LOS GATOS -- After giving in to Comcast's demands for payment to ensure strong streams to its customers, Netflix shares reached record highs Monday as another major Internet service provider signaled willingness for a similar deal.
Netflix stock reached an all-time intraday high of $449.69 Monday before closing at a record price of $447, an increase of $14.77, or 3.4 percent, from Friday's closing price for the video-on-demand company. The move follows Sunday's announcement of a groundbreaking deal with cable and Internet provider Comcast that will allow the two companies to join their networks to ensure customers of Comcast's Internet service will have access to Netflix's streaming service at speeds high enough to handle the traffic.
The two companies worked up the outline of a deal at CES in January, according to The New York Times, days before a federal court struck down the Federal Communications Commission's "net neutrality" rules designed to keep ISP's from favoring or slowing down specific Web services. That ruling has caused concerns that ISPs such as Comcast and Verizon could throttle Netflix streams to force payment; similar concerns were brought up when Comcast agreed to acquire its biggest rival, Time Warner Cable, for $45 billion earlier this month.
Neither company would divulge the amount of money that will change hands in the deal, but Michael Pachter, Wedbush Securities' managing director of equity research, predicted that Netflix will pay $25 million to $50 million annually for the next three to five years and is likely to pay similar amounts to other large ISPs.
"The agreement reinforces the leverage that broadband providers have over Netflix, leaving the latter no recourse other than to open its checkbook (albeit for an undisclosed amount), as service degradation is a real threat now that the net neutrality rules have been eliminated," Pachter said in a note Monday morning. "We expect agreements with other ISPs in coming months, also at undisclosed terms, although Verizon appears to be the most likely to seek very high fees from Netflix, given that it was the lead plaintiff in the net neutrality challenge."
In fact, Verizon Communications CEO Lowell McAdam on Monday confirmed during a morning interview on CNBC that the companies have been discussing a deal for the past year and expect to come to a final agreement soon.
"I think there's a good opportunity here," McAdam said, later adding, "Both (Netflix CEO) Reed (Hastings) and I have talked about it and we think it's in both of our interests."
JPMorgan analyst Doug Anmuth wrote in a note that "a more direct connection should be positive for the Netflix user experience," and added that the Los Gatos company likely accounted for the deals in its 2014 financial forecasts. Anmuth suggests buying Netflix shares and has a $500 price target, while Pachter is massively bearish on the stock, offering an "underperform" rating and $175 price target.
Netflix stock has been on a roll since recovering from a poorly implemented subscription change that severed its streaming service from its original DVD-by-mail business in 2011, effectively doubling the price for customers who subscribed to both offerings and costing Netflix dearly in the court of public perception and on Wall Street. Shares nearly tripled in 2013, gaining 297 percent to lead the Standard & Poor's 500 in percentage gain for the year, and have managed to advance another 20.3 percent in 2014 though Monday morning's trading session.
Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510.