Tellynomics 51: Extending the new Netflix distribution model: to the UK? to pay services?

Of the factors driving the recent distribution deal between Netflix and TF1 in France (see Tellynomics 50), many are also present in the UK, some of them more so:

• the UK public sector broadcasters (PSBs) are equally worried about falling viewing and the rise of streaming

• Netflix is even more prevalent in the UK than in France, with c17.5m UK subscribers (versus c10m in France), so there are even more homes that start and potentially finish an extended viewing session in the Netflix environment

• a related issue is the steady rise in the number IP-only homes (as canvassed in recent posts on licence fee avoiders) in which there are diminishing prospects of regular exposure to PSB content

• retaining four PSBs in the UK system has perpetuated fragmentation, so that none on their own has sufficient scale and scope to establish and sustain a habit of viewers coming into their environment and staying there – most viewing behaviour remains dip-in and dip-out

• the UK PSBs are also agitating for intervention relating to due prominence on digital platforms (recently extended to YouTube), but worry that they will never get enough

Put all of that together and, like TF1, the UK PSBs might reasonably wonder whether it would make sense to pitch their stall inside the big Netflix tent, if that’s where all the crowds are congregating.

A chequered history of UK PSBs engaging with third party platforms

All that said, the UK PSBs have long history in these matters and have not always been open to engaging with distribution platforms operated by others.

For example, when Sky launched its digital satellite platform in 1998, ITV chose to stay away. The BBC and C4 did join, despite having to pay Sky c£5m pa for “conditional access” services. But ITV took a different view: it chose not to pay and stayed off the platform, preferring to favour its investment in ONdigital and trusting that people would come out of the Sky Digital environment to find ITV via their terrestrial aerial, and then they might even stay there.

All the same issue were in play as TF1 has recently been grappling with in France. Perhaps ITV bet that Sky would blink, would be desperate for ITV to come inside the Sky Digital tent, but that did not happen. As events transpired it was ITV that blinked, three years later, despite having to pay the higher price of £17m pa for conditional access.

But to illustrate further the Tellynomics 50 point it is sometimes hard to predict who pays whom, there was a different outcome when it came to VOD services. Again, there was a standoff between Sky and ITV, but on this occasion it was Sky that blinked. VOD was less established and so ITV had less to lose by staying away in the early days, whereas Sky was desperate to show that, despite being a satellite player, it too could deliver a comprehensive VOD offering. So this time it was Sky that paid, quite handsomely, and has been doing so ever since (indeed, the partnership between the two has been renewed in recent days).

This is not, however, merely a story of ITV intransigence, with the BBC also enjoying a reputation for not sharing when it suits. Consider, for example, the Sky Go platform, which offers on-the-go content (mobile, tablet, etc) access to Sky’s satellite subscribers. Sky Go carries the Sky channels, but also those of its competitors, including the likes of TNT Sports as well as ITV, C4 and Five. The last three judge that it is better to be present and available in an environment that significant numbers of viewers enjoy.

The BBC, however, prefers not to make its channels (or on-demand assets) available on Sky Go, preferring to have iPlayer as the only route for BBC viewing in an IP environment. In this context, the BBC ignores what would be convenient for a large slug of its licence fee payers and prioritises the interests of the BBC itself, in particular its attachment to headlines about iPlayer usage.

So, even if the economics are strong, it’s not a slam dunk that the UK PSBs would follow TF1 and choose to play ball with Netflix. But does Netflix even want them?

Netflix should be interested, in ITV at least

Despite the gentle fading of the PSB star, Netflix will observe that the UK PSBs nonetheless retain a large swathe of major content draws across high profile sports, long running soaps, popular continuing drama, must-see entertainment and reality shows and major new tent pole dramas. Many of these content draws demand to be viewed live or near-live, which means they will drag significant numbers of Netflix viewers outside the Netflix tent, after which Netflix has lost control of when and if they return.

Netflix could, therefore, in principle at least, be interested to bring such content inside the tent. As in France, this is not about driving subscriber acquisition – because the PSB content is already widely available to all – and is more about increasing the time that subscribers spend in the Netflix environment. This improved dwell time could help with ad revenue, but also satisfaction, which can help subscriber numbers indirectly through reduced churn, but also enhance the ability to sustain price increases.

It is worth noting, however, that not all PSBs would be viewed equally, with Five and C4 perhaps lacking the requisite volume of big-name, must-see shows that would be attractive to Netflix. The BBC does have content with the desired characteristics, but Netflix might observe the Sky Go precedent and expect that the BBC will be reluctant to embed its content in third party apps. Which means that, in practice, this is mainly an ITV question. Sadly for ITV, there is a catch, and it’s a big one.

The catch for ITV: the licence fee rules act as a poison pill

A non-trivial share of Netflix UK customers are part of the growing move towards IP-only homes, with no broadcast platform present. This means that, if they don’t use iPlayer, they are not liable to pay the licence fee. Mark Oliver, at the recent RTS event, estimated that there were already 2m such homes based on 2024 data.

