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Why Cable Needs Netflix

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Netflix (NASDAQ: NFLX) is a media magnet and has been leaving the market in the dust lately. However, the subject matter of too many articles is "cord cutting," or consumers leaving cable-TV providers for streaming services. One doesn't need to research stocks to know that cable providers, particularly Comcast (NASDAQ: CMCSA), are doing just fine. Although these companies are easily and often viewed as competitors, they depend on each other more than most people see.

The Challenger

Netflix is a great product that people are continuing to discover even fifteen years after its founding. The idea of bringing movies and television shows to the living room doesn't need to change, but the content needs to expand and evolve to attract different audiences. So far, they're on the right track with their original House of Cards to compete with cable companies. If Netflix becomes a hub for high-demand shows that can only be seen on Netflix, competitors are going to panic. Original content is now in more places than your cable box.

Perhaps more importantly is the reported $300M/year deal with Disney (NYSE: DIS) for reasons beyond the joining forces with a blue-chip company. Families will soon be able to enjoy titles that span generations for children and adults alike in a library that includes Disney animation, Pixar, and the high-profile Marvel films. Even if Netflix hikes its streaming price in the next few years, families will fork it out for the kids.

Much of the deal will not take effect until 2016, but because of the agreement, Netflix hopes that more broadband streaming in more than the current 80 million American homes can only mean more subscribers. Having exhausted its positive free cash flow resulting in -$67 million for 2012, the need for subscribers has become critical. The company's goal is to more than double its current amount of viewers; it sounds a little too ambitious, but Disney making a deal is normally a green light for investors. 

Netflix has exclusive rights for Disney content, but the more impactful result is that competitors are restricted. Ever surprising Amazon.com will likely have a trick up its sleeve, but other competitors such as Hulu Plus and Redbox Instant may fade out if they are unable to secure top-notch content or produce originals of their own. There is an endless amount of content out there, but with many companies providing similar services, the best content combined with value will win out, such as SiriusXM Radio dominating the radio industry.

The Reigning Champion

No matter how much attention Netflix receives, cable tv still rules the American household. Whether this is out of tradition, convenience, financial concerns, or any other reasons, more people are sticking with cable than subscribing to streaming services. Some figures suggest that "pay-tv" lost almost half a million subscribers by the end of the second quarter of 2012, but many of these "losses" switched to services such as AT&T U-Verse and Verizon FiOS. This is still cable tv when considering cost and content.

Americans spend an average time of over five hours each day watching television. Whether it is on in the background or being diligently viewed, it's still on and consumers are still paying for it. Reasonable explanations for this include the access to live broadcasts and original content.

Unless the internet can one day provide everything, my house will retain cable so my mother can watch American Idol and my father and I can watch ESPN. Forget live broadcasting for a moment and realize that Netflix is on the offensive for entertaining you with never-before-seen content. Queue in Comcast flexing its muscles with its $16.7 billion deal. 

Comcast now has full control of NBC, CNBC, Universal Pictures, and many other channels including Bravo. NBC networks have been performing well since the Summer Olympics in 2012, including its original content such as the final season of 30 Rock. Even after buying the company (at a bargain price according to Wunderlich Securities analyst Matthew Harrigan) and considering imminent purchases such as the GE Building at 30 Rockefeller Plaza for $1.4 billion, Comcast is still swimming in $8.2 billion worth of cash. Looks like the company is more than ready to crank out original content, fuel innovation, and compete on a higher level than an ordinary cable provider.

Comcast reported a 12% increase in total sales for 2012 despite losing 22 million cable subscribers. However, it is now gearing convince people to supplement cable with Netflix, not replace it. If more acquisitions and purchases end up costing in the short term, their internet business will assist the investment having added 1.2 million high-speed internet subscribers. 

Beneficiaries of One Another (for now)

Netflix and Comcast are growing companies. There is a vast pool of potential consumers that would be willing to use both services if the products are deemed worth the money. Pooling more resources to their past success lays the groundwork for future profits and more importantly, stability. Both companies are setting the standard in their respective industries and present an opportunity for your portfolio. If you're searching for even more stability and willing to pay the premium price, you can always relax with Disney. Innovation is the only way to succeed in this industry.

KyleVaughan owns shares of Walt Disney. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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