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Jim Cramer's Action Alerts PLUS

Comcast, Alphabet Add YouTube to the Mix

By Jim Cramer and the AAP Team | 2017-02-27 11:21:49.0
Stocks in Focus: CMCSA, GOOGL

Comcast (CMCSA:Nasdaq) and Alphabet (GOOGL:Nasdaq) announced a deal Monday to bring YouTube to Comcast's X1 Xfinity cable set-top box. In other words, for those who subscribe to Comcast for cable TV and use the new operating system (X1, which we have been positive on for some time), there will be a dedicated YouTube app on the menu screen where users can easily transition between live/cable TV and internet video. As a side note, only those customers who have Comcast's latest X1 set-top box will receive access to the app due to integration capabilities (roughly 50% of the 22.5 million video subscriber base has those boxes). The integration will occur later this year.

The move from Comcast is similar to the one agreed to last year between the cable giant and video streamer Netflix (NFLX:Nasdaq), and represents a changing of the guard in terms of the company's approach to internet video and its threat to traditional cable bundles. You can read our analysis of that deal here. In short, the X1 set-top box is now acting, in some form or another, similar to Apple TV, Roku or smart TVs, all of which provide users access to apps on their TVs, thereby offering a similar experience to that of an iPad or other tablets.

As we mentioned in our earlier note analyzing the deal with Netflix, "the true benefit for Comcast comes from reducing consumer friction. Allowing users to access Netflix without transitioning to a separate device or separate TV input gives consumers one less reason to think about cutting the cord. Thus, we believe the deal should immediately improve the company's competitive position in the marketplace." We believe this view holds true for the deal with YouTube as well.

As the digital revolution continues to captivate consumers, the most seamless experience is the best experience, especially in our on-demand world where consumers want content immediately. By providing access to YouTube, Netflix and likely others in the future, Comcast can act as an aggregator for consumers while still providing live TV content. X1's voice commands will work to control YouTube, adding to the convenience factor. The software will also automatically recommend related shows, across platforms, to offer users the best content, regardless of the provider. Comcast's X1 will be the only service to allow for integrated searches across traditional TV networks, Netflix, YouTube and other web apps.

For now, the agreement is simply a way for both Comcast and Alphabet to create a better experience for their customers. Google knows well the importance of investing early in the product experience in order to drive long-term value, and we believe the move is a positive for both companies. On one hand, Comcast offers users an alternative to cord-cutting and we appreciate management's willingness to adjust to the changing consumer landscape, which has been evolving whether they like it or not. On the other side of the coin, YouTube reaches more consumers, breaking into an industry where web-video had been met with major resistance in the past, thereby creating an even more attractive ad platform for marketers moving forward.

While no money is changing hands for now, Comcast could eventually allow customers to subscribe to YouTube Red (the ad-free subscription service), a transaction from which Comcast could take a fee. We cannot speculate how the financial dynamics will play out, but we believe both companies can benefit from a working relationship moving forward, if only to use each other's expertise (Comcast for distribution and Google for its user experience know-how) to better their own respective businesses. Of course, the true winner, for now, is the consumer, who will no longer have to sort content between TV and web video. Content is content, regardless of the means of consumption. This deal validates that view and should lead to higher customer satisfaction moving forward.

Regards,

Jim Cramer, Portfolio Manager & the AAP Team
Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long CMCSA and GOOGL.

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Chart of I:DJI
DOW 20,804.19 -17.57 -0.08%
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Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.04090727187386548 Consumer Durables
AGN 0.0491296917826052 Drugs
APA 0.03942177057771599 Energy
CMCSA 0.027350411166512698 Media
DHR 0.01879607939812345 Health Services
FB 0.0497813168762342 Internet
GE 0.025594719415223375 Industrial
GOOGL 0.0462746671686917 Internet
HPE 0.01626240663954809 Telecomm
MMP 0.014052088495749234 Energy
NWL 0.03456198376599613 Consumer Durables
NXPI 0.02433644028080872 Electronics
SLB 0.035446657230635226 Energy
SNA 0.02796635072833078 Industrial
XEC 0.029763736289746125 Energy
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
ADBE 0.03232180629966161 Computer Software & Services
AEP 0.024273444393020056 Utilities
ARNC 0.0375590222309939 Industrial
C 0.03798278792124859 Banking
CSCO 0.03732779455038233 Computer Hardware
DOW 0.03397180697331705 Chemicals
KHC 0.013270648176706014 Food & Beverage
PEP 0.0398403473003349 Food & Beverage
SBUX 0.0289205745661932 Leisure
TJX 0.03992701216330427 Retail
WBA 0.028567724766960734 Retail
WFC 0.040128016383300484 Banking