Netflix Is Coming After Your Cable Box

Streaming service is now available to cable subscribers abroad but will face challenges working out similar deals in the U.S.

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Netflix has found a surprising ally as it tries to boost its subscriber base: cable operators. Firms that stand to be disrupted by Netflix’s distribution model are now working out deals to make the streaming service directly available through their own boxes.

Earlier this month Netflix inked a deal with U.K.-based Virgin Media to bring the streaming service to the cable operator’s 1.7 million subscribers who have TiVo set-top boxes. A similar deal was announced last week in Sweden with Com Hem, which is the country’s largest cable provider with almost 1.8 million subscribers.

While both deals still require viewers to purchase a Netflix subscription, they open the door for an increased cooperation between traditional cable operators and Internet-based streaming services. Users will now be able to seamlessly switch between watching cable and viewing content on demand via Netflix within the set-top-box interface. Currently, users typically have to switch between a cable box and other Netflix-enabled devices, like Roku gadgets or video-game consoles.

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Netflix says it would like to work out similar deals in the U.S. Last week chief financial officer David Wells said American cable operators have had an “open offer” for two years to include the technology as part of their offerings. “We are always in discussions to expand the universe of devices that run Netflix, and that includes set-top boxes inside and outside the U.S.,” company spokesman Joris Evers said in an e-mail. “We want to make access to Netflix as easy and frictionless as possible.”

Such deals have obvious benefits for Netflix, placing it directly in front of a new audience of potential subscribers who might not have used online streaming services. For cable operators increasingly under pressure to offer subscribers the ability to watch what they want when they want it, including Netflix is a shortcut to more complex video-on-demand services.

But it’s not clear U.S. operators would be keen on bringing the disruptive streaming service directly into the fold. “There’s been kind of an animosity on the pay-TV side because Netflix is seen as contributing to the biggest bogeyman in the business today, and that’s cord cutting,” says Erik Brannon, a senior analyst at IHS Screen Digest. A spokesman for Time Warner Cable declined to comment on whether the company would ever offer Netflix. A spokesman for Cox Communications said the company had no current plans to do so, though its latest DVR devices have the technical ability to integrate a third-party app like Netflix.

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The state of play between Netflix and cable operators is much different in the U.S. than abroad. While Netflix has almost 29 million paying subscribers in the U.S., it has about 7 million total across 40 international markets. The company is in the midst of an aggressive international rollout, but has not scaled to a size to be perceived as a direct threat to cable operators in Europe. “Netflix is a relatively new entrant in terms of streaming services overseas,” Brannon says. “Competition from Netflix … hasn’t really been the same for pay-TV operators abroad.”

Instead of partnering with Netflix, some U.S. operators are competing directly with the service. Comcast launched a Netflix-like streaming service called Streampix last year, offering thousands of movies and television episodes on demand for $4.99 a month. Now the company is planning to vastly expand its TV-on-demand service to allow all cable subscribers to watch entire current seasons of shows like Justified and The Mindy Project, for example, according to the Wall Street Journal.

Cable companies are also working to expand the types of devices on which live TV can be viewed. Every major cable operator now has a “TV everywhere” app that allows users to watch some channels live on computers, smartphones or tablets. They’re also bringing this functionality to devices where Netflix has long been popular, like the Xbox 360.

As Netflix’s portability and back catalog become less relevant differentiating factors, the company is increasing its focus on original content. CEO Reed Hastings has said in the past that the service could back as many as 20 new shows, but in July the company admitted that initial ventures like House of Cards and Arrested Development provided only “a small but noticeable bump in membership.” Still, there’s lots of new content on deck. The company just released Ricky Gervais’ comedy Derek in September, along with a documentary about the 2008 financial crisis developed by Bloomberg Businessweek. Comedian Aziz Ansari is releasing his latest stand-up special (a staple genre of premium cable) via Netflix in November.

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If Netflix reaches HBO levels of consistent, high-profile productions, that could make cable operators reconsider integrating the service. But all signs point to U.S. operators keeping newcomers out of their walled garden. Intel, for instance, has been forced to delay its Internet-based pay-TV service because TV networks are reluctant to introduce new competition that could upset traditional cable operators. “If the money’s right, carriage of Netflix on an affiliate-fee basis could be a key differentiator for a U.S. pay-TV operator in the near future,” Brannon says. “Everything’s possible, but I just don’t think it’s likely.”