We were surprised to learn that Netflix (NFLX) and Comcast (CMCSA) were able to come to the table and reach a deal so soon on what we would describe as carriage, or data/traffic management fees. We are interested in how lucrative this may or may not be for both parties, but will have to await details until later. Our take is that this should be good news for all parties, as any payments from Netflix would seem to guarantee them a quality product moving forward to help continue to grow the company and this new revenue stream will allow the cable and telecom companies to continue to upgrade their networks to accommodate this traffic as well as to keep their dividend policies in place.
Chart of the Day:
The below chart from sandvine, which was published in a November 2013 CNET article (located here) shows just how much internet traffic is from Netflix. The truth of the matter is that it is not just Netflix, but video overall as YouTube is also a large data user.
Source: sandvine
We have no economic news today but will see the flow pick up tomorrow.
Asian markets finished mixed today:
- All Ordinaries -- up 0.03%
- Shanghai Composite -- down 1.75%
- Nikkei 225 -- down 0.19%
- NZSE 50 -- up 0.85%
- Seoul Composite -- down 0.45%
In Europe, markets are trading mostly higher this morning:
- CAC 40 -- up 0.28%
- DAX -- up 0.01%
- FTSE 100 -- down 0.10%
- OSE -- up 0.89%
Icahn Ramping Up Pressure
Carl Icahn is increasing the pressure on the Board of Directors at eBay (EBAY) as he tries to force them into accepting his proposals to increase shareholder value. From the beginning this looked like it would be one of the nastier, and more high profile, fights that investors had seen in some time. The board is composed of some high profile names in the tech industry and with their initial reluctance to split the company, the only logical next step would be to go after seats on the board.
Mr. Icahn decided to attack two members today, going after Marc Andreessen and Scott Cook, for competing against the company. It is obvious that Icahn is attempting to shame the board members into vacating their seats, but it will not be that easy. None of the information provided in the letter from Mr. Icahn contains information which is new, but rather old news with a new spin...albeit a very good spin which assigns dollar figures and puts everything front and center.
We would be watching eBay shares as they approach the $57-58/share range to see if momentum continues or whether investors hit the breaks to look for further guidance. Notice on the chart that the area has provided stiff resistance numerous times.
(click to enlarge)
Source: Yahoo Finance
The escalation on Mr. Icahn's part has pushed the shares higher today, and the market seems to think that he shall keep pushing until something is fixed for shareholders.
Pipes Matter
We have been steadily adding to exposure for clients and advising prospective clients to look at the companies with pipes in the ground which can deliver data services at good speeds with reliability. Our thinking all along has been that these pipes are the future and that somewhere down the road the government would have to allow for charges to be applied to incoming data in order to keep "the information highway" affordable and open to all.
With the news that Netflix has agreed to a deal with Comcast to pay for guaranteed speeds for their data over Comcast's network we think that the tide has finally shifted. Netflix knows that they have to keep their feeds streaming (without buffering numerous times during a viewing) and Comcast knows that they need to start posturing for their showdown with the Department of Justice and Federal Communications Commission for the recently announced Time Warner Cable (TWC) deal. Obviously the scale allows Comcast to negotiate with Netflix as they are, and will become even more of, the closest thing to a national player in the cable industry as one can have.
Although no details on the deal were announced, such as time frame or value, it does appear that this paves the way for further deals among the other large carriers. Our guess is that Verizon (VZ) will be next up, especially as they have been quite vocal, in the media and their actions, with the cost of delivering Netflix over their systems without compensation.
Verizon looks like a decent buy at these levels to us as they pay a solid dividend and have spent a lot upgrading their networks over the years. With the wireless unit now all in house, we suspect that the company will be able to pay down debt, continue to upgrade networks and increase their stock buyback programs and the dividend.
(click to enlarge)
Source: Yahoo Finance
Although it appears the big names will get paid in this first round of negotiations, the smaller cable systems might be left out in the dark until the FCC revises its net neutrality laws which were recently thrown out. Netflix will negotiate for scale early on as they need to protect the vast majority of the business they have already signed up, but down the road they will focus on quality across the board and should be a major player in the push behind upgrading smaller systems.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: VZ has previously been recommended.
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