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Why Comcast Will Crush Netflix

I’m sitting in my rental car outside of eBay headquarters on a rainy day in San Francisco. I’m about to step into my second day delivering an Outthinker workshop to group of technology execs from various companies. Television news here centers on the rapidly reorganizing technology landscape: the Yelp IPO, Yahoo suing Facebook during its pre-IPO quiet period.

But the most game-changing technology news has gone mostly overlooked. Comcast, the largest U.S. cable service provider, announced it will soon launch a video-streaming service aimed at beating Netflix. It’s easy to miss the strategic importance of this move. But if you understand the strategic narrative that cable companies have played again and again to devastating effect, you will recognize this as the critical turning point in the plot.

The battle to own the "digital home" has been waging for years, but over the past 12 months, it has really heated up. Apple is rumored to be launching a television, Amazon’s video-streaming business is taking off, Samsung and other electronics firms are embedding ever more online video services into their TVs, and television channels are increasingly streaming directly. How this all plays out will have significant consequences for investors and television viewers around the country.

The future may look uncertain, but look to the past and you will see a pattern that points clearly to where things may be going. A shift is underway. Cable companies look poised to turn the tables on Netflix and other video streaming players. The recent relative stock performance of Comcast and Netflix underscores that this is happening (see the stock chart below). That in a few days Netflix will lose its rights to carry Starz video content, including my daughter’s favorite Disney films, offers yet more evidence.

Here is what the past tells us about who may win and lose in this high-stakes game: 

1. There are only three sources of advantage, and Netflix has none of them: For any company to win over the long term, they must secure one of three sources of competitive advantage: customer captivity (think Microsoft Windows), economies of scale (think Walmart), or preferential access to resources (think De Beers Diamonds). Netflix once enjoyed customer captivity, but this advantage has eroded thanks to its missteps that upset customers, drove an exodus of more than 800,000 Netflix users, and sent its stock price reeling.

2. The tortoise inches toward the finish line: Cable companies have historically played the tortoise to high-tech innovator hares. They adopt a predictable pattern—they let someone introduce a new service, watch the market grow, and much later step in and take away the opportunity. This is how cable companies beat out TiVo (which introduced the world to the DVR) and Vonage (which convinced Americans to embrace VoIP). Comcast’s announcement is the most direct message yet that it intends to seriously attack the new video-streaming opportunity Netflix has ushered in.

3. Google and others understand the game: This is why Google is making steady inroads into the home. In Kansas City, Google has launched an experiment with potentially huge consequences. It has begun wiring homes with high-speed fiber optic service, which positions it to get into the cable service provider game.

4. Netflix’s last hope is to become HBO: There is little reason to believe Netflix can regain customer captivity or create economies of scale, so the company’s only hope is to secure preferred access to content, which it is attempting to do by producing its own shows and movies. If Netflix can succeed at this, it will begin looking more like HBO. If it fails, it falls.

As you watch your company evolve, look for these three sources of advantage and see who is moving toward them ahead of you. Do you have customer captivity? Do you have economies of scale? Do you have preferential access to a key input? If not, start making plans, like Google is doing and Netflix probably should have done, to build such power now.

Want more? See author Kaihan Krippendorff's Outthinker series on YouTube

[Image: Flickr user Travis K]

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  • Marc Schenker

    Web is right. Most people will do anything they can to avoid dealing more with Comcast, for those who unfortunate enough to have their service. If Netflix goes bye bye, we will turn to Amazon, Google, Apple or anyone else before we give The World's Worst Company, also known as The Company That Perfected Ambush Marketing, any more of our business.

  • Web

    You are forgetting the fact that I will NEVER deal with Comcast, ever.   This is the most integrity challenged company and it's CEO Brian Roberts is a pompus a-hole.   I would go w/o TV if this was the only option.  Many others feel the same.   That's a wild card in all of this

  • Marcus Barrowman

    Kaihan Krippendoriff said
    '' Netflix once enjoyed customer captivity, but this advantage has eroded
    thanks to its missteps that upset customers, drove an exodus of more
    than 800,000 Netflix users, and sent its stock price reeling.''

    Netflix has already overcome those fall subscribers losses. In their January Q4 financial report, they noted they upped their subscriber total to over 24.5 million, from the fall decline number of 23.7 million.

  • Denis D. McKeown

    Twenty years ago, Cabllevison founder Charles Dolan promised subscribers they would be able receive only their individual channel selections -- and only pay for them!

  • Jensen_G

    As long as subscribing to cable includes paying for a bunch of channels that I don't want and being forced to watch non-live content at specific times, I will stick with the Netflix, Hulu, MLB.TV, Amazon on-demand, etc, thank you very much.

  • Ken Davidson

    With broadband, access is king.  I know people often say content is king, but if you are providing the link to a home, you have open access to marketing to that home.  The small cadre of Netflix devotees are not enough to save the company.  While I do believe that streamed content is the future for end users, I also agree that many end users are looking for diversification. Google's privacy policy has raised concerns about putting everything in one place. 

  • jackbox

    You're forgetting that netflix has a customer base that largely has no desire to do business with the cable company.  The cable companies idea of competing is to offer its own customers cheap streaming.  But as a netflix customer I don't have cable, or satellite service, nor will I ever.  At $8/month for the entire package, I can justify the expense, as well as a pay go service like red box at $1.20/movie.  I don't want to pay for things I won't use, and netflix knows I won't watch most of their programming, but they are betting I can find $8 worth per month, which I think I can as well.

  • Tim Doggman

    Your observations about the motivation of the typical Netflix customer are accurate -- they want to pay les and more a la carte vis-a-vis Cable-Co./Sat-Co.  However, your thesis has a fatal flaw ... the cost of content.  That's why they are taking a stab at content production. 

    STARZ took the first step and drew the line in the sand on pricing content.  Others will follow suit.  Content providers are scrambling to offer verticals direct to the consumer (HBO Go).  Cable co's. are buying content (NBC Universal); already owns the pipe (broadband); and they already have economies of scale when negotiating for addl. content (cheaper pricing).

    Your Netflix experience will change dramatically over the next couple of years as they have a critical decision to make: low price/less content or higher pricing/more content.  It will likely end up being both.   The value proposition of their product will skew negative and they will go the way of the dodo bird.