How Netflix could help save the local media industry

Kevin DillonWhile many predict the official arrival of global streaming giant Netflix in Australia will damage local media players Kevin Dillon argues it might actually end up being a boon for the savvy ones. 

I first encountered the notion of online DVD rental between pints of Sierra Nevada at the Black Watch (a dive bar in Los Gatos, California). It was late 1999, and my friends and I were toasting my two years survival in Silicon Valley. Those were halcyon Internet bubble days in the Bay Area. Notable successes (Amazon) were emerging. Others (webvan) burned brightly but briefly. Most wouldn’t see the other side of the 2000 tech wreck.My friends were two of the few dozen employees at an early stage start-up just down the road. The online DVD rental service their company offered was hugely convenient and affordable, and I was a rapid convert. Movies and TV series that just could not be found on US TV leapt out of their ruby red  envelopes and into my DVD player.

The start-up, of course, was Netflix. And their pivot from DVD to streaming is the stuff of Internet legend.

netflix_australiaToday’s Netflix employs 2,000 people and has squirrelled away US$1.7 billion in cash. This year they will invest more than $600 million on marketing, $400 million on technology, and close to $3 billion on new content. Their total content spend runs at $8.9 billion. They have survived – and prospered – despite the tech wreck and several other major business challenges. The company is well led and chock-a-block with talent. The only red you will find there is in their branding!

The Netflix story illustrates how scale is King. A deep content catalogue is just one aspect of their achieving scale. Operating for 17 years now, they have scaled their coverage across pretty much every available connected viewing platform.

They have scaled the personalisation capabilities of their own platform, and their ability to extract valuable consumer insights from that platform is probably second-to-none.

Over the last four years, Netflix has honed their new market entry and development practice, and their addressable market is scaling accordingly. Their international expansion started with Canada in September 2010. Since then they have launched in the Caribbean, Mexico, Central America, South America, United Kingdom, Ireland, Norway, Denmark, Sweden, Finland, The Netherlands, Germany, Austria, Switzerland, France, Belgium and Luxembourg. They expect to exit 2014 with 57 million global customers.

We know they have their eye on the Australian and New Zealand markets, and their launch here may be imminent.

What might such a launch mean for the industry here in Australia? A neflix.com.au would:

1. Accelerate viewership evolution

Assuming connected TV penetration and broadband speeds continue to improve, we’re likely to see increased bifurcation of viewing into two surprisingly complementary modes:

• Conventional linear broadcast TV centred around an EPG grid of mass-appeal events (sport, news, reality and must-see series), sponsor-funded, and viewed predominately on large TV screens.

• Non-linear Internet TV centred around personalised portals into a broad and deep catalogue of exclusive and non-exclusive movies and TV series, unlimited no-commitment monthly subscription-funded, and viewed on any broadband-connected screen.

Stan 2. Exert considerable competitive pressure on our domestic Internet TV subscription platforms

Netflix will not launch here without a mostly intact content library augmented by some compelling local content. To effectively compete Presto, Stan etc. will need to find ways to gain the benefits of scale beyond Australia’s small domestic market. Can we expect to see closer tie-ups with HBO, Amazon Prime?

3. Ignite an aggressive marketing and pricing program

As subscription Internet TV has very limited penetration here, some of this marketing effort will need to cultivate the sector itself. Netflix’ ability to price their service aggressively will be constrained by exchange rate movements. But their relative advantage in purchasing services like CDN capacity in global – rather than domestic – volumes may somewhat offset exchange rate downside. After 12-18 months Netflix may slightly raise their prices, as they have done after establishing themselves in other markets.

4. Offer an attractive expanded distribution option for Australian content producers

This is where things could get really interesting:

• Netflix offers a further channel to market that is for the most part un-conflicted with current commitments (excepting DVD distribution perhaps). More importantly though, it opens up that option beyond Australia into much larger video consuming markets.

• Given Australia’s healthy creative capability, an attractive exchange rate, and Netflix’ demand for more original and differentiated content we could see Netflix play a role in funding locally produced content. They may fund local content production outright or in collaboration with – say – domestic broadcasters. Joint content commissions with output rights split between broadcasters for the domestic linear domain and Netflix for domestic and/or international non-linear domain are very possible. These joint commissions would also benefit from the Netflix audience insights platform; further reducing the risks associated with new programming.

5. Augment existing IPTV platforms

Assuming the underlying platform technology allows, we should see Netflix apps appear on Australian Apple TVs, possibly on T-Box and Fetch TV too, and perhaps even on Freeview Plus.

6. Enable free-to-air TV broadcasters to double down on innovation

Within their sponsor-funded Internet catch-up platforms (Plus7, JumpIn, Tenplay), assuming that for non-linear subscription Internet TV they partner with Netflix or one of the other majors. As ITV in the UK, and others have demonstrated there is still huge scope for enhancements such as sponsored in-app voting (i.e. free to the viewer) for reality TV programming. Advancements in this space are likely to be harder for those distracted competing head-to-head with Netflix and their ilk.

So the Netflix red may just bring some unexpected black to media balance sheets here. Seems we’re about to find out, are we ready?

Kevin Dillon is Principal Consultant at IBB Consulting, Asia Pacific, which consults to broadband, cable, media and telecommunications companies


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