Netflix and Comcast to Team Up?

In a move to avoid a pay-TV annihilation, Netflix might be joining forces with the competitors it was expected to put out of business.

According to an exclusive report by Reuters, Netflix's (NASDAQ: NFLX) chief executive, Reed Hastings, “quietly met with some of the largest U.S. cable companies in recent weeks” to discuss the possibility of adding Netflix to their cable packages.

In short, this would allow companies like Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) to offer Netflix as an additional option to their subscribers. Reuters believes this would intensify Netflix's competition with HBO, the Time Warner-owned (NYSE: TWX) pay-TV movie enterprise. But what, exactly, could this do for consumers?

Reuters suggested that by offering Netflix through a cable package, it could “could help the streaming service avoid a separate potential clash with cable operators over rising costs for online video traffic over their Internet pipes.” This is an excellent point. If Comcast subscribers could stream unlimited Netflix videos without touching their monthly bandwidth allotment (250 gigabytes), they would be more likely to use both services. It gives consumers an incentive to spend a little more to gain a lot more content.

However, it also means that consumers can kiss the dream of cord-cutting goodbye. Granted, that was always a bit of a pipedream for Netflix subscribers, first because of content limitations (ex: neither Netflix nor Hulu offer live TV shows or sporting events), and second because of broadband data caps. But if Netflix forms a partnership with any cable company (or any satellite provider, for that matter), any cord-cutting hopes that consumers still had will be lost forever.

Netflix would also have to start sharing revenue with cable providers, which would cut into its ailing bottom line. The company's streaming video margins are horrendous, especially compared to DVDs, a business that Netflix is determined to kill off. By joining forces with the pay-TV industry, Netflix's margins may only get worse.

In the best-case scenario, the streaming video giant could use Comcast to increase its subscriber base. That's certainly a possibility. But how many subscribers could Netflix possibly gain from a cable deal? And how many subscribers would it take for this venture to be truly profitable?

Long-term, a deal like this would likely lead to a Netflix takeover. If that were to occur, the buyer (likely a cable provider) would be guaranteed to skew Netflix in its favor by restricting select content to those who also pay for cable. This would be equally bad for consumers and for Netflix.

Even without a Netflix/pay-TV deal in place, some streaming video sites have already been tempted to join forces with the cable service industry. myUbi.tv founder and CEO James Norman initially launched his “discovery entertainment platform” because he wanted to cut the cord.

“Comcast (NASDAQ: CMCSA) kept changing my bill,” Norman told Benzinga in January. “I figured there was a better way to watch video. I can still pay the publisher, so I'm just gonna cut [Comcast] out of the picture.”

That mission didn't last long. “That story has kind of changed now because we found that our framework is kind of valuable,” Norman continued. “So we might start trying to license it to cable providers. That way they can deliver streaming content to their subscribers. All in all, it was really about personalizing the user experience and not having to think about what I wanted to watch, ‘cause what was missing from online was the laziness of traditional TV. Online takes so much effort, and that's why so many people don't do it. If you can just turn it on and watch it, you've improved the experience that much more.”

Regardless of how far Netflix intends to take its proposed (still rumored) deal, Reuters said it could be months before consumers are able to stream videos through their cable box. This is because the majority of Netflix's current programming deals do not allow the company to distribute their shows through a traditional cable box. Netflix would reportedly have to rework its contracts (or wait until they expire and sign new ones) before cable users would be able to take advantage of the new venture.

But we can wait, can't we? While the prospect of unlimited data for streaming Netflix is particularly awesome, the long-term side effects (price increases, an inevitable acquisition, etc.) may not be worth the short-term benefits.

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