By Sanjay Sanghoee
FORTUNE – The future of Netflix (NFLX) could soon change dramatically, now that Comcast (CMSCA) has agreed to buy rival Time Warner Cable (TWC) in a $45 billion deal that would combine America's two biggest cable companies.
With 44 million subscribers, Netflix has established itself as a leading player in the market for online on-demand video programming, and cable, telephony, and satellite companies are under serious pressure. Comcast cited competition from Netflix as one reason for acquiring Time Warner. And to take on the combined muscles of Comcast and Time Warner, Verizon (VZ), AT&T (T), Charter Communications (CHTR) (which lost its bid for Time Warner), DirecTV (DTV), and DISH Network (DISH) will now need even more traction.
Given the competition, Netflix could be an attractive candidate for an acquisition, or at least a major investment.
Even though Comcast is a content producer (it owns NBC Universal), cable, and online distributor (it owns a piece of Hulu), and is promoting HBO GO by making it available without a cable subscription, that doesn't mean that the company may not want to expand its share of the pie through Netflix. For one, Comcast-Time Warner could widen its effective reach without violating the 30% pay-TV market cap that the government imposes on cable companies. What's more, a combination with Netflix would create synergies for licensing content.
As I wrote in an earlier piece, Netflix's current offerings of licensed content are lackluster and create an opportunity for a more robust partnership between the company and content producers.
As for Verizon and others who do not have direct content relationships, the need to make a deal with Netflix is even more pressing. While the recent court order striking down the Federal Communications Commission's open-Internet rules gives network providers the ability to slow down Netflix's service over their systems, it is unclear whether they can afford to exercise that power given the popularity of Netflix and a possible public backlash against a restricted Internet. The point is that both sides have good reason to explore a deal.
Another factor in favor of a transaction is that Netflix needs both new and original content to stay attractive to subscribers. The company will spend $3 billion in 2014 for content, including to develop original shows, which is 60% of the revenue projected by Morgan Stanley analysts for this year.
While Netflix reported $1.2 billion of cash and equivalents at the end of 2013, it also anticipates high expenditures and may have to raise capital to finance its plans. This means that the company should welcome a partnership with a deep-pocketed player.
Finally, there is Amazon (AMZN), a major competitor to Netflix and also a possible suitor. Amazon's strategy is to leverage its 10 million strong Prime subscriber base to sell streaming content, but if the company raises its Prime fee, those numbers could fall fast and make Netflix a smart acquisition, both for streaming and cross-marketing purposes.
Amazon offers newer movies and television episodes than Netflix, but lacks the popularity of Netflix, which makes them complementary. Amazon also has the cash to finance Netflix's original shows and to pay for faster delivery over distribution networks.
Regardless of who ultimately makes a move, the point is that Netflix is ripe for some type of transaction, and investors should take note.
Correction: An earlier version of this article suggested Netflix is expected to spend $3 billion to acquire new shows only. This figure represents spending on total acquisitions, not exclusively for new programming.
Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator, and has an MBA from Columbia Business School. He is also the author of two thriller novels.
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