) recently announced a multiyear partnership with
). 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
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
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
) 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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