The Quest for new markets
In the course of last week, the giant video streaming service Netflix made its debut in 3 new Mediterranean countries, namely Portugal, Spain and Italy. The streaming platforms continues its European and international expansion plan, being now present in over 50 countries and serving almost 70 million subscribers. The company plans to reach 200 global markets by 2016 and several analysts predict Netflix could easily have more than a 100 millions paid subscribers by 2020. These impressive numbers and growth did get bullish investors excited in the past, and Netflix did manage to earn over $5,5 Bn in revenues in 2014. However, their path towards global domination is not an easy nor a cheap one. The costs incurred for the international expansion actually strongly contributed to their 50% profit slide last quarter.
This is not to say that the new media innovator is failing in the execution of its strategy -the better than expected international subscribers growths actually more than offset the weakly performing domestic US growth. In fact, it seems the company is ready to bare the necessary costs to continue increasing its reach, with the assumption that it will be able to profitably monetize these new untouched markets. Considering that the model of the service requires a sustained growth in the subscriber base to increase the profitability, it makes sense that Netflix thrives to export its American success globally. To become the world leader of V-O-D and streaming platforms. Nonetheless, to do so, they need first to seduce the new idiosyncratic markets.
Their service, along with the arguments to convince the customer to pay for them, rest on two main pillars: the pricing and convenience of their offer on the one hand, the quality and diversity of the content they provide on the other. Not an easy task to satisfy an ever-more wanting user that has, to facilitate things, access to a wide range of increasingly sophisticated free alternatives (we are not going to discuss you now Popcorntime…). However, Netflix managed to get into the hearts -and lifestyle- of a large portion of the American market, in particular amongst the valuable millennials target.
They presented strong arguments to respond to both aspects of the need: a deeply user-friendly interface, enhanced with insights derived from an enormous quantity of precious (big)data analyzed about the users. Moreover, their platform allowed access to a vast amount of content, including most popular programs as well as an increasing number of high quality original productions. All this accessible at a reasonable price. Netflix is logically trying to implement the same winning formula in the newly approached markets. This requires substantial costs in developing the presence in global markets, notably for building the required infrastructure, brand presence and of course the continuous need to provide fresh quality content.
The rise of a new model
It is interesting to stop here and consider for a moment the current climate in the video on demand and streaming environment, to have a better perspective on the challenges and necessities behind Netflix’s expansion. Amidst a global shift in the way medias are consumed, notably in the television industry where (millennial) customers turn away from traditional “bundled” offers, platforms providing a truly personalized a la carte service thrive. However, as an article of the FT nicely exposes it:
“Music and print publishing have made painful transitions to online business models. Television, though, is not waiting to be disrupted”.
Indeed, most dominant traditional players did not wait long before proposing their own version of a digital service, trying to stay ahead -or at least not fall too far behind- in the current innovation wave. Big names in the content production game, HBO for instance, are experiencing a shift from their old model of solely licensing their products to becoming creator, producer as well as (online) distributor of their content. Most recently, Disney launched its own streaming service in the UK, DisneyLife, joining the likes of CNB, NBC and Hulu in this new battleground.
Of course, tech giants are also looking to step into this industry. Amazon’s Prime Instant Video service is already a notable player, successfully adventuring in the content production as well, and Rakuten also seems to be eager to enter the race. These services, to date mostly restricted to the United States, threaten the crucial domestic hegemony of Netflix, further highlighting the importance for the VOD service to establish itself in new territories to pursue its growth.
In fact, as pointed out beforehand, the revenue model of Netflix rests dominantly on the subscription fees received. So, to keep up with the increasing costs of producing quality original production and licensing other valuable content, which could get more expensive due to the stronger competition (from content licensors…), Netflix needs its growing subscription revenues. This can be done either by gaining new members or by increasing the fees. We do not need to insist on the dangers an excessive use of the 2nd option would create in the current competitive environment. Therefore, venturing into new markets with a large number of potential users, such as the Mediterranean countries, appears to be an almost necessary strategic path to follow.
Even more so considering that the main competitor services often have a “Big Brother” behind them (Time Warner for HBO, Amazon, Disney…), and the revenues from their new digital platforms are not quintessential for their survival. All the contrary to Netflix, which needs the continuous growth to maintain the hope the market puts in them, even if this means a drop in profits to finance the expansion. Yes, assuming that Netflix is indeed able to replicate the success and profitability they enjoy in the USA in completely different markets.
