Netflix’s Asian ambition faces challenges: Analysts
By Edwin Yapp February 22, 2016
- User acceptance, competition, censorship and content distribution key challenges
- Already a myriad of VOD, Internet TV and OTT services available in SEA
ANALYSIS: The availability of the Netflix service in 130 countries worldwide signals the US video-streaming company’s bid to not only stay ahead of its competitors, but to also shore up its subscriber numbers and revenue.
But as Netflix Inc continues to invest heavily to expand its market share, it can expect impediments, say several industry analysts.
The challenges are several: Acceptance of its services in different markets, government regulation, competition from regional players, and the lack of a consistent global catalogue of content.
Research firm Ovum believes that while a ‘global Netflix’ heralds the start of a new era of online streaming and Internet TV, it does not necessarily spell the end of traditional TV.
In a research note, the UK-based firm argued that consumer habits actually change remarkably slowly, and that the real impact of its global service won’t be felt that soon.
“If Netflix will prove successful in all new 130 markets – and going by past performance, it’s safe to say it will – it will still take Netflix years to build the level of subscriber numbers it has in Western Europe and Latin America,” said Ovum senior analyst Tony Gunnarsson.
“Netflix’s domestic market is still by far its largest single market and, even there, the impact of Netflix on cord-cutting has probably been overstated,” he added.
Gunnarsson estimated that the Los Gatos, California-based Netflix is likely to add about 20 million new subscribers in new and existing markets in 2016, taking its total global subscription up to 95 million from 75 million today.
“Ovum believes that the real impact of the new 130 markets won’t be felt before 2017 or 2018 when Netflix will start to experience rapid growth in these markets,” he said.
Asked by Digital News Asia (DNA) to elaborate as to why he thinks Netflix is going global now, Gunnarsson acknowledged the move to launch in 130 markets is indeed a change in its strategy, which has always been to roll out very carefully, market by market.
“Netflix is confident that its appeal is universal and this is in line with its long-term ambition, which is to become a global internet TV network that is available everywhere, to everyone, delivered to consumers outside the constraints of traditional TV distribution such as set-top boxes, without high monthly costs and lengthy contracts,” he said.
Greg Unsworth, digital business leader at PwC Singapore’s telecom, media and technology practice, however took a more sceptical view, suggesting that Netflix’s entry globally is “because it’s being pressured by consumers.”
“Consumers are increasingly demanding a more consistent and comprehensive viewing experience across the globe, and are looking for great content that can be viewed on any screen, on-demand, when and where they want to view it,” he told DNA via email.
Meanwhile Harsh Upadhyay, Asia Pacific telecom analyst for Analysys Mason, argued that competitive pressure may not be the real threat for now.
However, he said he believes that Netflix is trying to mitigate against the risk of growth of alternative channels by catering to existing or latent user needs.
“In many instances, people used proxy virtual private networks (VPNs) to access Netflix, but now they have direct access,” he told DNA via email.
“In 2016, Netflix’s focus will be to expand its reach while maintaining low levels of margins,” he added.
While Netflix’s global availability could be considered a major milestone for the company, streaming video services are not exactly new to the South-East Asian region.
Indeed, the market has been heating up recently now, with services like Astro’s On The Go and Telekom Malaysia’ HyppTV, both of which serve the Malaysian market; and iflix, also a Malaysian company, which has launched its service in Malaysia, Thailand and the Philippines.
Singapore Telecommunications Ltd (Singtel) has a service called Hooq which serves India, Thailand and the Philippines; and Hong Kong-based PCCW’s Viu is already available in Singapore, while HBO Go serves Hong Kong and the Philippines.
Indeed, Telekom Malaysia is expected to launch Viu today (Feb 22).
Meanwhile, both Hooq and iflix said they welcome the competition from Netflix, saying its entry would further spearhead the disruption of broadcast TV.
The analysts DNA spoke to believe that for now, the smaller, nascent competitors can stave off Netflix dominance as the latter has not yet reached critical mass. These smaller players can also differentiate themselves by providing local content.
