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Digital Home: Netflix Balances The Benefits And Costs Of Broadband

It’s taken several more years for broadband penetration to get to the level Netflix (NSDQ: NFLX) had expected, but now that it has, it’s been paying dividends in the form of rising subscriber numbers and expansion of content deals. But as Andrew Wallenstein, senior editor of paidContent, noted during a Q&A with Ted Sarandos, the company’s chief content officer, at the Battle for the Digital Home conference, Netflix has faced upwards of $2 billion in content costs related to broadband. But for Sarandos, the costs only point to Netflix’s success, especially considering the content deals it has netted.

Netflix’s ability to strike and then expand key streaming deals with programmers such as NBC Universal (NYSE: GE), Epix and Relativity has driven its popularity. Ultimately, the benefits of subscriber growth will pay the bills. He didn’t venture too deeply into the cord-cutting issue — which appears to be non-existent right now — but Sarandos was practically at pains to stress that Netflix was no threat to cable.

Not a water-cooler: In Sarandos’ explanation, cable TV, live viewing is a matter of water-cooler, appointment viewing. Renting TV shows is a matter of “completeness,” where fans of a series, or people discovering or catching up on a show, want to do a marathon session of watching several episodes right after the other. “There’s no conflict with cable, it’s strictly complementary,” he said. When pressed by Wallenstein, Sarandos conceded that recognized why some companies feel Netflix’s growing streaming library represents the potential for conflict with cable. Expect some of those issues to be played out and addressed when Netflix’s deal with Starz comes up again.

Not an ad vehicle: “We’re not getting into the advertising business, we’re not getting into content creation,” Sarandos said. “The reason cable companies got into content creation was to differentiate themselves from other channels. We don’t need to do that. Our point of differentiation is our ability to provide discovery and personalization.”

No lack of deals: In any case, companies like HBO apparently aren’t buying the argument that Netflix’s streaming is complementary, rather than a threat, as that network doesn’t plan any Netflix broadband deals any time soon. Nevertheless, Sarandos, who praised HBO’s programming and said he would like a deal, says that Netflix isn’t exactly hurting for lack of content already. Especially TV content deals.

Cracking the window: “The one that captured the most press was Relativity Media,” he said, about this past summer’s agreement that helped Netflix crack the pay-TV window that was previously available only to the likes of HBO, Showtime and Starz.”The deal with Relativity was the equivalent of Howard Stern leaving terrestrial radio for satellite.”

Epix was also transformative in that it “created a new window — 90 days instead of nine years.”

TV streaming is 50 percent: Sarandos reflected on how things have changed when it comes to doing deals. “It was almost four years ago that we started streaming content. We did the deals we could get — in other words, we got junk,” Sarandos said. “But that eventually led us away from movies and towards TV content. The outcome is that steaming TV content has become half of all the viewing hours on Netflix. TV has never been never more than 20 percent on DVD.”