Five points for Netflix to watch in expansion plan

Christophe Firth January 13, 2016 No Comments
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Five points for Netflix to watch in expansion plan

GoogleKayvan Shoaye RadkayvanshrHi-Tech Development Group LLCFive points for Netflix to watch in expansion plan2016-01-13 23:00:04Author Google+ Page

Netflix made headlines last week with its unexpected launch in 130 new countries, including the UAE. But is it really going to send shockwaves through the market? Here are five factors that could prove to be key plot points:

1. Content is king

This old saying is as true in the world of online video as in traditional broadcasting. Netflix’s success on the content side is based on exclusive rights to a few in-house hits – House of Cards, Marco Polo etc – and a portfolio of catalogue movies. 

This has worked well in the US, UK and some other English-speaking markets, and the common language across most of Latin America made expansion easier in that region. However, the company’s library is generally not as compelling in other markets, and striking local content deals and/or producing original local programming – as it is doing with Marseille for the French market – will be more complex.

Until Netflix can build up similarly attractive propositions in its new markets, take-up may be slow and limited to niche segments.

The challenge is that content owners will play hardball. Netflix benefited in the US from being an early mover, while content owners were still figuring out their online strategies, and it managed to scoop up online rights without paying over the odds for them. Nowadays the rights holders are smarter about the opportunities online and will be mindful to hold on to enough of the right content for their own direct-to-customer services, as Disney has recently done in the UK with DisneyLife.

 

2. Being a late mover

By the end of last year many non-Netflix countries already had several indigenous dedicated OTT (“Over-the-top” delivery of audio, video, and other media over the internet without the involvement of a multiple-system operator) video services. India had Hotstar, ErosNow, YuppTV and others. The Middle East had Starz Play, icflix, Telly, Istikana, Shahid and Cinemoz. South East Asia had Hooq, icflix and others. Beyond this there are the pay TV operators’ own multiscreen offerings. 

These services either have libraries of non-premium English movies of the type offered by Netflix and/or locally-tailored offerings. Despite its clever algorithms, Netflix offers little differentiation, and will have to decide how aggressively to compete for content rights in each market vis-à-vis the incumbent TT and other pay TV operators.

 

3. It is there already

While Netflix is a late mover in many of the more attractive markets, ironically it was already present globally even before its January 6 expansion. In the UAE alone, Netflix is estimated to have more than 200,000 subscribers, mainly western expats signing up to the US or UK Netflix service over a virtual private network (VPN). The official launch of a local service with a smaller catalogue will therefore have a more moderate impact than if the market was starting from zero.

 

4. Not a mass-market product

Netflix faces three main challenges to becoming a mass-market product in emerging markets. First, credit card penetration is low in most of these regions, while even among those with credit cards there is often a reluctance to use them, as is the case for example in some of the Arabian Gulf states. Local OTT operators have sought to circumvent this through deals with mobile operators for direct carrier billing, and using a prepaid mobile balance to subscribe to online video services. 

Second, a subscription of US$7 to $10 per month is a huge amount in markets where people spend less than $5 per month on their mobile phones and usually do not pay for TV – pay TV penetration in large regions such as the Arab world and Indonesia remains below 10 per cent, with free-to-air satellite still dominating. Beyond this, prepaid mobile continues to dominate in cost-conscious markets where committing to monthly payments is not palatable to people. A change in consumer mindset, together with more accessible price points, is needed. 

Thirdly, few people have the internet access speeds required to stream long-form video, let alone on HD – Netflix recommends a connection of 3 Mbps for standard definition and 5 Mbps for HD. High-speed fixed internet in most of the 130 new Netflix countries is limited or non-existent, mobile data is prohibitively expensive, and the public Wi-Fi and office networks used by many people for their video are more suited to short-form YouTube-style video snacking than the long-form experience that Netflix offers.

 

5. Piracy

Content piracy continues to blight the entertainment industry, with illegal online video streaming and download services proving even more difficult to control than cable or control word sharing. For example, it costs the pay TV sector in the Middle East and North Africa more than $500 million per year. Free is a difficult price to compete with, and Netflix risks finding itself caught between free/ultra-low cost pirate services and regular pay TV services that are increasingly targeting the non-premium end of the market, as Astro has successfully done in Malaysia with its NJOI prepaid service. NJOI enabled Astro to drive its Malaysian household penetration up by 10 percentage points to more than 60 per cent.

Netflix’s strong brand, marketing push and distribution partnerships will help to give it a leg-up in its new markets. Its unique customisation features and algorithm-driven suggestion engine will also help. However, it is likely to take time for the hype in its new markets to be matched by business performance.

Christophe Firth is a principal at the management consultancy AT Kearney Middle East.


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