But NFLX might be throwing these telecom stocks a lifeline in the form of talks to add its service to set-top boxes.
Some investors and consumers are wondering why in the world Netflix would go down this road. Pay TV subscribers continue to decline, and Netflix stock is ascendant as it rides the streaming video wave. NFLX is up about 225% year-to-date in 2013, with Netflix stock up over 1,100% in the past five years.
Having Netflix on your cable box might sound on the surface like a boon for NFLX; however, it’s important to note that allowing cable companies like Comcast to become the “gatekeepers” of streaming service is more of an alliance than a pure victory for Netflix stock.
Still, there’s something to be said for this set-top push — particularly overseas — even if the idea of an unholy alliance between Netflix and Comcast doesn’t sit well with many.
NFLX Growth Overseas
Click to EnlargeNFLX just inked deals last month with Swedish cable company Com Hem and Britain’s Virgin Media to allow similar access. Those kinds of alliances are a no-brainer, since they allow Netflix to continue its brisk international growth and hopefully reduce the rollout cost of its service in new markets by piggybacking on local cable providers.
This is a boon to Netflix stock investors, considering the big mandate on NFLX to achieve international growth — and more importantly, international profitability.
NFLX first looked overseas in 2010 … well, and not even overseas, really, with a push into Canada. Now, Netflix can claim more than 40 countries in its coverage area, and it’s growing at an impressive clip — with revenue and users both soaring.
However, Netflix stock hasn’t seen profitability from operations overseas. Earnings for NFLX have focused mainly on the entrenched U.S. base of streaming users, with profits abroad tough to come by thanks to the cost of investing in this growth.
Perhaps this set-top push will turn up the volume on international sales going forward.
At Home, a Mixed Bag
The question remains, however, why NFLX would want to embark on a similar deal at home where it is already entrenched. The fact remains that many U.S. subscribers either have already decided to cut the cord, or if they like Netflix, they have plenty of options to watch it via apps on Blu-ray players or tablets or Internet-connected TVs.
Well, there are a few benefits to Netflix stock worth pointing out.
The first is that Netflix can now count low-speed Internet users as potential customers — something that many of us in urban areas overlook. Many U.S. regions don’t have the high-speed Internet connectivity necessary for Netflix streaming. The sad reality, then, is that these folks couldn’t watch NFLX movies even if they wanted to … so why not partner with cable providers to at least get a larger share of households?
Also, talks are advancing with regional providers and smaller cable companies as well as the big guys. So Netflix isn’t simply jumping into bed with Big Cable.
The million-dollar question, however, is whether this move will pay off enough in rural America to offset the fact that Netflix is now partnering up with Big Cable in many places where it used to go head-to-head.
It will be interesting to see how things play out abroad and in low-speed segments of the U.S., but watch consumer behavior as well as growth. Because if customers start to associate Netflix with set-top boxes provided by cable companies … well, NFLX has essentially given up its disruptive independence and has become little more than software that rides along on someone else’s product.
Not a death knell if done right, but there are certainly risks.
Related Reading on NFLX
- Details on the set-top box talks. (WSJ)
- 1.8 million cable subscribers quit in Q2. (BGR)
- I’m pretty bearish on NFLX in advance of earnings … and so is one analyst predicting a 40% flop. (The Slant)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.