Netflix and Comcast are at War!

Source: Wikimedia Commons

In its earnings release for the first quarter of its 2014 fiscal year, Netflix (NASDAQ: NFLX  ) announced better-than-anticipated earnings and revenue that fell in line with analyst estimates. However, there was one tidbit the company mentioned that some investors might have overlooked. On pages 5 and 6 of its release, the company provided its opinion of the pending merger to take place between Comcast (NASDAQ: CMCSA  ) and Time Warner Cable (NYSE: TWC  ) . Needless to say, its thoughts were nothing less than candid.

Netflix's little hissy fit with Comcast
Right now, Netflix appears to have some hard feelings against Comcast. After announcing on Feb. 23 that both it and Comcast agreed to a long-term contract whereby Netflix would pay Comcast for faster bandwidth speed, speculation began circulating that the streaming service would eventually have to raise prices.

Source: Comcast

According to Reed Hastings, the agreement between the two parties was, in essence, forced because customers were experiencing slower load times on Netflix. In an effort to avoid an outflow of customers, Netflix approached Comcast and negotiated a deal that would solve the issue. The terms of the deal have not been disclosed to the public.

Because of this, as well as already slim margins, Netflix revealed in its quarterly report that monthly cost will increase between one and two dollars, depending on each individual country. So as to avoid disenfranchising its already large customer base of 48.4 million, the business will initially apply the higher costs to new members, but will eventually ease its existing subscribers into the price hike.

Source: Netflix

Netflix is taking a stand against Comcast and Time Warner merging
In response to these troubles, Netflix stated very clearly in its earnings release that it opposes any deal involving Comcast and Time Warner merging. Its reasoning is fairly straightforward: once Time Warner and Comcast complete their merger and the latter divests itself of around 3 million subscribers in an attempt to appease regulators, the combined company will hold claim to over 60% of broadband households in the U.S.

This concentration of power will, according to Netflix, create a business with extreme "anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers." What this suggests is that Comcast will be able to charge whatever fees it wants in exchange for faster broadband speeds, irrespective of what competitors can offer Netflix. This would afford the consolidated bandwidth provider a near monopoly.

Comcast bites back
After Netflix's comments went public, Comcast posted a retort to the claims that the agreement between the companies was in any way forced and that its merger with Time Warner would create an uncompetitive environment. Perhaps its strongest statement in opposition to Netflix's position was the following:

Source: Comcast

In a nutshell, Comcast is saying that Netflix is not acting as a hero for net neutrality but is instead looking after its own interests. By maintaining the status quo, Netflix would see its costs stay lower but would essentially be shifting the costs to every Internet user. Truth be told, there is a ring of truth to both company's claims.

To summarize its argument, Comcast left readers with the following tidbit. It essentially reasserted its belief that Netflix is not, in any way, looking out for the average person:

Source: Comcast

Foolish takeaway
Based on the data that's been provided, it's clear that Netflix is no friend of Comcast. Because of the nature of their agreement, it's unlikely that anything bad will come from their back-and-forth bickering but in the long term, there could be trouble once any contracts between the two entities come up for renewal.

For investors in Comcast, this could be a bullish sign, but only in the event that Netflix's prayers that regulators block the merger turns out to be nothing but a pipedream. In the event that the deal does not go through as planned, however, Netflix may gain a slightly more favorable position because it will be able to negotiate more effectively with Comcast and Time Warner if they remain separate businesses.

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  • Report this Comment On April 25, 2014, at 11:21 PM, Fo45 wrote:

    The worst mistake of Hastings is starting a war with ISPs and major cable companies .Now , Netflix is in a very precarious position. Cost of content skyrocketing , ISPs holding its umbilical cord after net neutrality gone and HBO originals better than house of card available for free in Amazon prime I wonder what left to look forward to Netflix future ?

  • Report this Comment On April 26, 2014, at 12:42 AM, BuffettJr89 wrote:

    Hello Fo45! Thank you very much for reading my article and commenting! I do agree that it's unwise to pick a fight with ISPs. It's akin to biting the hand the feeds you. It will be interesting to see what happens to Netflix and Comcast down the road, but I believe that, between what the company has done recently, increased competition, and it's high P/E, there is a lot of risk moving forward. It's certainly possible that Netflix could continue to charge ahead but it's not the kind of investment I'd call a slam dunk.

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