In my earlier article, I discussed the strategic imperative for Netflix (NFLX) to partner or merge with a content provider in order to manage its sharply rising content costs. The encouraging news is the CEO Reed Hastings is actively courting content partnerships. The not-so-encouraging news is that Netflix appears to be wasting its valuable time courting cable operator Comcast. News outlets are now reporting that Comcast (CMCSA) is not interested in partnering with Netflix. In other news, the U.S. is not interested in merging its military with Russia. This news cannot a shock to anyone besides Netflix.
Partner with anyone besides Comcast
Comcast benefits little from a Netflix partnership, and that is why it is easy to walk away from a Netflix overture. In the online streaming market, Comcast is Wal-Mart (WMT) and Netflix is a local mom-and-pop shop. As we all know, Wal-Mart's scale allows it to provide products at the lowest price. Similarly, Comcast is able to offer a $4.99/month streaming option at almost half the cost of Netflix's $7.99/month online membership. Comcast has a more comprehensive media offer through cable and on-demand.
If anything, Comcast views Netflix as a cannibalizing threat. Netflix wants to gain access to Comcast's NBC content at the lowest price, and it wants to disintermediate its higher-margin on-demand product. From Comcast's perspective, it makes little sense to aid its struggling competitor, Netflix.
Partner with Starz or HBO
Recent comments from Reed Hastings are a real head-scratcher. At a Morgan Stanley technology conference, Hastings stated that Netflix seeks to become a premium cable channel with unique content. Retreat, Reed! Bidding on unique content is not a game-winner. You are likely to overpay for content in order to outbid more well-capitalized channels such as HBO or Starz.
Curiously, Hastings views Comcast as its partner and Starz as its competitor. To me, it's the other way around. I recognize the last contract negotiations with Starz were tough and Hastings may feel like a jilted lover, but he must be dispassionate as a business person. Premium channel providers such as Starz or HBO are the most natural alliance for Netflix- they have the content and could benefit from an online-streaming platform. It is in shareholder's best interests for Hastings to re-open conversations with these providers.
To prevent subscriber churn, Netflix needs to acquire reasonably-priced content by year-end 2012. Approaching large cable providers is a waste of management's time. Premium channel providers such as Starz and HBO are more natural partners. I will give Reed Hastings and his team a few months to announce that Netflix is pursuing deals with premium channel providers. Shares would likely rally on such news.