Netflix did two things the other day: It officially opposed Comcast’s proposed acquisition of Time Warner Cable, and it announced its decision to hike fees on new subscribers by a dollar or two a month. Netflix stock soared (up more than 27 dollars a share) on the announcements – and on the fact that Netflix earnings and new-subscriber count both exceeded the market’s expectations.
All of which causes one to consider whether, in the three-way competition among the cable owners (the pipes), the movie studios (the content owners), and, increasingly, companies like Netflix and Amazon (the streamers), who holds the strongest hand.
The truth is, all three need each other. Without content, the pipe owners are helpless. Without pipes, the studios can’t reach our homes. And the streamers need both content and pipes. Wireless technology may eventually replace coaxial pipes, but that’s a long way off, and anyway, the new pipe owners would be wireless companies.
Still, certain facts cannot be ignored. The first is that content, unlike the installed base of hardware, is mobile and will flow to where the money is. Kevin Spacey was drawn to Netflix’s House of Cards by money and is free to leave Netflix when someone offers more money. So content is king, in a way that pipes are not. However, viewers (especially people in the cherished 20-to-35 age group) are a fickle and unpredictable bunch, as Hollywood and the TV networks find out every week. Certain talent is bankable until it is not; and while content is a crapshoot, the pipes are not. A length of coaxial cable is a length of coaxial cable, and it can be depended on to deliver both quality content and garbage. So the owner of the pipe is king.
On the other hand, there is no question that the trends favor streaming. Netflix has about 50 million subscribers in 40 counties, and it adds more every day. The market values Netflix at over $22B, which means that it can afford pricey talent. So Netflix is king, which exactly is what the Netflix bulls are betting on.
In other words, I don’t know how the contest will play out. I don’t know whether Comcast’s takeover of TWC will be approved. I don’t know whether Netflix’s next show will be as successful as House of Cards or a turkey. In short, any bet on any of these stocks is a pure gamble.