This Could Be Netflix's Greatest Trap Ever

In what appears to be a win-win on the surface, Netflix (NASDAQ: NFLX  ) is reportedly negotiating with several pay-TV companies to incorporate Netflix into their set-top boxes. Sources are telling The Wall Street Journal that the talks are in their early stages, but naturally, it would be a pretty big deal if your own cable box could hook you up with your growing Netflix queue.

It's no secret that Netflix has wanted to play nice with cable and satellite television providers. It has proposed offering its flagship video service alongside HBO, Showtime, and other premium movie channels for pay-TV providers to cash in on the booming popularity of streaming video. It recently landed a deal with Virgin in the U.K. for a similar arrangement. Pay TV has been reluctant, fearing that educating consumers on the merits of Netflix will encourage cord-cutting.

At the very least, Netflix's growing digital catalog at $7.99 a month will make it hard for the premium movie channels, which cost twice as much.

However, Netflix is on a tear. Domestic streaming subscribers have grown from 24 million to nearly 30 million over the past year, surpassing the top premium channels. Warming up to Netflix would make sense, as providing educated buffs with more convenient access to Netflix may make them less likely to cut the cord. 

There's naturally the fear that this could be a trap. We've seen this happen before. Netflix got several of the leading Blu-ray player manufacturers to include Netflix buttons on their remotes. Why not? Streaming used to be a freebie tacked on to disc-based subscribers. If folks were renting optical discs, they were going to need Blu-ray and DVD players, and they chose to be responsive. Well, Netflix then went on to start charging for streaming as a stand-alone service two years ago, leaving disc-based players with that Netflix button that sidestepped DVDs and Blu-rays altogether. Netflix could be pulling a fast one here if it waits until it nabs enough set-top box deals to being selling piecemeal rentals of first-release titles, eating into their own pay-per-view and on-demand offerings. 

However, given the sluggish nature of growth for pay-TV providers, it's a gamble that they may have no choice but to make. Comcast (NASDAQ: CMCSA  ) is singled out by name in the article, and the country's largest cable provider has plenty to lose. If folks cut the cord, they often decide to also nix Comcast's lucrative broadband and broadband telephone offerings. Comcast's video customers have declined from 22.1 million to 21.8 million over the past year, yet its broadband and voice offerings are growing as Comcast's bundles the three offerings together. If greater numbers of TV watchers cancel cable in favor of HD antennas and Netflix, the entire empire can begun crumbling down.

Working with Netflix now is better than dealing with Netflix later, even if striking a pact to get Netflix's streaming functionality will open up a can of worms.

It's too late to stop Netflix, and the cable and satellite companies that try to get in the way of that stream engine will be dead on the tracks.

Spoiler alert: Netflix wins
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  • Report this Comment On October 14, 2013, at 11:00 AM, MKArch wrote:

    Puuuulease, don't you remember the nonsense a couple of years ago about how Netflix was in talks to provide their service through cable companies? Comcast scoffed at the idea and it was quickly forgotten.

    Comcast alone spends more on video content than Netflix takes in on revenues. Netflix is a pimple on the butts of the cable companies and it's just a matter of time before they crush Netflix. Netflix can compete with HBO and Showtime for content but the cable companies can crush them outbidding for content.

    Since cable roughly splits the fees they receive from the Premium content services like HBO look for them to step in and crush Netflix outbidding them for content (buing up the premium services or going around them), if Netflix starts taking serious market share from these services.

    Bet your bottom dollar IF there is a cable/Netflix deal it's one that favors the cable companies. If they add Netflix to their set top boxes as rumored my guess is they do this to avoid anti trust issues when they go for the jugular bidding up content to destroy Netflix.

  • Report this Comment On October 14, 2013, at 11:19 AM, MKArch wrote:

    BTW just for a visual, imagine Comcast bidding for new movie content directly for their Streampix service and re-selling the rights to other cable companies as well. TWC already owns HBO. Anybody who thinks the cable companies would would be constrained by profitability issues might want to look at the history of the cable industry. They have no problem spending money in the short term to further a long term goal. If Netflix threatens their premium movie channel services they'll have no problem spending money to crush Netflix.

