122016 Turner_Goblin
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SVOD,Global

Netflix Triggers SVOD Acceleration

Netflix’s wider entry into Asia-Pacific is a major catalyst for the growth of subscription-based digital video.

The SVOD giant is now fully global bar China, bringing greater scale to conquer internet TV as the company strives to: (1) Produce and acquire more original content with multi-market appeal; (2) Partner with local producers and writers; and (3) Integrate with more broadband and mobile carriers.

Analysts from Media Partners Asia (MPA) estimate that the platform could secure 9 million paying subs in Asia-Pacific by 2020, without assuming significant localization in markets such as India and Korea.

Our estimate includes Australia but excludes China.

 

Netflix reports its Q4 and FYE Dec. 2015 results today.

Consensus estimates point to ~US$6.8 billion in full-year turnover, with US$300 million in operating income.

Netflix is likely to generate free cash flow losses until 2018 because of global expansion.

The company has been guiding for about US$120 million per quarter in international contribution losses this year, which works out to almost US$500 million on an annual basis. Breakeven could occur during 2H 2017.

By 2020, scale and critical mass in key international markets, as well as greater pricing power and incremental (but slower) subscriber growth in the US, could theoretically help Netflix generate more than US$1.5 billion in free cash.

At the same time, the company is expected to invest in original content across large international markets where it sees strong take-up over the next one to two years.

local tie-ups

At present, Netflix is sorely lacking in local depth across potentially big markets such as India, Indonesia and Korea, although we understand that some deals for global distribution of new titles are being inked with producers in each of these markets.

The full array of Netflix’s US library will also take time to come online in many Asian markets. Licensing complexities may delay the process further.

Potential entry in China could take place by 2017, providing a boost to the business.

Netflix’s paid subs base across international markets should approach 92 million by 2020 (versus less than 30 million at end-Q4 2015), assuming strong execution and a ramp-up in run-rate growth.

The US base should also surpass 65 million at that time.

In the medium term, the company could apply differential pricing with more aggressive investment in specific markets.

“Today the global product is equivalent to US pricing,” remarked Netflix CFO David Wells at a Citi investor conference earlier this month.

“We are not talking about lower pricing in these markets, but we could get there in a few years,” he added.

“We also have the opportunity to use our tiers; we are in very early days whether it might make more sense from a revenue and a market maximization opportunity to explore lower or higher pricing.”

CATALYSTS & COMPETITION

Broadly, we believe Netflix’s launch will be a catalyst for progressive evolution in business models, content production, industry alliances, and regulation. Key factors include:

A Boost To Local Competition  While Netflix has experienced significant success with its launch in Australia, its progress in Japan has been more of a slow burn. That said, its entry has encouraged more domestic competition and content production in Japan, benefiting the video industry as whole.

The likes of Amazon, Avex, Nippon TV-owned Hulu Japan, Gyao and Rakuten Showtime have scaled up the SVOD market as a result, while also becoming aggressive on content acquisition and first-window deals.

Such competition is especially welcome for pay-TV operators and branded pay channels across Asia-Pacific.

Few have stepped up consumer marketing to address key demographics that are served by Hollywood content, and many have remained complacent for too long, failing to invest significantly in scalable local and Asian content.

Less Is More Marketing  Netflix’s current standardized consumer offer is hindered by its premium pricing, together with the absence of some key titles.

Its consumer proposition is strengthened, however, by impactful marketing, PR and an established brand. These advantages will be amplified and exploited by mobile and broadband partners.

While regional and local OTT platforms often dwell on the number of hours they offer, Netflix’s consistent first-year marketing philosophy (in markets where it freshly launches) is that less is more.

Its full library typically takes two to three years to come online. Even then, it will still be limited by rights and licensing hurdles.

Nonetheless, Netflix’s consumer offer is underpinned by an immersive content experience, led by strong design and UX, together with great customer service. Both are natural magnets for customers.

Although Netflix’s pricing (the local equivalent of US$7.99/month) inevitably confines it to a niche A or AB demographic, these segments well developed in more mature markets and are growing in emerging economies.

This means that, over eight quarters, Netflix could secure a reasonable penetration in markets such as Singapore while securing a decent toehold in larger markets such as India and Korea.

The service currently supports three Asian languages: Chinese (simplified and traditional), Japanese and Korean.

A Lift For The Ecosystem  Netflix's pricing will also encourage content creators and distributors.

Indian SVOD platforms, for instance, are eager to avoid the Arpu stagnation that’s plagued pay-TV in India. Netflix’s pricing and tiers set a good, strong base for negotiations.

Similarly, large-scale pay-TV operators that are investing aggressively in SVOD content and technology, will welcome the pricing and competition.

Players such as Malaysia’s Astro have a deeper array of day-and-date content from Hollywood studios, and key Chinese and Korean content groups, as well as a large pool of vernacular content.

Some Hollywood studios, dismayed by a flight-to-bottom in SVOD retail pricing across pan-regional OTT platforms in Southeast Asia, may also welcome the move.

At the same time however, it could also allow telcos in growth markets such as Indonesia, without comparable data plans that can accommodate Netflix’s standardized prices, to create alternative, cheaper offers of their own

Netflix going legal across the world ex-China is also a tacit effort to tackle content theft and sneaky usage, confirmed by a pledge to crack down on subscribers using VPNs to access the US library announced earlier this month.

Launch across some of Asia’s tightly controlled content regimes (i.e. Indonesia, Malaysia and Singapore) may also create an opportunity to deregulate strict content norms across the on-demand window, helping level the playing field for players such as HBO and local rivals.

That, however, depends on decisions taken by local regulators.

Netflix’s recent moves may also accelerate potential plans by 21st Century Fox and Disney, both shareholders in Hulu, to expand the scope of their existing OTT offerings in a number of Asian markets through partnership with telco and pay-TV partners.

Netflix’s flight to global supremacy is certainly making a mockery of Hulu’s alarming lack of progress in expanding beyond the US, despite the deep relationships and knowledge its shareholders have in international markets.

Time Warner may also accelerate its own initiatives through Warner Brothers, which has experienced success in China, and HBO.

Vivek Couto is the director of research and consulting at Media Partners Asia. He can be contacted at vivek@media-partners-asia.com

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