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Will Swedes Love Netflix (NFLX) as much as Canadians? A Wall Street Transcript Interview with David W. Miller, Managing Director at Caris & Company

67 WALL STREET, New York - November 14, 2012 - The Wall Street Transcript has just published its Entertainment, Toys and Games Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Cable Subscription Rates - International Paid Television Growth - Digital Advertisement Trends - Mobile Device Gaming Prospects - Content Quality

Companies include: Lions Gate Entertainment Corp. (LGF), DreamWorks Animation SKG Inc. (DWA), Walt Disney Co. (DIS), Netflix, Inc. (NFLX), TiVo Inc. (TIVO), EchoStar Corp. (SATS), AT&T, Inc. (T), Verizon Communications Inc. (VZ), Time Warner Cable Inc. (TWC), Regal Entertainment Group (RGC), CBS Corporation (CBS), Time Warner Inc. (TWX), Discovery Communications, Inc. (DISCA)

In the following excerpt from the Entertainment, Toys and Games Report, an experienced media analyst discusses the outlook for the sector for investors:

TWST: There are several potential risks for Netflix. Which of those potential risks are you most concerned about, and which ones do you believe that Netflix is well prepared to deal with?

Mr. Miller: Well, I would say that the greatest risk, right now, is additional downside of the numbers for next year, because right now what the equity markets are doing is evaluating the stocks for next year's earnings profile. This year is essentially over as it applies to the equity markets, because the equity markets usually think six, seven, eight months ahead of time. So the big mystery surrounding Netflix (NFLX) is: What is Netflix's earnings profile and free cash flow profile going to look like next year? And the concern is that, with yet more international launches to take place, any hint of free cash flow is going to be eaten up by startup expenses required to exist in a new market.

So for example, look at the current fourth quarter, anyone who had this company generating cash in the fourth quarter, now has to rethink their model, because of startup expenses in Scandinavia. Now, I would predict that the folks in Sweden, Finland and Norway and those areas will embrace Netflix just like the folks in Canada have done, just like the folks in the U.K. and Ireland have done. But it's going to cost them money in terms of the marketing, technology and development, and overall startup costs in the region.

And so for the free-cash-flow-oriented investor, that's not good news. It's going to come down to how much patience you have in terms of seeing Netflix nurture these markets, up the free cash flow positivity, but then, once that happens, they're going to go out and expand again. They're going to go on and expand yet again. So basically, they're taking every single penny of free cash flow in the existing business and dumping it into a brand new business, and that obviously has some investors concerned.

TWST: You believe there's an opportunity for TiVo to be positioned to thrive as the connectivity between broadcast, cable, pay TV, search and broadband. What would it take for that scenario to play out, and if it does, what does it means for the company and for the sector?

Mr. Miller: Well, the first thing that really has to play out is the legal angle. And keep in mind that TiVo (TIVO) invented the ability to pause, rewind and replay a live TV signal. They invented the ability to record film and entertainment content onto a hard drive. They invented this product in 1995, back when all of us were using VCRs. Now, hardly anyone uses the VCR. So the VCR is a relic because of the DVR.

TiVo invented DVR and the HD play for the iTunes, and so they had to litigate very aggressively to get certain cable MSOs and other distributors who have been using this technology without their permission to pay for the technology. So they got through EchoStar (SATS), they litigated against EchoStar for years, finally EchoStar settled. That was about a year and half ago. They got through AT&T (T), through its U-verse product, and settled with that in the January of this year. And then, most recently, they got through Verizon (VZ), and that was a $250 million settlement, which hit the tape last month.

So the next kind of dominoes to fall would be Time Warner Cable (TWC), which is sitting out there with 5.1 million DVRs in North America that are also infringing on this product. And we believe that is going to be a settlement as well, as we've seen with those other three litigants. So once that happens, then you've got full validation of the intellectual property, and that puts TiVo in a much better cash position with which they can innovate...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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