  • Report this Comment On October 14, 2013, at 12:45 PM, duuude1 wrote:

    HULK SMASH! COMCAST CRUSH PUNY NETFLIX!!

    Yeah, if you want to bet on the big hulking dimwitted cable providers, go ahead and put your money there. Netflix has a history of taking on companies and industries many times bigger than itself - and I'm betting on that history repeating (Blockbuster, NBC Fox and Disney's Hulu, McDonald's Redbox, Walmart's Vudu, Amazon...)

    If Netflix were some small operator manned by your average entrepreneur and tech folks, I'd also bet with you that the Cable companies would HULK SMASH them in no time. But Netflix is the Floyd Mayweather of corporate America - hated by many, but undeniably smart and talented and so far untouchable and raking in the dough.

    The primary weapon NFLX has that the cable companies lack is their in-depth knowledge of what customers actually watch (not what they say they watch). So cable can go ahead and bid up prices for all kinds of crap that add no real value to the final customer - while Netflix can surgically bid for the content that people actually want to watch.

    So go ahead, put your money on COMCAST SMASH. My money is on Money Mayweather, I mean Money Hastings and his NFLX team.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 2:06 PM, MKArch wrote:

    Sorry duuuuude but the depth of knowledge thing is nonsense, all you need is the box office take from a movie to know whether it was popular or not and the all the big hulking dimwits need to do is buy it all at a price that Netflix can't match to destroy them. Again Comcast alone already spends more on content than Netflix takes in revenues. It's only going to take them deciding to bid directly for movie content to destroy Netflix. Why do you think they created Streampix?

  • Report this Comment On October 14, 2013, at 2:31 PM, duuude1 wrote:

    Well MKArch, what is taking Comcast and the long list of potential NFLX-SMASHERs so freaking long to destroy them? You do realize that NFLX is 16 years old? For almost two decades, people have been saying that every big company interested in NFLX's space would SMASH and CRUSH them like a bug. I listed some heavily hyped SMASHERS above - and now you say Comcast can do what proven competitors like McDonalds and Walmart and Amazon - and for their own survival Blockbuster - have failed to do?

    "All you need to do..." hasn't been done, and so NFLX is thriving. "All you need to do..." is old school thinking and will go the way of buggy whips.

    Depth of knowledge is how businesses today will have to operate to be competitive, and old school "depth of knowledge thing is nonsense" companies will slowly dwindle and die unless they embrace this operating principle.

    NFLX is one of a handful of companies like GOOG and AMZN who have pioneered this idea of what people now call Big Data - collecting real-time customer behavior data and making better predictive business decisions (like what content to bid for). Depth of knowledge is a huge competitive advantage. Bank on it MKArch!!

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 3:05 PM, MKArch wrote:

    Streaming video has only been around for a few years and my guess is Comcast is waiting to see if Netflix gets big enough to threaten it's premium movie service business before pulling the trigger. Right now Comcast and the other cable companies buy content through incumbent premium movie services like HOB and Showtime roughly splitting the subscription fee. Netflix can sell at roughly half the price by cutting out the middle man and selling directly to consumers. It's only going to take the cable companies deciding to play the same game, bidding directly for content and being willing to go higher than Netflix can afford to go to destroy Netflix. IMO Streampix is the ground work for this very strategy. As far as I can tell for all the bluster about cord cutting (ain't going to happen) Netflix hasn't even affected their real threat to the cable companies in premium movie services. If/When Netflix hits this revenue stream expect the cable companies to respond with their vastly superior pocket books.

  • Report this Comment On October 14, 2013, at 3:35 PM, duuude1 wrote:

    I hear you loud and clear MKArch.

    So let's follow your chain of events a little.

    Comcast goes direct to content producers, bypassing HBO, Showtime and others, outbidding everyone, most importantly their main target Netflix.

    Now cable provides content through their overpriced delivery infrastructure. But now HBO and Showtime are pissed that Comcast is outbidding them for original content, and so HBO rapidly expands their HBO-Go streaming infrastructure and withholds their own considerable original content from Comcast and other cable companies. So now, who is going to pay $60-100/mo without Game of Thrones?

