Business | Netflix

Making friends

For the time being, Netflix is trying to be an ally of pay-television

UNTIL recently, they were rivals. But on September 10th Virgin Media, a British television company, said that it would make Netflix, an online-video service, available to 1.7m of its customers through their set-top boxes by the end of the year. For the first time Netflix subscribers will have access to the service through pay-TV. Hitherto they have had to use game consoles and other electronic paraphernalia to watch Netflix shows on their TV sets. Eliminating this hassle may win Netflix more customers and help Virgin Media retain its, too, by making a cable subscription a gateway to other services. Netflix’s share price jumped on news of what may be the first of many deals that extend its reach.

Netflix has recovered impressively from a nasty stumble in 2011, when it announced changes to its pricing structure so unpopular that they had to be abandoned. As customers quit, its share price plunged (see chart). This year it has been the best-performing share in the S&P 500.

Investors are pleased that it is devoting some $150m of the $2 billion it spends each year to acquire content on original programming. It has already achieved hits with home-made shows such as “House of Cards” and “Orange is the New Black”, which are available only on Netflix. This strategy may help keep subscribers hooked and differentiate it from rival online-video services, such as Amazon’s.

Investors applaud the firm’s push into new markets (rather than complaining that the heavy investment involved is depressing profits). Some 7m of the 38m Netflix subscribers are now outside America.

The TV executives who once reviled it are starting to change their tune in part because pay-TV subscribers failed to flee cable en masse for Netflix, as was once predicted. The firm is also winning over former critics by spending billions to license content from big media firms, such as Viacom and CBS, boosting their profits. “We view Netflix as a friend,” Leslie Moonves, the boss of CBS, has said.

Yet the big cheques it is writing worry some sceptics. In June Netflix had at least $6.4 billion in content liabilities due in the next few years. To pay, it must keep growing fast, fend off competition and hope rules do not change in America that could make it more costly to deliver content over a broadband connection.

It will need to balance disruptive innovation with not irking the content-owners whose material it must continue to license (as well as making its own). Netflix may not be so different from Frank Underwood, the scheming senator played by Kevin Spacey in “House of Cards”. It can form alliances with incumbents and make life better for them, if it suits its agenda. But the plot can always take a dramatic turn.

This article appeared in the Business section of the print edition under the headline "Making friends"

Hang on

From the September 14th 2013 edition

Discover stories from this section and more in the list of contents

Explore the edition

Discover more

Making accounting sexy again

The profession needs a makeover to attract newcomers

A marketing victory for Nike is a business win for Adidas

The contest of the sportswear giants heats up


The pros and cons of corporate uniforms

A quarter of the American workforce wears one. Why?