Apple-Comcast TV Service Rumor Drives Down Netflix Shares

netflix remote

Netflix (NASDAQ:NFLX) shares slumped over 6 percent today after an unconfirmed report from The Wall Street Journal suggested that Apple (NASDAQ:AAPL) is in talks with Comcast (NASDAQ:CMCSA) over the possibility of creating a streaming-television service that would work through Apple’s TV set-top box. The Wall Street Journal’s report was based on unnamed “people familiar with the matter.”

Although the sources noted that the talks were only in the early phase and that there were still many obstacles that must be overcome to complete the deal, investors apparently felt that the prospect of an alliance between Apple and Comcast was too much of a threat to Netflix’s business. However, even if Apple and Comcast reached a deal, it is unclear how the proposed streaming-television service would affect Netflix’s own video service.

“Folks don’t understand the Comcast-Apple box and somehow think that because someone changes their set top that they would cancel Netflix for a service that does not even exist,” observed Janney Montgomery Scott analyst Tony Wible via the Financial Times. According to the company’s earnings report, Netflix finished 2013 with 44 million subscribers, including many users who access the service through the current iteration of the Apple TV product.

However, some investors may have been spooked by the idea of a streaming-television service that could potentially be of a higher quality than Netflix’s service. As noted by The Wall Street Journal’s sources, Apple’s video streams would travel on a separate, less-congested part of the network during the final leg of its journey to customers’ homes.

On the other hand, Netflix’s video streams would presumably still be transmitted as a regular part of public Internet traffic. This means that Apple’s video streams could potentially be of a higher quality than Netflix’s video streams for some customers during peak Internet traffic times. Comcast would be allowed to treat Apple’s streaming-television service differently because it would be classified as a “managed service.” Internet service providers won the right to transmit managed services separately after a federal appeals court struck down key segments of the Federal Communications Commission’s Open Internet rules.

Meanwhile, Netflix CEO Reed Hastings recently criticized several major ISPs, including Comcast, over their alleged anti-net neutrality behavior in a recent post on the video-streaming company’s blog. Hastings’s criticisms centered on the interconnection fees that Netflix was forced to pay in order to ensure that its customers got a quality video-streaming experience. Although Netflix’s interconnection fees complaint is a separate issue from Apple’s proposed service, the net neutrality issues raised by Hastings may have added to investor uncertainty about Netflix’s future.

Here’s how Apple and Netflix traded  today.


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