September 19, 2013

Sleeping with the Enemy – Virgin Media, Netflix, and the Future of TV

This month has seen lots of discussion about Virgin Media’s plan to offer Netflix to a portion of its UK pay-TV subscribers via a TiVo-provided set-top box. On first glance this story may seem obvious, given that TiVo has supported Netflix on its standalone boxes for years now. While adding Netflix on its boxes is newsworthy, perhaps the real story here is that Virgin Media didn’t make TiVo remove Netflix from boxes bound for Virgin Media customers. This indeed is thought provoking and a first for a pay-TV operator.

So what does this mean for Netflix and pay-TV operators going forward? Two things.

Netflix is About Content, not Distribution

Netflix can be a hard company to understand. Or perhaps an easy company to misunderstand. In its early years as a DVD-by-mail company, Netflix presented itself as a different way to rent movies. Its innovation was to dispense with physical stores and use the postal system to transport movies to customers. Not exactly high tech, but its Pony Express-version of a broadband network was an improvement on driving to Blockbuster to return a movie. The name “Netflix,” on the other hand, always implied that its ambition was to use the Internet (the “net”) to distribute movies (the “flix”) directly to customers. Again, the innovation was distribution, not content. As a result, Netflix became the poster child for the OTT industry, which itself has been defined largely in terms of distribution. All of this to say that Netflix has a lot of perceptual baggage, most of it not particularly helpful in understanding the company today.

So repeat after me – Netflix is a content company. Netflix is a content company. Netflix is a content company. Feel better now? Me too.

Once we understand that Netflix is a content company in the mold of HBO, not a pay-TV distributor in the mold of DirecTV, the Virgin Media deal becomes much easier to understand. Yes, Netflix uses streaming rather than broadcasting to deliver content, but that’s actually beside the point. From a business standpoint, Netflix has unique content and wants distribution in order to acquire additional customers. Its business development partners to date have largely been hardware and ecosystem companies, but there is no reason for Netflix not to partner with pay-TV providers, as well. If Virgin Media (or Comcast or any other MVPD) can provide additional distribution for the Netflix app, that’s clearly a good thing for Netflix.

Going Forward, Pay-TV Distribution will be About Apps, Not Channels

As a pay-TV service, Virgin Media is in the business of providing video entertainment to its subscribers. These subscribers demand a bundle of video entertainment options. Virgin Media does not produce this content itself, but instead aggregates offerings from leading global providers such as the BBC, HBO, CNN, etc. Increasingly, however, these video entertainment offerings do not come in the form of linear channels delivered via satellite feed. Instead, the future of TV is an app; one that connects to servers over IP. For a fully developed version of this argument, please check out my report The Future of TV: A View from 2013. For now, suffice to say that in this context we believe pay-TV providers can and should view Netflix as just another premium content app in the mix. If users demand the exclusive shows and content Netflix produces (i.e., House of Cards, Arrested Development), then smart pay-TV execs should be able to create business deals that allow the Netflix app to show up on the STB. If not, Netflix fans will just access the content on another connected device, of no benefit to the pay-TV operator.

Conclusion

Definitions illuminate, but they can also obscure. Viewing Netflix as an “OTT Service” is technically true, but not terribly helpful. Netflix has become a premium content provider that seeks to maximize distribution of its apps in order to continue to acquire (and retain) subscribers. Pay-TV providers, in turn, have an opportunity to leverage their traditional strength in distribution in the new world of TV-as-an-app. Thanks to the good folks at TiVo, Virgin Media and Netflix have an opportunity to show us all what that future looks like, starting in the UK. We’ll be watching.

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