    Now HBO and Netflix are direct competitors, who in turn are both growing much faster than the cable companies despite their much bigger pocketbooks. People are pissed at paying cable companies so much for so much wasted content, most of which they don't watch, and cord-cutting accelerates.

    Since cable executive disdain this "depth of knowledge" thing, they pay top dollar for everything produced, and quickly the rate of expenditures outstrips their revenue growth, and we know how this story will end...

    Netflix, meanwhile, uses their "Big Data" by carefully analyzing it to see what content makes sense to bid for, furthermore offering complete freedom to the artists instead of this mind-numbing pilot process, and content-producers flock to Netflix instead of the cable dinosaurs with big pockets but small minds.

    Sorry MKArch - despite agreeing with you that cable companies have much bigger pocketbooks, and just like Canelo Alvarez is a MUCH bigger boxer and MUCH stronger puncher than Mayweather ever was in his life, I still believe that NFLX will outbox, outclass, outmaneuver, and surgically destroy whoever tries to take away their punchbowl.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 4:18 PM, duuude1 wrote:

    http://espn.go.com/sports/boxing/photos/gallery/_/id/9675720...

    Netflix is the duuude on the right

    Comcast is the duuude on left eating the hook (and ultimately losing despite more than 10 lbs of extra beef).

    Brains beats beef... :)

  • Report this Comment On October 14, 2013, at 5:09 PM, MKArch wrote:

    A. Time Warner with their cable business also own HBO and Comcast could easily acquire another service to use in the bidding war if they chose to go that route.

    B. Not only do the cable companies pocket books dwarf the premium movie services pocket books but the premium channels also have no way to distribute their product without cable.

    C. IF/When Netflix charging half price takes a significant bite out of the incumbent services revenues they'll be happy to work with cable to stomp out this threat.

    Cable and the incumbent premium content services are not blind to what Netflix is doing and will deal decisively with Netflix when their business is sufficiently threatened. As far as I can tell Netflix hasn't hit their revenues YET.

  • Report this Comment On October 14, 2013, at 5:13 PM, MKArch wrote:

    BTW once again you don't need "big data" to tell what content was popular all you need are box office receipts and Neilson ratings. Cable doesn't outspend Netflix on content because they don't know how to price they outspend them because they provide local sports and news, ESPN current tv programming etc... that Netflix will NEVER provide and you ain't getting cutting the cord.

  • Report this Comment On October 14, 2013, at 5:48 PM, duuude1 wrote:

    I'm going to switch up the argument a bit here because I think this is ultimately irrelevant. I don't recall NFLX ever calling out cable operators as being a competitive threat - and Reed is pretty clear about who he believes are threats to NFLX. Cable companies and NFLX are in different businesses.

    Cable companies, however, do view NFLX as a threat, and have done so for a while. Perhaps two or three neurons in the backs of their walnut brains register fear of a highly evolved company, and so they act to impede NFLX in several ways including throttling bandwidth and refusing to work with NFLX to improve customer viewing experience.

    If I were a cable company, I would instead view Verizon 4G wireless and similar services as a potential killers, and would in that case cozy up to NFLX as a way to differentiate and grow customers.

    But in any case, even if there were a fight between NFLX and any of the cable companies, my money would still be on NFLX. The amount of cash on their books is totally irrelevant, and is the equivalent of bringing a big knife to a gun fight.

    The gun is still Big Data, which you refuse to acknowledge. So let's try this. Will box office receipts tell you whether your neighbor who went to see "Captain Philips" will see other Tom Hanks movies, or movies that include Navy SEALs, or anything with a maritime topic...? Exactly how much money do you bid for a movie with big box office receipts? Based on the opening weekend of "Captain Philips" - how much would you pay for it?

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 6:31 PM, MKArch wrote:

    duuude,

    If you never heard Netflix calling out the cable operators as threats you never read Reed Hastings shareholder letters or read their SEC filings. Hastings has in fact singled out cable (Multiple Systems Operators) as Netflix biggest threat.

