How Netflix could help save the local media industry
While 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.
Today’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.
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
Many of our friends have Netflix in OZ now. (mainly tech savvy at the moment due to the geo block you must adjust) Netflix is great, plus true HD. Lacks many new releases but other than that has made Foxtel quiver and lower its prices. Will make the rest of the country smarten up also in free to air. No ads is the reason it shines. Foxtel you pay plus you get ads. No wonder so many people un hooked include ourselves.
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Thanks Kevin, there have been a lot of articles written on this subject recently but this one particularly is lucid, persuasive, and non-hysterical. Thanks a lot.
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We need a sustainable business model for content producers that doesn’t rely on access to the scarce discovery models that prevail on traditional broadcast (paid or free) TV. If netflix can enable discovery and monetisation of innovative new programming alongside the big hitters then everyone benefits. If it can;t then youtube will just win, but it will take longer. With foxtel locking up the programming though it hard to see it working. We need to ensure open access to programming irrespective of transport channel ala the FCC reg that opened up content to both satellite and cable (and more recently, IP).
If the ACCC would get Telstra to divest foxtel then we would have real competition and a player with the incentives and scale to make this happen.
TV’s Kodak moment is coming, only question is what pushes it over the edge, and when. However unlike photos, TV has a lot of regulation propping it up.
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Interesting point about economies of scale such as whether future local links with the huge SVOD companies are needed. Personally I’ve always had a VPN and with netflix costing $10 AUD; actually $5 as you can be watching on two screens at once so I split it with my brother. That sort of price is unbeatable.
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Thanks Jack, Jennifer – yep, that is why scale is SO important. If you are going to be an SVOD company you will be charging $10/month or thereabouts – that means you need a lot of subscribers in order to be profitable. Netflix is already commissioning new content – which wouldn’t have otherwise been funded – in places like France and adding that into their global library. Every possibility they might do the same here.
Not sure that TV has a deep Kodak moment coming Paddo – especially here in Australia – linear TV so effectively assembles massive, synchronous audiences around events like sports and news. And it is so well socialised too. It is changing, for sure, and needs to position itself for 4K content distribution. There is considerable scope for more innovation around their broadcast events too (hinted at one possibility in the article). There is a strong future for savvy broadcasters.
On ads and SVOD Jennifer, down the track we may see some SVOD providers offer opt-in advertising in exchange for discounted subscription fees. It’d be interesting to see the A/B results for that one 🙂
Thanks to you too Al!
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The tricky issue for most of the readers of this site is that Netflix doesn’t carry advertising. Which is a bit of a shit if you’re in the business of making, producing, planning, placing, measuring, airing or requiring advertising.
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Interesting to see what content deals they are able to tie up. Their ongoing war with HBO will be a huge problem meaning no current or classic HBO shows
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Just gimme direct access, producer to consumer and cut all the parasites out of the equation, advertisers, redistributers etc etc
How many industries are based on “value-adding” nothing in the digital age? It’s ridiculous. I’m not going to pay Foxtel for Game of Thrones, they had nothing to do with it’s production and everything to do with its so-called artificial scarcity.
Stop looking for ways to scam dollars off other people’s content and turn your collective talents to making some. Then, I’ll happily reward you with cash.
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Bob, do you realise that the producer needs financial backing in order to produce that content BEFORE you can consume it?
It sure as hell isn’t coming from the consumer via KickStarter etc.
And your $10 a month ain’t going to go too far – maybe a cup of coffee for two lucky ones among a crew of 50+ one morning a month.
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