because it is a more mature company. It can spread the costs of its programming investments over the 65 countries where it operates HBO-branded networks and other countries where it sells its content. Netflix, by contrast, is in the early stages of building its international business, a process the company says carries costs that are damping profitability. HBO also benefits from being offered through cable operators: It keeps roughly half of the $16-per-month cable subscribers typically pay for the network-on par with what Netflix collects-but the cable operators take on billing, customer service and marketing costs. Since it owns its original programming-as opposed to Netflix, which so far has licensed first-run rights from studios-HBO can also benefit from additional revenue streams like DVD sales.

The challenge for Netflix is to keep up enough growth in $7.99-per-month subscriptions to balance out its significant investments in library programming and original TV shows. There are signs of momentum: Third-quarter "contribution profit" in the U.S. streaming business-defined as revenue minus cost of revenue and marketing-was 23.7% of revenue, continuing an expansion seen in the past several quarters. In a letter to shareholders, Netflix said buzz from the original prison comedy "Orange is the New Black" and the company's Emmy nominations helped win subscribers. But it said a bigger factor is the company's exclusive offerings of TV shows such as AMC's "Breaking Bad" and Fox's "New Girl." The company projected that its paid domestic subscriber count would grow to between 31.1 million and 31.8 million in the fourth quarter.

Netflix has previously said originals, which are inherently unproven but are a way to attract new subscribers, will make up less than 10% of its global content expense this year. Chief Financial Officer David Wells said that spending could double in coming years. "With the success we've seen to date, we're going to continue to expand it," he said. Netflix is producing second seasons of several original shows and is expanding into genres like comedy specials and documentaries. Last week the company announced its first original TV deal with a major Hollywood studio, Sony Pictures Television, which will produce a one-hour drama from the makers of "Damages."

In an interview, Mr. Hastings said Netflix's focus in the next several years is on international expansion, which requires investments that affect the company's ability to boost profits. "When someone is investing in Netflix, they're investing in the idea that Internet video is going to grow for a very long time in a large number of countries," he said. International operations are growing quickly but remain a drag on profitability. Netflix added 1.4 million international subscribers, citing improved service, content and marketing. But the segment's "contribution loss" grew to $74 million from $66 million the previous quarter. Netflix launched service in the Netherlands in September and now has over 40 million users globally. In Latin America, one challenge has been converting users who sign up for free promotional trials into paying subscribers. Mr. Wells said about 20% of the users on free trials in September weren't likely to become paid customers.

The contribution profit from Netflix's DVD-by-mail rental business slid to $106.7 million in the quarter, from $130.7 million a year earlier, as the subscriber count fell slightly to about 7 million. "We have done well but we have a long way to go to match HBO's 114 million global member count or their well-deserved Emmy award leadership," Netflix said in its letter to shareholders. Keeping with a practice that has irritated some TV industry executives, Netflix didn't disclose any viewership metrics for shows, but said "Orange is the New Black" will end the year as its most-watched original series ever and "enjoys an audience comparable with successful shows on cable and broadcast TV." Netflix has said it doesn't need to disclose ratings partly because it doesn't sell ads. Wall Street Journal

Netflix investors have a one-track mind-and the company is finally taking advantage of that. The Internet-video streaming service said late Monday that its domestic contribution margin-a measure of profitability-would shrink in the fourth quarter. Netflix set the midpoint of its guidance at 23.2%, compared with 23.7% in the third quarter. This would mark the first quarterly decline in this number since Netflix began breaking out its business segments two years ago. Yet investors didn't bat an eyelash: The stock surged more than 10% in after-hours trading following the company's strong third-quarter earnings report. For a stock that already trades at more than 100 times forward earnings estimates, why wasn't there more concern?

Netflix investors are focused elsewhere, and on one metric especially: domestic subscriber additions. While spending on content might hit margins, it should help lure new viewers. Netflix said Monday domestic subscribers rose in the third quarter to 31.09 million, more than HBO's number. The bigger Netflix gets, the more profitable it should become as it spreads content costs over a wider base of subscribers. Like rival Amazon.com, Netflix should be focusing on scale over profit while it maintains dominance over competitors. That is particularly true when investors aren't too concerned about profits, according to Tony Wible an analyst with Janney Capital Markets. Netflix seemed to acknowledge as much at the end of the second quarter when it said it would abandon a target of one percentage point of margin improvement per quarter in favor of a more flexible one of four percentage points per year. As long as Netflix's investments pay off with subscriber growth, its shareholders look set to stay glued to the screen. Wall Street Journal

Pennsylvania Lt. Gov. Jim Cawley was transported to Harrisburg Hospital Monday afternoon after complaining of feeling dizzy and light-headed while presiding over the state Senate. Cawley's chief of staff, Chad Saylor, said Cawley stepped down from the Senate rostrum about 3 p.m. and, in an abundance of caution, was advised by the Capitol nurse to go into the hospital for testing. "He's awake, alert and undergoing some tests," said Saylor, adding that his boss had shown no other symptoms like chest pains or shortness of breath. Saylor noted that Cawley had had a routine physical this summer and all indicators were that his underlying health is good. Cawley, 44, was elected to his current post as Gov. Tom Corbett's running mate in 2010 and has been in office since January 2011. He is married and he and his wife, Suzanne, have one son. pennlive.com

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