Is a Comcast-Netflix Partnership in the Cards?

Although a partnership between Comcast and Netflix at first appears like an odd proposal, such a tie-up would actually be beneficial to both companies.

Jan 7, 2014 at 3:58PM

Comcast (NASDAQ:CMCSA) the country's largest cable company, was reportedly approached sometime late last year by the king of video streaming, Netflix (NASDAQ:NFLX). The discussion concerned a partnership between the two companies that would enhance their content distribution and marketing capabilities.  At first glance, such a marriage seems like an anathema and highly implausible. After all, Netflix competes directly with traditional pay-TV services and is largely to blame for the continued loss of TV subscribers for Comcast and other pay-TV companies. However, the recent spat between Cable Vision and Time Warner Cable (NYSE:TWC), as well the distinct possibility of Dish Network cutting ties with Walt Disney, suggests that pay-TV operators are probably becoming more flexible about their content choices.

You might wonder why Comcast would consider carrying Netflix. After all, it has robust relationships with content providers as well as its own online streaming service, Xfinity Streampix. Netflix has already struck deals with European pay-TV companies Come Hem and Virgin Media, though, and their subscribers can now access Netflix content through Tivo set-top boxes.

How would Comcast benefit from partnering with Netflix?
A deeper look into the proposed deal between the two companies reveals that it would actually make a lot of sense for Comcast to carry Netflix. Having a Netflix app on its cable boxes would allow Comcast to acquire greater leverage when negotiating carriage fees with content owners. This would be a huge competitive advantage over other pay-TV players, and would also be a nice incentive for Comcast's Internet subscribers to upgrade to faster (and more costly) Internet tiers.

Why would Comcast want to do that, though, when it already has Xfinity Streampix? Well, the truth of the matter is that the story gets a little fuzzy here. Comcast doesn't typically release its Xfinity Streampix subscriber numbers, so it's a bit difficult to tell how it's fairing. There are two possible explanations that can be advanced, though. One is that Xfinity Streampix has failed to live up to Comcast's expectations. The project might not be a complete lead balloon, but Comcast is a big company that demands big results.

One of the major advantages of Xfinity Streampix that is commonly touted by its users is that its convenience and ease of use rivals or even exceeds that of streaming services such as Netflix or Amazon Prime. The app is easier and faster to access from your television/cable setup. The app, however, has some big limitations--namely that it is not available to everyone. The service is only available as an add-on to Xfinity TV, and costs $5 per month on top of the regular cable bill. For people who are not Comcast customers already, Xfinity Streampix might not be reason enough to switch to cable TV. Comcast is also not readily available in all areas in the U.S., further limiting its potential subscriber base.

A second plausible explanation is that Comcast is having a tough time negotiating its content deals for online video streaming. This might sound counterintuitive, but Dish Network's statement during its 2013 second-quarter earnings call indicated that getting content rights for its online streaming has not been a stroll in the park. It makes sense that other companies such as Comcast might have similar problems. It's perfectly possible that Netflix's content deals have certain clauses that prohibit content owners from striking similar deals with other companies.

Whichever the case might be, a partnership with Netflix would enhance Comcast's core competency. Such a deal would also help Netflix to continue growing its subscriber base. Comcast has around 21 million pay-TV subscribers and 18 million broadband customers. Assuming that 40% of these already use Netflix, that still leaves a huge potential customer base of 10-12 million. Netflix would find it a lot easier, and probably cheaper, to acquire these customers with the backing of Comcast and its extensive distribution and marketing muscle.

Netflix can get a better handle on its spiraling content costs
The benefits for Netflix do not stop there. Partnering with established pay-TV operators like Comcast would create an entity with stronger negotiating powers over content providers. Netflix's cost of original content has been growing at alarming rates; it increased 38% in the last twelve months, from $4.97 to $6.5 billion.

Can it really work?
In the final analysis, it's the consumer who would dictate whether such a partnership achieves its objectives. Consumers clearly want streaming video, as evidenced by Netflix's huge growth in its subscriber base. NPD Data shows that 49% of households with an Internet-enabled TV subscribe to Netflix. Having a Netflix app on Comcast's cable boxes would be a competitive advantage for Comcast.

According to Jeremey Toeman, CEO of online TV listings service Dijit Media, most Netflix subscribers already have cable TV at home.  Many of these customers do not want a separate cable bill. A partnership between Comcast and Netflix would be attractive for these customers. Netflix has already negotiated good deals with TV and movie studios, and cable companies such as Comcast would benefit greatly from these in the event of a partnership.

Competitive edge over rivals
It's not entirely inconceivable that a Comcast-Netlfix partnership would have rivals Roku and Apple's Apple TV hunkering after their own deals with cable companies. It is highly unlikely that these rival deals would threaten Netflix, though. According to available NDP data, the vast majority of people with no cable TV use game consoles, particularly Xbox 360 and Playstation 3, to stream video into their homes. Xbox already offers TimeWarner cable as a channel. Apple TV and Roku might only end up being transition products in the near-term, much like external modems were to PCs about two decades ago. In other words, the Comcast-Netflix deal would create a huge moat that would be very difficult to unsettle.

The bottom line
Although Comcast cable CEO tie Neil Smit recently said (tongue in cheek) that a deal with Netflix is not on the company's radar at the moment, do not be surprised if the two announce a comprehensive deal in a few months' time or a year at most. Such a deal would give both Comcast and Netflix a huge competitive edge over their rivals while continuing to grow their respective businesses.

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Fool contributor Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. 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.

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