Is Netflix Looking for Cable Distribution Deals?

Regional operators in the U.S. said to be among the company's targets

According to the Wall Street Journal, Netflix is on a hunt for cable distribution deals in the U.S.. to mirror the similar offerings the over-the-top service has in Europe.

As set-top boxes grow more sophisticated, cable operators now have the option of adding apps like the Netflix program to viewers' on-demand choices. The addition of Netflix to cable packages would allow the cable companies to offer the same breadth of library content on demand that Netflix offers, and it would create a second revenue stream for Netflix.

In terms of the benefit to cable operators, it's not clear that old episodes of Deep Space Nine are what's causing the cable subscriber universe to shrink, though it certainly couldn't hurt those companies to come up with a value proposition commensurate to the dramatic rise in prices over the last few years. Netflix is said to be seeking distribution among regional cable operators first, though it's reportedly had discussions with Time Warner and Comcast as well.

For Netflix, though, the benefits are obvious and potentially immense: the company missed on its Q2 subscriber count and its multibillion-dollar future content fees put it deep in the red. Cable networks are big on advertising, of course, but the last few years have seen subscriber fees grow ever larger—even on second- and third-tier networks—buoyed by bundling deals that allow content publishers to push unpopular channels as prerequisites for buying popular ones.

A rising tide lifts all ships, and even independent cable networks have eked out a modest existence during this boom time; it would make sense for Netflix to want that kind of distribution and the steadiness of the revenue stream that cable subs provide. "Content deals are lumpy, and it’s hard to predict that and also plan to that gradual expansion," admitted Netflix CFO David Wells, during the company's Q2 earnings call. 

The question, of course, is whether distribution—even on-demand distribution in the form of an app like the kind Apple TV and gaming console users currently enjoy—would violate Netflix's current agreements with its content providers, who (despite Netflix's emphasis on original material) still make up the lion's share of its available content. Netflix has always been tight-lipped at who watches what on the streaming service, but even CEO Reed Hastings was forced to admit on that same call that, in terms of driving subscriptions, original content was "not tremendously significant in the short-term."