Is the Netflix-Comcast Deal a Win-Win for Investors? - Analyst Blog

By Eric Dutram,

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Netflix ( NFLX ) has built itself into a dominant force in the content streaming market, largely thanks to a wide library of shows and movies, as well as some great original programming. This has made Netflix into a powerhouse that is almost a must-have for consumers, a factor that is certainly on the radar of major internet providers like Comcast ( CMCSA ) .

After all, Netflix shows and movies account for a huge percentage of traffic, and the widespread availability of high-definition video isn't helping matters either. Due to this, and how Netflix interacts with service providers, quality issues for Netflix services have been cropping up as of late.

This is because Netflix, not unlike many content providers, uses a middleman service (in this case Cogent Communications) to connect their network to various ISPs. These connections have been running at capacity for some time and it is starting to hit quality now, with Netflix stream speeds having fallen by a third on Comcast in the past few months.

The Solution

Netflix decided to pay Comcast to deliver NFLX content directly to Comcast instead of through a third party service. This should also guarantee a certain level of quality to Netflix , and may help to clear up quality issues for the streaming giant.

Though terms were not released, many seem to believe that the rates Comcast will be charging look to be comparable to what Netflix was paying when it was using a third party. Many are now looking for a similar deal to be struck with Verizon ( VZ ) , as that company was also seeing a similar problem, so this Comcast/Netflix deal could set a precedent for the space.

Is This Good for Netflix?

I believe that this is actually a good move by Netflix, and while it remains to be seen if it will reduce costs, it will certainly help to improve service and customer perception. Companies like Netflix were already paying a third party in order to link up with Comcast and other providers, so the deal is really just allowing NFLX to cut out the middleman.

And more importantly, without this direct feed, it was very likely that the quality of Netflix's content on Comcast would have stayed poor. This would have impacted the customer experience and it may have led some to drop their Netflix subscriptions entirely, cutting into NFLX's user base.

Obviously, that is a situation that Netflix wants to avoid, and it has to be one of the main reasons behind their deal with Comcast. It also suggests that Netflix is finally realizing that they are an enormous player in the content market, and that they can't really get away with using third parties anymore. They have to connect right at the source, especially if competition is expected to increase in the streaming market from the likes of Amazon ( AMZN ) among others.

Bottom Line

At first glance, the NFLX deal with Comcast sounds terrible and like an added cost for the streaming company. However, when you realize that Netflix was already paying for this service, and that now it has a direct line with Comcast, it becomes clearer that this is just a shrewd move on the part of NFLX in order to make sure their subscribers stay happy and can easily access their content.

The move may also be positive for Comcast, and eventually, other service providers as well. With less worries about sluggish quality users might watch more Netflix content and be more pleased with their experience overall. And since Comcast is receiving a payment for this data transfer now, it may help boost their bottom line too, suggesting that this Netflix/Comcast deal may be a win-win for the industry, and potentially investors as well.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AMZN , CMCSA , NFLX , VZ

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