Netflix-MSO Deal in the Works?

After years of jockeying with cable providers, Netflix may be on the verge of making peace with the industry and becoming another set-top-based video service that cable operators can offer and promote to their subscribers.

According to a report in The Wall Street Journal, Netflix Inc. (Nasdaq: NFLX) is now talking with several major US MSOs, including Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Suddenlink Communications , about placing its popular streaming video service on advanced cable set-tops. Under the framework for such a deal, Netflix would become an app on these set-tops, effectively relinquishing its status as the leading over-the-top (OTT) video rival to cable providers.

The Journal report stressed that the talks are still in the early stages and that no deals with US MSOs are imminent. The report also noted that there are still several major obstacles to any deals, including a clash over a special streaming program that Netflix uses to deliver its service to most participating broadband providers’ networks.

Netflix and Suddenlink declined to comment on the report. Comcast could not be reached for comment before this story was posted.

The reported talks come just a few weeks after Netflix struck a landmark deal with Virgin Media Inc. (Nasdaq: VMED), the large British cable operator that was just taken over by Liberty Global Inc. (Nasdaq: LBTY). Virgin is now testing an integrated Netflix-TiVo service in 40,000 cable homes with complink TiVo Inc. (Nasdaq: TIVO) set-tops, with plans to launch the combined service commercially throughout the UK next year. (See: Euronews: Orange Fears Merger 'Earthquake'.)

In addition, Netflix recently struck a deal with com hem AB , Sweden’s largest MSO, to offer the subscription streaming service to cable subscribers there. Similar to Virgin, Com Hem plans to offer Netflix to customers with new cable set-tops equipped with TiVo’s software and user interface before the end of the year.

But, even with these two European cable pacts under its belt, a deal with a major US MSO would represent a major breakthrough for Netflix. The company, which has battled on and off with US cable operators for years, has been angling for such a deal for months. In fact, at a recent investors conference in New York, Netflix CFO David Wells reportedly said his company would “love to reduce the friction to the end user” by finding a home on cable set-tops.

A peace treaty between Netflix and the cable industry would also make a lot of sense for cable operators, who have seen many subscribers cut the video cord or at least downgrade their cable service in favor of such broadband-delivered OTT services as Netflix, YouTube, Hulu, and Amazon Instant Video. Cable operators are also looking to sell more premium services to their highest paying video customers and enhance their broadband packages with more attractive content offerings.

But, as the Journal reported, the prospective deals could get tripped up by strong disagreements over Open Connect, a private content delivery network (CDN) that Netflix relies on to stream its service to the edge of broadband provider networks. Although such major US cable operators as Cablevision Systems Corp. (NYSE: CVC), Suddenlink, and RCN Corp. have signed up for Open Connect, others have resisted, including Comcast and Time Warner Cable Inc. (NYSE: TWC), because they fear that other OTT providers would then seek the same special treatment for their services. (See: TW Cable Slams Netflix's 'Super HD' Policy.)

In addition, some cable operators reportedly fear that if they open their set-tops to Netflix, the OTT provider will take advantage of that opening to sell pay-per-view and other services that compete directly with MSO offerings. That fear, the WSJ said, is one of the concerns that have made cable operators wary of making peace with Netflix for years.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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albreznick 10/14/2013 | 7:29:46 PM
Pros & Cons I can see why cable operators are concerned about letting Netflix into the club. But I think cable still has more to gain (and less to lose) by bringing Netflix inside. Even if operators's worst fears are realized and Netflix steals more of their video customers, at least they will make some money off the theft. But whart are your thoughts? Should cable let in Netflix?
albreznick 10/14/2013 | 7:31:27 PM
Re: Pros & Cons I'd also like to know more about the Open Connect issue. Not sure I understand what operators fear here. So comment away. 
KBode 10/15/2013 | 8:33:54 AM
Re: Pros & Cons Netflix wants to be seen as a complement to cable, cable still fears Netflix as a competitor. I'm not entirely sure what needs to happen for that current dynamic to change. 

The carrier resistance to Open Connect I believe is more on principle (or spite) given past net neutrality fisticuffs between the companies. The mindset is turf protection, even if collaboration would benefit everybody (including consumers).
wisnasky 10/15/2013 | 4:54:08 PM
Re: Pros & Cons Allowing Netflix into their protected backyards is the 1st step towards monetizing the relationship.  For years now, MSOs have been maintaining their valuable revenue positioning as the bit consuming ramps their subscribers have demainded.  As an app on the set top box, MSOs will gain rev share negotiatiing power as they seek a piece of the content pie.  
albreznick 10/15/2013 | 5:44:45 PM
Re: Pros & Cons I heartily agree. that's why it confounds me that cable operators haven't seized the initiative sooner. They have much more to gain than to lose. Or am I missing something here? 
albreznick 10/15/2013 | 5:46:27 PM
Re: Pros & Cons So how does cable get past that outdated mindset? Surely, there must be something that can change the current dynamic. Isn't the potential profit enough of an incentive?
KBode 10/15/2013 | 6:00:59 PM
Re: Pros & Cons I'm going to guess that accelerated basic video losses is probably what's going to do the trick. :)
albreznick 10/16/2013 | 5:34:10 PM
Re: Pros & Cons Sounds like an awfully good guess to me. Aren't those losses heavy enough already? 
KBode 10/16/2013 | 6:11:30 PM
Re: Pros & Cons I think some in the legacy turf protection business need things to be particularly loud before change gets embraced (see RIAA and MPAA, to name just a few). :)
KBode 10/16/2013 | 6:12:48 PM
Re: Pros & Cons I think some in the legacy turf protection business need things to be particularly loud before change gets embraced (see RIAA and MPAA, to name just a few). :)
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