Comcast (CMCSA, Financial) and Netflix (NFLX, Financial) sit at opposite ends of the spectrum. One is a traditional cable TV operator while the other is a video streaming operator that disrupted traditional methods of video content consumption. When two companies that were supposed to fight head on join together, it naturally raises a lot of questions, especially about the need for such deals.
Comcast announced this week that it will launch Netflix on X1 to millions of customers nationwide. The integration will allow X1 customers who have Netflix subscriptions to be able to access Netflix’s online library alongside the live, on demand, DVR and web programming included with their Xfinity TV subscription. This makes Netflix an add-on to Comcast’s offerings, similar to how we add channels to our TV subscriptions.
“The Netflix integration into the X1 platform means our mutual customers will no longer need to change inputs or juggle remotes,” said Reed Hastings, Netflix co-founder and chief executive officer. “Now they can seamlessly move between the Netflix app and their cable service, enjoying all the TV shows and movies they love without hassle.”
There are two underlying factors that have driven these “natural-born competitors” to work together instead of against each other. Netflix is already near the 50 million subscriber mark in the U.S., where the total number of people with broadband access is just a tad above 90 million, a penetration of more than 50%. When you factor in families who won't require multiple subscriptions, the penetration level is bound to be much higher than 50% of the potential market size.
In the last four quarters Netflix’s total membership in the U.S. has moved from 43.18 million to 47.50 million, a growth of 10%. With every additional customer added to the pool there is one customer less in the potential market, making the odds of growth slower as Netflix keeps expanding within the country. As a hypergrowth story with a bulk of its revenues coming from the U.S., single-digit growth rate is not something that will be palatable for the company. Unfortunately, Netflix has no choice but to accept reality as competition in the video streaming market is slowly heating up.
The best bet for Netflix would be international market growth, but it needs to build local content and establish itself in certain key markets. These things will take time, and until that happens the company needs to hold its ground in the home market and, if possible, give as little space as possible for its competitors to grow.
By aligning with Comcast, Netflix is expanding its reach to cable customers who are not yet ready to cut the cord and go with a video streaming service alone. In a sense, they are just making it easier for a bigger pool of people to access Netflix in the hope that they won’t go to a smaller competitor while they maintain their cable connections.
So the twofold need of Netflix to keep growth stable in the home market and get access to a new pool of potential users has led to this decision to sleep with the enemy. But on Comcast’s part it’s a brilliant stroke because Netflix is no longer an enemy but an ally. The more content Netflix gets, the more Comcast gets and the latter’s customers are happy because Netflix is now integrated with their main connection. And Comcast now has a pool of exclusive content to serve the massive group of overlapping users who subscribe to both services.
It’s unclear at this point whether this was a good move for Netflix, but at least it will help keep its user growth intact for a little while, giving it the time it needs to beef up local content for international markets.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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