Netflix’s Italian origin story
Let us consider their recent entry in Italy, how they attacked this mission and the new challenges they are facing.
Unlike in the US, in Italy Netflix did not enjoy a vast brand exposure and consumer knowledge about their service. The average millennial viewer knows it is an american streaming service, probably is aware of their highly recognized House of Cards show, but is not accustomed to Netlfix & Chill in his daily life. Therefore, along with investing in the infrastructure necessary to insure a smooth service, the VOD platform primarily needed to incept their brand awareness and recognition in the mind of the consumer.
Along with a traditional advertisement campaign, Netflix aimed to do so by showcasing the presence and quality of their original contents. On the one hand, they announced the production of a new show adapted to the italian market, Suburra, as well as the availability of many dubbed or subtitled versions of other shows. On the other hand, they ingeniously exploited their first original movie, Beast of no Nation. The drama received critical acclaim when it was presented (and won certain awards) at the Film Festival of… Venice. Showcasing their production at this prestigious event proved to be an intelligent move: it allowed the company to enjoy large positive coverage for free from italian media, scoring a good point in the heart of local consumers. However, one must ask if that is enough to overcome the difficulties related to a market having its own established TV-Movie consumption ecosystem.
Netflix entered here a more conservative, or less developed, market than its domestic one. Pay-Tv penetration for instance, is only around 25% compared to more than 85% in the US. This could benefit the streaming company as the potential customer base is largely untouched, but they need to convince the targeted part of the population to change the way they consume their media. Furthermore, though not as dense as in the US, local competition is intense.
Public TV (RAI) still plays a significant role, along with the local media and commercial television giant Mediaset. Rivalry between the latter and Britain’s SKY, who is dominating the pay-tv landscape, is fierce. The two company try to complicate each other’s’ life at every turn. In recent times, both media corporation launched on-demand streaming services (Sky Go and Infinity) allowing access to their wide range of content.
We arrived at another problem Netflix if facing: rights for distributing content often are licensed separately in the home (USA) market and the international ones. In other words, Netflix does not have access to all of his American catalogue in Italy, including content they actually produced themselves. Having already licensed the rights to its most acclaimed original show House of Cards to Sky Italia, it is for the moment impossible to watch Frank Underwood’s ascension on Netflix in Milan.
Moreover, as this is potentially a problem for other content producer’s new VOD services as well, it is possible that with time access to precious programs will become even more difficult. This trend further stresses the great future value of high quality and marketability original productions, tailored to the local market if possible.
The road forward
Of course, Netflix still offers a top quality platform with an extensive library of original and licensed videos, all at a lower price than its main rivals. For sure, it will stir up local competition, and, as their smooth marketing move with Beast of Nation showed, they are good for making a name for themselves.
The question is will the success it finds, as it surely will in Italy, bring (significantly) more than the costs of developing their presence in the new markets. As of yet, their international expansion is not profitable, but Netflix is just beginning to truly put its foot in there. There is the growing cost of continuously proposing the best (original) tailored content. Not to forget the local barrier each new environment brings with it: just think of the potential -and the challenges- of a market like China. Some ventures, like France, have not done so well, with only 700 000 paid members in a year. Nevertheless, Netflix will still be a strong contender for leadership in any new market it enters. Especially considering the current shifting trends in the Tv and movie industries, with a growing demand for personalized on demand services.
So far, Netflix successfully continues its international expansion, and, the company believes that by 2016 it will be fully profitable. Though the path towards and beyond this goal is becoming treacherous, the user-friendly streaming platform earned at least the right to prove it can live up to the task and continue what it promised in its quest:
“A stellar service, a valuable partner, the prospects of sustained profitable growth, and the allure of huge impact”.
Do not hesitate to share your comments & thoughts (see comment section below).
Subscribe with your email address (see dedicated section on the right) to be automatically notified when a new article is published. Also, don’t forget to follow us (on the blog and on our other social media pages, which include Facebook, Twitter &Instagram).
Stay tuned dear Storm-Troopers !
(Yes, this is indeed the term we coined for our loyal readers… Oh and yes, we areStar Wars fans)