Wednesday, July 6, 2016, 12:15 PM ET|Posted by Will Richmond
Yesterday, Recode reported that Comcast will integrate Netflix into its X1 set-top box. Loyal VideoNuze readers know that I’ve been advocating for this type of partnership for almost two years, back to when I articulated the benefits in “Why the Timing is Now Perfect for a Netflix-Comcast Partner Deal” in October, 2014. There are lots of benefits to Comcast and Netflix by partnering (as I’ll further explain below), but the biggest winners once the integration is complete later this year, are the companies’ mutual viewers.
Despite years of hype about cord-cutting, the reality is that the vast majority of U.S. homes still subscribe to pay-TV. However, viewers are watching more OTT video than ever, as last week’s Nielsen data clearly highlighted. And increasingly they’re watching more of that OTT video on the big screen via connected TV devices. According to the latest FreeWheel data, 22% of ad views occurred on connected TVs and another 14% of ad views occurred via pay-TV operators’ video-on-demand.
With this fragmentation of video viewing, sales of connected TV devices have soared, with Apple TV, Roku, Chromecast and Fire TV the biggest winners. While these devices are easy to use and often quite inexpensive, they’ve created new viewer headaches as they require changing inputs, conducting multiple searches by device for desired content, learning multiple UIs, and having inconsistent app availability.
Nonetheless, viewers have adopted the devices in droves, primarily because of the strength of OTT video and desire to watch on the big screen. With over 400 scripted TV series released in 2015 (up 10x in 10 years), viewers have more choices than ever and are able to use connected TV devices to watch in their living rooms.
Pay-TV operators have been ambivalent about the rise of OTT video, with some seeing inexpensive competition that would lead to cord-cutting (as it has, especially for younger viewers) and others sensing an opportunity to integrate OTT services to provide more holistic subscriber experiences.
Comcast has been in the former category for years, despite deploying millions of advanced X1 set-top boxes in its customers’ homes that can support apps. I’ve had X1 for nearly 4 years now and have always felt incorporating third-party IP-based apps was the biggest untapped opportunity for X1 and Comcast. Yet the app section has remained surprisingly thin. Perhaps the best example of Comcast leveraging X1 will be the blending of linear and online streams for the upcoming Rio Olympics, but those are from NBCU, which Comcast owns.
The Netflix integration suggests that Comcast may have finally recognized there’s genuine upside from incorporating third-party apps. Of course, the companies have long had a testy relationship, with Netflix carping about interconnections, advocating for net neutrality and trash-talking linear TV at every opportunity. It’s easy to see why Comcast wouldn’t rush to partner with Netflix.
When the integration is complete, X1 subscribers will no longer have to switch inputs to watch Netflix, and (hopefully!) will be able to search once and see results across Comcast sources (e.g. linear, DVR, On-Demand, etc.) and Netflix. For certain shows, viewers may see a full list of episodes from pilot to last night’s episode, all presented in one integrated UI. To be sure, Netflix is only one SVOD provider, but it seems almost inevitable Amazon and other SVOD providers will find their way onto X1 at some point as well.
These benefits will be felt immediately by joint Netflix-Comcast subscribers and will enhance the value of X1 overnight. For Comcast that will translate into better retention and improved X1 acquisition as well. Depending on how aggressively Comcast is willing to promote Netflix to its subscribers (and how their deal is structured), Comcast could also reap high-margin bounties and ongoing payments for driving new Netflix subscribers, creating a whole new revenue stream from its growing X1 subscriber base.
For Netflix, which has been pushing for pay-TV operator deals for years (with only modest success), Comcast is the biggest fish it has hooked so far, potentially prompting other operators around the world to embrace Netflix as well. With Netflix’s U.S. subscriber growth slowing, Comcast is a big new marketing partner that could provide a nice boost to subscriber acquisition.
Comcast and Netflix will both clearly benefit from the deal, but ultimately it’s their joint viewers who will benefit the most as the largest pay-TV operator and largest SVOD provider begin working together. By setting aside their corporate animosity and being willing to embrace the realities of the fast-evolving video landscape, Comcast and Netflix have set themselves up to do something valuable for their subscribers.