Broadband Cable Association of Pennsylvania

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July 23, 2013

Netflix Inc stock is set to open around 4 percent lower after the online entertainment company reported less-than-expected quarterly subscriber growth, undermining investor hopes for a dream run from its own programs. The shares have almost tripled this year, making it the biggest gainer on the S&P 500 Index, thanks to excitement about original online drama series including "Arrested Development" and political thriller "House of Cards".

Netflix said on Monday it added 630,000 streaming customers in the United States in the second quarter, short of the average 700,000 expected by analysts. It had 29.8 million domestic subscribers at the end of June. The shortfall against expected subscriber growth saw the stock fall as much as 11 percent in after-hours trading, although it made up some of the losses in pre-market trade on Tuesday. "The stock was priced for perfection; hence the drop after hours," Evercore Partners said in a note to clients.

Cantor Fitzgerald downgraded its rating on Netflix stock to "hold" from "buy", but raised its target price by $30 citing longer-term growth prospects. Unlike investors, many brokerages focused on the growth potential of the company and at least six raised their target price on Netflix stock by up to $36, to a high of $290. Analysts said they were encouraged by Netflix's progress in building its own content, which has driven good viewership and a surge in profitable U.S. streaming growth. Netflix said it saw a "small but noticeable bump," in subscribers from a new season of "Arrested Development," a quirky comedy about a broke California family.

Netflix has been pushing into original shows, trying to hook new viewers with shows they can't get elsewhere. "We believe the overall trajectory of net adds remains strong and we're confident that originals (shows) will have a significant positive impact as they accumulate audiences and build brands associated with Netflix over time," JP Morgan analyst Doug Anmuth said in a note. Netflix shook up Hollywood last week with 14 Emmy nominations for original series including "Arrested Development" and "House of Cards," the first Internet series to be nominated in major categories. Netflix shares closed at $261.96 on the Nasdaq on Monday. Reuters; more in Wall Street Journal

The latest legal defeat for big TV broadcasters against the start-up company Aereo could lead to a Supreme Court showdown over your ability to get free television signals. On Tuesday, the U.S. Second Circuit Court of Appeals said it wouldn't revisit its April ruling, in which a three-judge panel refused to issue an injunction halting Aereo, a service that steams over-the-air TV signals to consumers without paying broadcast networks.

Aereo charges a small, monthly fee to consumers for the service, which can be viewed on computer devices, including tablets. In response, Fox Television Stations (one of the plaintiffs in the case) says it's considering taking the case to the Supreme Court, a move that would surprise no one who has followed the evolving legal battle. "The 2nd circuit's denial of our request for an 'en banc' hearing, while disappointing was not unexpected. We will now review our options and determine the appropriate course of action, which include seeking a hearing in the U.S. Supreme Court and proceeding to a full trial on the merits of the case," said Fox in a statement.

Fox, ABC, CBS, NBC and other companies that broadcast over-the-air TV signals are all involved in the copyright case. "We are not surprised by this decision, given that requests for a full en banc hearing are rarely granted," Dennis Wharton, a spokesman for the trade group the National Association of Broadcasters, said in an e-mail to the Bloomberg News Service. "We believe that the broadcasters will prevail when this case goes to trial, and that Aereo will be declared a copyright infringer." And that trial could wind up being at the Supreme Court-if the justices decide to hear the case.

In April, Fox and Univision made threats about leaving free broadcast TV or producing different versions of its free signals if Aereo continued to relay its signals to consumers. Aereo is backed by Barry Diller, the media mogul who was the first head of the Fox broadcast network in the 1980s. The company uses banks of tiny antennae to record and stream broadcasts for subscribers and relay them over the Internet to a computer-based device. Its successful legal strategy, so far, is based on a 2008 ruling in the United States Court of Appeals for the Second Circuit. The case of Cartoon Network, LP v. CSC Holdings, Inc.,found that Cablevision had the right to record Cartoon Network programs using a DVR service that Cablevision hosted for the benefit of its subscribers.

In a July 2012 ruling, a U.S. district court denied the broadcasters' request for an injunction against Aereo, which is only marketed in New York City, citing the Cartoon Network decision. The judge in that case said without the Cartoon Network precedent, the broadcasters would have likely gained the injunction, based on copyright laws. The broadcasters suffered a bigger setback in April 2013, when an appeals court also denied the injunction request. The Court of Appeals for the Second Circuit ruled in a 2-1 vote decision, "the district court correctly concluded that Aereo's system is not materially distinguishable from the system upheld in Cartoon Network LP, LLLP v. CSC Holdings, Inc."

To be sure, the legal battles over the Aereo case aren't finished, and there are industry observers who think the networks could prevail. A similar case in California about a rival service called Aereokiller could lead to conflicting rulings-and an eventual date for Aereo and the broadcasters in the Supreme Court. In December 2012, a Ninth Circuit judge ruled in favor of the broadcasters in a similar case-in a region that wasn't bound to the Cartoon Network decision. The broadcasters followed with a similar lawsuit in May 2013 in District Court in Washington, D.C., against Aereokiller.

The company is defending the two lawsuits. Industry observers say the filing in the District of Columbia is significant, because the circuit gets close scrutiny by the Supreme Court. In the long run, networks could be forced to rethink their business strategy about offering free TV signals if they lose the Aereo case. But such a decision would also face Congressional and FCC scrutiny. About 10 percent of people still watch TV using an antenna and not cable, which is enough of an audience to make advertising concerns another critical factor. Constitution Daily

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