  • Report this Comment On October 14, 2013, at 6:37 PM, MKArch wrote:

    <<<Will box office receipts tell you whether your neighbor who went to see "Captain Philips">>>

    ---------------------------

    Why would I want to know what movies my neighbor watches and why wouldn't I be creeped out that Netflix is going to tell my neighbor what movies I watch?

    <<<Exactly how much money do you bid for a movie with big box office receipts>>>

    ---------------------------------------------------------

    A whole lot more than I'd pay for movies with lousy box office receipts. You don't really believe Comcast and Time Warner don't know how to value content do you?

  • Report this Comment On October 14, 2013, at 6:46 PM, duuude1 wrote:

    I have to disagree with you - indeed the phrase "Network operators" is listed in Netflix's 10k reports as RISK to business in terms of restricting access - not as competitive threats. HBO Go is specifically mentions at one point as a potential threat.

    I've also searched in all of Reed's letters to shareholders to 2011 and there are not even mentions of "operators".

    Sorry MKArch, but cable operators are not called out by NFLX as direct competitive threats - but their shenanigans on throttling bandwidth is considered a business risk.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 6:53 PM, duuude1 wrote:

    "You don't really believe Comcast and Time Warner don't know how to value content do you?"

    I believe that Comcast and TWC have complicated spreadsheets and discounted cash flow models as means of valuing content that they purchase. Much like banks all through 2007 had complicated spreadsheets to value homes and home loans. I don't believe either cable operators or banks have a monopoly on obtaining true value of any asset.

    I believe that NFLX has much better insight into the true value of content through their real time data on how people watch the content they provide. And therefore they are in much better position to competitively bid - and know when to back out of a bidding war.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 7:23 PM, MKArch wrote:

    I checked their latest shareholder letter and they don't even talk about competitive threats anymore however I followed Netflix closely a couple of years ago and Hastings regularly noted the MVPD's as Netflix biggest threat and specifically stated they were more of a threat than HULU and Amazon Prime type services. I don't know where to find the archives so you can choose to believe me or not.

    You might be able to find Hastings comments widely picked up in the press a couple of years ago that Netflix was in talks with cable companies to have cable offer Netflix as a paid service to which Comcast CEO scoffed at the next day pointing out the obvious that Netflix doesn't charge enough for it's product for their to be any money in it for a cable operator. IE: cable already makes about Netflix entire sub fee selling the incumbent premium services. The absurd idea was quickly forgotten but it should tell you a lot about who is worried about who.

  • Report this Comment On October 14, 2013, at 7:43 PM, duuude1 wrote:

    MKArch, you'll have to do better and be more specific in your claim that NFLX views cable operators as a competitive threat. Here's my evidence that NFLX views their behavior as a risk to their business (as distinct from being a competitor):

    see page 12 of http://files.shareholder.com/downloads/NFLX/2733503259x0x561...

    "Changes in how network operators handle and charge for access to data that travel across their networks could adversely impact our business."

    NFLX mentions similar issues repeatedly, and you might be confounding this concern with cable operators being competitors. They are not competitors. NFLX does not see them as such.

    Also, about Comcast dismissing NFLX, perhaps you recall TWC CEO Jeff Bewkes in 2010 calling NFLX the Albanian Army:

    http://www.nytimes.com/2010/12/13/business/media/13bewkes.ht...

    And see how this attitude has turned around recently:

    http://www.hollywoodreporter.com/news/time-warner-ceo-jeff-b...

    Things change fast in this business.

    And my contention is that cable is not changing fast enough to survive in their own business of data delivery. Back to Verizon 4G - they and their kin will eventually be the death of cable. Not NFLX.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 8:17 PM, MKArch wrote:

    I didn't say competition was the only threat the cable companies posed to Netflix so your example is a red herring. I looked at their latest 10K and they just talk about competition in general however I have read Hastings shareholder letters in the past where he has specifically stated the MVPD's were Netflix biggest competition and also specifically ranked them ahead of services like HULU and Amazon Prime. I don't know where to find this so you can choose to believe it or not. I know what I read and regardless simple logic dictates that selling for half of what cable charges is likely to erode cable's premium service business and that the natural response would be to fight back. Given cables deep pockets, history of spending gobs of money to invest in the future and Netflix puny balance sheet and razor thin margins it's a pretty safe bet that the cable companies will crush Netflix in battle for content and market share. As to HBO selling some old content to Netflix, fierce competitors also doing business is normal in the business world. It doesn't mean cable won't crush Netflix when Netflix threatens their revenue stream.

