Bloomberg News

Netflix Talks for Time Warner Cable Service Said to Stall (2)

February 18, 2014

Netflix Inc. (NFLX:US)’s effort to secure a place for its video-subscription service on Time Warner Cable Inc. set-top boxes is on hold now that the cable operator is being sold, people with knowledge of the matter said.

The discussions are unlikely to progress before Time Warner Cable (TWC:US)’s $45.2 billion acquisition by Comcast Corp. (CMCSA:US) is completed, said the people, who asked not to be named because the matter is private. Comcast, which isn’t as far along in its own talks with Netflix, is focused on increasing film downloads and rentals with its new X1 set-top box platform, they said.

“They will not be in any kind of rush to let Netflix on their cable box and cannibalize their business,” said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas who has a neutral rating on Netflix.

A deal with Time Warner Cable would put pressure on other pay-TV providers to offer Netflix as well. The video-streaming pioneer, with 44.4 million online subscribers, has pitched its Web-based trove of original shows, movies and older series as a must-have for pay-TV providers who increasingly poach each other’s viewers for growth. It has signed two European cable services and is trying to reach deals with smaller U.S. outfits that use TiVo Inc. (TIVO:US) set-top boxes.

Discussions have included the possibility of Netflix paying fees to pay-TV providers, Chief Executive Officer Reed Hastings said in an interview in late January.

While Los Gatos, California-based Netflix can continue to grow without such deals, access on cable TV systems would make viewing easier by eliminating the need to toggle between cable and Internet services, Hastings said.

Pleasing Customers

“Consumers already use Netflix on the smart TVs, their Apple TVs and their Rokus,” Hastings said last month. “For us, it’s not a financial decision, it’s a customer-pleasing decision,” he said.

Jonathan Friedland, a spokesman for Netflix, declined to comment on the Comcast-Time Warner merger, as did Maureen Huff, with Time Warner Cable. Steven Restivo, a spokesman for Comcast, said the company continues to talk to application providers about joining the X1 set-top box platform.

Comcast, already the largest U.S. cable company, has said it expects the deal to absorb No. 2 Time Warner Cable to be completed by year-end.

The X1 platform, which delivers content via the cloud, could evolve into an larger threat for online services like Netflix and offerings such as Apple Inc. (AAPL:US)’s Apple TV set-top box. It can be updated to duplicate many of their features, such as suggestions of what to watch, reviews and social tie-ins to Twitter or Facebook.

Engineer Army

Comcast has more than 1,000 engineers working on software improvements for X1, said Sam Schwartz, chief business development officer for the pay TV provider, which finished 2013 with 21.7 million video subscribers and could grow to 30 million by purchasing Time Warner Cable.

“It out-Netflixes Netflix,” said David Bank, an analyst at RBC Capital Markets who follows media companies including Walt Disney Co. and Time Warner Inc.

Netflix’s stock almost quadrupled last year to lead the Standard & Poor’s 500 Index. This year it’s advanced 18 percent to $436.85, including today’s gain of less than 1 percent.

To take on Netflix directly, Philadelphia-based Comcast would have to spend lavishly, building a library of shows it could sell for a monthly fee. Netflix has rights to $7.2 billion in content over the next five years, including movies from Disney and original shows like “House of Cards.”

‘Despicable Me’

Instead, Comcast is promoting X1 as technology that melds conventional TV with Web services, such as traffic and weather, along with film and TV rentals and purchases. Those services could include Netflix.

Late last year, Comcast began offering X1 subscribers online downloads of movies days or weeks before the DVDs reached stores.

Comcast became the largest seller of “Despicable Me 2” over Thanksgiving, the company said last month. It’s also seeking streaming rights during the pay-TV window that typically starts six months after the DVD release, the Wall Street Journal reported last week.

The company also has been working to expand its on-demand catalog of TV shows for current and past seasons, letting people catch up on programs at the touch of a button.

“The better Comcast does in advancing this aim, the more potential competition there is for subscription video on demand players like Netflix, Hulu and Amazon Prime,” said Michael Nathanson, an analyst at MoffettNathanson Research LLC.

Original Programming

Time Warner’s set-top boxes use traditional hard drives, making them more difficult to update with new features. The second-largest cable company has been trying to expand its higher-margin Internet service, making Netflix an attractive fit, according to Michael Pachter, an analyst at Wedbush Securities in Los Angeles.

With more cable providers offering on-demand access to older TV shows, Netflix is trying to differentiate itself by producing original programming such as “House of Cards” and “Orange is the New Black.” Its paying U.S. subscribers surpassed HBO last year.

To pay its rising content costs, Hastings said in January he is considering three different pricing tiers for its unlimited-viewing service, a departure from the $7.99 per month price it has had since July 2011.

Netflix could still benefit from a combined Comcast-Time Warner. Federal regulators scrutinizing the deal could demand conditions that benefit independent Web services, such as barring Comcast from charging online companies for access to its Internet subscribers.

Comcast agreed through 2018 to abide by so-called net neutrality rules as part of its deal to purchase NBCUniversal and said a combined entity would adhere to the same conditions.

“If it’s a condition of the merger, then of course they’d abide by it,” said Pachter.

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Edmund Lee in New York at elee310@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Sarah Rabil at srabil@bloomberg.net


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Companies Mentioned

  • NFLX
    (Netflix Inc)
    • $431.09 USD
    • -20.86
    • -4.84%
  • TWC
    (Time Warner Cable Inc)
    • $149.15 USD
    • 2.70
    • 1.81%
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