Netflix Makes the Leap to Cable TV

Netflix has announced a deal with a few select cable companies that will see its app come preinstalled on company DVR units. Does this indicate a new direction for Netflix's growth, or just an extension of what the company has been doing?

Apr 28, 2014 at 7:45AM

With all of the talk surrounding the programming deal between Time Warner's (NYSE:TWX) HBO and Amazon.com's (NASDAQ:AMZN) Amazon Instant Video, another deal with potentially significant ramifications may have slipped under the radar. It seems that Netflix (NASDAQ:NFLX) is branching its business out once again ... as a cable TV option.

On April 24, The Washington Post reported that Netflix had reached an agreement with three small cable TV companies to include Netflix as a feature in their services. Customers of Atlantic Broadband, Grande Communications, and RCN Telecom Services who have a TiVo DVR box as part of their cable subscriptions will be able to access Netflix streaming content directly through an app installed on the cable box.

Netflix expanding its reach
Typically, those wanting to access Netflix content on a TV need a third-party device to do so. Netflix apps are available on a number of devices, including gaming consoles, Blu-ray players, and specialty devices such as Roku players or Amazon's own Fire TV. While Netflix has announced partnerships with TV makers such as Sony and Samsung to offer the service as a built-in app for 4K Ultra HD TVs, the market for such TVs is considerably smaller than the market for third-party devices that allow streaming to current HD and SD TVs.

The deal with cable providers seems like a natural extension of Netflix's current growth, giving it a new source of viewers that may be interested in the company's extensive library and compelling original content. It's also fairly prudent in light of the company's current spat with Comcast (NASDAQ:CMCSA); it helps to align Netflix with some of Comcast's smaller competitors while showing that it's still interested in partnerships within the cable sector. Though this deal will only cover approximately 820,000 viewers, it could easily pave the way for similar deals with other cable providers in the future.

Haven't we seen this before?
One interesting thing to note about this deal is that despite it being somewhat groundbreaking in the U.S. cable industry, there's not a whole lot about it that's actually "new." Netflix has had similar partnerships with cable companies abroad in Britain, Denmark, and Sweden. There is also a Netflix app included with retail purchases of TiVo DVRs (that app is absent with cable company-supplied units, however).

It wouldn't be the first time that Netflix has expanded on a concept that's proven popular, and it likely won't be the last. The company's business model thrives on finding things that people like and building on that; it even monitors piracy statistics as one means of finding popular shows and movies for potential acquisitions. The same can be seen with its original programming, since the company has expanded its budget for originals significantly once shows like "House of Cards" became hits. It has even been branching out into original documentaries and films.

The future of streaming
Looking at the deal that Netflix has made, one has to wonder whether a similar deal was in mind when the company started its negotiations with Comcast. Though the deal that's currently in place with Comcast is limited to direct access to the Comcast network to ensure streaming speeds for customers and there's a spat going on between the two companies, it's not inconceivable that both Netflix and Amazon Instant Video could end up as preinstalled options on Comcast DVRs at some point.

Cable companies need to find a way to compete with the huge amount of content that companies like Netflix and Amazon offer to consumers. If the current Netflix deal proves successful, it's a pretty safe bet that other cable companies will want to provide similar benefits to subscribers (even if a separate Netflix or Amazon Prime subscription will be needed). Such deals would help streaming companies to grow in households with few third-party gadgets and computers, and they would allow the cable companies to benefit from streaming instead of suffering from the competition.

Your cable company is scared, but you can get rich
With all the changes in our viewing landscape, you know cable as we know it is going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

John Casteele has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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