Earlier this week, Netflix announced a partnership with Virgin America to offer free streaming video content on select Virgin flights. It’s a bold branding move at a time when the competitive landscape for streaming video services is heating up. Cable giant Comcast (CMCSA) last month launched Watchable, an ad-supported online portal that includes television shows from multiple sources, in a move to keep from losing its audience to streaming video providers, such as Netflix (NFLX) and Amazon (AMZN), the industry’s two biggest players.
Netflix has 42.3 million U.S. subscribers, while Amazon Prime boasts an estimated 40 million Amazon members (who also have free access to Prime Video). It took many years for both companies to build up subscriber numbers like these. If Comcast wants to be a key player in video streaming, it could spend just as much time and resources building up its own base, or it could consider buying Netflix.
Buying would be the better option to expand Comcast’s presence in the streaming arena with a pre-built platform and powerful brand already popular with consumers. It would also be in Comcast’s interest, given the acceleration of cord cutting. Expensive cable packages and busier lifestyles can all contribute to cord cutting but the biggest factor by far is the rise of streaming options over the Internet like Netflix. That’s very bad news for Comcast (CMCSA).
Even owning a studio, NBCUniversal, doesn’t give Comcast much of an edge in the cable arena, since the studio can’t afford to be too exclusive. NBCUniversal needs to pump its movies and shows over the widest distribution network possible, especially over popular services like Netflix and Amazon, in order to maximize profits. The point is that if cord cutting continues to speed up, Comcast will have to ramp up its presence in the streaming market quickly and that further supports the rationale for buying Netflix instead of trying to develop its own nascent service.
Netflix is planning to produce and shoot more of its original programming in the future instead of relying on third-party content providers. While that could be an expensive venture for Netflix, it will also up the ante significantly for movie and television studios that currently have a lock on production. It can also give Netflix more power in its negotiations with studios for licensing of existing content.
What’s more, access to NBCUniversal’s powerful studio machine would enable Netflix to experiment more freely and with more resources behind it with its original programming strategy, including diversifying into a greater variety of shows and movies; at the same time it would give NBCUniversal a direct and widespread streaming conduit for its content.
It’s worth noting that Comcast is a part owner of streaming site Hulu, which gives NBCUniversal an online distribution vehicle. However, Hulu’s reach and brand recognition are nowhere near that of Netflix. In addition, Hulu is not available internationally (the service even blocks foreign viewers), a major drawback for content distribution. Netflix can solve this problem for NBCUniversal.
The timing is also right for such a deal. Despite some isolated rallies, Netflix stock has generally been down over the past month, almost 25% below its 52-Week High of $129.29 per share. With market volatility set to continue over the next few months because of investor worries about the health of the global economy, commodity prices, political problems in the Middle East, and coupled with global demand fears for everything from iPhones to streaming video, Netflix stock will likely stay in this lower range.
That creates a good buying opportunity for Comcast. That doesn’t mean the deal would necessarily be cheap, given Netflix’s healthy price-to-earnings ratio of more than 380 times, but a market downturn is still the ideal time for Comcast to strike. Comcast’s price-to-earnings ratio is significantly lower, which would make the acquisition dilutive, but Comcast shares (assuming that any merger would likely involve some stock) are down only about 15% from their 52-Week High. That gives the company’s stock more buying power and should mitigate the effect of Netflix’s high valuation.
The wild card here, of course, will be Justice Department approval for the merger. Comcast lost an earlier battle on that front for its proposed purchase of Time Warner Cable (TWC) so it remains to be seen if the government would agree to letting the company buy Netflix/ But it’s still worth a try, and Comcast should move on this before Netflix becomes too expensive again.
S. Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. He does not own shares of Comcast, Netflix or any companies mentioned in this article.