Netflix: We’re a Friend, Not an Enemy, to Cable Networks

Netflix (s NFLX) may have more subscribers than Comcast, (s CMCSA) but that doesn’t mean it sees itself as a replacement to traditional cable TV services. In fact, in a letter to shareholders and on the company’s first-quarter earnings call, Netflix CEO Reed Hastings continues to argue that Netflix is complementary to cable networks.

In his letter to shareholders, Hastings made the case that licensing content to its on-demand streaming service can actually help grow audiences on linear TV. That is, viewers tune in to older episodes of shows on Netflix and then begin watching current-season episodes as they air. Hastings wrote:

“[W]hen we offer prior seasons of Glee or Mad Men, we think we grow the audience for current season on MVPD. We hope over time that HBO (s TWX) and Showtime will let us prove this proposition for them. We think more and more evidence that prior season on Netflix helps current season on MVPD will become apparent from our deals with Disney, (s DIS) Viacom, (s VIA) CBS, (s CBS) NBCU and others.”

On the investor call, Hastings cited Starz series Spartacus as one example of a show that has benefited from Netflix exposure. Despite the fact that the show is available on Netflix shortly after it airs — or perhaps because of it — Spartacus has remained one of the highest-rated cable shows, he said. The argument is that other networks could see a lift from content availability on Netflix. Hasting wrote:

“Looking at it from all of these angles, content owners that license to Netflix make more money –- now and in the future -– than content owners who don’t license to Netflix. A few media executives are still vocal about their fears of negative long-term impact on MVPD subscriptions from Netflix, but the evidence continues to pile up against their concerns.”

We’ve made the argument that premium cable networks like HBO are missing out on content licensing fees that would be supplemental to the money they collect from cable, satellite and IPTV providers. Instead, they’re putting more effort into trying to attract more money from their existing distributors.

Both HBO and Showtime have doubled down on their TV Everywhere initiatives, betting that by providing additional on-demand content to pay TV subscribers, they will be able to create more value and keep those subs paying, despite a rough economic market. These networks also hope that they will be able to convince their distributors to pay more for extending content rights onto additional platforms.

Jeff Bewkes, Chairman and CEO of HBO parent Time Warner, has been particularly hostile, suggesting that Netflix doesn’t appropriately value the content it licenses and that the online video service cannibalizes cable network viewing. And Showtime, which has made some of its shows available through Netflix’s streaming service over the years, is pulling back on the amount of content that it will license to Netflix.

Despite the threat from TV Everywhere, Hastings remained committed to seeking out content deals with cable networks as a complement to their traditional lines of business:

“This free bundling of a subset of our functionality within a larger subscription service is a classic way for an incumbent to leverage its strength. While TV Everywhere is not a strong offering today, it is likely to become much better over the coming years. We’ll continue to push ahead, developing an ever-better user experience to differentiate Netflix, and exploring exclusive rights, where it makes sense, such as our Mad Men deal, so that we remain complementary to MVPD.