Netflix-Comcast Streaming Deal: Analysts Weigh In

2:46 AM PST 02/24/2014 by Georg Szalai
Netflix CEO Reed Hastings

UPDATED: Payments won't "have material impact on Netflix's margins," says one Wall Street observer, while another one says it will provide another hurdle for companies considering competing in the streaming space.

Wall Street analysts on Monday weighed in on Sunday's multiyear streaming deal between Netflix and Comcast, which will see the online video company pay for access to the cable giant's broadband infrastructure.

Netflix shares rose 0.7 percent early in Monday trading, hitting $435.16 after the market open. The stock earlier this month set an all-time high of $441.24.

"The deal is likely a near-term positive for Netflix as we do not believe the payments will have material impact on Netflix's margins," said Sanford C. Bernstein analyst Carlos Kirjner. "We think the key motivation for the deal is Comcast's desire to remove IP-interconnection from the regulatory review of its proposed merger with Time Warner Cable. Extracting too much value from Netflix would have exactly the opposite effect."

Nomura analyst Anthony DiClemente analyzed the higher Comcast costs and cost savings that the streaming deal will provide elsewhere.

PHOTOS: 'House of Cards': Kevin Spacey and Robin Wright Toast Season 2

"On the surface, it would appear to be a modest negative to Netflix that it will now be paying Comcast in a paid peering deal," he said. "However, Netflix is essentially eliminating middleman providers like Cogent, whom Netflix had previously been paying to deliver traffic to Comcast subscribers. Cogent is known as a low-cost provider, so Netflix payments to Comcast may now be modestly higher under the new direct relationship (we really don’t know yet, as terms of the deal were not disclosed). A certainty here is that quality of service (speed of Netflix streams) will be improved for Netflix content delivered to Comcast subscribers."

He added: "It is unclear to us as to whether or not Netflix is paying a flat fee or paying on a per GB basis, but we are confident that Netflix management has considered the long-term implications of the agreement."

Concluded DiClemente: "The main takeaway of this agreement is that it is quite possible that the agreement is mutually beneficial to both, such that the barrier to entry around the delivery of Netflix-like streaming services may have just been raised."

PHOTOS: TV Executives Roundtable: Frustrations With Netflix

Cowen & Co. analyst John Blackledge had a similar take on the deal. "Content delivery costs will likely rise for Netflix, though it's not all incremental given lower transit costs. We view an improving Netflix customer experience at the largest U.S. cable company as a positive."

He explained: "For the ISPs that Netflix does not have direct access to their broadband networks (like Verizon, among others), Netflix pays transit fees. If Netflix continues to ink more direct access deals, the incremental costs will be offset by lower transit fees."

While financial terms of the streaming deal weren't disclosed, Blackledge concluded: "Although we have an incomplete picture on deal terms, we lean toward [seeing it as a] modest positive for the stock."

Janney Capital Markets analyst Tony Wible argued that the Comcast streaming deal could scare off potential new Netflix competitors.

"Although there is no prioritization benefit, we suspect that the exchange of money for resolution/performance could (if large) effectively limit competition," he wrote in a report. "In essence, Netflix could be trading margins for subs."

Added WIble: "Netflix has been progressively raising the stakes in streaming through aggressive content spend. Few others can match Netflix's spend without incurring massive losses. The competition may now have to cope with additional fees that sway their willingness to compete if they do not already have a large sub base."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

comments powered by Disqus