Should Aim for partnership Cable says from Netflix

Wednesday, March 7th 2012. | Hardware News

Netflix-articleInlineNetflix’s chief executive, Reed Hastings, has often compared his company’s Web streaming service to HBO. That comparison is inching closer to reality.

Over the last several weeks, Mr. Hastings and his top lieutenants have met with major cable operators to discuss a way for Netflix to appear on monthly cable bills, according to people who are familiar with the meetings but are not authorized to discuss negotiations publicly.

A partnership with cable providers, along with an ambitious slate of original series, would put Netflix one step closer to competing with premium cable channels, like HBO, Showtime and Starz, that offer original series and movies for a monthly fee.

“To be able to add Netflix to the bill, that might be very powerful, especially as we do more and more original content,” Mr. Hastings said at a Morgan Stanley media and technology conference in San Francisco last week.

“We are more and more a classic cable network,” Mr. Hastings said, adding that partnering with cable providers would eventually be the “logical path.”

A Netflix spokesman declined to comment on discussions with cable operators, but said Mr. Hastings’s comments in San Francisco were “futuristic.”

The nascent negotiations with cable operators, first reported by Reuters, underscore how Netflix has evolved. Once, on the strength of its popular DVD-by-mail service and emerging streaming offerings, the company was viewed as a rival to cable giants like Comcast and Time Warner Cable, the kind that could lead to widespread cord-cutting.

Netflix has stumbled, however, in obtaining rights to stream television shows and movies, and as the company has added streaming subscribers, it has lost subscribers to its DVD service.

At the same time, competitors have emerged. Last month, Comcast began an online streaming service called Streampix. The service is now available to Comcast’s 22.3 million Xfinity subscribers, but the company has the reach to one day expand the service beyond its customer base.

Also last month, Verizon said it would partner with Coinstar’s Redbox on a Web streaming service at a monthly rate of $4.99, compared with $7.99 for unlimited streaming on Netflix. The $79-a-year Amazon Prime service, which also offers shipping and Kindle benefits, has licensing deals with major television networks and movie studios. And Time Warner’s HBO Go, a streaming service available only to HBO subscribers, has been cited by Mr. Hastings as Netflix’s biggest competitor.

Partnering with a major cable operator would instantly increase the number of subscribers to Netflix, which currently has about 21.7 million streaming subscribers in the United States, according to the company.

Netflix may let cable partners handle monthly billing while still relying on the Web for delivering shows and movies. The company said Wednesday that it had struck a similar arrangement with Apple TV that lets viewers sign up for Netflix and pay via their iTunes accounts.

A Netflix partnership could manifest itself as an additional on-demand service through a traditional set-top box or allow customers to subscribe to Netflix through their cable providers.

But subscribers would stay only if Netflix mimics its pay-cable competitors with high-quality original series and exclusive movies, analysts said. Without original content, they said, there is a chance that cable operators will shun a potential partnership.

“If Netflix is going to more closely resemble a cable network, we believe it will need to acquire more exclusive content and also push more into development of original programs,” Anthony DiClemente, a Barclays Capital analyst, wrote in a report titled “Is Netflix Becoming a Cable Network?”

Last month, Netflix struck an exclusive deal with the Weinstein Company to offer films like “The Artist” and “Undefeated,” both of which won Oscars. Its anticipated original series “House of Cards,” a political drama based on a BBC miniseries, will arrive this year.

HBO, meanwhile, has 29 million subscribers in the United States and original movies and television series that attract critical acclaim and international revenue. The network took off by offering exclusive recently released movies, boxing matches and comedy and concert specials.

That is a different proposition from Netflix, which has evolved into a service for reruns of television series like “Mad Men,” “Lost” and “Breaking Bad,” rather than current feature films. Last week, its three-and-a-half-year deal with Starz ended, taking with it movies like “Toy Story 3” and “Scarface.”

If Netflix succeeds in forging new partnerships with major cable operators, customers will not see the results any time soon. Netflix’s rights agreements would need to be renegotiated and would only get trickier if the company paired up with cable providers, analysts said. Hollywood studios currently view cable companies and Netflix as separate sources of revenue.

“As we’ve seen, the content guys can be prickly,” said Barton Crockett, a media analyst at Lazard Capital Markets. “If Netflix has twice as many subscribers, they’ll look for twice as much money.”

On Wednesday, trading in Netflix closed at $105.19, down $1.94. Its 52-week high was $304.79.

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