If Netflix became a distributor of live BBC channels, those 2m homes would suddenly be liable for the licence fee and so face an immediate bill of £174.50 pa. This is because they have unfettered access to a service that brings broadcast content, or content that is available at the same time as its live broadcast. This applies whether or not the Netflix subscriber has any interest in said BBC content, whether or not they choose to watch such content. It is triggered simply by Netflix carrying those channels and that would seem to represent a bit of a dampener for Netflix.

Worse, the same would be true if Netflix were to distribute linear channels from ITV, or C4 or Five as part of the Netflix bundle made available to all. In this sense, even if Netflix was interested in distributing ITV in the same way as TF1, the licence fee rules would seem to represent a poison pill.

Here I must apologise to those who thought and perhaps hoped I had taken time off commenting on BBC licence fee matters. Sadly, as currently structured, the licence fee is a quirky market intervention, with perverse impacts. While this approach persists, the issue will continue to pop up in all sorts of unexpected places.

Could the Netflix logic extend to pay channels?

If Netflix is open to becoming a distributor of free channels (at least where there are no licence fee quirks), could this interest also extend to pay channels?

Most seem to say no, that that would be a step too far and not what this is about. Yet some of the same issues seem to apply, so it’s worth digging into the logic. Having moved from France to the UK in my discussion of free channels, I’ll will stay in the UK to explore pay channels, and I’ll focus on sports channels to draw out the key issues.

The case for TNT Sports

I’ve argued above, when talking about Netflix distributing free channels, that the genres of particular interest to Netflix are likely to be sports, long running soaps, continuing drama, must-see entertainment and reality shows, and major new tent pole dramas. These are the shows that are watched live or near-live or otherwise have a strong following and will draw significant numbers of subscribers away from the Netflix environment at a point in time. When thinking about pay services, sport is the obvious place to focus, it being the only genre where pay services have consistent standout strength.

Within sports in the UK, start by considering the case of the middle of the road TNT Sports – not the leading sports provider, but significant enough. TNT brings a strong football offering – a secondary but solid position in live Premier League and a primary position in the Champions League – alongside significant positions in other areas such as Premiership Rugby and cycling (including exclusive Tour de France from next year).

TNT would surely be interested in a Netflix distribution deal. As the number two sports player in the UK market, with less prominence and brand presence than Sky Sports, TNT would value the improved reach and visibility that such distribution would bring. TNT, moreover, unlike the old version of BT Sports, has no affiliation to a distribution platform of its own, so is more platform agnostic, more willing to go wherever the viewers are. TNT would need to be confident of security against piracy and of geo-location, but Netflix should be able to satisfy these requirements. Such carriage would be especially attractive if Sky Sports were not present, because this would give TNT a prominence advantage not available elsewhere.

Would Netflix be interested? The case for distributing a channel like TNT Sports is similar to that for TF1. TNT has distinctive and compelling content that serves significant pockets of demand that Netflix does not. This content is overwhelmingly live, which means that many Netflix subscribers will leave to watch their appointment-to-view sport, and then might not come back for some time. If Netflix brought TNT inside the tent, more Netflix subscribers would stay within the Netflix environment for longer. This would also be a way for Netflix to gain a form of access to Premier League and Champions League, but without having to bid for rights directly or bear the fixed costs.

Indeed, in some respects, a service like TNT could be even more attractive to Netflix than many free channels: when the appointment-to-view sporting event is over, there is little else in the TNT world to occupy the viewer, so they would naturally drop out to consider what on Netflix they might watch next. This is better than TF1 or ITV, because alongside their big-ticket appointment-to-view shows, they also bring a slew of other viewing options, less distinctive perhaps, but good enough to compete with the Netflix options.

Challenges with pricing

The obvious challenge for Netflix in distributing a chunky pay service is pricing. The content is too expensive and too polarising for Netflix to absorb as a fixed content cost and seek to recover from all subscribers with higher prices across the board.

Distributing TNT Sports would require a move to tiered pricing, such as Netflix for £15, then add TNT Sports for an extra £20, a model that is starting to appear in the streaming world. One recent example is the coming French football season, in which the LFP will be offering eight Ligue 1 matches per week in its own Ligue 1 streamer, priced at €14.99 standalone. But they have also announced a distribution deal with DAZN. For DAZN, their standard “Super Sports” bundle is priced at €14.99 (monthly, for an annual plan) while “Unlimited” (which will include the LFP bundle) will be priced at €19.99. (More on this in a later post.)

