Netflix, the cable box and the cable bill

Josh Wein

Netflix (Nasdaq: NFLX) might be coming soon to your cable box. With the help of TiVo (Nasdaq: TIVO), the company has reached two groundbreaking agreements with cable operators overseas, and Netflix has already suggested those deals could serve as a foundation to build on domestically. But true integration between cable operators and Netflix is probably a long way off.

Finding a Netflix app on a cable-leased set-top box would be a big deal. For decades, cable operators have guarded the hardware they lease to consumers from outsiders and have been reluctant to give up any control over the TV viewing user experience. Lately the industry has indicated it might finally be ready to let that guard down. Maybe the popularity of devices like the Roku, Apple TV (Nasdaq: AAPL) and Chromecast have finally worn them down.

But if the Netflix-TiVo deals with Com Hem in Sweden and Virgin Media in the U.K. are any guide, a key piece will be missing from these cable deals: billing.

In a true tie-up, the cable operator would collect Netflix's $8 monthly subscription fee from its subscribers. And if it did that, it would surely keep some of that $8, making Netflix no different (if somewhat more expensive) than other pay-TV networks. Customers would pay their local cable operator a monthly fee and part of that fee would find its way back to Netflix, just like it does to HBO, Comedy Central or ESPN.

Would Netflix want to share any of its revenue with distributors?

Maybe. Letting the cable operator handle billing would make it far easier for new subscribers to try Netflix.

Last month, Netflix's CFO David Wells told investors at a Goldman Sachs conference that the company "would love to reduce the friction to the end customer and to be available via the existing device in the home." Getting its app on cable-leased hardware would grease the skids some, but allowing cable operators to take care of the billing would really smooth the customer acquisition process. All a new customer would have to do is press a few buttons on a remote. If Netflix is to substantially increase its U.S. subscriber base, it may need cable's help.

But the idea that Netflix would have to share revenue with (a media-industry euphemism for "pay") cable operators may keep it from taking this step for quite some time. Netflix and other major online content companies have historically fought ISP efforts to extract fees related to delivering their products. Netflix may not want to start those payments before it has to, even if the costs can be rationalized as customer-acquisition expenses.

Cable operators also have reasons to avoid adding a Netflix line to their subscribers' bills. Cable's programming costs have increased sharply in the last decade and there's some concern the product is getting too expensive. Adding a Netflix charge to subscribers' video bills could prompt them to ditch other premium networks like HBO or Showtime.

More terrifying still to some cable operators is the prospect of adding a Netflix fee to subscribers' broadband bills. Cable's broadband business, with few exceptions, has remained unencumbered by the programming costs associated with its video business. Letting customers bundle Netflix with broadband service could open the door to increasing broadband content fees.

It's also worth noting that Netflix, Hulu Plus, YouTube and Amazon Instant Video (Nasdaq: AMZN) are already available to cable subscribers through retail TiVo devices. Each app has its own billing, but they're all available from the device's main menu. So some subset of customers is already living in the future described by these recent media reports.

I happen to be one of them. Although I do not subscribe to cable, I can search TV listings and see what's on Netflix and Amazon right alongside listings for what ABC, Fox and PBS are broadcasting. It's a nifty feature. But when it comes to watching a program, these apps still can't match the ease and speed with which the TiVo tunes to linear programming. Calling up a show on Netflix or Hulu plus prompts what can feel like an interminable wait while the software loads and finds the right program.

That's a solvable technical problem, and one that will get easier and easier to figure out as the quality and power of devices and software improves. The business arrangements may take much longer to sort out. --Josh