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Pay-TV Providers Are Signing Up a Lot of Netflix Subscribers

Adam Levy, The Motley Fool

Many people point to Netflix (NASDAQ: NFLX) and Hulu as the biggest reasons consumers cut the cord, but subscription video-on-demand services are more often used to complement the cable bundle than to replace it. With that in mind, some pay-TV providers started offering customers the option to subscribe and watch Netflix (and other SVOD services) right from their set-top boxes.

As of last month, around one out of every five pay-TV households subscribe to an online video service through their pay-TV providers, according to a survey from Parks Associates. That's good news for pay-TV companies like Comcast (NASDAQ: CMCSA), DISH Network (NASDAQ: DISH), and smaller providers using TiVo's (NASDAQ: TIVO) set-top boxes. It's also good news for Netflix, which is looking to penetrate the next 10 million to 30 million households through the cable box.

Netflix on Comcast's X1 platform

Image source: Comcast.

Making it easy for customers

Currently, just 25% of subscribers sign up for Netflix on their TVs. That's through streaming devices, smart TVs, and pay-TV set-top boxes combined. Ultimately, however, 70% of all Netflix viewing takes place on TV sets.

Wouldn't it make more sense for users to be able to easily sign up for the service on the device where they're most likely to use it?

Comcast, DISH, and TiVo are all attempting to do just that. What's more, they're simplifying the billing process for customers by putting Netflix as a line item on their cable bills.

That also benefits Netflix, which can outsource billing and processing to the cable companies selling its service, and pay them an affiliate fee.

But the cable companies benefit too. Bundling Netflix and other streaming services with the rest of a cable package increases subscriber retention. Comcast management says its X1 platform, which aggregates content from Comcast's services as well as other video services, increases its retention rate compared to households without the X1 box. And it makes sense that switching costs are higher for customers who have to go back through the sign-up process for Netflix if they cancel their cable.

Getting the next 10 million subscribers

Netflix's management believes it can attract 60 million to 90 million subscribers in the United States long term. But as of the end of 2017, the streaming leader had just 52.8 million paid subscribers in its home market.

Reaching customers where they're most likely to watch Netflix -- on their TV sets -- through integrations, as it has with Comcast, Dish, and TiVo, could be the best path for Netflix to reach its long-term subscriber goal.

Netflix also has a deal with Charter Communications (NASDAQ: CHTR) to distribute Netflix through its set-top boxes, but Charter doesn't yet offer it. The cable company will first offer Netflix to its customers with WorldBox -- Charter's version of X1 -- before offering it to customers with a standard set-top box. Only 2 million of Charter's 16.5 million video customers have the WorldBox so far.

As Netflix strikes more of these deals and pay-TV companies slowly build out the distribution system, Netflix should make steady progress toward its goal of 60 million to 90 million subscribers. AT&T, with its 25 million pay-TV subscribers, notably remains a major holdout from integrating Netflix.

Pay-TV providers may do better to embrace Netflix and other streaming services, as they can help reduce churn. The increase in customers signing up for streaming services through their pay-TV providers shows there's a clear demand for the ease of signing up and streaming directly from the same interface as the rest of the cable bundle. The sooner pay-TV providers start thinking of Netflix as another premium network like HBO, the better off they'll be.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.