According to Reuters, Netflix is in talk with cable providers such as Comcast to offer its streaming service through cable set-top boxes. Though Netflix hasn’t reached any agreement with cable providers in U.S. market, the company already took a step ahead in Europe. In September, Netflix announced a deal with British cable provider Virgin Media that would allow the latter to begin testing Netflix with its 40,000 TiVo users, marking the integration of a Web-delivered product and a major pay TV provider for the first time in history.
When Netflix was first founded in 1997, its main business was flat-fee unlimited DVD rentals. Once a subscriber created an order list and called a rental queue, the company would ship the DVDs through the United States Postal Service. In the competitive world of DVD rental services, the company was in a fledgling state. In 2002, Netflix had less than 2 percent of $8 billion video rental market, and the stock price dropped as low as $6 per share. CEO Reed Hasting, in an interview, called his company “an ugly financial story, with not much hope of breaking even”.
Though Netflix did succeed in its DVD rental business, the rapid change in technologies forced Netflix to catch up with online streaming services. In 2007, Netflix launched its online streaming service and soon reached deals with movie giants such as Paramount and MGM. Cable TV subscribers began switching to Netflix to avoid the high costs. By 2010, Netflix had become the biggest source of traffic on Internet in North America. Content owners soon started to ask Netflix to pay per-user fees for streaming rights since the streaming service had cut into the profits of DVD sales and cable television. In the third quarter of 2011 alone, Netflix lost 800,000 subscribers.
Netflix’s solution to the problem of rising costs was to acquire the original content. In February 2013, House of Cards debuted on the streaming service, and soon after that more shows like Arrested Development Season 4 and The Orange is The New Black were streamed exclusively on Netflix. Not only did the number of subscribers soar, but Netflix began to win recognition from the media world. In September of this year, House of Cards won three Emmy Awards, marking the first time ever an online delivered program won acclaim as the best that TV had to offer.
Thanks to Netflix’s help, online streaming has become the main way in which people now watch TV. According to Bloomberg, Netflix reached 30 million US subscribers and 40 million worldwide, passing HBO’s number of subscribers in the domestic market. The company’s success was reflected in its October 21st stock price, which reached $394, 26 times higher than its IPO price.
Because Netflix is challenging the cable companies and establishing its own rules in the media world, its move to cooperate with cable TVs was surprising. What it indicates is a desire to compete directly with its rival HBO.
There are many reasons for Netflix to reach deals with cable companies. For one, Reed Hasting realized that continuing to escalate the battle with cable companies may not be a very smart decision. The more people use Netflix as an alternative to cable TV, the more content providers will demand it pay for the content. And Netflix is a long way from being able to count itself among the likes of Fox and Disney, who are powerful enough to produce their own shows and broadcast them through their own channels.
On the other hand, cable companies also acknowledged the huge demand for Netflix in the U.S. market. At this moment, Netflix subscribers have to connect their TV sets to Internet via devices by Apple or Roku. When Google Chromecast went on sale in June and was offered a bundle of three months of free Netflix service, the promotion was forced to stop after just a day because of the “overwhelming demand”.
But Netflix wants more. To add Netflix to cable TV, it is not as simple as it sounds. Besides a cable, the cable companies are forced to add broadband to its set-top boxes, and eventually the companies would just provide everything through broadband and give up the cable service. From a financial and technical standpoint, this is a significant problem. Major cable companies, like Comcast, are still focusing its business on cables. Plus, their current broadband cannot satisfy the tremendous streaming volume that Netflix requires. Netflix also prefers to deliver its videos through a system called Open Connect, and most providers are not happy to adopt it.
There is a still a lot for both Netflix and cable providers to negotiate before reaching a deal, but if Netflix is to challenge not only HBO, but Fox and Disney, it can’t rely on online streaming alone: yet.