Netflix cannot compete with local firms

Over-the-top (OTT) video player Netflix announced at the Consumer Electronics Show (CES) in Las Vegas in early January 2016 that it has expanded its coverage to include 160 countries. It is likely that regional roll-outs in the Middle East and North Africa (MENA), as well as those aimed at middle-income Asia-Pacific (APAC), will have the greatest impact on paid-for video usage. By Martin Scott, Principal Analyst at Analysys Mason


This comment assesses operators’ potential responses to Netflix’s expansion.

Netflix has expanded its coverage to include an additional 130 countries, but its content has not been scaled to the same extent 

Netflix CEO Reed Hastings announced during the CES 2016 keynote presentation an increase in the company’s coverage by 130 countries. Consumers in many of these countries signed up for free trials, with services
available to subscribers in three price tiers. Each tier differs in terms of image resolution (SD, HD or UHD) and
the number of simultaneous streams available (1, 2 or 4).

Netflix’s recent launch strategy for individual countries has been to seed original content investment ahead of
launch, with typically 20% of its content localised for the market once the service has become established. This
current round of expansion will include little localised content for new country additions, which makes
subtitling and dubbing of foreign content an essential part of Netflix’s expansion plans.

Netflix will face some local and regional competition, as well as issues with consumers’ willingness to pay

Netflix is an established player in Western markets, and English-language (particularly US) content has an
international export value that exceeds that of other languages. However, Netflix does not necessarily face an
issue-free expansion. We have carried out a SWOT analysis of Netflix in these new coverage areas.

Strengths

  • Netflix benefits from a strong and familiar brand, to the extent that some consumers in markets where
    Netflix was unavailable used VPNs to access the service illegally – these subscribers can be directly
    converted into legitimate customers.
  • English-language content is understood in many parts of the world (and will particularly help Indian
    expansion), and Hollywood content will attract younger demographics, such as those aged 18–34, to the
    service.
  • Netflix has invested significantly in original content, as well as worldwide output deals with some studios,
    which will enable it to ensure a base level of attractive content selection in new markets.

Weaknesses

  • Netflix will not have original content localised to many of its new markets, and its services will compare
    unfavourably to local solutions as a result. Language issues may limit appeal to the mass market.
  • Netflix is dependent on high-speed broadband availability (mobile or fixed), as well as the affordability and
    reliability of such services.
  • Netflix’s target audience is relatively limited – their subscriber base primarily includes consumers attuned
    to international content, with discretionary spend for OTT video.

Opportunities

  • Netflix plans to appeal to local, original content creators in order to expand its original content
    programming in each region. During the keynote, Chief Content Officer Ted Sarandos emphasised this
    point: “we hire strong creatives and let them create worlds”.
  • The incremental cost of offering Netflix in these new regions is relatively low in terms of content (Netflix
    has some worldwide deals and would face no extra costs for distributing its own original content) and
    infrastructure (via established content delivery networks (CDNs) and attractive partnership schemes with
    operators).

Threats

  • Region-specific players such as OSN in MENA and Asia–Pacific-based PCCW Enterprises have
    established OTT platforms with region-specific content and rapid subtitling capabilities for international
    content.
  • Piracy is a significant limiting factor in many of Netflix’s expansion countries. Netflix noted a 14% fall in
    BitTorrent traffic following its launch in Australia, but we anticipate a smaller impact in emerging markets
    – and a lower conversion rate of pirates to paying customers.

Local licensing issues have prevented Netflix from launching its services in China, and Netflix may face further
challenges over licences in some of its expansion countries. Despite potential weaknesses, we would expect
Netflix to gain a significant number of subscribers in 2016 – even a 1% conversion rate from free trials to paidfor
subscriptions would represent a significant success. However, operators can capitalise on some of the
limitations mentioned above.

Operators should revisit their content, partnership and UI plans

  • Traditional pay-TV providers and burgeoning or established OTT providers that operate in Netflix’s expansion
    countries have three key differentiators working in their favour:
  • Local content: locally-produced content makes up the majority of paid-for video consumption in many
    countries. In particular, national broadcasters have large archives that retain inherent value for ‘watch
    again’ and catch-up services. Netflix is not aiming to immediately or directly compete with this scale of
    local content.
  • Local language: Netflix have identified the importance of making their content available in local languages
    , but solutions provided by local players (such as PCCW’s approach to crowd-sourcing subtitling and
    offering pan-Asian content and coverage) may give these competitors a local advantage.

Local language: Netflix have identified the importance of making their content available in local languages , but solutions provided by local players (such as PCCW’s approach to crowd-sourcing subtitling and offering pan-Asian content and coverage) may give these competitors a local advantage.

Local knowledge: Many countries have similarly structured video markets. However, the culture of industry players, as well as of content consumption in the market, can vary and can significantly affect new pay-video providers’ success. This has been observed in certain sub-Saharan African markets that have not mirrored the structure of major markets such as those in France, Japan and the USA.

The following factors will be important to traditional pay-TV and OTT providers when formulating a response to Netflix’s arrival:

Ensure a strong user interface. Many of the OTT solutions currently on the market have limited visual appeal, as well as confusing menu structures and ineffective content recommendation engines. Netflix excels in these areas, and local players must ensure that their user interface is polished in order to compete on ‘look and feel’ to retain higher-spend customers.

Revisit partnership and integration models. Many South-East Asian markets have approached OTT video and communications through partnership, rather than launching their own services. We can assume that Netflix is interested in developing further partnerships in its expansion markets. The launch of Netflix may also produce a ‘halo effect’ around OTT video propositions more generally and enable pay-TV providers to attract customers to their multi-screen solutions, should they integrate Netflix functionality.

Identify further opportunities for local content investment. In the CES keynote, Netflix’s senior management effectively invited local content developers to start discussions with the company, if they had not already. Partnering with established local video providers will also be attractive to local content producers and content exclusivity, in particular, will be important.

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