Comcast to Benefit from Netflix Streaming Deal; With Netflix paying Comcast to ensure smooth video streaming, this watershed deal marks a win for cable’s long-term value

MONDAY, FEBRUARY 24, 2014

Comcast to Benefit from Netflix Streaming Deal

By ALEXANDER EULE | MORE ARTICLES BY AUTHOR

With Netflix paying Comcast to ensure smooth video streaming, this watershed deal marks a win for cable’s long-term value.

After years of hearing about consumers cutting their cable cord, it’s the cord that’s suddenly back in demand. That’s the key takeaway from Sunday’s agreement betweenComcast (ticker: CMCSA) and Netflix (NFLX), which is finally agreeing to make a direct payment for the massive Internet bandwidth it consumes. For all its success with original content, Netflix still relies on cable companies to deliver those streams into consumers’ homes.

One might say, to borrow liberally from media theorist Marshall McLuhan, that the cord is the message. That was the big picture rationale underpinning Comcast’s recent decision to pay $45 billion for Time Warner’s own cable system.

Even still, it was Netflix shares that got the bigger bump Monday, with the stock up 3.5% in midday trading. Comcast shares rose just 0.3%, trailing the broader market on the day.

For Netflix, the deal ends some uncertainty about whether its streams might be penalized by Comcast, the country’s largest provider of in-home broadband. Comcast has reasons to play nice. The agreement is likely to mollify some concerns among regulators who are about to review the company’s Time Warner Cable deal. The Wall Street Journal reports that “Comcast presented Netflix with more attractive terms than it had previously offered.”

And yet it’s hard to see the deal as anything but a win for the long-term value of cable. Now that Netflix has agreed to assume responsibility for its heavy bandwidth needs, other broadband providers will begin to demand their own toll.

And there are other large-pocketed providers that could eventually face their own kind of tolls. In the second-half of 2013, Netflix accounted for 32% of all Internet traffic downloads during peak periods, according to network-monitoring firm Sandvine. But Google’s YouTube, for example, still represented a sizeable chunk of its own, at 19% of peak traffic last year, according to Sandvine. Apple iTunes was 3.3%, Amazon Video totaled 1.6%, Facebook was 1.3% and Hulu comprised 1.3%.

Barron’s has argued that the cable industry would eventually benefit from some kind of payment from major Internet providers. In a cover story last year we wrote: “Long-term investors should keep in mind that owning the communication pipes is a powerful resource that can’t be easily replicated. Cable operators have spent $200 billion building out the network over the past 15 years. And yet, it’s Netflix that now sends up to a third of the traffic through those broadband pipes, according to networking-firm Sandvine. Cable will eventually end that free ride.” (See “Don’t Touch That Dial,” Aug 5, 2013.)

And while that free ride seems to at least be slowing down, Netflix has retained its change-the-world type valuation. At $449, the shares trade at 115 times earnings-per-share estimates for 2014. Comcast, meanwhile, trades at 18 times. Comcast’s valuation should rise as the cord, finally, gets it due.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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