Why Comcast Doesn't Need Netflix

Netflix (NASDAQ: NFLX  ) is taking steps to reach its goal of becoming HBO. It's currently in talks with cable providers, including Comcast (NASDAQ: CMCSA  ) , to make its service available as an app on their set-top boxes. Netflix already has a deal with Virgin Media in the UK to allow TiVo (NASDAQ: TIVO  ) subscribers the opportunity to access the service right on their TV sets. A deal with a cable provider is positive for Netflix, but should cable companies, like Comcast, be teaming up with the proverbial "cable-killer?"

Netflix's biggest competitor?
Netflix has long been the centerpiece of the cord-cutting discussion. Is the value of entertainment Netflix provides for $8 a month enough to forego a cable subscription?

Yet, despite the huge growth in Netflix's U.S. subscribers over the last year, cable still added subscribers in 2012. That suggests that Netflix is viewed as a complement to cable, not a replacement. It's more like HBO.

Unlike HBO, however, you can subscribe to Netflix without a cable subscription. Comcast may believe adding Netflix integration is the best way to keep Netflix subscribers from ditching their cable subscriptions.

The real winner of deals like the one Netflix made with Virgin Media is TiVo. Subscribers gain an added incentive to buy a TiVo set-top box so they can stream Netflix directly to their TV sets without the friction of switching inputs. In fact, smaller cable companies like Virgin, those that don't produce their own set-top boxes, will do the selling for TiVo.

On the other hand, TiVo stands to lose if Netflix makes a deal with bigger cable companies like Comcast. Currently, TiVo offers cable subscribers an alternative set-top box that allows them to stream video through Netflix or several other Internet video services. If Comcast integrates that into their boxes, TiVo will likely lose out.

A better option for Comcast
I think Comcast has a better option available that will keep subscribers around, provide it with more pricing power, and make its content partners happy -- Video on Demand.

Video on Demand, or VOD, has been around for more than a decade. In the early years, it was used by cable companies to sell premium movie rentals and distribute children's shows. In more recent years, since Nielsen started counting VOD views toward ratings, cable companies have been able to add more prime-time programming.

VOD views are growing strong. ABC shows increased views 32% last year. Analysts estimate that shows on Fox and ABC add up to 300,000 additional viewers per episode through VOD. Comcast increased VOD hours 14% in 2012.

If Comcast made a deal with Netflix, it would likely lose VOD viewers. Why would the company want to cannibalize a growing segment of its business? It should, instead, invest in it.

Why content providers would choose VOD
Last season, Nielsen started counting VOD views like it does DVR views -- any view within three days of a show's original air date counts toward the total audience. Unlike DVR, however, VOD is capable of disabling fast-forward capabilities, which means no skipping commercials.

Content creators don't get paid for commercials that viewers fast-forward through, and don't receive any payment for views more than three days after the original broadcast. DVR households fast forward 70% of commercials according to CBS research. Moreover, VOD is capable of updating commercials, and Comcast has partnered with Fox and company-owned NBCUniversal to implement dynamic ad insertion to continue generating revenue after the three-day window.

That trend creates a huge incentive for content creators to draw viewers toward VOD services and wean them off of DVR. Comcast can leverage that to improve its content library, which currently stands at 36,000 titles over set-top boxes and 270,000 titles online through xfinity.com. Netflix offers somewhere around 60,000 titles for streaming.

Comcast and other cable providers are more than capable of competing with Netflix for content. The dual revenue stream of upfront price and advertising revenue, makes cable VOD potentially more attractive than Netflix single stream subscription model. Moreover, Comcast has enough revenue, from its multiple operations, to compete with Netflix for content.

Better to go it alone
Comcast doesn't need to offer its subscribers the option to watch Netflix. It might help it keep subscribers and sell a higher bandwidth Internet service, but it may be better if it goes it alone and increases its investment in VOD. With a high-quality VOD service, Comcast gains pricing power. In fact, Comcast raised the bill for 72% of its subscribers in the first quarter of the year.

It has a strong infrastructure with its Xfinity TV Everywhere service. And it already has strong relationships with the content providers. There's no need for it to cannibalize a growing part of its cable business by partnering with Netflix.


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  • Report this Comment On October 20, 2013, at 11:25 AM, MKArch wrote:

    Reed Hasting floated this nonsense about being in discussions with cable companies a couple of years ago and Brian Roberts of Comcast pointed out the obvious that there is no money in Netflix model for cable companies. Nothing has changed since then. As you point out cord cutting is and urban myth, in addition adding Netflix to prevent cord cutting makes no logical sense when it's just as easy to subscribe without going through your cable provider and as you point out Netflix is a threat to VOD. Maybe someone should write an article about why Hastings keeps floating this ridiculous rumor. Maybe he needs a distraction from upcoming earnings?

