Netflix befriends carriers to grow

Partnerships expand firm’s global reach

As he sat in his office in central Paris, Christian Bombrun, an executive at Orange, the French cell phone and cable operator, got an unexpected call. It was Netflix, the American streaming giant, proposing a deal.

Netflix was looking to offer its stable of movies and television programming to the 10 million Orange customers across France. What followed were six months of often tense negotiations, as both companies wrestled over the details.

“There were some difficult discussions,” said Bombrun, director of entertainment and digital services for Orange in France. At certain points, both sides thought the talks would fail. But in the end, he said, “we got a deal done.”

Such negotiations have become increasingly commonplace for Netflix as its global ambitions have taken the content streaming service far from its Los Gatos roots into markets across Europe, Latin America and Asia.

The company’s partnerships with cable and cell phone operators worldwide give it almost instantaneous access to potential new users without having to spend a fortune on advertising and distribution

deals in markets where its brand and content are often still relatively unknown.

This growing symbiotic relationship took center stage on Monday when Reed Hastings, the company’s chief executive, gave the keynote address on the first day of the Mobile World Congress. The conference is an annual trade show in Barcelona, Spain, where executives from across the telecom, media and technology worlds gather to meet and, potentially, sign new deals.

Hastings’ headline act — part sales pitch, part industry update — comes as Netflix’s attention has increasingly turned to its overseas subscribers.

The Orange deal, one of Netflix’s first international partnerships, is a case in point.

The two sides finally reached an agreement in late 2014, just as Netflix began expanding across much of Europe. As part of the deal, Orange customers are offered a one-month free trial with Netflix and the ability to pay for the streaming service through their existing monthly contracts. Orange has also entered into an undisclosed revenue-sharing pact in France, which has often been wary of the potential for Netflix’s American shows to outmuscle local content.

But the talks were not all smooth sailing.

Along with the typical back-and-forth about how much revenue each side would receive from the deal, Orange was concerned that Netflix, whose European headquarters are in Amsterdam, had not signed on to French rules requiring online video distributors to fund local-language content.

Stéphane Richard, the company’s chief executive, also had said he would not work with Netflix, fearful that Orange would become a “Trojan horse,” potentially helping the streaming service gain a global following, only to then cast Orange aside.

But for cable and cell phone companies from Bulgaria to Bolivia, the calculation is simple. Though many of them initially resisted such deals with online content providers, gaining access to Netflix’s exclusive programming helps set them apart from local rivals, just as customers’ online habits have shifted toward video, particularly on their smartphones and other mobile devices.

“Netflix wants to be exposed to as many people as it can,” said Tom Harrington, an analyst at Enders Analysis, a media and telecom industry research company in London. “Telecom operators want to keep people inside their walls, so they are willing to let Netflix in.”

Netflix’s American revenue, $1.4 billion in the fourth quarter, still constitutes a majority of its sales. But after a somewhat stuttering start to its global expansion, its international revenue is quickly catching up, hitting almost a billion dollars in the three months through December.

The company offers its streaming services in 190 countries, and added more than 5 million new international subscribers in the fourth quarter, or more than double the number of new users in the United States, according to regulatory filings.

Even Netflix’s senior executives equate much of that growth to the company’s strengthened ties with cable and cell phone operators around the globe.

“All the partnership deals, we really believe in; that is why we are doing more of them,” Hastings told analysts last month. “Those partnership deals are good for the customers, good for us and good for the partner.”

Such bonhomie between Netflix and carriers is a relatively recent phenomenon, and there are still teething pains whenever the company wades into international markets.

Sky, the British content and cable provider, has refused to include Netflix on its own set-top box, primarily because it views the streaming service as a direct competitor to its own original programming.

Telekom Indonesia, that country’s largest telecom operator, also banned Netflix from its network last year, saying it was not registered to offer content there. The company, which is state owned, later signed a deal with iFlix, a competing streaming service from Malaysia.

For Bob Greene, managing director of online entertainment at Liberty Global, a cable giant controlled by billionaire John Malone, his relationship with Netflix is rooted in the new realities of how people watch content online.

The streaming service first approached Greene in 2013 after Liberty Global bought Virgin Media, a British cable operator, for $16 billion. Netflix had hoped to be included on Liberty Global’s millions of settop boxes from Latin America to Europe.

At first, Greene said, Liberty Global limited the partnership to Britain, including the Netflix app on its cable service but keeping billing separate. (It takes an undisclosed percentage of revenue from its subscribers signing up to Netflix.)

Yet as Liberty Global crunched the numbers, it realized that its British customers who watched Netflix were less likely to jump to rival products and showed more loyalty to its own services.

So in early 2016, Greene renewed negotiations with Netflix to expand the partnership, eventually signing a worldwide deal to offer the streaming service in its more than 30 markets across Latin America, the Caribbean and Europe by early next year, at the latest.

“If our customers want Netflix and we don’t offer it, they’ll find another way to get it,” Greene said. “We’re better off if they don’t have to go elsewhere to find what they want.”