By Christophe Firth
Five insights on the TV firm's recent expansion to 130 countries.
1. Content is King: The old saying holds truth in the world of online video just as it does 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 well-curated portfolio of catalogue movies.
This has worked well in the 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, its library is generally not as compelling in other markets, while striking local content deals and/or producing original local programming (as it did 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 it faces 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 managed to scoop up the online rights without paying over-the-odds. Nowadays the rights holders are wiser to the opportunities online and will be mindful to hold onto 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 2015 many non-Netflix countries already had several indigenous dedicated over-the-top (OTT) 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 will the incumbent OTT 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 January 6. In the United Arab Emirates alone Netflix is estimated to have over 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 being accessible to the mass market: Netflix faces three main challenges to becoming a mass-market product in emerging markets. First, credit card penetration is low in most of these markets, while even amongst those with credit cards there is often a reluctance to use them as is the case for example in the 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 monthly subscription of $7-10 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 percent, 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 SD and 5 mpbs 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 wifi and office networks used by many people for their video are more suited to short-form YouTube-style video snacking than the long-form lean back experience that Netflix offer.
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/North Africa over $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 prepaid service - which enabled Astro to drive its household penetration up by 10percent to over 60 percent.
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 famous algorithm-driven suggestion engine will also help. However, it will likely take time for the hype in its new markets to be matched by business performance.
* Christophe Firth is a manager at consultancy firm A.T. Kearney Middle East.