Netflix to Pay Comcast for Higher Speed - Analyst Blog


Netflix ( NFLX ) recently announced a multiyear partnership with Comcast Corp ( CMCSA ). According to Bloomberg, Netflix will pay an undisclosed fee (amounting to millions of dollars) to directly access Comcast's broadband network, which will improve streaming quality.

Netflix consumes approximately 30.0% of peak Internet traffic (particularly in evening) in North America. The company streams shows through its Open Connect program that involves setting up its servers within ISPs network. However, Open Connect is a free arrangement with Internet service providers (ISPs) and is not supported by Comcast, Time Warner Cable ( TWC ), AT&T ( T ) and Verizon ( VZ ).  

Over the last 12 months, Comcast subscribers have been complaining about the streaming quality of Netflix shows. Netflix also reported that the stream speeds on Comcast's network have fallen significantly and blamed excessive traffic. Per Netflix's ISP speed index, among the 17 ISPs measured, Comcast was #14, while Verizon was the last.

Comcast recently entered into an agreement to acquire Time Warner Cable, which will make the combined entity a significant provider of broadband Internet in the U.S. In such a scenario, declining net speeds that would have put subscriber growth at risk forced Netflix to enter the deal.  

However, we believe that the partnership is a double-edged sword for Netflix. Although the deal is expected to boost streaming quality, it paves the way for other ISPs to demand a similar kind of monetary arrangement, which will dent Netflix's cash balances going forward.

Netflix is already facing significant headwinds related to rising content costs. The company currently charges $7.99 for its streaming service that had 33.4 million U.S. subscribers at the end of 2013. The increase in operating costs may force Netflix to increase subscription price, which can negatively impact subscriber growth amid significant competition from Amazon ( AMZN ) Prime and HBO, going forward.

However, we believe that the company's ever expanding content portfolio will continue to attract subscribers despite a price rise. Its partnerships with major film studios and production houses have helped it to expand its content portfolio faster than its rivals. We believe that Netflix's growing subscriber base and international expansion opportunities are significant positives.

Currently, Netflix sports a Zacks Rank #2 (Buy).

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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 The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AMZN , CMCSA , NFLX , T , TWC

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