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The Bauminator

Netflix’s Cable Challenge

10/14/2013 11:29 AM

That Netfix is in talks with U.S. cable operators about getting its streaming service integrated with set-top boxes isn’t a huge surprise. After all, Netflix has already integrated itself with just about every retail video platform on the planet, so it makes perfect sense that they’d want to be part of the leased box ecosystem too.

Save for having a linear service, Netflix, thanks to its mix of original series and large catalog of TV shows and movies, has essentially become a new premium subscription service that can do battle with HBO, Starz and Showtime. It just doesn’t have all the distribution rights it needs to offer its entire service on leased boxes in the U.S. At least not yet.

But Netflix’s new arrangement with Virgin Media and, more recently, with Sweden’s Com Hem, have gotten the attention of U.S. cable operators.

An executive with a tier 1 U.S. operator that offers leased TiVo boxes told me that he has pursued the Netflix angle when the Virgin Media deal was announced and was told that Netflix was indeed making progress with programmers. But he was also told that Netflix couldn’t precisely say when it would salt away the deals needed to move forward with a leased box strategy in the U.S.

An industry source also confirmed that Comcast is indeed in talks with Netflix and other over-the-top providers about porting video apps apps to X1, the MSO’s new IP-capable video platform. But, echoing what The Wall Street Journal reported on Sunday, the same person also warned that discussions with Netflix are at the “very early stages” and that there are many business-related issues that would need to be ironed out before anything could move forward.

At this point in the game, Netflix would not gain much from a U.S. cable deal (other than a stock bump). The leased cable box ecosystem, at least when it comes to MSO-supplied boxes with IP capabilities, is comparatively miniscule. Most cable boxes in the field today don’t speak IP or otherwise have the technical wherewithal to support a Netflix app. While cable operators are starting to deploy IP boxes, they will represent a sliver of the market for years to come. But it's smart of Netflix to get this dialogue going.

I suppose it’s technically possible that cable could also consider offering Netflix content on its traditional VOD platform, ensuring that  Netflix could become available to millions of legacy QAM-locked boxes. But I’m told that such a scenario is far-fetched, as cable operators would be unlikely to go through the hassle of doing all that work if there wasn’t a big financial reward attached to it.

But U.S. cable operators have some good reasons to at least consider adding Netflix to their set-top box platforms as they move ahead with their IP video migrations and introduce new boxes. Netflix subscribers, at almost 30 million strong in the U.S. alone, will continue to access the service one way or another – via gaming consoles, retail TiVo boxes, Roku boxes and smart TVs – with or without cable’s help. Getting Netflix on the set-top box would at least keep subscribers engaged with the cable video platform and prevent them toggling to a different video input and a different video device.

But the devil will be in the business end of these negotiations. Will Netflix be willing to share subscription revenues with cable operators in exchange for access to the cable box? That historically has not been their model.

Would an MSO like Comcast be willing to put Netflix’s private caches on the edges of their networks and, in essence, cede some control of its network to Netflix? Netflix, I’m told, has taken a hard line on this part of the negotiations. Some cable operators (Cablevision Systems and Suddenlink Communications, among them) have been okay with this and are card-carrying members of Open Connect, Netflix's private CDN initiative. Many others have not, concerned that if they allow Netflix in, they’ll likewise be compelled to also let in Google, Amazon and other OTT players. Some operators are also worried that Netflix, which currently offers ISPs free access to Open Connect, could later try to turn the tables and charge ISPs for these local caching systems. So, at least one thing is clear: there are still some trust issues to overcome between Netflix and some of the nation's biggest cable operators.

Then there’s this: What’s stopping cable operators from coming together and developing their own Netflix-style rival?  In fact, that’s precisely what Liberty Media chairman John Malone suggested they should do in comments made at the company’s annual investor conference last Thursday (October 10).

Malone's not known for making such suggestions just for the sake of it. There's always something deeper going on. So, there’s appears to be plenty of road to travel between these early discussion phases and when Netflix might actually get the kind of cable deal it’s seeking. At this point, it appears that some small progress is being made, awash in plenty of wishful thinking.

September