The Comcast-Netflix Equation

comcast netflix artPart 2.  See also Part 1: Comcast’s Bite at the Apple

A deal between Apple and Comcast would be a huge advance for Net-TV, streaming live and on-demand video from a new Apple set-top device plugged directly into Comcast cable systems.  But it would be bad for Netflix.  And it also could hasten the erosion of a far bigger business at Comcast—cable-TV, in which fat packages of dozens of channels afford high profit margins and mask barely detectable price increases and any link between usage and pricing.

Comcast will dominate the U.S. cable business with 30 million subscriber homes after it acquires #2 Time Warner Cable (presumably).  It isn’t withering under the Internet-threat, it’s thriving, helped in part by the Internet-access business.   So why hasten the day when Internet streaming and al a carte might replace the tiered channel packages that now prop up profits in the cable business?  (And Comcast, in this instance, owns more of both sides of the house than most any other company in the world).

Okay sure:  maybe Comcast should do it because, if it’s inevitable, it’s better to pre-empt yourself rather than have it done to you.  But you can give in too early.  As AOL did some years ago when it embraced the “free” Internet and scrapped a declining subscriber business that still had more than 10 million people paying $20 or so a month.

And this next Internet wave is harder than those before it.  Right now 30 million of the nation’s 110 million homes stream on Netflix.  Netflix and YouTube together hog half of the nation’s nightly bandwidth.  But one day when most everyone is streaming something, big snarls and snags and traffic jams will erupt.

Two weeks ago, HBO Go, the innovative watch-anywhere streaming service from the Time Warner-owned channel, crashed under a rush of “live” viewers of the season finale for the much-hailed “True Detective.”  This, after ABC had similar problems streaming the Oscars.

We Americans have become tolerant of tech’s flaws and foibles—but mess with our ability to watch TV, and we will get ugly.

This is why Netflix, after whining about cable providers’ ability to raise prices for carrying its horde of online movies and TV shows, now deigns to pay Comcast extra for priority video service; and why Apple now is in talks to do the same.

Which leads to the threat to Netflix posed by the talks between Apple and Comcast, reported this morning in The Wall Street Journal.  A few weeks ago, Netflix’s move to ally with Comcast looked like a coup.  But now Apple suddenly could slide into a deal with Comcast, too, and Amazon and Hulu can’t be far behind.  So much for any first-mover advantage to Netflix.

And if Apple gets serious about a new streaming service, Netflix would have the most to lose.  Apple has $40 billion in cash and investments on hand; Netflix has just $1.2B.  Apple’s market value is at $480 billion even after a long fall to $536 now from $700 a share in September 2012; Netflix’s value is at all of $22B.

In fact, maybe Apple should just buy Netflix outright.

NFLX has done a great job pushing its customers to drop old, cumbersome DVDs and switch to streaming on the Internet.  But Netflix stock more than tripled in 2013, and Apple need not buy it at these lofty prices.   Instead, Apple could wait and rev up a new AppleTV streaming service, with Comcast offering it instantly in 30 million homes.  Netflix has little room for error: On $1.18 billion in revenue last quarter, it held on to only $5 million in free cash.

Give it a few years, and Apple one day may be able to buy Netflix on the cheap.

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