  • Report this Comment On October 14, 2013, at 9:00 PM, duuude1 wrote:

    I just love when discussion turn into "I didn't say..."

    So here goes:

    I said: " I don't recall NFLX ever calling out cable operators as being a competitive threat"

    And you said "If you never heard Netflix calling out the cable operators as threats you never read Reed Hastings shareholder letters or read their SEC filings. Hastings has in fact singled out cable (Multiple Systems Operators) as Netflix biggest threat. "

    So I said "...the phrase "Network operators" is listed in Netflix's 10k reports as RISK to business in terms of restricting access - not as competitive threats."

    And you said: "I checked their latest shareholder letter and they don't even talk about competitive threats anymore however I followed Netflix closely a couple of years ago and Hastings regularly noted the MVPD's as Netflix biggest threat..."

    So I showed you my evidence "...that NFLX views their behavior as a risk to their business (as distinct from being a competitor):"

    So this whole 2nd half was about whether cable is a competitor to NFLX - no red herrings at all.

    Good luck with COMCAST SMASH and all that - you seem pretty fierce about it. Just a bit of advice, not that you need it, but if you're short NFLX you should close that position (check with Whitney Tilson on how his short worked for him) - or if you're heavily invested in cable you should diversify. I'm not saying invest in NFLX - I don't think you'd be happy with them from the sounds of it.

    Oh, and if it wasn't clear from my position in this loooong comment train, I'm very loooong NFLX - been so since 2007. Haven't sold a single share. But I do value hearing the bear cases.

    Best,

    Duuude1

  • Report this Comment On October 14, 2013, at 9:19 PM, MKArch wrote:

    http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?F...

    We’ve written before that authentication models for Internet access of cable network content would be our eventual primary competitor. The first of the two models for authentication is that subscribers use their MVPD application, such as DishOnline, or Comcast Xfinity, to access content online from laptops, tablets, phones, game consoles, Smart TVs, and Internet set-tops. The second of the two models for authentication is subscribers use the cable TV network applications, such as HBO GO or WatchESPN on the iPad or Roku or Samsung TV.

    *********************************************

    Luckily I forgot to delete an old link to a shareholder letter. In prior letter Hastings specifically states that the MVPD's are a greater threat than services like HULU and Amazon Prime. You need to learn how the business concerns in a 10K are organized. They describe one issue at a time. The fact that they mentioned the MVPD's in relation to data fees does not mean that's the only threat that the MVPD's pose to Netflix business.

    Once again there's a reason why Hastings suggested the ludicrous idea that the cable companies would sell Netflix subscriptions a few years ago and periodically mentions that his service is complimentary to cables offerings not a threat to them. Hastings knows who his real competition is and who has the real leverage in the eventual battle.

  • Report this Comment On October 15, 2013, at 8:46 AM, MKArch wrote:

    Duuuude,

    I haven't followed Netflix closely for a couple of years and have seen mention of their "deep data" but haven't paid much attention to it. Your earlier post is the first time I've heard it in the context of having an advantage in pricing content and I'm assuming this all comes from Hastings talking points.

    I'm sure you recall the infamous 60% price increase a couple of years ago that was necessary as the old pricing plan was going to bankrupt them. Having followed NFLX closely back then I also remember less than a year before the price increase ole Reed bragging about a mythical circle of content funding growth funding content. I also remember ole Reed buying back stock on the rocket ride from ~$200/ share to $300+/ share. Not long after the price increase earnings went negative the share price tanked to well sub $100 and they had to do a secondary to raise cash selling stock at 1/3 the price they were buying it for a few months earlier. I wouldn't put too much faith in Hastings claims to know more than everyone else.

    BTW I don't short stocks although I did very well red thumbing NFLX in CAPS a few years ago and I fully expect my new red thumb to do better. Congrats on your looooong position so far. With the massive growth already priced into the stock I'm not sure what the bull case is at this point but good luck to you.

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