If you don’t happen to closely follow developments in over-the-top (OTT) services, you may have missed the news released in mid-September that Netflix has struck a deal with Virgin Media in the UK to directly provide the Netflix app to its TiVo service subscribers. Although there is nothing new about the fact that the content and distribution industries have been significantly disrupted by the arrival of OTT services, this marks the first time that a cable subscription company has formally entered a partnership with a prior existing online subscription service. In fact, within days of this announcement, there was already a second European TiVo provider Com Hem set to ink a deal with Netflix and even further talk about HBO reconsidering an OTT format. But before consumers start rejoicing and broadcast distribution undertakings (BDUs) start bemoaning at the prospect of Netflix being included in future cable package bundles, let’s deconstruct this pioneer deal.
- Virgin Media will pilot the Netflix video-streaming service with 40,000 of its current TiVo set-top box subscribers.
- Those participating in the pilot will need a Netflix subscription on top of their Virgin/TiVo subscription.
- Netflix will directly handle its own subscriber payments.
- Netflix will appear as an app on the TiVo service, allowing users to search the same on-screen guide for both Pay-TV programs and the Netflix library through the connected service.
- Netflix will not be offered as part of a Virgin Media cable package.
- Virgin plans to roll out the service to all of its 1.7 million TiVo subscribers by the end of the year.
TV DISTRIBUTION 101
A cable subscriber will generally subscribe to a BDU’s services to gain access to specialty channels through a channel package. For each specialty channel carried, a portion of the subscription fee is paid to the specialty channel and a portion stays with the BDU. For example, HBO agrees to provide its content exclusively to cable subscribers, accepting the revenue split as regulated through carriage agreements. This is its business model.
In Canada, services distributing content through cable packages or free-to-air are required to follow expenditure and exhibition conditions of license, as set out in the Broadcasting Act. The Canadian industry’s grouse with Netflix is that it is providing consumers with access to content without contributing to license fees and without being required to follow expenditure or exhibition regulations.
Enters Virgin Media, setting a global precedent as the first deal reached between a licensed operator and the unlicensed disruptor (Netflix).
DECONSTRUCTING THE DEAL
However, the deal inked with Virgin Media is not as scandalously detrimental to broadcast as it may first appear. Firstly, Netflix has long been widely available as an app on standard gaming consoles, which many of the cord-cutting generation have been using to amalgamate access to the Internet, games and content through a connected screen. This deal is really just another set-top box that will also be carrying the Netflix app and at an additional cost, as users will still require a Netflix account in addition to their TiVo service. In fact, the industry may even see further price wars through Netflix’s competitor and recent market entrant Wuaki.tv—owned by Japanese e-commerce giant Rakuten, the Kobo brand’s parent company—which is currently offering its services at half the price of Netflix.
Secondly, it is highly unlikely that Netflix will become a channel included in any traditional cable package given the way all premium services currently operate in Canada or elsewhere. From a policy perspective, carriage within a subscription package only applies to content that is exclusively licensed for traditional broadcasters. BDUs would not be able to incorporate Netflix in a cable package because it is not delivered as a channel. Additionally, Netflix would never actually need to join a cable package in order for its content to be viewed since it is all online, and therefore in the unregulated spectrum. Economically, the margins are just too low for Netflix to share any portion of its revenue with cable operators. It is doubtful that Reed Hastings, who pockets $8 per month per subscription, would be willing to negotiate $0.45 per subscriber with Bell in Canada, and something else with Comcast in the US, and another amount with a leading cable provider in Japan.
THE NETFLIX EFFECT IN CANADA
According to a 2012 Media Technology Monitor report, 17% of Canadians had Netflix accounts in 2012. By the spring of 2013, that number had grown to 21% (25% among Anglophone Canadians). According to the CRTC’s Communications Monitoring Report 2013, in Canada,streaming video services grew by 70% in 2012, which translates to about 2.5 million households. Netflix will have a durable effect here, and this unprecedented deal with Virgin Media is probably making traditional broadcasters a bit nervous.
Traditional broadcasters argue that Netflix is bypassing Canadian distribution regulations and that the playing field should be levelled, either by imposing Canadian content regulations on online services or lifting the quotas for everyone in the industry. The problem for BDUs is that online streaming services are able to annex their subscribers by offering lower prices. They claim these lower prices are possible because the online services do not have to meet the regulatory and financial requirements that are imposed upon traditional broadcasters.
The CRTC is currently preparing a review of the television industry, asking Canadians which changes should be made to the broadcast system to better meet their needs. Undoubtedly, Netflix and other online services will make up a large part of this review as will broader discussions with the industry about content delivery to households. But the problem with Netflix is not Canadian regulation because Netflix is bypassing ALL distribution requirements and ALL regulations, regardless of territory. The sentiment was aptly expressed by theCRTC’s vice-chairman, Peter Menzies, who stated that the Commission can no longer serve its role as a gatekeeper in a world that may no longer have gates.
WHAT HAPPENS NEXT?
Variety’s Digital Editor-in-Chief, Andrew Wallenstein, believes there’s more that cable operators could do with Netflix including bundling the OTT service with a multichannel package rather than as an add-on with a separate billing system. This could possibly transform future negotiations with Netflix and Pay-TV operators around the world. In fact, Netflix’s CFO, David Wells, encourages HBO to rethink its strategy of rejecting OTT, saying: “We believe that if they [HBO] were direct-to-consumer, there would be materially more subscribers that would pay for it in the US.” Increasingly, the future of TV content is connected to the app, and when the day arrives that HBO bypasses the BDU by going directly through Netflix or its own OTT, then may we possibly see an expedited embrace of the web-based bundle.