Internet video provider pursues deals with U.S. MSOs, after reaching pacts with pair of Euro operators

Netflix has been a quasi-competitor to Comcast, whose cable bundle looks pretty steep compared with Netflix’s low $7.99 monthly price for a wealth of on-demand entertainment options.

Now Netflix is in early-stage talks with Comcast and other cable operators including Suddenlink Communications to offer the Internet streaming service on their set-tops, according to a Wall Street Journal report, which noted that “no deal is imminent.”

It’s no secret Netflix is eager to gain a powerful new distribution vehicle through cable set-tops in the U.S., after inking such pacts with U.K. cable provider Virgin Media and Sweden’s Com Hem. Chief financial officer David Wells said at Goldman Sachs’ Communacopia investment conference last month in New York that the company is open to deals with pay TV providers in the States.

“It’s up to the MVPDs (multichannel video programming distributors) to decide how much of a competitor we are or a complement,” Wells said.

Why would Comcast or another major cable operator want to join forces with Netflix, which could over time walk away with their video customers? Here are three reasons it might make sense:

1. It would underscore the distinction between TV and Internet subscription video-on-demand services. Netflix isn’t a true replacement for TV: It doesn’t offer live sports, news, or current primetime broadcast or cable shows. Pay TV providers and Netflix both have pointed this out regularly. But if an MSO added Netflix into its lineup, the marketing body language would be clear — pay television is one (higher priced) thing, and Netflix is something separate, akin to a premium cabler like HBO, Showtime or Starz.

Note that Comcast has chosen to fight Netflix than team up, for now. The MSO offers Streampix, a Netflix-like collection of older TV shows and movies available on multiple screens, bundled with double- and triple-play packages. But it could decide that the cost of licensing a swath of library to be the all-things-video provider doesn’t make as much sense as going into business with Netflix (or others like Amazon, for that matter) — an embrace-and-marginalize tactic that could enhance the MSO’s overall service; let it gain incremental revenue through erstwhile competitors; and, again, highlight that Netflix is just one smaller piece of what Comcast’s Xfinity TV delivers.

2. It would give cable operators another weapon in programming fights. Let’s say a broadcaster is threatening to pull its signals in a fight with a cable distributor. If that TV network’s past-season shows are on Netflix (e.g., “The New Girl”), cable operators could tide subscribers over in the event of a blackout with the older fare. Not the perfect firewall, but it could boost customer goodwill and/or reduce programmers’ leverage.

3. It would give MSOs a marketing edge over satellite and telco — and boost broadband upgrades. Cable TV plus Netflix, in one integrated service, could be a perfect way to upgrade customers to a higher-speed (and more expensive) broadband package. It would give cable a way to tout its superiority over competitors, too: Satellite broadband is far slower and more limited than cable broadband, and telcos do not offer super-fast fiber-based services ubiquitously.

However, a sticking point in Netflix’s talks with MSOs is that the streaming-video company wants them to put caching servers (through its Open Connect program) in their networks, according to the Journal — something many ISPs have resisted. Open Connect saves Netflix money by reducing the amount of data it needs to send through third-party CDNs.

SEE ALSO: Second-Guessing the Netflix-Virgin Media Deal

Deals between Netflix and U.S. operators are not out of the question. But it’s worth noting that there could be some downside in these deals for Netflix, given that MSOs presumably would take a cut of the monthly fee or otherwise get compensated by Netflix. Also note cable operators would face pressure from programming partners for terms or promotional perks on par with — or exceeding — whatever Netflix is the beneficiary of.

Suddenlink, for one, apparently has been interested in offering Netflix on its TiVo set-tops for some time — but Netflix’s licensing deals with studios previously forbade pay-TV distributors from offering its service, because of studios’ concerns it would reduce transactional VOD sales. But recently, Netflix eliminated those old restrictions in new deals with media companies, the Journal said.

Netflix last month announced an agreement with Virgin Media in the U.K., which initially is testing the service with a test group of 40,000 subs before offering it to all 1.7 million who have a TiVo box, as well as Com Hem, the largest cable operator in Sweden. Both MSO are delivering Netflix to subscribers through TiVo boxes.

Meanwhile, Liberty Media chairman John Malone last week said cable operators should get together and create a nationwide Internet video service to rival Netflix, saying the industry has been slow to respond to over-the-top competitors.

It seems likely that we’ll see something from Big Cable in the way of an online video service — whether that’s with Netflix or not.

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