  • Report this Comment On October 20, 2013, at 12:42 PM, duuude1 wrote:

    Hi again MK. So then why is Comcast losing cable TV subscribers:

    "Comcast has been losing TV subscribers to DirecTV and Verizon FiOS for years. It lost another 159,000 in the second quarter, but the rate of loss has slowed lately. The company squeezed a 2.7 percent revenue gain from its television business, largely through rates increases and subscribers who chose more expensive packages."

    http://www.nytimes.com/2013/08/01/business/media/comcast-pro...

  • Report this Comment On October 20, 2013, at 1:07 PM, duuude1 wrote:

    http://www.nytimes.com/2013/08/01/business/media/comcast-pro...

    "Comcast has been losing TV subscribers to DirecTV and Verizon FiOS for years. It lost another 159,000 in the second quarter, but the rate of loss has slowed lately"

    Perhaps despite all these efforts by Comcast, they see NFLX as the only way to stanch and then re-grow cable subscriber numbers.

    Duuude1

  • Report this Comment On October 20, 2013, at 3:19 PM, adamlevy wrote:

    Thanks Duuude1,

    It's interesting to see DirecTV and Verizon encroach on Comcast so effectively. Perhaps that loss rate has slowed as Comcast invests in its VOD service with its xfinity X2 platform. It might require some more delving into as the common thesis is people are simply cutting the cord, not changing providers.

    DirecTV is likely more opposed to giving Netflix a spot on its set-top boxes since it doesn't provide internet service and can't capitalize on the increased internet use by Netflix subscribers. But that doesn't change the fact that Comcast doesn't need Netflix.

  • Report this Comment On October 20, 2013, at 5:07 PM, MKArch wrote:

    You answered your own question duuuude, they're losing subs to Direct TV and Verizon. IE: Competition providing the same full service. This has nothing to do with Netflix and adding Netflix to their service makes no logical sense to address this issue. The last time I checked Comcast had something like 29M subs although this was a couple of years ago. I don't know the current count but 159K is likely a fairly small amount and as other have pointed (and as a Comcast sub I can verify) they ain't worried enough to stop them from raising their prices.

  • Report this Comment On October 20, 2013, at 5:14 PM, MKArch wrote:

    Duuude,

    Please explain to me how Comcast offering a Netflix service that's already readily available outside of Comcast and likely most Comcast subs who are interested already subscribe to will make any difference to Comcast losing full service subs to Verizon and Direct TV? This is an argument that only makes sense to Reed Hastings and NFLX investors who looking to rationalize a rumor that makes zero sense. Actually I seriously doubt Hastings even believes this argument.

  • Report this Comment On October 20, 2013, at 6:16 PM, duuude1 wrote:

    Well MK, let me ask you a question in turn.

    If you were the CEO of Comcast, what should your over-riding concern be? To maximize revenues? Profits? Shareholder returns?

    Well, for a few other highly successful companies such as NFLX and AMZN, it is to make their customers happy, and make buying their products as easy as possible. Revenues and profits will follow, in the meantime the goal is to GROW.

    Growth is something Comcast appears to have forgotten how to do - and clearly keeping their customers delighted is not near the top of their list.

    So if Comcast is NOT interested in making their customers live's easier by making Netflix, something many of their customers as you say already have, easily accessible - then you are absolutely right, there is no need for Comcast to have anything to do with Netflix.

    But if Comcast is interested in (here's that dreaded cliche...) delighting their customers, then having Netflix available as simple as clicking another channel may help them grow subscribers again in a way that all their other efforts have failed to do.

    Duuude1

  • Report this Comment On October 20, 2013, at 7:02 PM, MKArch wrote:

    Duuude,

    I can't stand Comcast but I'm a sub anyway because it ain't gonna be much different with Verizon or a combination of Direct TV and Verizon. It doesn't matter whether Comcast "delights" their customers you ain't getting local sports and news, ESPN, current tv programming etc without them or a similarly priced alternative and you need at least HSI from them to get Netflix. And once again Comcast subs don't need Comcast to subscribe to Netflix and given Netflix has already signed up a large chunk of the HSI households in the U.S. they've probably already got most of the Comcast subs that would want Netflix service.

    I don't know all of the cable companies out there so it's possible there are some tiny cable companies out there that don't have VOD that could possibly be talking to Netflix however there is zero logic to any major cable companies selling Netflix subscriptions. Reed Hastings personally stated Netflix was in talks with cable companies a couple of years ago only to have Brian Roberts of Comcast come out the next day to point out the obvious that there's no money in Netflix model for cable companies. This time it's "unnamed sources" talking about talks in "the preliminary stages" that "may never materialize into anything". Gee I wonder who the unnamed source is? BTW as I remember the last time Hastings floated this ridiculous rumor was shortly before the business imploded.

