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Netflix and Pay TV Are Perfect for Each Other

If they can manage to cooperate, both sides stand to benefit


Though Fortune dubbed the cable box “America’s most hated device”, there are tens of millions of them out there. So it makes sense for Netflix (NFLX) to push their content on the devices, and just as much sense for pay television providers such as Comcast (CMCSA) to agree to such deals.

For one thing, it provides Netflix with more opportunities for growth, which has been slowing. During the second quarter, it gained 630,000 domestic streaming customers, which was below Wall Street’s expectations. The company has forecast about 1.9 million net additions in the current quarter, below the 1.16 million gain it enjoyed during the same period a year earlier.

Though CEO Reed Hastings has bragged that Netflix would reach as many as 90 million customers at some point, exceeding more traditional networks such as HBO, he recently sounded a note of caution, noting “The larger we get, the harder it is to grow.”

Nonetheless, a tie-up between Netflix and the pay TV industry would be a watershed moment for both parties.

According to the Wall Street Journal, which broke the story:

“For years, several U.S. pay-TV providers have been fearful of a linkup with Netflix, worrying the online TV service could lure eyeballs away from their own video services. But some cable operators have warmed to the idea, in part because of improved set-top-box technology and because they believe Netflix users are more likely to buy more expensive, faster broadband connections.”

One thing that isn’t clear about Netflix heading to the cable box is whether this will lead to advertising on the service. Netflix has resisted ads for years, but it’s going be increasingly difficult for the company to offset rising programming costs by subscribers alone. And the Netflix audience would be quite attractive to advertisers.

For one thing, Netflix’s households tend to be fiercely loyal, watching about 87 minutes per day, more than any cable network, according to Quartz. The service is growing in popularity among parents of young children, along with highly educated watchers like fans of Arrested Development and Orange Is the New Black. Besides, advertising seems to be working just fine for Netflix’s rival Hulu.

For Comcast and other pay TV providers, the rewards of forming an alliance with Netflix far outweigh the risks.

If there was a carriage fee dispute like the one this summer between CBS (CBS) and Time Warner Cable (TWC), a pay TV provider could simply encourage customers to use Netlix as an alternative, countering some of the power of the media companies to demand steep increases.

Though many in the media have noted the long-term threat posed by cord-cutters — people who quit pay television services entirely — the threat may be overstated. A survey by Magid Advisors recently found that 2.7% of customers are thinking about cutting the cord, up from 2.2% a year ago. But the question that often gets overlooked is what happens after the cord is cut.

It seems likely that some of these customers will continue to rely on the Internet service they get from the same companies such as Comcast or Verizon (VZ). That seems to be what the publicly available data indicates, and it makes sense given that online videos can’t stream themselves.

During the second quarter, Comcast gained 187,000 high-speed Internet customers and lost 159,000 video customers. The company still has 21.8 million video customers. Time Warner Cable, the second-largest cable provider behind Comcast, lost 191,000 video customers and gained 8,000 high-speed Internet clients. Verizon reported 161,000 net additions for its FiOS Internet business and 140,000 net additions for its FiOS video business.

In the end, Netflix and the cable companies stand to benefit more from cooperation rather than confrontation. Whether the masters of the media universe can figure out how to live together is another question.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter@jdberr and at “Berr’s World.”

Article printed from InvestorPlace Media,

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