What Happened to Netflix the Disruptor?

Maybe Reed Hastings wasn't dreaming after all.

"Many (cable service providers) would like to have a competitor to HBO, and they would bid us off of HBO," the Netflix (Nasdaq: NFLX  ) helmsman said at the Morgan Stanley Technology, Media and Telecom Conference last week. "It's in the natural direction for us in the long term."

Well, maybe it's the company's natural direction in the short term, too.

Sources are telling Reuters that Netflix has already been meeting with some of the country's leading cable companies. At least one cable provider may begin offering Netflix as a premium add-on later this year.

I'm still left scratching my head.

A disruptor among the disrupted
It's not that I don't get the attraction. Netflix is cheaper than both Time Warner's (NYSE: TWX  ) HBO and CBS' (NYSE: CBS  ) Showtime, and it's also a differentiated platform. Instead of a handful of award-winning original programming and relatively new movies, Netflix offers on-demand access to tens of thousands of titles including older movies and past TV show seasons.

Cable companies would be likely to pad their bills. Netflix would be a compelling add-on for folks who don't want to pay up for a premium movie channel, yet it would also be a logical incremental service for high-paying customers, to be ordered in addition to HBO or Showtime.

Things begin to fall apart when we consider pricing and logistics. Will this be offered for less than Netflix's $7.99 a month rate? If not, why wouldn't folks just deal directly with Netflix? The compelling twist could be that it would be offered directly through a cable provider's set-top box, but would it still require a speedy Internet connection or be an expanded part of the cable company's more reliable on-demand vault?

Just the fact that cable companies are talking to Netflix is impressive. This isn't on the level of Richard Nixon going to China, but cable and satellite television providers were pointing the finger at Netflix as the root of "cord cutting" that was taking video customers away.

However, the cable giants are starting to realize that Netflix isn't necessarily the enemy. The streaming service emphasizes past seasons, getting couch potatoes up to speed for the current seasons that they can only get through the providers. Netflix will likely never dabble in the live sports, current news, and fresh content (with a few exceptions) that keep folks hog-tied to chunky cable bills.

Netflix is more evolutionary than revolutionary. It's more friend than foe.

Deep down inside, cable and satellite players know that the two companies that can ultimately kill them are Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) .

Tech giants on the small screen
Set aside anything that Apple may announce later today on Apple TV. The real prize is waiting later this year when the class act of Cupertino seems more and more likely to roll out a full-blown high-def television.

Apple doesn't enter a market as a premium brand unless it feels it can raise the bar, so don't be surprised if it introduces its own pay TV offering.

Google is even closer than that. It's in the process of building an experimental fiber-optic network in Kansas City, and last month applied for licenses to offer local TV service subscriptions there.

Coming attractions
Cable and satellite providers -- and the broadcasters and networks that arm them with content -- have a right to be scared. They have been serving up a flawed product for way too long. They've bundled a ton of channels into pricey standard cable plans, even though most of them go unwatched.

If Google or Apple are able to pull off a la carte plans where folks pay only for what they actually consume, the cable and satellite companies are toast. It won't be easy, because obviously the same networks that would need to provide Apple or Google with content also have plenty to lose if they can't get paid for their channels in homes where they're not even being watched. It's a pretty sweet racket, but if anyone can disrupt it, Apple or Google would be it.

In the end, the threat of Google and Apple as the ultimate disruptors makes Netflix tame by comparison. It's not the enemy to the stodgy cable companies. It's the one feeding folks older seasons of Mad Men or the original foreign versions of the Girl With the Dragon Tattoo trilogy.

Netflix was a disruptive enemy. It's an ally -- for now.

Stream on
Motley Fool co-founder David Gardner has been a fan of Netflix as a disruptor for nearly a decade, but there's a new Rule-Breaking multibagger that's getting him excited these days. Learn more in a free report that you can check out right now.

The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Netflix, Google, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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