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Is Netflix Getting Fuzzy? Hang On

Swarup Gupta

House of Cards launched its second season on Valentine's Day, to a huge round of applause. Millions of subscribers streamed the show from Netflix, Inc. (NFLX), 16% of the company’s total subscriber base according to some estimates.

But have Frank Underwood’s actions seemed fuzzier than usual? That’s because several viewers have experienced snail-paced download speeds while watching his delightfully devious machinations.

Online Transmission Fees

For some time now, Netflix has been sparring with internet service providers (ISPs) over sluggish broadband speeds. Such behemoths as Verizon Communications Inc. (VZ) and Comcast Corp. (CMCSA) have been demanding additional fees to speed up streaming services. A refusal to pay up may have resulted in blurry pictures and extended buffering.

The situation is nearly identical to the clash between multiple-system operators (MSOs) and broadcasters that have occurred in the past. Could this result in a situation similar to high octane channel blackouts which happened when “placement fees” were not paid? And more importantly, could this result in a situation where Netflix streaming is drastically affected because of a clash with ISPs?

FCC to Intervene

The Federal Communications Commission (:FCC) said this week that it will once again lay down rules to regulate ISPs. These regulations would be aimed at preventing them from barring content providers or reducing the speed of access to consumers in case they refuse to pay placement fees

Widely known as "net neutrality," this concept aims to provide equal access to the Internet. One of the desired outcomes is a level playing field which would allow small players to compete with large content providers on an equal footing.

Industry experts believe that such regulations, could, in fact, clear the way for ISPs to enter into deals with the likes of Google Inc. (GOOG) and Netflix. These agreements would offer these content providers certain advantages, such as greater or speed or advantageous placement.

Other Challenges

The slowing down of speed harkens the beginning of a conflict, which also implies the failure of negotiations. And a clash between ISPs and content providers would have a singular casualty: the consumer.

However, it would not be incorrect to assume that Netflix and other large content providers would settle the matter through placement fees. It would then have other issues to deal with. Among these are a possible merger between Comcast and Time Warner Cable Inc. (TWC). However, the rate at which the company continues to add subscribers means it is well equipped to deal with the situation. Netflix added 2.3 million subscribers in the U.S. in the fourth quarter and expects to grow this number in 2014’s first quarter compared to the year-ago period.

Why the Stock Remains a Strong Bet

Many analysts have questioned the aura surrounding the stock. The criticism has primarily centered on whether it can continue to grow its subscriber base. However, the euphoria surrounding the second season of House of Cards has proved otherwise.

Moreover, the stock has a positive earnings surprise across the last four trailing quarters with an average surprise of 30.4%. It is expected to continue to grow its earnings appreciably, at 140% over the next year. This despite the near 500% appreciation over the last year. At the same time, estimate revisions for this a Zacks Rank #2 (Buy) stock continue to be favourable.

Probably, its ace remains the original programming, the likes of Orange is the New Black and Lilyhammer. And, of course, House of Cards. Not only did viewership bump up the day its second season launched, shares of Netflix posted an all-time record of $439.49 last Thursday.  

As of date, prices continue to hover around the $430 mark. It seems we’ll continue to see a fuzzier Underwood, albeit on clearer screens. And his reach will only get wider.

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