What is Netflix doing talking to cable companies?

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Across the interwebs, people are rolling their eyes as they read the Netflix is in discussions with cable companies to bundle services. The ‘cable cutter’ community is near apoplectic over this.

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The reality is that Netflix is positioning themselves for the long game here.

Remember, Netflix is most interested in Netflix’s survival and profits. They are not focused on your hatred of the cable companies.

Revenue – With cable and satellite penetration well over 80% in the US, we are looking at over 100 million households paying a monthly fee for entertainment. Netflix would like to get a slice of those customer’s money. When you multiply any revenue number by millions, the result is big. By bundling with cable companies, Netflix gets the possibility of vastly increased revenues by tapping into these traditional viewers and exposing them to the Netflix service. Getting the ‘late majority’ and ‘laggards’ to see and learn about the Netflix service is a huge benefit to Netflix.

Content distribution – Netflix has been looking into creating it’s own content, like Hulu and Amazon, to bolster it’s attractiveness to viewers. Creating good television content ain’t cheap, so Netflix is going to want maximize the demand for it to get a good return on their investment. The more people that get a chance watch their shows, the more likely they are to get a bonafide hit. Getting a hit that is Netflix-only would be huge. When the Sopranos was airing, HBO created entire campaigns to drive cable subscriptions and package upgrades simply on the desire of viewers not to miss the show. If Netflix can get enough eyeballs on good content they make, the have a good chance to significantly increase subscribers.

Net Neutrality – The situation in the US is bit strange considering the that major providers of broadband are also the major providers of television programming. We see this surface in the debate known as ‘net neutrality’. The broadband providers don’t want consumers to be able to get content without having to subscribe to their programming service. Over The Top type services like Netflix, Hulu, Amazon, and Apple need the broadband pipes to stay open and unmetered. If Netflix can strike agreements with the cable companies that control broadband, they can protect themselves from being frozen out in a broadband toll situation.

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Again, Netflix is aiming to be in every home, whether they be tech enthusiasts or not. What better way to get into people’s homes than to be invited in by the cable company that is already there. While Netflix would love to eventually love to supplant cable & satellite as primary in the home, they are happy to form a temporary alliance if it fits their long term goals. To paraphrase Machiavelli, “Keep your friends close and your enemies closer.”

  • http://squisheddiorama.wordpress.com Stephen Ornelas

    Nice article on what’s going on with Netflix. I quit them just before they changed their service. I’ve had them in the back of my mind as an option to go back to. But the more I hear about what Netflix is doing, the smaller that option gets, and the further it gets driven to the recesses of my mind. You know where I remember the good ol’ days. RED BOX is a solid with their $1/video. My roommates are all about that deal. I think I am too. It’s even hard to purchase off of my AppleTV, when I know that I’m paying 5 times as much for HD (@720p no less!). 

    • cruftbox

      I hear you about RedBox.  My TV is about as well connected as possible, but sometimes it’s just cheaper and simpler to pick up a disc from RedBox than getting it online.  The upcoming RedBox/Verizon service will be interesting to see if they can get to lower cost levels than other digital download providers.  Thanks for reading.

  • http://twitter.com/topscientist Top Scientist

    I ran out of things to stream on Netflix after a few weeks Roughly 5% of the movies I want to see are available for streaming. Useless service is useless. Their DVD selection is still first-rate.

  • Fred

    Nice article. I do agree that Netflix is trying to position themselves for the long haul. I think they just need to be careful that they don’t gt into anymore PR nightmares. They don’t want to alienate core subscribers by trying to be too much like the other guys. I like the idea of a Netflix channel but I’m afraid that it could hurt their ability to strike deals with content providers. It’s definitely an interesting time and who knows what could happen.

  • guest

    Interesting article on one of my favorite topics.  I certainly cannot fault Netflix for going after an alliance with cable.

    But really, what Netflix should be looking at is how they will change the game.  While big cable has a strangle-hold on hi-speed internet for the foreseeable future, their media offerings have so many feeling like chumps at the movie theater paying $9 for popcorn.  (We’d rather just sneak stuff in in our jackets.)

    If Netflix would add more content (the titles that people actually want to see), they could charge more for their streaming service.  I had no problem paying $9.99 for the service bundled with DVD in the past, and if they would simply add those titles, I’d have no problem paying it again.  How hard is it to just rip the DVD, compress it, and serve it?  I know there is a massive licensing concern here, but I am clueless as to what happened in the courts to make that so, and will just go on naively being upset they cannot get their act together.

    More to the point, if they modeled it after what Spotify or Google Music has done for music, but with tv/movies, they’d pretty much be there.  Again, I realize licensing is an expensive problem, and there are some deals that just won’t be struck, but if they allowed me to “cloud” my media and stream it on mobile, etc. along with their offerings for say, $9.99/mo, they’d definitely keep my subscription.  

    As it is, I’m restless and looking.

    • Michael Pusateri

      I agree it’s frustrating to see a title available on DVD but not to Watch Instantly.  This stems from the desire of the studios to maintain their DVD & Blu-Ray business models.  They are scared to do anything that might reduce the demand for plastic discs of content.  Like so many industries, they will try to prop up the model with things like Digital Copy and Ultraviolet, until it the s-curve breaks and they have to switch to a new distribution model.  And new models aren’t always more digital.  RedBox is hugely popular as a replacement model for both buying discs and renting them from stores like Blockbuster.  As always, it’s all about the benjamins in hand now, not about what makes long term sense.