Would You Join Netflix if It Were on Your Cable Box?

Last month, Netflix (NASDAQ: NFLX  ) and U.K. cable company Virgin Media announced a partnership that could turn the cable vs. streaming video rivalry into a more cooperative relationship. For Virgin Media customers with a TiVo set-top box, Netflix will be available as an app along with Virgin's own on-demand offerings.

Naturally, investors were very excited about this news, believing that putting the app on cable boxes would encourage more people to use the streaming service. They were even more excited about the possibility that Netflix could implement a similar arrangement with other cable operators, especially in the U.S.

Thus, when The Wall Street Journal reported on Monday that Netflix was in talks with Comcast and other cable providers to include a set-top box app, a new Netflix stock rally was born. (By midday, Netflix's market cap had expanded by more than $1 billion.) Yet even if these talks eventually lead to deals, Netflix will not benefit nearly as much as bulls expect.

The last straw?
The goal in infiltrating cable set-top boxes is to make it easier for customers to get Netflix programming on their TVs. For a long time, Netflix has been interested in deals like this that would position it as a complement to cable TV.

This aim makes sense, and at the margin anything that improves the customer experience should be good for Netflix. However, it's hard to imagine how this move could lead to a flood of new subscribers.

Netflix already has great brand recognition within the U.S. The streaming service has more than 30 million domestic subscribers, which represent about 35% of all U.S. broadband households. While a set-top box deal in international markets might introduce Netflix to new potential customers, most people in the U.S. already know about the company.

Hence the title of this article. How many people have really been waiting for Netflix to become an app on their set-top boxes to join the service? Perhaps the additional ease of use will draw in a few more customers, but most people are probably deciding whether to subscribe based on Netflix's content and cost.

A set-top box app could also help Netflix if it reduces churn, but this doesn't seem especially likely either. Presumably, Netflix members already have one of the many devices available that can stream Netflix content to a TV. A Netflix app on cable set-top boxes might be bad for Roku, but it won't make much of a difference in Netflix subscribers' decisions to cancel or keep the service.

Focus on what matters
All this excitement about Netflix on set-top boxes is distracting investors from what really matters. Netflix has posted strong subscriber growth over the past year, but it still has a tiny pretax profit margin in the low single digits. To hit the market's optimistic earnings targets, Netflix will need to raise prices -- eventually -- without chasing customers away.

Netflix failed miserably in its last attempt at raising prices; subscriber growth immediately came crashing to a halt. Somehow, I don't think that a Netflix set-top box app will be a key factor in convincing subscribers to pay more this time.

Looking beyond the red envelope
Do you know the major developments that could crush Netflix? The secrets to success that could make investors like you rich? The answers are simpler than you think, and The Motley Fool is sharing them in a free report titled "5 Secrets to Netflix's Future." Inside, we outline critical information every Netflix investor must know, so click here now for your free report.

Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2013, at 7:30 PM, AceInMySleeve wrote:

    The number of subscribers with some Pay TV is 90M. At 8$, Netflix is the best content+experience value of any of them. So the question is really, why can't Netflix reach that number?

  • Report this Comment On October 15, 2013, at 8:55 AM, TMFGemHunter wrote:

    Personally, I don't think that Netflix is the "best content+experience value". Frankly, there's very little that I would want to watch on Netflix. (And I should note that I'm right in the top Netflix target demographic: late 20s) For my own viewing tastes, Amazon Prime actually has a better content library right now.

    That's not to say everybody (or even most people) feel that way. But Netflix has a content budget around 2%-3% of the total content budget for all TV channels. So it's inevitable that its programming will appeal to some people more than others.

    To put it another way, if Netflix is clearly the best value, why doesn't it already have 90 million domestic subs? Are there really 60 million people who don't know what Netflix is but would love to join if they found out about it?


  • Report this Comment On October 15, 2013, at 10:16 AM, TMFPennyWise wrote:

    From my observation I think there are a whole lot of people who don't know what Netflix is or think that they can only stream it through their computers.

    In a random survey at our family reunion this summer, of my eight sisters few of them knew how easy it is to use Netflix at all and none knew how to get or hook up its streaming services. They are not in your demographics (they are age 50+) but they are all very attractive potential streaming customers, just not very pro active on technology. (A few of them do use Netflix DVD services.)

    And it surprised me to hear my son who is 30 tell me yesterday when we were discussing this NFLX development that he was shocked at how many of his friends didn't know you could access NFLX thru their TV--only thru streaming on the computer.

    So just anecdotally I think there is good potential for NFLX in this prospective joint venture.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2681386, ~/Articles/ArticleHandler.aspx, 9/27/2016 1:34:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,220.46 125.63 0.69%
S&P 500 2,159.46 13.36 0.62%
NASD 5,296.44 38.95 0.74%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 1:19 PM
NFLX $96.98 Up +2.42 +2.55%
Netflix CAPS Rating: ***