Nonetheless, a move to tiered pricing would be a major line for Netflix to cross. No more simplicity, no more one-price-and-you-get-it-all. That said, to some extent this line has been partially crossed with differential pricing for ad-supported versus no-ads. It is not a trivial step, however, but if Netflix can get their heads round such a shift, it could have merit. It would open up a whole new class of revenue for Netflix, in the form of retailer margins, which fits neatly with the general direction of travel towards focus on financial rather than subscriber metrics. And it could be a neat solution to Netflix’s sports problem: how to get sports working for Netflix, without having to bid crazy fixed sums for rights.

The problem with Sky Sports

In the early days, when still in its teenage years, Netflix was happy to accept distribution in the UK on a range of established platforms and eventually Sky agreed a deal. Now Netflix is all grown up, with twice as many subscribers as Sky, could Netflix turn the tables, be the platform, and offer to carry Sky channels?

Assume that Netflix has got its head round the issue of tiered pricing, needed for TNT Sports or any other significant pay service. Could the model then extend to Sky Sports, the biggest of the pay channel bundles, the one with by far the most must-see, appointment-to-view content? In principle, the deal could deliver many of the benefits discussed above. In practice, however, there are serious barriers.

One obstacle might be price. Sky would be unlikely to deviate from the old “cable wholesale rate card” price for Sky Sports, so as not to fall foul of claims of discrimination from other distributors. Netflix, however, might think it deserves a special deal, because of its far superior reach. BT tried this years ago and got nowhere, even after years of regulatory and legal wrangling, and I can imagine Netflix struggling with a flat no.

At the same time, I suspect this would not really work for Sky, who is less desperate than TNT for distribution generally, and happy with their prominence on existing platforms. They have enough brand awareness to be confident that anyone who wants sport knows about Sky Sports – after 35 years, they don’t need help with discovery.

Unlike TNT, moreover, they have their own platforms – the Sky satellite and Stream platforms, or Now TV if standalone streaming is your thing. They are also better placed than most, including the likes of TF1 and ITV, to retain viewers within their environment for extended periods, because of the wider retailed offering, beyond sports. My sense, therefore, would be that Sky would feel no need to put themselves in the hands of Netflix, would see the benefit of any such deal accruing mainly to Netflix, and would politely decline any advance.

What about the little guys?

If Sky Sports is perhaps too big and too established, then the likes of DAZN or Premier Sports are probably too small. DAZN and Premier Sports, like TNT, would value the visibility and distribution Netflix could bring (assuming the deal was right), and might hope for subscriber growth as a result. But it does not work for Netflix because there is not enough must-see content on these services to retain significant numbers of people within the Netflix environment. Carrying these channels would bring complexity – in terms of pricing, and navigation – and the risk of some viewing leaking away from Netflix content, but without much in the way of upside.

Potential renaissance for some old regulatory questions?

I said above that a Netflix carriage deal for Sky Sports might not happen because, even if approached, Sky might politely decline. It is worth noting, however, that there is a long history of Sky not having the option of declining, politely or otherwise.

If Netflix comes to be seen as a platform, in the same way as Virgin Media and BT and others, because it is carrying a range of third-party services and pitching itself as the only service you need, might the regulator start to get interested? They have certainly been keen to do so every time this question has come up in the past. In particular, does Ofcom start to think that Sky’s market position in sports is such that Sky must offer its sports channels to Netflix, at rate card prices, if Netflix wants them?

Indeed, as soon as you start to think about Netflix as a platform, a series of new issues start to emerge, for Netflix itself and for others engaging with it, both commercial and regulatory. Too many to set out in this post.

The inevitable licence fee footnote

For the record, however, the licence fee is not one of them, and the licence fee poison pill discussed above for free channels in the UK is not as serious here for pay sports channels. The key point is that tiered pricing solves most of the problem. If Netflix offers core Netflix for £15 and TNT Sports as an add-on for an extra £20, for example, then there is no change for those not taking the TNT option. They do not have unfettered access to broadcast TV, so there is no “gotcha” moment for people with no interest in watching live sport accidentally finding themselves back in the licence fee net.

For those others who do take the TNT option, yes, they would be liable for the licence fee because they would have access to broadcast content. But that would be true wherever and however they decided to subscribe to a linear sports channel, so it is not a problem with the Netflix arrangement per se.

An authentication model won’t work for Sky either

Also for the record, there is, in principle, a distribution-lite version of this story to consider, one in which a service such as Sky Sports is available within the Netflix environment, but Netflix is not retailing the Sky channels. This is the “authentication model” in which existing Sky Sports subscribers would prove to Netflix that they are already paying for Sky Sports elsewhere and so be allowed to access their sports content within the Netflix world.

This works for Netflix, perhaps even better than the examples above, because there is no new pricing complexity, and yet Netflix customers who might otherwise have left to get their essential sports fix no longer need to do so. But it does not work for Sky. There is no real upside (in the form of new or happier sports subscribers) to compensate for Sky Sports viewers dropping out into a Netflix environment rather than the Sky grid when looking for their next show to watch. Indeed, it would seem to be a negative for Sky.