Comcast Might Be the Key to Netflix's Continued Subscriber Growth

By Adam Levy Markets Fool.com


Netflix on Comcast's X1 service. Image source: Comcast.

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The percentage of households with at least one of the big three streaming services -- Netflix (NASDAQ: NFLX), Amazon (NASDAQ: AMZN) Prime Video, or Hulu -- is about the same as last year, according to a recent survey from UBS.

Netflix, specifically, saw its penetration remain stagnant at 42%, while Amazon Prime Video saw the largest improvement, increasing penetration 4 percentage points from 23% to 27%. Overall, streaming services are in 51% of U.S. broadband households, according to the survey.

The trend doesn't bode well for Netflix, which expects its domestic subscriber count to reach 60 million to 90 million in the long run. It had 46.5 million paid U.S. subscribers as of the end of the third quarter.

Interestingly, one of the biggest opportunities for Netflix to continue growing in the U.S. is to work with cable companies like Comcast (NASDAQ: CMCSA).

Just another premium cable network

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"The goal is to become HBO faster than HBO can become us," Netflix Chief Content Officer Ted Sarandos said about four years ago. At the time, he was mostly referring to Netflix's original content strategy and HBO's move to stream more of its content. Now, Netflix is making moves to make more partnerships with cable companies, something that would've been unthinkable just a few years ago.

Comcast has already moved to integrate Netflix's content with its X1 set-top box. Consumers subscribing to both Comcast and Netflix can search both Comcast's and Netflix's catalog at the same time from a single interface.

With the integration, Comcast has enabled customers to sign up for Netflix directly from its set-top box, and Comcast will include a Netflix line item on customer's subsequent bills. It's likely Comcast gets a small cut of Netflix's $10-per-month fee for onboarding customers and taking care of billing. That fee is likely offset by Netflix's recent price increases, so profitability isn't impacted. Additionally, Netflix likely benefits from lower churn rates from these subscribers, since they don't pay for the service directly. Out of sight, out of mind.

Comcast and other pay-TV distributors have similar agreements with HBO, but with significant incentives for signing up certain amounts of subscribers. Netflix might benefit from pushing Comcast to market its service with additional incentives just like HBO did. Fifteen percent of U.S. pay-TV homes without Netflix say they would sign up if it was "bundled with pay TV," according to the UBS survey.

Netflix has similar relationships with other pay-TV distributors around the world including DISH Network (NASDAQ: DISH) (U.S.), Virgin (U.K.), Telus (Canada), Orange (France), and many others. Still, there are many more cable companies for it to bring on board.

Other opportunities for Netflix

The UBS note touched on the most under-penetrated demographics for Netflix. Here's an overview of its opportunities and threats for each.

  • They skew older and are slower adopters of technology.Sixty-two percent of non-Netfllix subscribers are over the age of 55. What's more, Netflix has had poor take rates with those that aren't keen on keeping up with technology. More partnerships with traditional television distributors would help get Netflix in front of older people. People over 50 watch more television than younger people, and they're the only age demographic that watched more television per week in 2016 compared to 2015, according to Nielsen.
  • Smaller households.Eighty percent of non-Netflix subscribers live in one- or two-person households. Netflix offers an $8-per-month plan for streaming to one device at a time, but it doesn't promote it as much as its $10-per-month plan. It also doesn't allow streaming in HD. Allowing HD streaming or pushing the marketing of its lower-priced plan could help it penetrate those smaller households better.
  • Lower-income households.Sixty percent of non-subscribers are below the median U.S. household income level. Amazon has done an excellent job appealing to lower-income households over the past year by offering a monthly payment option for Prime and additional cost-saving benefits. Netflix's position as a relatively inexpensive pay-TV alternative is already well-cemented in American culture. Finding a way to better serve that market, however, could provide a nice boost to Netflix.

For now, working more with cable operators like Comcast is the best path forward for Netflix in the U.S. The recent price increase to $10 per month means revenue-sharing agreements shouldn't impact the company's core profitability. There's a large untapped market of consumers willing to pay for Netflix if it makes it easy enough. Bundling it with a bill they already pay every month would help Netflix reach its goal of 60 million to 90 million domestic subscribers.

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Adam Levy owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN and NFLX. The Motley Fool has a disclosure policy.