Would You Join Netflix if It Were on Your Cable Box?


Last month, Netflix and U.K. cable company Virgin Media announced a partnership that could turn the cable vs. streaming video rivalry into a more cooperative relationship. For Virgin Media customers with a TiVo set-top box, Netflix will be available as an app along with Virgin's own on-demand offerings.

Naturally, investors were very excited about this news, believing that putting the app on cable boxes would encourage more people to use the streaming service. They were even more excited about the possibility that Netflix could implement a similar arrangement with other cable operators, especially in the U.S.

Thus, when The Wall Street Journal reported on Monday that Netflix was in talks with Comcast and other cable providers to include a set-top box app, a new Netflix stock rally was born. (By midday, Netflix's market cap had expanded by more than $1 billion.) Yet even if these talks eventually lead to deals, Netflix will not benefit nearly as much as bulls expect.

The last straw?
The goal in infiltrating cable set-top boxes is to make it easier for customers to get Netflix programming on their TVs. For a long time, Netflix has been interested in deals like this that would position it as a complement to cable TV.

This aim makes sense, and at the margin anything that improves the customer experience should be good for Netflix. However, it's hard to imagine how this move could lead to a flood of new subscribers.

Netflix already has great brand recognition within the U.S. The streaming service has more than 30 million domestic subscribers, which represent about 35% of all U.S. broadband households. While a set-top box deal in international markets might introduce Netflix to new potential customers, most people in the U.S. already know about the company.

Hence the title of this article. How many people have really been waiting for Netflix to become an app on their set-top boxes to join the service? Perhaps the additional ease of use will draw in a few more customers, but most people are probably deciding whether to subscribe based on Netflix's content and cost.

A set-top box app could also help Netflix if it reduces churn, but this doesn't seem especially likely either. Presumably, Netflix members already have one of the many devices available that can stream Netflix content to a TV. A Netflix app on cable set-top boxes might be bad for Roku, but it won't make much of a difference in Netflix subscribers' decisions to cancel or keep the service.

Focus on what matters
All this excitement about Netflix on set-top boxes is distracting investors from what really matters. Netflix has posted strong subscriber growth over the past year, but it still has a tiny pretax profit margin in the low single digits. To hit the market's optimistic earnings targets, Netflix will need to raise prices -- eventually -- without chasing customers away.

Netflix failed miserably in its last attempt at raising prices; subscriber growth immediately came crashing to a halt. Somehow, I don't think that a Netflix set-top box app will be a key factor in convincing subscribers to pay more this time.

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The article Would You Join Netflix if It Were on Your Cable Box? originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg is short shares of Netflix and long December 2013 $275 puts on Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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