• November 27, 2014

Netflix relies on cable, telecom firms even as it clashes with them

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Posted: Thursday, July 17, 2014 4:30 am

LOS GATOS, Calif. — Reed Hastings, the lanky and goateed chief executive of Netflix, is on a mission: to turn his company into the Internet’s first television network.

On July 10, Netflix collected 31 Emmy nominations for its shows, more than double its haul last year, for hit programs such as “Orange is the New Black” and “House of Cards.” Last month, the company surprised the TV industry by signing comedian Chelsea Handler for a talk show that will be exclusive to Netflix subscribers, the latest gambit by the company to prove that it can create high-quality programs.

“We are defining the way consumer entertainment ought to work,” Hastings said in an interview at Netflix’s headquarters.

The company that took down Blockbuster and transformed how people watch movies — even as analysts predicted its demise a number of times along the way — now has its eyes set on television. And Hastings sees the future of video entertainment as being largely written by HBO and Netflix, companies that offer must-see series such as “Game of Thrones” and “House of Cards” on mobile apps that are highly personalized and constantly recommend more entertainment from vast libraries of content.

But there’s one major threat to its long-term survival. Netflix, which takes up nearly one-third of all Internet traffic, relies on the Internet pipes ruled by companies like Comcast and Verizon. Stream to viewers a “House of Cards” episode whose connection fades in and out, and watch subscribers walk out the door.

Already this year, Netflix has grudgingly cut deals with Comcast and Verizon to guarantee faster streaming.

Entrenched players

The world of television is dominated by big, entrenched players: broadcasters such as ABC and CBS, and cable companies such as Comcast that run the piping of the Internet and hope to get even bigger.

Standing in the middle is Netflix, which has begun to flex its muscles in Washington, challenging the same cable companies who control those pipes that the company needs to survive, waging a high-stakes bet on government regulators to act as a referee over the fast-evolving tech and telecom industries.

Whether Netflix can survive will help determine how consumers watch television for years to come. Do they continue to pay Comcast for a big package of channels? Or do they abandon the bundle and subscribe

to a mix of streaming video services like Netflix or Amazon Prime, streamed through their Apple TV or Google Android TV?

Already, Netflix’s drumbeat of complaints to Washington has sparked a recent federal probe into how Internet service providers such as Comcast and Verizon charge Netflix and other Web firms for more direct — and therefore faster — delivery of their sites to users. Netflix also urged regulators to reject Comcast’s proposed $45 billion merger with Time Warner Cable, saying the combined company would have too much power with more than 40 percent of all U.S. high-speed Internet subscriptions.

“We think the right principle is that they shouldn’t be impeding, favoring or charging for data,” Hastings said. The Comcast merger is troubling, he added, because “the idea that one company, if the merger goes through, will control half of U.S. residential broadband, not including DSL, isn’t in the interest of the Internet, public and our society.”

Pay for broadband

Netflix’s opponents, though, say that the company needs to pay for the sheer amount of broadband its content eats up.

“Netflix’s argument is a House of Cards,” Jennifer Khoury, Comcast’s senior vice president for communications, wrote this spring, arguing that the company is simply trying to make all Internet users pay for the cost of supporting its broadband-gobbling business. “The company should at least be honest about its cost-shifting strategy.

For years, Netflix has navigated a paradoxical relationship with the cable industry, challenging its existence yet depending on it for the tech firm’s survival. “It’s like skating on a razor blade,” describes a former Netflix executive who said the friend-and-foe relationship with cable companies has long been the source of great concern for Hastings.

Hastings, 53, co-founded the company 17 years ago and has transformed it at least three times to fit with changing technology.

Hastings, who nearly named the company dvdbymail.com, began Netflix as a mail-order DVD business that quickly built a loyal customer following. After Hastings saw DSL Internet begin to take off, Netflix began streaming videos in 2007.

In 2010, as some analysts predicted the company’s demise, Hastings began plotting the company’s next big move: building original content. Its first foray would be gangster comedy “Lillyhammer” and then political drama series “House of Cards,” starring Kevin Spacey.

Hastings likes to say that he needs to turn Netflix into HBO before HBO becomes more like Netflix — meaning he wants to create a company that has the same level of quality and variety as the famed network but isn’t tied to the cable bundle.

Today, Netflix has 1,300 employees, with a staff of more than 300 in Beverly Hills creating original shows and forming exclusive licensing deals.

Netflix sees this kind of original content — and its technology — as its competitive edge. But costs for Netflix could quickly skyrocket as it tries to secure faster service for its content. Last February, Netflix agreed to pay an undisclosed amount to directly connect its servers to Comcast’s network into American homes. Netflix reached a similar deal with Verizon in April.

Netflix’s founder is careful with how he characterizes his bigger industry bedfellows. And he concedes that the status quo could be difficult to dislodge. “The cable television bundle is very powerful,” Hastings said. “People have speculated on breaking the bundle for decades and when it’s speculated that much and the number of subscribers hasn’t really gone down, you know its a pretty stable business model.”

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