Channeling Netflix

One likely fallout from cable operators’ subscriber losses and ever-weakening position in retransmission fights that I discussed in this week’s Update, will be to drive operators deeper into the arms of over-the-top services like Netflix, although the cable guys may not be ready to accept it yet.

Over in Europe, in fact, cable operators are embracing Netflix, as Denmark’s Waoo did yesterday in becoming the third European operator to add the Netflix app to its own set-top boxes. And in Netflix’s third-quarter earnings call last week, CEO Reed Hastings reiterated his hope of reaching similar deals “with Comcast and other people in the industry.”

Comcast and other MSOs remain officially skeptical. “Our customers can receive Netflix in a number of ways, so it’s not really a high priority for us,” Comcast Cable CEO Neil Smit said on his own company’s earnings call last week. And at an investors day conference last month, Liberty Media chairman John Malone suggested perhaps cable operators ought to launch their own, joint OTT venture themselves rather than play ball with Netflix (something that’s almost certainly out of the question for Comcast under its consent decree with the Justice Department related to the NBC Universal merger).

I think the MSOs will eventually get over it, though. Unless Congress and/or the FCC does something to change the rules of the retransmission game, pay-TV providers will need to do something to re-balance their negotiating leverage with the networks. I also think Smit has it backwards. The fact that Comcast’s customers have a number of ways they can receive Netflix is precisely the reason Comcast ought to think about bundling it with its own service. According to an analysis by BTIG Research analyst Rich Greenfield, in fact, Netflix is already the No. 1 cable network in the U.S.

The more content vendors pay-TV operators have, the greater their leverage with each of them. Netflix may look like a rival today, operators may eventually find they have more to gain by holding Netflix close than by resisting it.