Netflix viewers are fully aware that their choices are limited, but the cost and viewing flexibility nonetheless gives Netflix an advantage over pay-TV VOD and premium broadcast TV.

Because of this, Netflix viewing may, in fact, be eating into pay-TV profits, Parks Associates concluded in a report based on a consumer survey the research company recently concluded.

"Consumers can pay for a month of Netflix for about the same amount as for two pay-TV VOD movies," said Brett Sappington, director of research at Parks Associates. "Parks Associates research shows consumers know the quality of the OTT service is not comparable to pay-TV quality, but the cost-benefit comparison is enough to affect their purchase decisions."

Parks Associates determined that the availability of Netflix influences consumers’ decision-making process. It is this finding that leads the research organization to speculate that Netflix’s Watch Instantly feature is “cannibalizing pay-TV offerings.”

Parks Associates’ research found 16 percent of U.S. broadband consumers, when watching movies on VOD, consider instead using an online subscription service as an alternative. Similarly, 17 percent of those watching TV programs on a premium channel like HBO consider using Netflix instead.

"Netflix is competitive against VOD and premium channels because it has a decisive edge in cost," said John Barrett, director of consumer analytics at Parks Associates. "Its greatest weakness is picture quality, but there are times when the consumer will sacrifice quality for other considerations. Pay-TV providers need to develop alternative services that counter Netflix's advantages in cost and flexibility."

Pay-TV providers worldwide have adopted their own OTT services to combat independent services such as Netflix, Parks Associates noted, but consumer awareness is low, and few providers offer subscription OTT services. Comcast offers an OTT subscription service exclusively to its pay-TV subscribers, and Dish Network offers an online service to its subscribers via Blockbuster. Verizon and Redbox are partnering to offer an over-the-top service later this year.