Virgin and Netflix: sleeping with the enemy?

The media world has always been a promiscuous place, but what do we make of the new relationship between Virgin and Netflix? With very little comment on the announcement, the Media Native – aka David Brennan – assesses the impact for the pay-TV market.

There has been surprisingly little comment about the move by Virgin Media to offer Netflix as part of its packaged service to its pay TV customers.

The deal, announced last week, will see Virgin Media piloting access to the Netflix video streaming with 40,000 of its TiVo customers, but only if they have a Netflix subscription. Newsline reported that Virgin Media was planning to roll out the service, as part of a bundled package, to all 1.7 million of its subscribers by the end of the year, in which case it will be a very quick pilot exercise indeed.

With all the recent talk of cord cutting, and the positioning of streaming services such as Netflix and LoveFilm as disruptive competitors to the pay TV providers, is this a case of Virgin sleeping with the enemy?

Well, if it is, we are a promiscuous lot in the media world, as sleeping with the enemy has been a common feature of the media landscape since the invention of the printing press. A quick Google search shows the phrase ‘sleeping with the enemy’ has been applied to the infamous AOL/Time Warner merger (well, promiscuity is often costly), the coming together of broadcast TV and newspapers in the 1990s, broadcasters’ moves into online content and newsbrands’ relationships with social media, to name but a few.

Compared with any of these examples, a pay TV provider offering access to its subscribers to an organisation that offers…well, more TV essentially, can hardly be said to be a revolution in the making.

But it will confound the digital doom-mongers who have assumed for some time that video streaming services will steal a significant proportion of the TV market’s cake; especially in the area of pay TV revenues.

It helps Virgin Media, of course, that they do not have a significant TV content business of their own to feel threatened by an alternative such as Netflix; it is harder to imagine Sky doing this deal right now, for example.

It also helps Virgin Media to combat the competitive advantage of Sky in the TV content arena, furthering Virgin’s strategy of providing a better interactive offering instead. Indeed, it reinforces Decipher’s recent recommendations that pay TV providers should seek to do all they can to keep their subscribers ‘inside the box’ rather than going beyond the STB for their alternative content

Meanwhile, given that Netflix themselves are under intense pressure from LoveFilm, Blinkbox and Japanese-owned Wuaki.tv (which appears to have a significant price advantage over them all), the access to Virgin’s subscriber base directly via the TV set is a distribution no-brainer.

If there is any risk attached, it is likely to fall on Virgin Media, because if their subscribers get a taste for Netflix, it could induce them to transfer some of their pay TV spend; I would expect premium movie channels to be most at risk.

That said, pay TV is in a pretty strong place right now and, despite all of the apocalyptic talk of cord-cutting, revenues have been more than healthy in the UK, rising by more than a third in the past six years – not too bad for a business which should by rights be affected more by the recession than most. There has been some evidence of cord-cutting in the States, but even that has been at the margins.

It might be argued that the video streaming services, such as Netflix, can gain much more revenue from the non-pay TV audience, who have less available to them. However, it is a fact of life that services like this are far more popular with people who already have lots of TV available to them for one simple reason; they are prepared to pay for the best TV they can get and are relatively price insensitive.

But perhaps the bigger picture view of this deal is that it makes a mockery of the phrase ‘sleeping with the enemy’; there are few out and out enemies in the media world any more. Instead we should be looking at how deals and alliances like this one can create added value.

In my view, Netflix doesn’t add a game-changing degree of value to Virgin’s pay TV offering, but it does make sense and it does demonstrate that Virgin and Netflix may not exactly be best friends, but they are going to become neighbours; and, as we all know from the denizens of Ramsey Street, neighbours can become good friends. Sometimes.