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Attempting to gauge the impact of so-called 'Netflix taxes'

Opinions expressed in thispiece are solely those of the author and do not represent the views of SNLKagan.

Onemeasure of streaming's prowess in pay media is the growing desire to tax it bybudget-challenged municipalities.

Thelatest pushis centered in tax-happy California, where some 146 cities could conceivablyexpand their utility user tax (UTT) powers to capture new revenues from allaudio and video streaming providers, especially video flagship

NinetyCalifornia cities and one county — together representing about 20% of stateresidents — already tax cable TV services, according to a July 2015 analysis Among them is Pasadena, which is consideringa new 9.4% video streaming tax.

So-called"Netflix taxes" have already been enacted in Chicago, which has a 9% "" on all streamingmedia; and in Pennsylvania, which recently imposeda 6% state sales tax on all streaming media, including downloaded applications.

Whileany price increase is not consumer friendly, it is difficult to quantify whatimpact streaming taxes would have on subscription growth. I suspect there isalways a bit of price elasticity in play, but streaming's inherent popularitysuggests the tax impact could be minimal.

Netflixbegan raising U.S.monthly prices from $7.99 to in May 2014. Pricing $9.99 per month for newcustomers in October 2015 and increased just this year for older subs, some ofwhom were still on a grandfathered $7.99 pricing plan. U.S. subscribers grew ahefty 18.9% in 2014 and 15.1% in 2015 (as shown below) despite the 25% pricehike.

Becausethe price increase was rolled out over an 18-month period, the impact onaverage monthly prices was only 2.7% in 2014 and 4.3% in 2015. In the firsthalf of 2016, the average price was up only 2.8% as subscribers grew 6.0%.

Basedon management's third-quarter guidanceof 46.4 million U.S. subs (up 0.9% from the second quarter of 2016) and $1.309billion of U.S. streaming revenue (up 8.4%), Netflix's average U.S. streamingsubscription price could leap 6.9% to $9.44/month from an average $8.83/monthin the first half of 2016. Netflix reports third-quarter earnings on Oct. 17.

Isuspect the slowdown in sub growth is more a function of increased competitionfrom other video streamers, as noted in my Sept. 13 "Netflix still the SVODgorilla in a growing field."

Netflixstock is already under pressure, down 8.3% this year (as of Oct. 7) after a134.2% surge in 2015. Like most high flyers, Netflix is now a victim of its ownimpressive prior trajectory. Growth stocks do not sustain high slopes forever —a law of physics that seems to escape too many growth-worshipping investors —especially retail players.

Streamingtaxes are not a selective price hike imposed by a provider. They are fairlydemocratic in that all streamers are taxed so that no particular streamer isadvantaged in avoiding price elasticity. Beyond that, the tax partially impactsthe service's overall economics because it is geo-focused rather than anacross-the-board, de facto price increase.

Still,I do not think providers can stuff this tax genie back in the bottle.Municipalities, which already tax incumbent MVPDs, need to recapture erodingtax revenue due to cord cutting and subscriber declines.

InChicago, telecom tax revenue — which includes cable TV — fell 4.9% over a10-year span from 2004-2014, by my estimate.Targeting a disruptive challenger like Netflix makes sense.

That'snot to say it will be easy. Not only does Netflix have deep pockets to fightthe new UTT levies, but it has powerful allies like The Internet Association.According to, the association is ready to fightagainst state and local taxes on streamers, although I could not find anyofficial position about streaming taxes on its website.

Onewild card could be incumbent network distributors in cable, broadcasting,satellite, and telecom, which also have plans to ramp up their own streamingservices. Although many of the distributors are already taxed on services, itcould be awkward if they supported a Netflix tax just to hurt their currentnemesis. Slippery slopes breed strange alliances.