As my past columns make clear, I remain bullish on Netflix (NASDAQ:NFLX) under the visionary leadership of Reed Hastings, and made a substantial return on my Netflix derivative investment in December.
However, I do believe that success in this industry will be a zero sum game. There is room for perhaps a handfull of major players, but I think in the end, three-five players in the distribution game would best serve consumers. My reasoning behind that can be read in my April 8 column.
I have tried Netflix's key competitors and personally found important elements of their services underwhelming (Hulu's content) to annoying in the case of Amazon's (NASDAQ:AMZN) payment structure (in my humble opinion).
After looking at Coinstar's (CSTR) multi-faceted system with the Redbox service, I give it sincere plaudits for creativity. Mapping out one's weekly movie rentals by researching the Redbox website, reserving movies at specific kiosks at grocery stores in the area, picking up the DVD on the way home from the office, then circling back there the next day - and having some streaming available can certainly be popular with those willing to put forth the effort. I just don't see the vast majority of consumers doing that as it takes extra time and planning, and the benefits are temporary as DVDs will soon be totally obsolete. When that happens, Coinstar will likely be an inferior version of Netflix without the critical-mass and inevitably be consolidated within the "final three" (or four or five perhaps).
Wanting to hedge a bit and being a believer in diversification, I decided to take a position in a competitor that seems most likely to survive Netflix's domination. For the past 17 years, I have been one of the millions of entrenched customers of Comcast (NASDAQ:CMCSA) who have no effectual choice in cable providers. For Internet service, I tried AT&T's DSL for a few months and it was too slow compared to what cable can provide. So, I pay Comcast every month separately for the Internet service while my homeowner's association forces Comcast television on us (It negotiates a rate with Comcast and make us pay for cable TV in our dues).
So I am "entrenched" with Comcast but would cherish the day I had the opportunity to extricate myself from what seems a monopoly. The biggest reason is that I am tired of paying for 100 channels like M-TV, Al Jazeera and others for which I have no use. They do not fit my desires as a customer. I literally watch a total of five channels out of the 100+ for which I'm paying and am not about to give the company another $20+ a month to get an upgraded "package" that would contain maybe one additional channel that I want.
Despite my personal distaste for the company, as of two weeks ago, I am literally long Comcast Jan 2015 Calls along with my Netflix position. Why then would I see it as a viable hedge? It is only based upon what Comcast could be. If the executives running the cable companies ran them according to the true interests of shareholders and the desires of their customers, there would be no competition left.
It seems inevitable these executives have a modicum of success in spite of themselves because of the fiber assets they have and the capability of those assets. It is only their attitudes that ferment success among companies like Netflix. In my opinion, these Comcast executives refuse to listen to their customers in regard to programming. This creates a tremendous opportunity for Netflix to open up new markets such as live streaming, because live programming is mainly what the cable companies have to offer that Netflix does not - yet - provide.
An example of how Netflix could potentially attract millions more customers away from cable through live streaming would be to strike streaming agreements with networks such as theblaze.com founded by talk host Glenn Beck. Here, we have a network that has the devotion of approximately 20 million listeners and viewers who want the cable companies to add The Blaze television programming to their line-up.
So, Comcast and other cable companies provide Al Jazeera as though customers demand it - but refuse the millions of blaze viewers and subscribers, many of whom already demonstrate willingness to pay separately for the network?
Here's what I believe marks the key difference between success and failure in this competition: Netflix has many films and documentaries that offer viewpoints and values with which I disagree. However, it is also loaded with movies and documentaries with which I do agree. The willingness of Hastings to sacrifice any agenda other than providing customers with the programming they desire over his own personal persuasion (whatever that might be) is worthy of adulation.
It is a shame that something that should be an axiom is the exception rather than the rule, but that is what you can expect when comparing a dynamic company run by the founder versus executives far removed from consequences, regardless of the outcome to shareholders.
When you consider the fact that Comcast and a few other cable companies hold an enormous advantage over companies like Netflix in that they actually own and control the pipelines through which Netflix, Amazon, and others compete with them, it is almost inexcusable that they cannot defeat them all hands down. That was the inspiration behind my June 15, 2011 column - Netflix vs. "The Keystone Cable Cos." in which I pointed out :
"I've found it amusing the past week watching all of the headlines about the cable television executives having their meeting of the minds regarding their bleak futures and The Netflix Problem. I have long maintained that Comcast shareholders and CONSUMERS would be better off if Netflix and Reed Hastings could put together a highly leveraged buyout of Comcast."
It is not difficult to envision a future in which Netflix streams a number of popular live television programs from news, talk, to even sporting events as it can pay the producers of valuable content for what programs they view in an a la cart fashion, not per month but rather "per show." As Netflix would bring tens of millions of potential new viewers it has as subscribers, it can compete with the cable companies in the ratings department.
All of this aside, I see Comcast surviving - but perhaps it should focus on maintaining the infrastructure, the fiber optic pipeline and augmenting bandwidth. Perhaps it should in other words act exclusively as a utility.
In programming it will likely languish as a lower-tier competitor, unless by miracle it should be acquired and the management replaced with leaders like Hastings who listen to the desires of their customers and shareholders rather than trying to force their vision of how they themselves want the future of media to operate.
Disclosure: I am long NFLX, CMCSA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.