Tuesday, October 15, 2013, 7:55 AM ET|Posted by Will Richmond
The WSJ has reported that Netflix is holding early stage discussions with at least two U.S. cable operators, Comcast and Suddenlink, about having its app included in their set-top boxes. I've been seeing a lot of arguments for why Netflix partnerships would be good for cable operators, but it seems to me there would be a lot of risk involved for them if such deals materialized.
Helping Netflix become bigger and stronger would be disadvantageous for cable operators. First and foremost, this would be felt in the area of content rights. By securing past seasons of TV programs, Netflix has driven the binge-viewing phenomenon and become its biggest beneficiary. I expect binge-viewing will only gain in popularity going forward as more people experience it and more devices make it ever easier to do. Adoption of binge-viewing means those distributors with strong video libraries will do better.
So if cable operators helped Netflix to get bigger, it would then have even greater resources to license more and better TV programs for its library. And the better Netflix's library becomes, the more viewers will be drawn to it and the worse operators' own libraries are likely to become. Why? Because over time cable networks and studios will demand ever-greater payments from operators for them to obtain similar digital distribution rights to Netflix and other OTT providers. Pinched by already escalating content costs, operators would be unable/reluctant to keep pace with Netflix and others. We got a great preview of this dynamic in the recent CBS-Time Warner Cable retrans dispute, which centered on digital distribution rights.
Worse for operators is that weak content libraries undermine their top strategic priority, TV Everywhere. There are lots of reasons TV Everywhere hasn't taken off, but lack of digital rights is at the top of the list. Where cable operators have TVE rights to on-demand entertainment programming, they're quite limited, usually for just a few recent episodes. That may be useful for viewers who are fully up to date on a series, but as binge-viewing demonstrates, enabling viewers to watch from the beginning of a series is now a critical part of the equation (note HBO's former president Eric Kessler told me 2 years ago the most important decision it made was for HBO GO to include all past seasons' episodes).
If cable operators were to fail with TV Everywhere, they would become a living room-only service, out of synch with viewers' changing expectations for greater, more flexible, multiscreen access (like Netflix has been providing for a while). This narrower value prop would weaken the appeal of already expensive monthly subscriptions.
Bolstered by revenue from its library-centric service, Netflix has been able to invest in high quality originals, which in turn helps it diversify its value prop. These days studio heads openly discuss producing specifically for Netflix, and now Sony Pictures TV has announced its first original for Netflix. Netflix is still a long way from being the programming juggernaut that HBO is, but as it invests more and its originals get better and more frequent, how many Netflix subscribers - especially those that are entertainment-centric and fed up with paying for expensive sports they don't watch - will conclude they no longer need a cable subscription at all?
For all the above reasons and more, any move by cable operators that helps Netflix get bigger and stronger seems ill advised. Further, a decision to partner means operators would have capitulated to the idea that Netflix now has a permanent place in the video ecosystem. Not too long ago, the idea of Netflix as even a viable, much less successful, middleman struck many pay-TV executives as far-fetched.
Admittedly, there may be a few incremental rewards to operators from a Netflix partnership, such as reducing peering costs in their ISP operations or possibly creating improved user experiences through integrated content searches with VOD. But these seem relatively minor in the bigger picture. Any cable operator thinking about a partnership with Netflix needs to be brutally honest about the long-term consequences.