Shares of Netflix, Inc. (NFLX) plunged $27.09 (6.7%) to $378.90 on Mar 24, 2014, on the heels of a probable Apple (AAPL)–Comcast (CMCSA) partnership, which is expected to hurt the streaming service provider’s subscriber growth.
Reportedly, Apple is looking for an exclusive cable line from Comcast, which will allow it to bypass the “last mile” congestion in the cable provider’s public line. This will help Apple deliver high quality video-on-demand and live TV through its set-top box to Comcast customers.
Netflix recently entered into an agreement with Comcast to ensure smooth transmission of its content, after customers complained of declining net speed (in Comcast network) that affected the quality of shows. Reportedly, Netflix is paying millions of dollar to enhance the net speed through Comcast’s public line.
An exclusive arrangement between Apple and Comcast will drastically improve the viewing quality of shows for Comcast’s customers, which they will stream through Apple TV. This improving engagement may prompt some customers to discard Netflix’s service going forward.
However, the fear that Netflix will lose substantial customer base due to the Apple-Comcast partnership is overblown in our view. Netflix’s ever-expanding content library is its primary strength. The company’s focus on producing original shows that increases its own content is a major positive in this regard.
Besides offering iTunes content, Apple TV also offers Netflix along with Hulu and Google’s YouTube. A possible deal with Comcast will help Apple to sell its set-top boxes much faster. Moreover, it can also attract Netflix subscribers who use other set-top boxes from Roku, Microsoft and Google (GOOG), thus improving Apple TV’s competitive position going forward.
We believe Netflix’s streaming and Apple TV’s set-top box are more of complementary services rather than being substitutes. Netflix superior content portfolio and Apple TV’s undisturbed streaming ability (post the deal with Comcast) should be beneficial for both the companies going forward.
Currently, Netflix has a Zacks Rank #1 (Strong Buy), while Apple has a Zacks Rank #3 (Hold).
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