Netflix's slowing U.S. subscriber market may have driven truce with Comcast

Netflix's (NASDAQ: NFLX) apparent truce with Comcast (NASDAQ: CMCSA), which will see its SVOD service stream over the cable operator's X1 set-top boxes in the near future, may have been partially driven by the need to grab more subscribers as its U.S. growth slows and its international expansion appears to be less than stellar.

According to a new Jefferies research note, the future for Netflix, at least in the United States, may rely upon integrated offerings such as its set-top streaming deals with cable operators.

Jefferies analysts cited several factors that will slow Netflix's progress in the near term. The analyst firm downgraded Netflix stock from "hold" to "underperform" with a target price of $80, a drop from its earlier target of $120.

A transitioning SVOD landscape, slowing subscriber growth in the United States, and "challenging" international growth in the near term are three of the key reasons for the firm's lowered estimate. But perhaps most significant is that Netflix's status as a "first mover" is eroding, with more SVOD services entering the market and its top competitors, Amazon and Hulu, improving their platforms and grabbing more exclusive content from studios and networks.

"NFLX has transformed an industry, catching competitors flat-footed while building a massive sub base and content library, with minimal competition. Given the number of new SVOD / OTT products that have launched in the past year, and investment made by existing platforms (Hulu, AMZN), we believe the landscape will be much more competitive over the next 5+ years, with the consumer the winner," said Jefferies equity analyst John Janedis in a research note.

Comcast and Netflix were at odds for at least five years over the amount of streaming data traffic that Netflix sent over Comcast's last-mile networks. The SVOD provider complained in 2010 that Comcast was deliberately throttling its data – slowing it down at the network edge where Comcast's network connected to the public internet and/or transport providers' networks.

The two companies grudgingly settled their differences in 2014 by signing a transit deal, pre-net neutrality, that put an end to the throttling. However, both continued to grumble about the agreement.

Netflix didn't just have Comcast in its sights; it also took AT&T (NYSE: T) and Verizon (NYSE: VZ) to task over alleged throttling practices as net neutrality heated up ahead of the FCC's adoption of new rules regarding treatment of internet traffic.

However, the new agreement with Comcast is a huge step for the two companies, and one that ultimately may be a win-win for both Netflix and the Tier 1 cable operator. For Comcast, the deal "lets the cable giant show regulators that it is more open to competitors and that its X1 box is a web video platform and not just an old-time cable box with a better user interface," said Kara Swisher, in a Recode article that broke the news on Tuesday.

The move is also a way for Comcast to stay competitive with its newest rival, New Charter (NASDAQ: CHTR), the recently merged trifecta of Charter Communications, Time Warner Cable and Bright House. Charter CEO Tom Rutledge said in May that the embiggened cable MSO is planning to integrate Netflix and Hulu streaming into its user interface and other products.

Netflix, in the meantime, gets better access to Comcast's multi-million subscriber footprint, a big opportunity in the increasingly saturated U.S. SVOD market. The SVOD provider has penetrated about 47 percent of U.S. broadband households so far, Janedis said in the Jefferies note, but the research firm does not see Netflix reaching its estimated 60 to 90 million subscribers by 2020, instead projecting that the provider will see only about 58.3 million paying subs in that time frame. Pressure from competing SVOD providers and battles for licensed content could partially impact subscriber numbers -- something the Comcast set-top deal could help defray.

"In the long term, we believe the media conglomerate group understands the need to come to market with an integrated offering (instead of individually) to make the consumer viewing and billing experience more appealing," Janedis said.

For more:
- see this FierceCable article
- see this Recode article

Related articles:
Netflix price hike could raise $500M in needed cash, if subscribers don't flee
Amazon's $2B estimated content spend easily subsidized by Prime subscribers, analyst says
'Star Wars' may come to Netflix, sort of, thanks to exclusive Disney deal
Charter pursuing Netflix, Hulu integration

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