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View Count: 117 |  Publish Date: October 20, 2013
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Netflix pursues deals with cable TV operators

Behind original series such as Orange is the New Black, Netflix is proving that online video is the new TV.
Now, the Emmy-winning Netflix is reportedly in talks with major cable television operators - many that used to see it as a threat - on a distribution deal that could make it the new HBO.
Such a deal could pave the way for Netflix and a growing wave of online video streaming services to become even bigger players in the TV industry, analysts say.
Im not surprised were at the junction where both Netflix and cable operators are talking about opportunities that can make them both bigger if they do something together, said John Buffone of the research and advisory company NPD Group.
Netflixs remarkable stock price rebound from a major mid-2011 sell-off has been well documented, but the bounce has been even more dramatic this year: Netflix, which started 2013 at $92.01 per share, closed at a lofty $333.50 per share Friday on the Nasdaq.
Yet thats only part of the roll the Los Gatos company has been on lately.
Netflix, which CEO Reed Hastings grew as an online subscription DVD movie rental service, is successfully pivoting to an online streaming model.
Its been fueled in large part by subscribers who have migrated to watching multiple online and on-demand TV episodes at one sitting - binge watching - instead of in the traditional network style of viewing shows in weekly installments.
And Netflixs strategy of supplanting its catalog of movies and older network TV shows by paying millions of dollars for original TV series like House of Cards, the return of Arrested Development and the horror series Hemlock Grove has won critical acclaim - those shows received a total of 14 Academy of Television Arts and Sciences nominations this year.
Moreover, Netflix made history when House of Cards director David Fincher won a coveted prime-time Emmy for best director for a dramatic series, a first for an online-only show. House of Cards also won creative arts Emmys for outstanding casting for a drama series and outstanding cinematography for a single-camera series.Sony signs on
Last week, Sony Pictures Television signed on to produce an as-yet unnamed psychological thriller series from the creators of Damages. The deal was a milestone because Sony Pictures is the first major studio to agree to produce an all-new series exclusively for Netflix.
How that critical acclaim translates to subscriber growth and Netflixs bottom line will be revealed Monday when the company releases its third-quarter earnings report. Netflix had projected adding 700,000 to 1.5 million U.S. subscribers during the third quarter.
But earlier this year, Netflix said it passed HBO in the number of U.S. subscribers, 29.17 million to 28.7 million, although counting the number of subscribers around the world, HBO is still about three times larger. (HBOs shows also received 108 Emmy nominations.)
Hastings has set bold goals for his company. Earlier this year, he said he believed Netflix could eventually reach 60 million to 90 million households in the U.S.
Youd have to assume theyre looking at other strategies to take the leap to the next 10 million subscribers, said Buffone, who is director of devices for NPD Connected Intelligence.Cable app buzz
And thats where the story line gets more intriguing. The biggest buzz last week came after the Wall Street Journal reported that Netflix was in the early stages of negotiations with Comcast and other cable TV operators to include the Netflix app in newer generation Internet-connected set-top cable boxes. That could mean cable customers would be able to tune to Netflix on their main TV screens as easily as they can switch channels to HBO or ESPN.
Now, Netflix viewers have to set up a separate $7.99-per-month subscription and plug a streaming media device such as a Roku, Apple TV or Google Chromecast into their TV monitors.
That procedure isnt hard to do. Indeed, a recent NPD study showed that 75 percent of viewers ages 18 to 34 were watching Internet video from services like YouTube and Netflix on their connected TVs. Even among consumers ages 35 to 54, the percentage watching Internet video that way was still 52 percent.Cable expands reach
But a cable distribution deal could help Netflix greatly expand its reach to customers who dont want to connect another box or subscribe to another service, said Peter Csathy, CEO of Manatt Digital Media, a consulting arm of entertainment law firm Manatt, Phelps & Philips.
Having an included Netflix app would make the service seem like just another channel thats available to you, Csathy said.
Many people who dont have Netflix today have cable of some kind, he said. For Netflix, theres really no downside to aligning with the cable companies because of what theyd get.
For cable operators, a Netflix deal would be, in a sense, admitting that if you cant beat em, join em, Csathy said.
But it could help counter a growing trend of cord cutting by customers who cancel their pay-TV service to instead rely on less-expensive video streamers like Netflix. Adding a Netflix app could provide those customers with one less reason to leave and more of a reason to be delighted, Csathy said.
And since cable operators also sell broadband Internet services that customers need to access Netflix, Csathy said those operators could market a Netflix collaboration as, Weve got everything you need in one place. Thats a pretty powerful story.
Netflix in September said Virgin Media in the United Kingdom will distribute the subscription service through an app that will be available to 1.7 million of its cable customers who use a TiVo set-top box.
Andrew Sheehy, chief analyst for Britains Generator Research, said a distribution deal between Netflix and an operator like Comcast could be structured similarly to one that the BBC networks online iPlayer streaming service has with Virgin Media. About 15 percent of iPlayers traffic comes through Virgin Media. Because this works, a Netflix-Comcast deal could also work, Sheehy said. Paves way for others
And just as Netflix paved the way for streaming video, a deal with a cable provider could pave the way for similar tie-ups by a wave of competitors like Amazon, Hulu Plus, Walmarts Vudu and the just-launched Target Ticket, said NPDs Buffone.
Since the talks are reportedly in an early stage, its unclear whether cable services would subsidize a Netflix subscription or how much of a cut cable would take from Netflix. And the industry could instead follow industry pioneer John Malones idea to band together to create a service to compete with Netflix.
Still, the fact that the potential deal is already causing a stir in the industry demonstrates how much of a force Netflix has become in TV.
The reason why this is a real possibility now, when it was almost inconceivable maybe a year ago and certainly not two years ago, is that Netflix is the reality, Csathy said.
Benny Evangelista is a San Francisco Chronicle staff writer. E-mail: bevangelista@sfchronicle.com

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Time: 0:43  |  News Code: 334084  |  Site: San Francisco Chronicle
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