  • Report this Comment On October 20, 2013, at 7:53 PM, duuude1 wrote:

    MK, you're not the only one who hates Comcast:

    http://blogs.hbr.org/2013/07/why-comcast-would-rather-be-fe/

    But if Comcast has two neurons to rub together in it's prehistoric reptilian brain, it would know that it's days are numbered because younger folks actively search for ways to get around them (I just assume from your grumpy duuude posts that you are not one of them young'uns :)... and that technology such as Verizon's 4G wireless means that it's days are ultimately numbered:

    http://blogs.hbr.org/2012/08/the-inevitable-disruption-of-t/

    So Comcast needs NFLX for a couple reasons:

    - the ONLY real growth area is broadband, not cable subscriptions, and this is ultimately threatened by wireless

    - since their cable TV subs have stalled and has even been shrinking for years they need to do everything they can to attract younger customers - not the old established victims - I mean subscribers - like you. Besides it's the young folks who love NFLX

    But of course, dumb executives can't be expected to make smart decisions, and so Comcast may snub NFLX yet again. Just like Starz did a couple years ago - look at their revenue growth drop after they snubbed NFLX.

    Duuude1

  • Report this Comment On October 20, 2013, at 8:07 PM, MKArch wrote:

    One more for the night duuude; local sports and news, ESPN current tv programming is about money not technology. The cable companies spend something like $30/ sub/ month on programming content and the garbage they package in that you don't want to pay for has nothing to do with the cable companies arrogance it has to do with the content companies forcing the cable companies to buy the garbage with the good stuff like ESPN. You can dream all you want but Netflix will never be in a position to offer the sticky programming the cable companies offer and it has nothing to do with technology. It's a good old fashioned dollars and cents thing.

  • Report this Comment On October 20, 2013, at 8:21 PM, duuude1 wrote:

    Speaking of growth (or not) here's a nice summary and graph of the contrast between NFLX and CMCSA:

    http://www.nscreenmedia.com/1/post/2013/04/can-netflixs-subs...

    Does that look like a company who's business imploded?

    Reminder: it was the stock that imploded - not the business. That was what you call a buying opportunity :)

    Duuude1

  • Report this Comment On October 20, 2013, at 8:30 PM, MKArch wrote:

    dude, they went from a run rate of over $4.00/ share in EPS to negative EPS and even after the recent bounce back they're still only earning about1/4 of pre-collapse profits right now (and trading for new all time highs). The stock and business collapsed. You might remember they had to hike their prices 60% just to salvage their model. BTW it's likely the current bounce back is temporary as well. Let's see what all the new content deals that are driving the stock up do to the bottom line when they hit the earnings statement. I know what happened the last time.

  • Report this Comment On October 20, 2013, at 9:57 PM, MKArch wrote:

    O.K. duuuude you got me going. Here are the latest quarterly stats for Comcast and Netflix. I don't know the exact number of subs for each but they are roughly the same.

    Comcast:

    http://finance.yahoo.com/q/is?s=CMCSA

    16.3B Revenues, $1.7B net income

    Netflix:

    http://finance.yahoo.com/q/is?s=NFLX+Income+Statement&an...

    1.1B Revenues, 0.029B Net Income

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

    Besides the fact that Netflix recent growth is off a base of nothing with Comcast generating orders of magnitude more revenues and profits from roughly the same number of subs as Netflix what about Netflix do you say Comcast needs?

  • Report this Comment On October 20, 2013, at 9:58 PM, MKArch wrote:

    I forgot to switch to Netflix quarterly data in my last post so you need to do it to compare properly to Comcast's quarterly data.

  • Report this Comment On October 21, 2013, at 4:07 PM, leaderoftheback wrote:

    Fun discussion!

    I'd never pay so much for Netflix; at some point it's stock price will reflect actual earnings; nothing can grow fast enough to close that 440X P/E gap.

    Comcast has pricing power...for now. There is your revenue and earnings growth. That won't continue much longer.

    Guess I'm happiest owning TiVo, then. Plenty of cash, growth potential as demonstrated by Virgin Media, and unloved by the market. What more could you ask for?

  • Report this Comment On December 08, 2013, at 8:19 PM, TwentyNothing wrote:

    How to judge Netflix vs Comcast. Simply try watching a program on both of them.

    Disclosure: I am a Comcast broadband customer.

    Comcast's 'streaming', if you can call it that, certainly gives you time to get a sandwich or service your kidneys. No need to rush. You program or movie will be paused until you click on the start arrow. Then, when you're half way through your show, it will restart from the beginning. It's like dial up in a broadband world

    Netflix streams without pause or hesitation. Not just one time but every time and all the time. Both come to me through the same Internet service. How can a company the size of Comcast fail to do what Netflix can do through Comcast's own cables?

    Does Comcast need Netflix? Perhaps that is the wrong question. Does Netflix need Comcast?

    I think not.

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