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Cablevision, Hulu deal bets tie-up could win more subs for both

For over-the-top video providers, the next frontier may be areturn to an old and familiar territory: cable TV.

Digital operators like NetflixInc. and Hulu LLCare attempting to cozy up to traditional pay TV operators of late. Hulu just managedto get its subscription platform deliveredover Cablevision Systems Corp.'spay TV set-top boxes in a first-of-its-kind partnership for the industry, accordingto the companies. Meanwhile, Netflix has been trying for months to strike a partnershipdeal with a major operator and has yet to make an announcement.

But where there are closed doors, there seems to be open windows.As the major operators assess the costs and benefits of cozying up to enemy onlineupstarts, smaller companies like Cablevision — which has a market cap of about $9billion compared to Comcast Corp.'s$151 billion — are under more pressure to adapt quickly and stay competitive.

"This really is probably the wave of the future that we'regoing to see," SNL Kagan analyst Seth Shafer said in an interview.

Small cable companies cannot afford a wait-and-see approach,so they are more likely to strike forward-looking deals, Shafer explained. WhileNetflix's efforts to reach the largest operators have failed to date, the companyhas struck deals withseveral smaller cablecompanies, including Suddenlink Communications,RCN Telecom Services Inc.and Atlantic Broadband Group LLC.

However, Hulu, much more so than Netflix, carries a lot of contentthat overlaps a linear TV offering, a fact that led Ooyala principal analyst JimO'Neill to question the end game for its cable partnership strategy. He suggestedthat cable companies may look at digital channels as viable content silos, muchlike existing TV networks, and make carriage decisions accordingly. In his view,cable companies themselves could start cutting the cord, so to speak.

"The tiering of these companies might come not so much fromthe idea of how many subscribers you have but how much content you can afford. Someof them might in fact drop the broadcasters and replace them with aggregations ofother content," O'Neil said.

Cablevision is already out in front on this trajectory. The companywas the first to offerCBS Corp.'s OTT serviceAll Access on its cable boxes, and it also is a market innovator in offering skinnybundles, or more narrow, affordable packages of content. The more OTT services Cablevisioncan plug into its boxes, the more opportunities it has to deliver increasingly flexible,customizable video packages that may or may not be associated with the traditionalcable bundle. As early as 2013, Cablevision's CEO James Dolan toldTheWall Street Journal that television will eventually shift to the Internetand Cablevision could stop offering television service, focusing exclusively onbroadband delivery.

"I don't think that the companies should look at that andsay, 'How should we fight that?' … I don't like to fight trends. I think it's alosing battle. I think you try and take advantage of it," Dolan told the Journal.

Fighting the trend does not appear to be very sustainable. ForCablevision itself, the company reportedonly modest customer growth in 2015, which was the first positive net subscribergrowth reported since 2008. By offering digital subscriptions like Hulu and AllAccess, Cablevision hopes to stem the tide away from packaged video. S&P GlobalMarket Intelligence analyst Tuna Amobi said that this strategy could help.

"The pay TV offering as it is by itself is insufficientto cater to the evolving needs of the consumers, especially the younger millennials,and they want to not only encourage traditional subscribers to stay on the platformbut also provide customized offerings to broaden their content," Amobi saidin an interview.

For some customers, the addition of digital services availablevia the cable set-top box is "a major convenience," and such "incrementalenhancements" can go a long way in reducing churn and boosting customer satisfaction,he said.

Further, SNL Kagan's sources generally agreed that while it isunlikely that the Hulu partnership was a direct result of Cablevision's impendingmerger with , the optics do not hurt.Regulators seem to appreciate an open attitude from pay TV operators when it comesto digital video and customer preferences, and the deal shows that Cablevision iswilling to be flexible.

It also is probably not coincidental that Cablevision made thisdeal with Hulu rather than Netflix, Amobi suggested. Hulu may be considered lessof a threat, as it is an OTT offering with roots in the industry, whereas Netflixstands as a Silicon Valley disruptor.

Hulu gets additional distribution channels and subscribers fromthe deal, subscribers that are already bound to a cable contract and so may be morelikely to stay once they are signed on. While Hulu is probably sharing some of its$7.99 subscription fee with Cablevision for sign-ups on its service, so the financialsare less attractive than its two-party online sign-up business, the company addsa large chunk of potential subscribers as it puts its product a click away for Cablevision's3 million customers, Amobi pointed out.

As Shafer put it: "Consumers don't necessarily know or carehow they get it, so if you can offer them an easier path to putting together thissort of package there might be demand for that."

That is what both Cablevision and Hulu are hoping, anyway. Fornow, many of these deals are experimental in nature, Shafer said. The video businessis changing, and the best packages, products and business arrangements are yet tobe agreed upon. In the meantime, companies want to stay nimble and agile so theydo not lose footing.

"I don't think anybody knows for sure which way to go,"Shafer said, "but they definitely want to be able to move one way or the other."