Is Netflix Onboard With Cable?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Talk about your coincidence. The article from two weeks ago discussing Comcast’s (NASDAQ: CMCSA) foray into the world of Netflix (NASDAQ: NFLX) included some insightful comments from readers. Well, actually there were several insightful comments, but a couple in particular caught my eye. They spoke to what seemed to be a natural progression in the monthly pay-for-streaming-entertainment business – the move to cable. It made sense and apparently it makes sense now – to Netflix anyway.
Yesterday’s announcement that Netflix CEO Reed Hastings has been discreetly meeting with cable providers around the country is very intriguing. Apparently he is discussing the ins and outs of providing streaming content via cable as another option for cable customers.
For long-time followers of Netflix there are a couple of ways to view this pursuit. On the one hand the two sides may seem like strange bedfellows. Wasn’t long ago the cable industry viewed Netflix with disdain, and vice versa. Netflix was the upstart company that threatened to steal customers and revenue. On the other hand the potential market for this type of service on good old-fashioned TV’s is tremendous. There would also seem to be a natural tie-in with content as well. Which directly correlates with Netflix management’s shift from feature movies to TV.
Not Entirely New
If you haven’t been privy to investor conferences, this concept isn’t new. Mr. Hastings has dropped the occasional hint that a cable partnership is a natural extension of the Netflix business. Think HBO but a wider variety of options – not including as many new feature movies however, as evidenced by Netflix opting to not re-up with Starz.
Though not necessarily new, the timing for this foray is intriguing. As the Comcast article points out competition is heating up. Verizon (NYSE: VZ) and Coinstar (NASDAQ: CSTR) have formed their partnership and it’s likely these won’t be the last to join the streaming video party.
Pursuing new forms of revenue is a must for Netflix to continue growing revenues - at least signficantly. Sure, they will continue to add customers and that will help. But as the shift away from the higher margin DVD delivery market continues to take hold, Netflix can’t rely on the thin margin internet customer to drive shareholder value.
It’s great to see valuations that are in line with an internet growth firm as Netflix trades at just over 26 times earnings. A cable partnership - and the additional revenue that would bring – would certainly help justify multiples based on estimated earnings (those are in the low 40's).
Never one that can’t be persuaded by a solid argument I have to say – even though I’m not fully onboard with Netflix at these prices – I’m slowly starting to see what all hubbub is about. If nothing else shareholders can take heart that management isn’t going to lie back and rest on their laurels.
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