Netflix wants to hook up with your cable company in 2015

Netflix’s new strategy to take on cable involves becoming best friends with cable: The video streaming service has been working hard to get its app included on set-top boxes of cable, fiber and satellite TV operators, and has been looking to strike deals with major U.S. operators. These deals could not only greatly expand Netflix’s potential audience, but also change how the company deals with both consumers and operators.

Internally, partnerships with TV operators are seen as the next big step for the company. Earlier this year, a Netflix job offer put it this way:

“After having Netflix integrated on every relevant TV, Blu-Ray Player, Streaming Box, and Streaming Stick our new frontier is now cable boxes. We want to reach our current and future members on devices they use most frequently to watch linear TV, cable, and satellite set top boxes. (…) Our mad dash to integrate Netflix into all devices was just the start, now things start to get interesting…”

[company]Netflix[/company] struck deals with a few smaller U.S. cable operators earlier this year, including [company]Suddenlink[/company] and [company]RCN[/company], which all use TiVo’s DVR as their standard set-top box. However, [company]TiVo[/company]-based pay TV boxes are in less than two million U.S. households, according to numbers disclosed in some of the company’s recent financial filings. Roughly 90 million U.S. households subscribe to cable or other forms of pay TV, and more than 73 million subscribe to the biggest five operators alone. That’s why Netflix has been working hard to team up with one of these major operators.

I’ve been told by sources with knowledge of the company’s plans that it is getting closer to finalize and announce a deal with at least one of these major operators. One source told me that an announcement may come as early as early next year, but others have cautioned that an actual deal may not be announced until much later. One of the names that kept coming up in chatter about Netflix’s plans was AT&T, but other alliances are also possible.

Who is Netflix going to partner with?

With around six million subscribers, AT&T currently ranks fifth in the list of the country’s biggest TV service operators. It’s much smaller than Comcast, which has more than 22 million TV subscribers, but it aims to become number two by combining with DirecTV, which it intends to buy for a whopping $48.5 billion.

AT&T has been more progressive than other operators with regards to online video, launching a joint venture called Otter Media with the Chernin Group that is investing in and developing niche video services. But for Netflix, there is another reason to team up with AT&T: The company uses Ericsson’s Mediaroom set-top boxes, which are also being used by Germany’s Deutsche Telekom for its Entertain pay TV service.

Netflix has already built a version of its app for this hardware, and Entertain subscribers have been able to access the app through their set-top boxes since October. That’s an important detail: Netflix likes to custom-build apps for the chipsets of devices on which it is running on to optimize speed and performance. Adapting the app it built for Deutsche Telekom to run on AT&T’s TV boxes should be easy for the company.

But AT&T isn’t the only possible candidate. I’ve heard from industry sources that Netflix has approached a number of U.S. pay TV operators for similar deals. Some of these negotiations have apparently been tied to talks about peering and caching Netflix traffic. Netflix agreed in recent months to pay Comcast, Verizon, Time Warner Cable and AT&T for peering despite publicly insisting that it shouldn’t have to do so; I’ve been told that similar discussions with operators in Europe ended with “broad agreements” that included both peering and set-top box carriage.

Netflix becomes part of your cable bill

Publicly, operators have been all over the map on partnerships with Netflix. Comcast has been the most conservative company, despite having developed a next-generation set-top box that could easily include Netflix’s app. In fact, Comcast’s proposed takeover of Time Warner Cable reportedly killed a partnership between Netflix and Time Warner Cable. Verizon on the other hand has been a lot more Netflix-friendly in recent months, to the point where it even offers new subscribers of its FIOS TV service 12 months of free Netflix as part of a promotional deal.

Pay TV operators have in the past shied away from including Netflix on their set-top boxes because they saw it as a direct competition to some of their core business, which includes reselling premium cable channels like HBO and Showtime.

However, I’ve been told by multiple sources that Netflix may be willing to sweeten the deal for cable companies by using financial incentives, which could include a monthly cut out of the company’s subscription fees. Up until now, Netflix has only paid consumer electronics manufacturers a one-time bounty for helping to sign up new customers, but no recurring fees. In exchange, operators may include Netflix subscription fees in their monthly cable bill. Netflix recently pioneered these kinds of billing relationships in the U.K., but could bring them to the U.S. as well.

Like a cable channel, with some key differences

Netflix executives have long said that they want to become more like HBO. These remarks have generally been seen in the context of Netflix’s original programming initiatives, but Netflix’s attempts to get onto the set-top boxes of major operators show that there is a lot more to this strategy. Netflix executives have realized that there are millions of consumers out there who won’t buy a Roku or Chromecast any time soon and feel most comfortable with the set-top box that’s already in their living room.

That’s why the company wants to be on those boxes; not just an app hidden in the menus most people never access, but right in the channel grid, next to properties like Showtime and HBO. Add a billing relationship to the mix, and subscribing to and watching Netflix may just become as easy as changing the channel to HBO, even for people who are not internet-savvy.

However, even with Netflix cozying up to cable, it wants to maintain one key difference to traditional cable channels: The company still is going to maintain the customer relationship. Consumers will be able to cancel their Netflix subscription any time on the Netflix website, and won’t be locked in to big bundles with two-year contracts.

In other words: Netflix wants to be on your cable box you’ve learned to live with, but not part of the cable bundle you hate so much.