Is Netflix's CEO Wooing Comcast?

Includes: CMCSA, NFLX
by: Trefis

During a recent interview, Netflix (NASDAQ:NFLX) CEO Reed Hastings claimed that the company's internet streaming service will help cable companies like Comcast (NASDAQ:CMCSA) by spurring greater consumer adoption of broadband internet.

What Hastings Sees in Broadband

  • Only 87 million US Internet Households with 92% (80 million) of them currently subscribed to broadband internet services like those delivered by Comcast.
  • Compared to 115 million US TV Households of which 91% (105 million) subscribe to cable / satellite services.
  • Netflix's streaming service could drive a faster convergence of the number of broadband internet households and the number of US cable / satellite households over time.

Our Counter-Argument

  • Netflix's subscriber base is too small
  • In comparison to the 80 million US broadband households, Netflix has only about 12 million subscribers currently and we expect this figure to grow to about 22 million over the Trefis forecast period
  • No overlap between Netflix subscribers and non-broadband population
  • We believe there is no overlap between Netflix subscribers (trendy, early adopters of technology), and the non-broadband US internet households (late adopters)

Overall, we don't think Netflix will be able to drive new broadband customers for cable providers like Comcast as Hastings claims. Furthermore, based on our analysis of Netflix and Comcast, we believe Netflix can actually hurt Comcast in three ways:

1. Cannibalize Cable's Pay-per-View and On-Demand

Comcast's Pay-per-View and On-Demand services which constitute about 3% of the company's value may suffer as a result of streaming services from Netflix (as well as Hulu and YouTube).

2. Raise broadband internet delivery costs and hurt margins

In the absence of tiered broadband internet pricing, higher broadband internet use could lead to greater declines in Broadband Internet Gross Profit Margins as bandwidth consumption rises.

3. Provide telco competitors AT&T (NYSE:T) and Verizon (NYSE:VZ) a competitive advantage

Comcast and other cable companies may hesitate to introduce tiered broadband internet pricing (based on bandwidth consumption) due to the growing presence of telcos (AT&T, Verizon) in internet and TV markets (e.g. Verizon FiOS and AT&T u-Verse). The telcos are less beholden to the TV and broadband internet business since they have the lucrative mobile phone business.

Disclosure: No positions