Netflix and Comcast and the triumph of necessity
Just this last week Netflix (NASDAQ:NFLX) and Comcast (NASDAQ: CMCSA) agreed to a deal that would allow Netflix access to Comcasts new X-1 cable box. In real numbers, Comcast gave Netflix access to 35% (7.7 million) of its customers.
This deal is a great lesson how Business Development is not only about pioneering new customer channels, but how it can shape a company's overall trajectory. Oddly enough, I think that Comcast got the better end of the deal. To understand where I am coming from we have to go back in time to 2013.
In 2013, Netflix was reinventing how we consume episodic television with House of Cards. House of Cards premiered in February of 2013 and introduced America to “binge watching”. While Netflix subscribers were getting their fill, cable and internet providers felt like they were getting the scraps. In response, they began to rate limit video streaming services. This made Netflix unwatchable for many.
In defense of their actions, the cable companies insisted that Netflix was putting a huge burden on their systems. The user were gluttonous oafs at the buffet and Netflix their enabler. At the same time, the real cost of bandwidth was dropping faster than a grown man’s self esteem at Taylor Swift concert.
Regardless, Netflix needed to do something. So, they made a faustian bargain with Comcast, AT&T, Verizon and Time Warner Cable for a fast lane to deliver their content.
At the same time, Netflix began to pressure Washington and particularly the Federal Communications Commission (FCC) to make some rules around internet service. There were basically none. The concept of Net Neutrality was a gentle person’s agreement from when we all started using the internet. Now that the cable companies, famous for their egalitarian leaning, smelled blood in the water they threatened a feeding frenzy on basically every internet company that served an image file.
In early 2015, the FCC under the direction of its Chairman Tom Wheeler dives into the fray and declares the cable companies Common Carriers. In short, Netflix wins. The fastlane deal of 2014 are pretty much nulled.
Adding further insult to injury, the FCC signals that Comcast’s attempt to buy Time Warner Cable for $45 billion would not be approved. Since the deal would give Comcast control of more than 30% of all U.S. cable subscribers and over 40% of all high speed internet, I can see how one might think that the deal would be bad for the average Joe and Jane. (BTW, Charter Communication purchased Time Warner Cable in May.)
Comcast and the cable companies did not take this lying down and took it to court. But after a year of appeals, the court upheld the designation and regulation earlier this year.
Ok, so cable companies loose and Netflix wins. Conversation over. Nope, not even close. Here is where the deals start to get interesting. There are still two very powerful business needs here Netflix need to grow and the cable companies need to play nice.
Netflix needs to grow very fast to make Wall Street happy. As of Q4 of 2015, they had over 75 million subscribers worldwide. In Q1 of 2016, they added more than 6.7 million new subscribers, over 2 million in the U.S., launched service in over 130 countries, beat expectations and still saw a drop in their stock price!
Comcast on the other hand is now looking down the barrel of becoming a pure utility. The days of arbitrarily hiking prices and providing comically bad service seem to be coming to an end. If they do not change their ways and show that they can “self regulate” than they will be a ward of the FCC. (No really, but you get the existential threat.)
Do you see the win/win here?
So, Comcast and Netflix do a deal gives Netflix access to 35% of Comcast’s cable customers via the newer X-1 set top boxes that act a bit like a crappy, bloatware loaded Apple TVs. This gives Netflix the chance to add more, non chord cutting subscribers. More than 7 million at the time of the deal and presumably that number will grow as older boxes are swapped out by the sad people standing in line at the Comcast service center. This should make Wall Street happyish with Netflix. Well probably not, but one can hope.
From Comcast, the win is long term and I think the better part of the deal. With this deal, Comcast is on the road to making a complex media ecosystem. They let content providers on their networks and they put their content on other networks in an iTunes-kind-of-way. Comcast owns NBCUniversial which includes NBC, Universal Studios, Telemundo and many others. For example, Comcast’s deal to put their app on Roku in April.
This complex ecosystem let’s Comcast point to the X-1 box and tell the FCC that they are not using their cable and internet service as leverage. They are playing nice. Content is becoming platform agnostic and 50 channel mandatory NFL bundle is fading into memory.
Lastly, Comcast may be seeing these changes in the ecosystem as a way of not only making money via revenue sharing (via subscriptions, more pay-per-view, and on-demand), but also cost cutting. All of those support people that have customer hold for an eternity to 22 minutes later flip through a script that answers a total of zero questions is expensive. They only thing they do well is sell overpriced bundles of services. If content and services can be bought a` la carte via the cable box it could mean a massive reduction in overhead along with a growth in revenue from those aforementioned, gluttonous, binge watchers.
From my perspective, it is amazing that these two companies could do a deal. Considering all the bad blood, mistrust and backstabbing. (They are house Lannister and Stark, basically). Yet, necessity triumphs. As Tyrion Lannister says "we make piece with our enemies, not our friends"
Market capitalization 41 B
6.74mm new subscribers in Q1 (2.3mm in US)
Market capitalization of 166 B
February 2016 over 22mm
Gained another 53,000 in Q1, which is the larges video increase in 9 years
35% have x-1 box (7.7 million)