Netflix And Several U.S. Cable Companies In Talks For Possible Partnerships
The rivalry between Internet streaming video services and cable companies may be coming to an end. According to a report by the Wall Street Journal yesterday, Netflix, Inc. (NASDAQ: NFLX) wants to make its streaming video service available to more consumers via major cable companies through set-top boxes. The article cites Comcast Corporation (NASDAQ: CMCSA) and Suddenlink Communications as two of the several companies involved in talks with Netflix. In reaction to the news, shares of the Internet subscription service gapped sharply higher on below average volume this morning, rising as high as $310.97. Shares closed at $306 on Friday.
Netflix has already set precedence by inking deals with two European cable providers to allow their clients to access Netflix through TiVo (NASDAQ: TIVO) set-top boxes. Last month, Britain’s Virgin Media (NASDAQ: VMED) and Sweden’s Com Hem decided to allow the Netflix app on its set-top boxes. The Netflix feature is expected to launch on Com Hem’s TiVos in December and is already available on a trial basis in the UK. Aside from Sweden and the United Kingdom, Netflix is assertively growing into other international markets such as Brazil, Denmark, Mexico and Canada. A short time ago, the company entered the Netherlands, which is additionally expected to enhance its business opportunities going forward.
Although international expansions are a major catalyst to Netflix’s growth, increasing investments are expected to hurt profitability in the near-term. Starting operations in new countries demands enormous investments and substantively enhances marketing and general and administrative expenses. Margins will likely remain under pressure during the investment period. On the other hand, in the second quarter of 2013, revenue from international ventures rocketed 155.3 percent from the same quarter last year.
If the talks with U.S. cable companies prove fruitful, there is quite a bit that cable operators could do with Netflix that would make the partnership for both parties extremely viable. They could bundle Netflix with a multichannel package rather than as an add-on with a separate billing system. That could augment their double or triple play offerings, giving subscribers’ added inducement to kick in broadband to their packages.
Although U.S. cable companies have been leery of a partnership with Netflix for years, some cable operators are now warming up to the idea. Part of the reason is because of improved set-top box technology. They also believe that Netflix users will purchase costly, much faster broadband connections. The talks should prove interesting on both sides.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.
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