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Features

Breaking down Netflix’s big reveal: The birth of a global internet TV network

Success of the SVOD's bullish move hinges on internet access, pricing and original programming that satisfies a diverse worldwide audience.
January 7, 2016

LAS VEGAS — Sure, there are driverless cars, bendable TV screens and literally thousands of the coolest gadgets and tech innovations to catch consumers’ eyes at the Consumer Electronics Show in Las Vegas. But, Netflix had no trouble standing out from the crowd with CEO Reed Hastings’ big reveal in the closing minutes of his keynote speech Jan. 6 that the SVOD has added another 130 countries to its global streaming empire.

From Azerbaijan to Saudi Arabia (with some critical markets in between, including India, South Korea and Russia), Netflix is now live, with subscribers able to tap into a growing catalog of television series and feature films, including in-demand originals such as Orange is the New Black, House of Cards, and new hits like Marvel’s Jessica Jones and Narcos.

While not entirely unexpected (Netflix had been rumored these past few weeks to announce a pending expansion into India and Russia), few had anticipated the global scope of the company’s expansion just six days into a new year.

The news was so big, in fact, Hastings didn’t even try to play down its magnitude and what it means to the already-mighty Netflix brand.

“Right now you are witnessing the birth of a global internet TV network,” he told a packed house of thousands of CES delegates and media gathered at The Venetian resort.

Indeed, Hastings, along with Netflix chief content officer Ted Sarandos, spent much of the one-hour keynote reminding people of just how far and how fast the company has grown since first launched its streaming service in 2007.

It was only eight years ago, Hastings reflected, that Netflix announced at CES its very first integration into the LG Blu-ray player.

Netflix is now available on virtually any device that has an internet connection and more than 1000 connected TV models, according to Hastings, who added the company leads other platforms in 4K content creation and titles in high-def.

“We live in an on-demand world,” said Hastings, who noted in Q4 2015 12 billion hours of Netflix content was streamed across its existing 60 global territories, compared to 8.25 billion a year earlier.

Netflix’s expansion strategy has largely been driven by a goal of reaching 200 countries by the year’s end, despite slower-than-expected subscriber growth at home. Netflix added 880,000 new subscribers in the quarter (for a total of 43.18 million), missing the target of 1.15 million. In a report to shareholders released Oct. 14, Hastings and David Wells, CFO, said the company’s new-member forecast for the U.S. proved too high.

In all, Netflix expected to finish the year at about 44.83 million American subscribers, up only slightly from 39.11 million at the end of 2014. Outside the U.S., global net subscriber additions totalled 2.74 million, compared to 2.04 million in the prior year, and well above the 2.40 million Q3 forecast.

On the heels of its latest launch in Japan, Netflix had nearly 26 million members internationally. The company expected to end 2015 at 29.5 million following its roll out later this month in Spain, Italy and Portugal.

The growth of internet connectivity worldwide has made much of the expansion possible: Hastings noted that 3.2 billion people in the world are now connected to the internet. More than half (two billion) live in developing countries.

But Netflix’s bank of much-hailed original programming (which will increase to more than 600 hours in 2016, said Sarandos), is equally important to the strategy.

In the Indian market, for instance, Roopak Saluja, CEO and founder of the 120 Media Collective told StreamDaily that while many global markets are used to consuming American fare, with its Bollywood industry, the Indian market already has a high rate of domestic content consumption and, as such, will demand series with a local flavor – simply translating content into local languages won’t be enough. There’s a grace period for Netflix, however: it won’t need to start out the gate with a handful of Indian shows and movies, but it will need to move quickly once it’s entered the market, he said.

Saluja also stressed that price will be a deciding factor in Netflix’s success. The current price point of $9.99 per month for new subscribers wouldn’t fly in India (or indeed, many countries) – especially since most of the competitors currently setting up shop in the market offer some form of “free-mium” model. (In India, the basic Netflix plan runs for 500 Rupees, or roughly $7.50 US.)

China, an attractive market of 1.3 billion people, was noticeably absent from the company’s immediate expansion plans.

Last spring, the SVOD had been strongly expected to announce a partnership with Wasu Media Holdings Co., a Chinese cable TV and broadband provider backed by Alibaba founder Jack Ma. But those talks fell apart, with Alibaba instead launching its own streaming service, Tmall, in September. It’s now one of several competitors in a crowded steaming market which includes Tencent Video, YoukuTudou, Baofeng, Letv, IQIYI, Funshion and Sohu.

Greg Stoller, senior lecturer at the Questrom School of Business at Boston University, specializes in Asia Pacific markets and said he understands the business case behind a Chinese expansion, but said the move would be an uphill battle — even for Netflix.

“For one thing, pricing is just lower. If you think about the comparative cost of living in a place like China versus the U.S. or even any other place where Netflix does business, the margins are going to potentially be lower. I call it the return on effort – is that going to be enough to justify Netflix’s expansion?” he said in an interview with StreamDaily.

Stoller said Netflix also faces a strong preference among Chinese streaming viewers for made-in-China solutions: “The Chinese are very patriotic. They always prefer to work with Chinese firms. And it’s not like IQIYI and Alibaba are small companies.”

In Asia, Japan is the largest SVOD market, with South Korea coming in second with access to broadband internet helping to speed up a demand for content.

Stoller said China is expected to outpace Korea in the number-two spot, “and that’s why I think most people view China as the ultimate payoff. Not only do you have 1.3 billion people, but you see so much gentrification, so many people moving toward the upper middle class.”

Nevertheless, Hastings said the push into China remains important to the company, noting, “we hope to be there in the future.”

Netflix is also not available in North Korea, Crimea nor Syria due to U.S. government restrictions on American companies.

Though Netflix has made big moves to penetrate international markets, expansions are never easy. Experts have noted that it took nearly four years for Netflix to break even on its expansion into Canada. In some markets, Netflix also faces big competition from local SVOD and OTT services, many owned by larger telcos (such as Aussie VOD Presto).

With files from Bree Rody-Mantha and Megan Haynes

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