Thanks to the latest Comcast news, Netflix(NASDAQ:NFLX) stock overcame a brief downfall to reach a record closing price of $447, jumping 3.4% from Friday. Over the weekend Comcast(NASDAQ:CMCSK) confirmed reports that it had reached a deal with Netflix that offered the video streaming company guaranteed bandwidth for services, which will now be offered directly through Comcast instead of subsidiaries. 5
Netflix has certainly overcome its turbulent early 2010s. Lest we forget, its stock fell 80% in the last half of 2011 thanks to a series of poor decisions, only to have a sharp valuation jump at the start of 2013 , moving from lows of $50 to a stable $160. Investors were bullish, Netflix started getting good press instead of bad, and the company has been on the rise since. But what does this latest news mean for everyone's favorite streamer?
Why is Netflix benefiting so much from this news? Well, the Comcast deal will cost Netflix fees but will also increase the quality of Netflix service to millions of customers, cutting down on the lags, stutters, and frozen video. If you like net neutrality this is a bad sign , because it shows that Comcast can indeed play favorites with the big streaming companies by making them pay for premium "peer" services at prices little guys can't afford. If you just like Netflix, it is great news, because the company was quick on the draw and has secured a premium bandwidth position for itself – not to mention cutting out troublesome middlemen like Cogent. The price for the peering is a subject of debate, but is probably somewhere around a reasonable $12-20 million annually, not counting out the cost of avoiding contracts Cogent, et al.
Netflix is in an interesting and fortunate place in the topsy-turvy telecom market. Its stock is on the rise, its future is somewhat secured thanks to deals like the Comcast affair, it has no problem generating buzz these days. Attention has moved away from network TV and toward the flashy shows that Netflix has been busy producing. Within the last year the company has made the successful jump to content creator with shows like Arrested Development season 4, Orange is the New Black, and of course the headline-grabbing and Kevin Spacy-touting House of Cards. Each new binge leads to a burst of new press, and the price of Netflix stock rises accordingly. In today's social media culture, the engine is a strong one.
Comcast and Verizon
The rise of Netflix also puts Comcast, Verizon, and similar entities in an interesting place. Comcast already saw its stock rise on the news of its Time Warner acquisition attempt. Not only does Comcast get a Netflix contract, it also lays the ground for many future contracts of the same sort, creating a new source of funds and highlighting its position as a big fish in a relatively small pond.
Verizon(NYSE:VZ) is in a similar position. The company was quick to announce that it was working on a similar agreement with Netflix that could spell gains for both companies. Verizon posted a 4.1% increase in revenue in 2013, and wants to secure the same for this year through more network investment and lucrative deals. It also needs to cut $60 billion of inherited debt from its recent Vodafone buyout . By quickly announcing its own Netflix deal Verizon highlights its own importance while securing additional business. More deals with big telecom players could have a similar effect.
However, note that Comcast and Verizon are also competitors with Netflix. Comcast owns NBCUniversal, and Verizon just created a joint venture with Redbox to make a rival video streaming service. Thus, the deals represent an unusual collision of motives and long-term goals in the ever-evolving telecom industry. This would be a great place for a House of Cards joke, but I will spare you. Just keep an eye on these intertwining fee relationships, and get ready for more bullish Netflix behavior.
Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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.