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Why Did Netflix Agree to the Deal with Comcast?


Jul. 13 2016, Updated 5:55 a.m. ET

Netflix’s subscriber growth in the US

In the prior part of this series, we looked at why Comcast (CMCSA) would be interested in adding Netflix (NFLX) to its X1 set-top box. In this part of the series, we’ll look at why Netflix was interested in being added to the X1 set-top box.

Netflix stated in its last earnings call that its expects a lower contribution margin of 33.3% in fiscal 2Q16. Netflix is facing increasing competition in the US from the launch of new OTT (over-the-top) services including Amazon’s (AMZN) new standalone video service priced at $8.99 per month. Traditional television networks are also launching direct-to-consumer services such Time Warner’s (TWX) HBO Now and CBS’s (CBS) Showtime.

Considering these factors, there’s the possibility that Netflix’s subscribers in the US will decline. In fiscal 1Q16, as indicated by the above chart, Netflix had domestic streaming memberships of 47 million.

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Reasoning behind Netflix’s deal with Comcast

Netflix’s deal with Comcast would enable it to gain access to Comcast’s cable subscribers. If Netflix offers a trial membership to Comcast’s X1 set-top box users, there’s the possibility that these users could also turn into Netflix subscribers. This would widen Netflix’s subscriber base. Netflix usually pays its affiliates and “device partners” a fixed amount or “revenue sharing payments.” It isn’t clear how much Netflix will pay Comcast and who will handle the billing processes as a result of this agreement.

Netflix accounts for 0.81% of the PowerShares QQQ Trust Series 1 ETF (QQQ). QQQ also has 5.2% exposure to the television & radio sector.


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