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Netflix Finds Growth By Turning Rivals Into Allies

By Danny Vena – Apr 13, 2018 at 7:15AM

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By making partners out of adversaries, Netflix has doubled the number of customers that sign up for streaming through cable TV providers.

When Netflix (NFLX -1.78%) began streaming movies and television shows just over a decade ago, it was first viewed as a novelty -- something that only the tech savvy would be able to enjoy. But the company's move to add a branded Netflix button to a host of devices including televisions, Blu-ray players, and gaming consoles marked a watershed moment, making it easy for everyone to access the service. 

While this was groundbreaking for Netflix, its growing influence in the media space ruffled feathers among the industry's titans. In 2010, Time Warner CEO, Jeff Bewkes, famously said of Netflix, "It's a little bit like, is the Albanian army going to take over the world? I don't think so." The following year, the executive said, "I would say it [Netflix] is like a 200 pound chimp -- it's not an 800 pound gorilla." 

Those comments were representative of the ire directed toward Netflix by media and cable companies as streaming represented a threat to  the established pay-TV paradigm, with cord-cutters embracing Netflix as a viable alternative.

Then, a funny thing happened on the way to the TV set: Netflix and cable became allies.

Couple sitting on couch eating popcorn and watching something on a laptop.

Netflix and cable providers are getting cozy. Image source: Getty Images.

If you can't beat 'em, join 'em

Longtime followers of Netflix will recall that the company has long forecast that its subscriber volume in the United States would top out somewhere between 60 million and 90 million customers. In its most recent quarter, of Netflix's 117 million subscribers worldwide, nearly 55 million of those were domestic. More importantly, Netflix's 18 million new international subscribers in 2017 represented a 41% year-over-year increase that dwarfed the 11% growth it recorded in its more heavily penetrated domestic market. 

With the increasing saturation in the U.S., Netflix has been seeking ways to attract new subscribers -- and in the past two years that meant reaching agreements to work with rivals, including four of the largest cable providers in the country.

In late 2016, Comcast (CMCSA -3.62%), the largest U.S. cable provider, integrated Netflix programming alongside other shows on its Xfinity X1 platform. Charter Communications (CHTR -2.96%) followed Comcast's lead last year by adding Netflix content to its Spectrum Guide user interface. Privately held Cox Communications joined the trend in late 2017 as well, integrating Netflix with its Cox Contour platform. Then in 2018, Netflix reached an agreement with Altice USA (ATUS 2.28%) to add the streaming service via its new set-top box. 

A TV in living room displaying Comcast Xfinity platform.

Former rivals like Comcast are partnering with Netflix. Image source: Comcast.

Truly a win-win situation

Netflix and the cable providers each have something to gain by these alliances. Pay-TV providers can use Netflix to help stem the tide of subscriber losses resulting from cord-cutting, particularly among customers that might have migrated to Netflix, while also promoting their hi-speed internet services.

For its part, Netflix can reach longtime cable customers who aren't likely to cut the cord. Some 49% of U.S customers that have been pay-TV subscribers for four years or longer still subscribe to an over-the-top streaming service, according to a study commissioned by TiVo. The remaining 51% are the pay-TV customers Netflix is targeting.

Netflix and chill

Netflix isn't only employing this strategy at home. The company has forged agreements with a growing number of pay-TV providers and telecom companies outside the U.S., including Liberty Global, Altice, and Deutsche Telecom, in an effort to boost its already strong international growth.

The overall strategy appears to be working. More than 20% of domestic pay-TV customers say they subscribe to an online video service through their pay-TV provider, up from just 10% a year ago. Recent agreements will likely see those numbers surge in the coming months.

In its fourth quarter 2017 shareholder letter, Netflix said, "We are partnering with a growing number of [cable operators and internet service providers] across the world to the benefit of our mutual customers. These partnerships make it easier for consumers to sign up, enjoy, and pay for Netflix, while our service allows our partners to deepen their relationships with these subscribers."

Deals like these should help keep Netflix's subscriber growth booming for years to come.

Danny Vena owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Comcast and Time Warner. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$235.44 (-1.78%) $-4.27
Comcast Corporation Stock Quote
Comcast Corporation
$29.33 (-3.62%) $-1.10
Charter Communications, Inc. Stock Quote
Charter Communications, Inc.
$303.35 (-2.96%) $-9.24
Altice USA, Inc. Stock Quote
Altice USA, Inc.
$5.83 (2.28%) $0.13

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