Netflix on Cable? It Just Might Work

It could tap a vast new market for subscribers, but risks are high

   

Netflix on Cable? It Just Might Work

Since turning his eye to the vast undiscovered country of streaming video, Netflix (NASDAQ:NFLX) CEO Reed Hastings has been making a simple pitch to consumers and content producers alike: His company isn’t TV, but it’s not HBO either.

It’s Netflix. Watch what you want from our catalog, whenever you want, on whatever device you’re watching. Got a phone? Watch some Downton Abbey. Got an Xbox? Watch Toy Story 3. All without turning on the cable box.

A Tuesday Reuters report indicated that Netflix’s sales pitch is going to change: Maybe Netflix is HBO after all. The one-time king of DVDs by mail and the reigning champ of streaming video is trying to get in on the premium cable/satellite TV channel business, according to sources in the know.

As counter-intuitive as that move may seem, it has some powerful logic. If Netflix plows forward with its TV plans, though, it better tread carefully or risk repeating the mistake that nearly destroyed it in 2011.

Some background: Hastings is said to have met with a number of cable companies to discuss adding a Netflix Channel to their services. Companies like Verizon (NYSE:VZ), Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC) and others that have seen streaming video seemingly snatch away customers (so-called cord cutters) would instead become partners offering Netflix as an additional premium option to add to their cable subscription.

That would make Netflix a choice listed right alongside Time Warner’s (NYSE: TWX) HBO on the cable sign-up sheet, further entrenching the growing battle between Netflix and Amazon (NASDAQ:AMZN). Hastings’ recent comments at an investors’ meeting certainly support these murmurings: “[It’s] the natural direction for us in the long term. Many [cable service providers] would like to have a competitor to HBO, and they would bid us off of HBO.”

Although The New York Times today reported that Comcast isn’t interested, here’s why it still makes sense: Netflix is already becoming a common feature built right into Internet-connected TVs and set-top boxes. A Netflix channel on cable as an addition to its streaming and DVD rental services would strengthen the brand through exposure, but it could also potentially strengthen Netflix’s relationship with content producers.

Part of the reason that Netflix’s lost contract with Liberty Media’s (NASDAQ:LSTZA) Starz was such a big deal is that it meant Netflix no longer had movie content that fell within the “HBO Window.” That’s the time period when new movies are aired only on premium cable channels, between their home release (DVD/Blu-ray) and streaming-video release. With its own channel, Netflix could offer studios a new venue for exclusive content available on a limited basis.

A Netflix channel could also reignite subscriber growth. As All Things Digital’s Peter Kafka noted on Wednesday, Netflix is, for the first time ever, letting third parties control member sign-ups. It’s doing this with Apple (NASDAQ:AAPL), letting users sign up for Netflix directly through the new Apple TV set-top box. Partnering with cable companies to do this would likely trigger new subscriptions on a massive scale. Time Warner Cable alone has more than 12 million subscribers. That’s an attractive honey pot for Netflix.

The process also comes with a ton of risk. Consumer outrage over Netflix’s change in pricing for streaming and DVD subscriptions last summer was catastrophic, causing earnings to plummet. Netflix shares crumbled from over $300 to below $63 between July and November 2011. If Netflix does become a cable channel, it needs to ensure that it doesn’t diminish any existing services, in terms or price or available content. Otherwise, it risks igniting yet another powder keg.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/netflix-on-cable-it-just-might-work/.

©2014 InvestorPlace Media, LLC

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