Netflix Risks Tangle With Cable

The key to Netflix's future is steady subscriber growth. Could it get some extra juice by hooking up with cable companies? Recent reports indicated that the DVD and video-streaming company was in discussions with cable operators about offering its content alongside other pay-television channels.

While it doesn't appear those talks have any traction, at least yet, it is worth asking why Netflix would even consider such deals. Netflix loses more than 50% of its customers each year and has to replace all of them just to keep a steady count. Tony Wible of Janney Montgomery Scott says pay television has a lower churn rate of 20% to 25%. That may mean customers who purchase Netflix through a cable platform would stick around longer. Meanwhile, for cable companies, there may be a chance to profit from Netflix's success. Netflix's streaming service depends on high-speed connections that cable companies provide, but right now they don't see any extra revenue from it. The obvious hurdle is that Netflix competes directly with cable companies. If cable customers become fond of Netflix, they might decide to abandon their pay-TV packages and just subscribe to the streaming service directly alongside other Web-based services. Perhaps a bigger concern is the economics of any deal. As it stands, Netflix's $7.99-a-month fee for streaming content doesn't appear very profitable. Margins would be squeezed by a deal in which Netflix shared some of that fee, unless it were offset by lower marketing costs.