The Netflix effect

From foe to friend – Kate Bulkley reports on Netflix’s increasingly cosy relationship with traditional cable operators. 

It wasn’t so long ago that Netflix was considered enemy number one in the cord-cutting wars. Now the online TV and film provider is being invited on to cable boxes both in Europe and in the US.

What gives? The shift has been as dramatic as the growth of online video viewing, which the average American now watches for close to an hour a day, according to eMarketer.  While a lot of this growth has been on mobile devices, increasingly it is via streaming devices including Google’s Chromecast, Roku and Apple TV. Ease of access is crucial but so is the lower cost of Netflix and other online services and, of course, the quality of the content, which is improving all the time, not just on Netflix but on other services as well.

Netflix’s recent move into cable is perhaps an acknowledgement of the marriage of linear TV with streaming online TV. For cable, it’s a case of ‘if you can’t beat’em, join’em’. Operators realise that it’s perhaps better to have Netflix inside their set-top boxes so customers remain in the cable environment even if they are using Netflix. There is also recognition that if customers downgrade their pay TV spend, they will still need a good broadband connection. Given that Netflix is one of the biggest broadband hogs around, chewing up more than a third of US broadband capacity at peak times, the recent tie-ups with cable make a lot of sense for both sides.

Cable operators like Virgin Media in the UK, Com Hem in Sweden and US operators including Atlantic Broadband, RCN Telecom Services and, most recently, Suddenlink Communications have all embraced Netflix, adding its service as an app on their TiVo set-tops. Netflix customers sign up for the service separately and Netflix controls the billing relationship and viewer usage data.

So far US cable giants led by Comcast have yet to put Netflix on their boxes. Instead Comcast is providing its own authenticated ways for customers to access online services including HBO Go. TV Everywhere-style services offered by pay TV operators are proving attractive to customers. According to a study by NPD Group, 21% of pay TV subscribers use such a service at least once a month. These services are seen as ways to mitigate cord-cutting, and NPD thinks it’s working.

But there may be less of a gulf between Netflix subscribers and pay TV customers than many thought. According to NPD, many subscribers to SVoD services also have a pay TV subscription and are using the companion TV Everywhere services that come with them.

However, clearly there will be competition between the offers and I think the decision to keep one or both will come down to three things: pricing, convenience and what’s on.

While there is a rapprochement between Netflix and cable for mutually beneficial ends, it’s not all sweetness and light. Last month Netflix signed a direct peering deal with Comcast to protect the quality of its service to customers – a key selling point amid growing competition in the streaming space.

Netflix may have done a deal with Comcast, but the subscription VoD provider has also launched a rocket in Comcast’s direction by being publicly very vocal about ‘internet tolls’. The US regulator, the FCC, has been doing a bit of fence-sitting on this and the wider issue of net neutrality. The FCC has proposed that ISPs be allowed to charge for access to special ‘fast lanes’. Yet its chairman  has also warned cable operators that he doesn’t want to see innovation by small internet firms being stifled because they don’t have the wherewithal to pay for access. (So that’s clear then.)

The idea of paying for better, faster access to customers has become a hot potato. While Netflix has agreed to pay Comcast for direct access to its network it has also spoken out against the pending merger of Comcast with Time Warner Cable because it says the deal will create the US’s biggest ISP, able to exact tolls for access with no alternatives available.

Meanwhile, Netflix continues to beef up its programming both through acquisition and commissioning of original content like House of Cards, making its service even more compelling and attractive to cord cutters. A recent report in the UK by Mediabug found that while broadcast TV for most consumers still makes up the lion’s share of viewing (76%) followed by DVR viewing (7%) and online catch-up (3%) the report said that SVoD services like Netflix and Amazon’s Prime Instant Video have increased their viewing share by 1% (to 3%) in the last six months, with the gains coming from a fall in live TV viewing.

Netflix is now spending a lot of time and money on its non-US business, which accounts for 20% of total revenues and 10 million subscribers. It may only be seven years old, but the publicly-listed streaming service has big ambitions – and as other streaming services beef up their offers the pressure is on.

Will internet TV replace pay TV? Its important for traditional operators to keep putting themselves in their customers’ shoes and focus on what they want as the choices continue to multiply.

Kate Bulkley is a broadcaster and writer specialising in media and telecommunications. [email protected].