Set-top boxes

Netflix thinking inside the box

Even as it competes directly with legacy pay-TV providers for subscribers and revenues, Netflix is cozying up to them like never before.

The streaming video giant is increasingly pursuing "content bundling" partnerships with pay-TV, broadband and mobile providers both in the US and abroad as it seeks to expand its OTT empire throughout the world and maintain its subscriber growth pace, which slowed dramatically during the spring months. In the latest example, the company disclosed in its second-quarter earnings report Wednesday that it has "entered into a new partnership with AT&T in the US to integrate Netflix into their new set-top box," a likely reference to an Android V-powered device that AT&T plans to use for its next-gen DirecTV streaming service.

In the US, Netflix already has bagged integration deals with such major pay-TV and mobile operators as Comcast, Charter, Altice USA, Dish Network, Verizon and T-Mobile. Among the biggest video players, only AT&T had been missing from the partnership roster before.

Speaking on the company's second-quarter video interview, Greg Peters, Netflix's chief product officer, said the streaming king wants to "make it super simple" for less tech-savvy consumers to access the service and enjoy the Netflix "experience" on a traditional pay-TV set-top. "It's a nice supplemental, incremental component, but a minority component, of our overall subscriber acquisition process."

In its earnings results, Netflix does not break down how many subscribers it picks up from its growing network of distribution partners and how many it signs up directly. Nor do its pay-TV partners break these numbers down. So it's difficult to determine just how much of a lift Netflix gets from these deals.

Nevertheless, Netflix officials clearly are enamored of what they call "bundling acquisition channels." In another prime example, the company disclosed plans last week to launch a new mobile-only subscription offering in India and potentially elsewhere. Plans call for the low-cost package to launch in India by the end of September with an undisclosed mobile provider, following a service trial that cost mobile subs about $4 a month in India and other select Asian territories over the past few months.

"We believe this plan … will be an effective way to introduce a larger number of people in India to Netflix and to further expand our business in a market where pay-TV ARPU is low (below $5)," the company said in its quarterly letter to shareholders. "We will continue to learn more after launch of this plan."

Look for more such service trials and launches in the coming months and years as Netflix tries every way it can think of to get into more homes around the world. Even though it has now signed up more than 150 million customers globally, it has its eyes on the 700 million pay-TV subscribers across the planet (outside China), including the 90 million pay-TV subs in the US.

"We're still early in the process from a global perspective," Peters said. But, he noted, "we see tons of opportunities globally to add many more partners."

Market analysts say moves like these are critical for Netflix to keep growing. With its heavy debt, the company must continue to boost its revenues by a healthy margin each year to carry that load and pour more money into original programming.

"Netflix must diversify into new services and broaden its business model," said Paolo Pescatore, a principal analyst at PP Foresight. "It cannot solely rely on annual price increases to grow revenue and reduce its burgeoning debt and content obligations."

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

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