Last week, when news broke of the deal between Comcast (CMCSA) and Time Warner Cable (TWC), I wrote a piece explaining why I thought that, despite the dilution of CMCSA from an all stock deal, Comcast was still a buy. I generally avoid writing on the same subject twice in a short space of time, but news of another deal entered into by the cable and network giant has surfaced, and this may make the case for buying CMCSA even stronger.
Details of the arrangement weren’t disclosed in yesterday’s announcement, but the main point is that Netflix (NFLX) will begin paying Comcast for faster access to the cable company’s subscribers. Of course, coming on the heels of last week’s announcement, this has caused some consternation, even outrage, among many.
It touches on the thorny subject of net neutrality, the understanding that internet providers will not discriminate between content. The two companies maintain that the deal is not concerned with the final delivery to consumers, but rather access to the Comcast system via their “on ramp” and so it doesn’t affect that. That may seem like a distinction without a difference to many, but it may be enough to ensure that the deal is allowed to remain in place.
The strongest argument against such an arrangement, it would seem to me, is that it would make it difficult for the “next Netflix” to emerge and prosper, although I am not sure that such a company would have the right to start up without paying for delivery of their content. This is the basic problem. The streaming content that Netflix provides requires a fast connection which costs the cable provider money, whether in terms of technological or physical equipment advances. If the likes of NFLX don’t compensate the high speed internet providers for that, then you and I, the end users, pay for it, whether we subscribe to Netflix or not.
If the United States Postal Service were required to deliver the packages of Amazon (AMZN) and other online sales companies for free and postal rates were increased to cover the cost I don’t think anybody would see that as fair, but that is analogous to where we have been with NFLX until now. I understand that there are concerns regarding charges for access to the internet becoming de facto censorship, or at least opening the door to that in the future, but streaming content for entertainment presents a problem and is, it seems to me, different than the written word.
The political and ethical arguments around net neutrality, however, are not my concern here. The potential effects on profitability, and therefore stock price, is. From this perspective, the deal announced yesterday is good for both NFLX and CMCSA. The first improves the user experience for their subscribers, while the second gets compensated for the extra demand put on their infrastructure. From CMCSA’s point of view, they are so big that the actual cash received from NFLX is unlikely to be massively significant, but the principal of charging content providers that require high bandwidth is.
This “win win” scenario is evidenced by the pre-market performance of the stocks. Both NFLX and CMCSA are indicating a higher opening as I write, both up well over 1%.
For the short term technical perspective, this makes CMCSA doubly appealing at these levels. It means that the stock will show secondary support at the early January lows around $51, making a bounce seem more likely than anything and providing support should the market as a whole decline. That is a positive from an entry level perspective, but over the long term a stock’s performance is about the company’s ability to make money, not lines on a chart.
Yesterday’s announcement is yet more evidence that Comcast is increasingly putting itself in a position to do that and the long term prospects for the stock look even better now than last week.