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Why Comcast Will Beat Netflix

|Includes: Comcast Corporation (CMCSA), NFLX

I'm sitting in my rental car outside of eBay headquarters on a rainy day in San Francisco. I'm about to step into my second day delivering an Outthinker workshop to group of technology execs from various companies. Television news here centers around the rapidly reorganizing technology landscape: the Yelp IPO, Yahoo suing Facebook during its pre-IPO quiet period.

But the most game-changing technology news has gone mostly overlooked. Comcast, the largest US cable service provider, announced it will soon launch a video-streaming service aimed at beating Netflix. It's easy to miss the strategic importance of this move. But if you understand the strategic narrative that cable companies have played again and again to devastating effect, you will recognize this as the critical turning point in the plot.

The battle to own the "digital home" has been waging for years, but over the past 12 months, it has really heated up. Apple is rumored to be launching a television, Amazon's video-streaming business is taking off, Samsung and other electronics firms are imbedding ever more online video services into their TVs, and television channels are increasingly streaming directly. How this all plays out will have significant consequences for investors and television viewers around the country.

The future may look uncertain but look to the past and you will see a pattern that points clearly to where things may be going. A shift is underway. Cable companies look poised to turn the tables on Netflix and other video streaming players. The recent relative stock performance of Comcast and Netflix underscores that this is happening (see the stock chart below). That in a few days Netflix will lose its rights to carry Starz video content, including my daughter's favorite Disney films, offers yet more evidence.

Here is what the past tells us about who may win and lose in this high-stakes game.

1. There are only three sources of advantage and Netflix has none of them: for any company to win over the long term, they must secure one of three sources of competitive advantage: customer captivity (think Microsoft Windows), economies of scale (think Walmart), or preferential access to resources (think De Beers Diamonds). Netflix once enjoyed customer captivity but this advantage has eroded thanks to its missteps that upset customers, drove an exodus of over 800,000 Netflix users, and cut its stock price dramatically.

2. The tortuous heads toward the finish line: cable companies have historically acted like the tortuous to high-tech innovator hares. They adopt a predictable pattern - they let someone introduce a new service, watch the market grow, and much later step in and take away the opportunity. This is how cable companies beat out TiVo (which introduced the world to the DVR) and Vonage (which convinced Americans to embrace VoIP). Comcast's announcement is the most direct message yet that it intends to seriously attack the new video-streaming opportunity Netflix has ushered in.

3. Google and others understand the game: this is why Google is making steady inroads into the home. In Kansas City, Google has launched an experiment with potentially huge consequences. It has begun wiring homes with high-speed fiber optic service which positions it to get into the cable service provider game.

4. Netflix's last hope is to become HBO: there is little reason to believe Netflix can regain customer captivity or create economies of scale, so the company's only hope is to secure preferred access to content, which it is attempting to do by producing its own shows and movies. If Netflix can succeed at this, it will begin looking more like HBO. If it fails, it falls.

As you watch your company evolve, look for these three sources of advantage and see who is moving toward them ahead of you. Do you have customer captivity? Do you have economies of scale? Do you have preferential access to a key input? If not, start making plans now, like Google is doing and Netflix probably should have done, to build such power now.

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