“iflix and Hooq have local country-specific content, lower pricing and bundles, and existing partnerships which will help them grow, while Netflix will expand its base by catering to the wider base,” argued Analysys Mason’s Harsh (pic).
“When the market gets competitive a few years down the line, we can even expect some smaller players to be taken over by Netflix.
“Alternatively, smaller players may merge to form bigger entities [to take on Netflix],” he added.
Ovum’s Gunnarsson pointed out Netflix would probably not be looking to produce any original programming specific for smaller markets like Malaysia – at least, not in the foreseeable future.
“However, Netflix would likely produce and market content with a regional interest that the company believes will appeal to consumers in Malaysia,” he said.
“It may also consider buying rights to third-party local South-East Asian content, as this is all in line with what the company has done elsewhere in the past,” he added.
Regulatory, censorship issues
Another big challenge Netflix would have to face is the region’s regulatory maze.
Historically speaking, governments in the region have had tight controls over what they allow to be broadcast by traditional TV stations, and the trend is likely to be true of the video-streaming market too.
Netflix faces two broad issues entering the region: The need for a business operating licence in some countries in the region; and the requirement by governments to censor content containing nudity, sex, drugs, homosexuality, and other ‘undesirable social-economic elements.’
The first such salvo came from Vietnam, where it has been reported that Netflix could be classified as a pay-TV operator, which means a broadcast journalism permit may be required for it to operate in that country.
Censorship however, remains the thorniest issue for Netflix, as governments could use the need for a business licence or specific provisions in their countries’ laws to restrict how Netflix operates.
Barely a month after Netflix’s global launch, Indonesia’s largest telecommunications provider PT Telekomunikasi Indonesia (Telkom) said it would block Netflix, saying that it was taking this action to “protect Indonesian consumers from unregulated content that does not comply with the country’s film regulations.”
In Singapore, where regulation has traditionally been tight, local media reported in September 2015 that Netflix is expected to work closely with industry regulator Media Development Authority (MDA) in classifying its content.
The MDA said that “it will work with Netflix to familiarise them with Singapore's regulations and media capabilities ahead of Netflix’s arrival [in 2016].”
In Malaysia, The Malay Mail Online reported on Jan 8 that Netflix has claimed that its content will not be censored.
A day later, the same portal reported Malaysia’s Communications Minister as saying that Netflix’s content was still subject to the country’s regulations, and that action can be taken against the company for flouting the law.
Kuala Lumpur-based iflix told DNA that it “complies with local legislation and regulations, and is sensitive to cultural preferences in each of its markets,” adding that it would be “careful that its treatment to ensure the integrity of its content is not compromised.”
In response to DNA queries, a Netflix spokesperson said it is “an Internet TV network and not a traditional broadcaster, and thus, services delivered over the Internet present new questions for policymakers.
“Our intention is to comply with applicable laws and regulations as our service rolls out globally.
“To watch anything on Netflix, consumers have to subscribe. We will empower consumers to make smart viewing choices by providing details on the titles on Netflix, including ratings and episode synopses, and parental controls via PIN codes,” the spokesperson told DNA via email.
As at the time of writing, Netflix’s content is still available in its full, uncensored form in Malaysia and Singapore, according to checks conducted by DNA.
Asked how such regulations are going to affect Netflix, PwC’s Unsworth said this issue will be a real challenge for any organisation trying to operate an over-the-top (OTT) video service on a global basis.
“Local regulators will increasingly focus on this and start to enforce censorship to suit specific country norms and standards,” he said.
“ [Netflix] will have to get better at tailoring content if it truly wants to successfully operate on a global basis,” he added.
Ovum’s Gunnarsson believes that Netflix will only respond and act on issues when it is forced to do so by a local regulator.
“Perhaps in a few years’ time, Netflix will have developed a four-tier catalogue system, with the first tier being its domestic [US] catalogue, and the second tier being the one used in key mature international markets such as Europe.
“A third tier catalogue can be used in markets with a legacy of challenging distribution rights, while a fourth tier catalogue is one that is somewhat more cautious and applicable to markets with sensitive censorship issues,” he suggested.
