) is reportedly in talks with Comcast (
) concerning a partnership which could significantly enhance its
distribution and marketing capabilities. The company intends to
build upon its ground breaking deals with Virgin Media and Come Hem
in Europe, and expand its domestic streaming business. At this
point, there is no doubt that Netflix's streaming is complementary
to traditional pay-TV services. The recent spat between Time Warner
) and CBS (
) as well as the possibility of Dish Network (
) dropping Disney (DIS) channels (read
Will Dish Dump Disney Over ESPN?
) suggest that the pay-TV operators may become more flexible about
their content choices. But given that Comcast already has strong
content relationships and its own online streaming service, why
would it consider carrying Netflix? We try to answer this question
and consider the impact on Netflix.
We currently forecast Netflix's U.S. streaming subscriber base
to reach close to 54 million by the end of our forecast period. If
the partnerships with pay-TV companies are successful, and Netflix
manages to retain its advantage in terms of content and device
reach, our forecast could turn out to be conservative. In an event
where Netflix's U.S. streaming subscriber base reaches 60-90
million, which is the company's long term goal, there could be an
upside of about 10%-40% to our current price estimate. Subscriber
growth of such magnitude will also imply higher margins than we
currently forecast, which means that the upside could be much more.
Perhaps the current market price reflects such lofty expectations.
Our price estimate for Netflix stands at $232
, implying a discount of about 30% to the market price.
See our complete analysis for Netflix
What Could Prompt Comcast To Partner With Netflix?
It makes a lot of sense in having a streaming service packaged
with traditional pay-TV. Having Netflix could potentially allow
Comcast to have greater leverage in carriage fee negotiations with
content owners, a competitive advantage over other players and an
incentive for its subscribers to upgrade to faster tiers of
Internet. The question is, why can't the company achieve the same
with its own Xfinity Streampix service? Given that Comcast doesn't
typically release numbers around this offering, it is hard to gauge
the kind of adoption that it is getting. There appears to be two
main possibilities that could prompt Comcast to partner with
One, Xfinity Streampix hasn't lived up to the company's
expectations and leveraging Netflix's brand and device reach would
be a better option. Two, Comcast is having a hard time negotiating
content deals for online streaming. This may appear to be counter
intuitive, but not implausible as evident from Dish Network's
statement last year. During one of its earnings announcements, the
satellite company indicated that getting content rights for online
streaming is a different ball game and hasn't been easy. There is a
good chance that many of Netflix's deals involve certain clauses
and conditions that would deter content owners to strike similar
deals with other players.
Whatever may be the case, a successful partnership with Netflix
can enhance Comcast's core competency. On the other hand, it will
help Netflix sustain its subscriber growth. Comcast has more than
20 million pay-TV subscribers and over 18 million broadband
subscribers. Even if we assume that 40% of these subscribers
already have Netflix, this still leaves the online streaming
company with a potential target customer base of 10-12 million.
Acquiring these customers will be easier with the backing of
Comcast's distribution and marketing muscle.
Partnerships With Pay-TV Operators Can Help Netflix
Control Rising Content Costs
Partnering with an established pay-TV operator will create an
entity that will have stronger negotiating power over the content
owners. This can help the company reign in content costs and
achieve profitability in international markets sooner than we
Netflix's content costs have risen substantially over the last
few years due to its efforts to expand its streaming library both
in the U.S. and international markets. Back in 2011, Starz was
demanding as much as a ten-fold increase in payments for the
renewal of its content contract with Netflix. This would have
amounted to an annual payment of around $300 million compared to
its original deal of close to $30 million. This is a classic
example demonstrating how streaming content costs have skyrocketed
in recent years as competitors are bidding up prices and media
companies are realizing the value of their content.
Netflix has been adding some original and exclusive programming
to its streaming library, which seems to be paying off. The company
has effectively marketed these exclusive shows to maintain its
subscriber momentum. However, such content does not come cheap,
which is evident from the significant jump in Netflix's streaming
content costs, overall content costs and streaming obligations over
the last two years. The trend has continued in the first half of
2013 as well. It is estimated that Netflix is paying somewhere
around $4 million per original episode.
Our price estimate for Netflix stands at $232, implying a
discount of about 30% to the market price.
How a Company's Products Impact its Stock Price at
Streaming Content Costs as % of Revenue
Total Content Costs as % of Revenue
Streaming Content Obligations as % of Revenue
Total Streaming Content Obligations ($ Million)