Netflix (NFLX) Deal With Comcast Raises the Stakes, Janney Capital Says

February 24, 2014 6:47 AM EST
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Janney Capital's Netflix (NASDAQ: NFLX) analyst Tony Wible weighed in on news the company entered into an agreement to pay Comcast (NASDAQ: CMCSA) a fee to improve its streaming speeds.

Wible notes while the release is vague there is value being exchanged. While the rate was not disclosed, the move does: 1) set a precedent for other MSOs, 2) allows NFLX to be more proactive in the looming UBB debate during a more vulnerable time for CMCSA, and 3) creates a barrier to entry if the fee is material.

"The deal has reportedly been in the works for months but the timing may be fortuitous for NFLX given CMCSA's bid for TWC and the need for favorable regulatory oversight. Although there is no prioritization benefit, we suspect that the exchange of money for resolution/performance could (if large) effectively limit competition. In essence, NFLX could be trading margins for subs. Furthermore,there is no way to yet know if there are other quid pro quos (e.g. NFLX set top integration, marketing, bundled billing). We believe it is too early to predict how this will affect NFLX."

Commenting on the potential cost, Wible notes: "UBB of data will happen, but the price point will be a major swing factor in determining if it will alter consumer behavior. NFLX has thrived in Canada despite an egregious UBB rate ($2/GB in some cases). The test pricing on CMCSA is far cheaper given the 300GB cap and $0.20/GB rate. Although these are consumer price points, we assume the corporate/sender pricing would be comparable and believe it is in the MSO's interests to keep the rate at a level that does not undermine the demand for broadband. Under the current CMCSA plan consumers would not hit a use cap until they streamed 112 hours per month in full 1080p. Even at 150 hours of full HD per month one's bill would only rise by $7.60, which is not an issue for NFLX given that the average NFLX user consumes about 43 hours per month. Furthermore, consumers can control their cost by throttling resolutions."

Netfix is playing for keeps, Wible also notes. This deal raises the stakes, the analyst said. "We believe NFLX has been progressively raising the stakes in streaming through aggressive content spend. Few others can match NFLX'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. In our view, the NFLX thesis hinges on its ability to minimize future competition and garner pricing leverage. Although UBB may alter demand for SVOD, we do not believe this is in the best interests of the MSOs as they are still keen to increase demand for broadband service."

The analyst maintained a Buy rating and price target of $450 on Netflix.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

Shares of Netflix are down 1.4% to $426 early Monday.

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