Analysys Mason’s Harsh added, “We do not think that there is any way to circumnavigate local censorship issues. [If] Netflix wants to target local markets, it has to comply with local regulations and rules.”
Short of content
Another major hurdle Netflix has to overcome is the growing dissatisfaction that not all its shows are available in the South-East Asian region, compared with what is available in the United States.
CNBC reported that hit shows such as House of Cards and Arrested Development, as well as some South Korean TV dramas and Chinese kungfu movies, are among the missing content in the Singapore version of the service.
However, other hit shows such as Marvel’s Jessica Jones (pic) and Daredevil, as well as acclaimed dramas such as Narcos, are available.
In response to DNA’s questions, Netflix said after it launches in a given market, it will almost immediately add more content to the service as it grows in popularity and better understands what its members want to watch in each region.
“In most markets, the size of the catalogue doubles in the first year. As a global internet TV network, we are increasingly offering programming around the world simultaneously – whether it is our Netflix original series, or movies and titles we license from third parties,” said its spokesperson.
“The goal is for Netflix to offer a fully global service with a global catalogue so no-one has to wait for the hottest new show or movie.
“However, the world of content licensing has traditionally been very fragmented and regionalised. It will take some time to get to an offering that’s the same everywhere.
“Until then, we strive to offer a compelling service everywhere by licensing the best of TV and film available,” the spokesperson added.
According to Analysys’ Harsh, licensing agreements are regional in nature and distribution rights involve highly complicated negotiations which can take more than six months to a year to resolve.
“One important thing to understand here is that the English-speaking user base with access to decent Internet speeds is quite small in Asia. By the time this user base grows to a significant chunk, Netflix may have such content already available,” he said.
“One of Netflix’s strategies is to work directly with the producers and film-makers, and empower them to present their films globally.
“By doing this, it will be able to produce local content for a much wider base in Asia, and hence, record higher adoption than just focusing on the demand of a relatively smaller base.
“But this will take time,” he added.
Ovum’s Gunnarsson argued that this dissatisfaction with non-global content is unlikely to be a major obstacle for Netflix as to date, the varying movie and TV catalogues in its individual markets have not had a direct impact on new subscriber uptake.
“We believe Netflix’s popularity is better explained by it being synonymous with ‘watching video on the Internet’ and importantly, consumers recognise Netflix as the pioneer in this field.
“Netflix is an aspirational video service and the appeal to consumers across the world has proven to be universal,” he argued.
Blocking VPN services
For some years now, consumers outside the United States have been using VPNs to get Netflix content.
By using a VPN service, they are able to log in to proxy servers which change their Internet Protocol addresses to make Netflix ‘think’ these users are in the United States.
When Netflix went global however, it also announced that it would be cracking down on such practices, a move that has drawn disdain from current and potential subscribers alike. Australia was one of the first countries which experienced that crackdown.
But technical experts say that Netflix’s attempts at blocking isn’t bulletproof and is mostly likely futile. One VPN provider even publicly boasted that its customers would still be able to use its services to access Netflix’s full catalogue of shows despite the crackdown.
Ovum’s Gunnarsson (pic) said Netflix’s efforts to block VPN access is all about showing its content partners – Hollywood studios and TV networks – that it takes contractual obligations seriously and that it is doing everything in its power to stop any unauthorised distribution of third party content outside licensed markets.
“Netflix has never officially condoned VPN access, and my guess is that the number of consumers using VPN services to access Netflix USA internationally has been vastly overstated,” he said.
Analysys Mason’s Harsh said that based on traditional content delivery strategy, local content would be based in local servers, and hence the quality of service and consumer experience will be better.
But the VPN problem may not be an issue in the long run anyway, he argued.
“People want VPNs as they wish to access the larger library in the United States and other markets. Once Netflix is able to provide global content, people will no longer use VPN or proxy servers,” Harsh said.
PwC’s Unsworth added, “My sense is that as [Netflix] evolves its global rollout of services in new countries, it would be under some pressure to engage more directly with local service providers and to align with local regulator expectations and guidelines.
“To ensure a sustainable long-term global business model, it will gradually try to steer its customers away from accessing its content internationally through VPNs,” he added.
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