Netflix (NASDAQ:NFLX) is in talks with cable companies to bring its service to their set-top boxes. I previously wrote that a large company like Comcast doesn't need Netflix. It's better investing in its Video on Demand service. There are, however, some cable companies that could benefit from partnering with Netflix -- smaller cable companies competing with satellite TV providers like DISH Network (NASDAQ:DISH) and DIRECTV (NYSE:DTV.DL).
The little guy
Comcast gets all the headlines, but Netflix is also in talks with smaller provider Suddenlink Communications. Smaller providers like Suddenlink often have a limited VOD library, and it's not a huge selling point like it is with Comcast. Moreover, since they command such a small portion of the market, they don't have much sway with content creators to expand that library.
Adding Netflix as an app on people's cable boxes will allow the small companies to advertise the Netflix's library of 60,000-plus titles available for viewing on their customers' television sets. Additionally, Netflix could provide the smaller companies a bit more leverage when negotiating carriage fees with content providers. But I think the biggest advantage a small cable company gains from offering Netflix is that it's something their biggest competitors can't provide.
The biggest competitors
A lot of smaller cable companies compete primarily with satellite TV companies. The two largest satellite TV providers in the U.S. are DISH Network and DIRECTV. These two companies are unlikely to offer Netflix through their set-top box because it requires a lot of Internet bandwidth.
DIRECTV is currently the largest pay-TV provider in the world, serving over 20 million U.S. households. When it comes to Internet service, however, it doesn't have a pipe like cable does. Customers are simply given the option of using another company to "bundle" Internet and phone services.
DISH Network offers satellite Internet service, but puts strict bandwidth limits on its users. Speeds are incapable of reaching anything faster than those comparable to 4G smartphones. At its highest tier, users could only stream about 15 hours of video. Considering the average Netflix user streams about 8 hours of video per week, DISH subscribers would run out of data halfway through the month.
Suddenlink and other small cable providers can use this as a selling point. Since they can sell the Internet service necessary to take full advantage of Netflix's integration with the set-top box, cable companies won't mind giving its customers better access to a competing platform. In fact, it may be able to upsell customers on a higher-speed Internet package.
DISH and DIRECTV, on the other hand, have more to lose. Without the Internet business, there's nothing to make up for the potential losses as Netflix lures eyeballs away from their TV service. It wouldn't make sense for either company to partner with Netflix.
Competitor or complement?
For some pay-TV providers, particularly the satellite companies, Netflix is one of their biggest competitors. But for the little guy, Netflix could become a nice complement to its service.
I think Netflix's best shot at getting on the cable set-top box is to go after the smaller cable companies first; they ought to see a greater benefit than a Comcast or Time Warner Cable. These companies will happily market Netflix's service, and could help reduce churn by providing customers with another desirable viewing option.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of 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.