January 18, 2016
Analyst: 9m APAC Netflix subs by 2020
Copyright Advanced Television Ltd

Analysts from Media Partners Asia (MPA) estimate that Netflix could secure 9 million paying subs in Asia-Pacific by 2020, without assuming significant localisation in markets such as India and Korea.

Vivek Couto, executive director of Media Partners Asia, suggests that the Internet TV service’s wider entry into Asia-Pacific is a major catalyst for the growth of subscription-based digital video.

MPA notes that Netflix is now fully global bar China, bringing greater scale to conquer Internet TV as the company strives to: (1) Produce and acquire more original content with multi-market appeal; (2) Partner with local producers and writers; and (3) Integrate with more broadband and mobile carriers.

It suggests that Netflix’s Q4 and FYE December 2015 results will show ~US$6.8 billion in full-year turnover, with US$300 million in operating income, with the company likely to generate free cash flow losses until 2018 because of global expansion. “The company has been guiding for about US$120 million per quarter in international contribution losses this year, which works out to almost US$500 million on an annual basis. Breakeven could occur during 2H 2017,” advises Couto.

“By 2020, scale and critical mass in key international markets, as well as greater pricing power and incremental (but slower) subscriber growth in the US, could theoretically help Netflix generate more than US$1.5 billion in free cash. At the same time, the company is expected to invest in original content across large international markets where it sees strong take-up over the next one to two years,” he notes.

In terms of local markets, MPA suggests that at present, Netflix is sorely lacking in local depth across potentially big markets such as India, Indonesia and Korea, although it understands that some deals for global distribution of new titles are being inked with producers in each of these markets.

“The full array of Netflix’s US library will also take time to come online in many Asian markets. Licensing complexities may delay the process further,” suggests Couto, who adds that potential entry in China could take place by 2017, providing a boost to the business.

MPA suggests that Netflix’s paid subs base across international markets should approach 100 million by 2020 (versus less than 30 million at end-Q4 2015), assuming strong execution and a ramp-up in run-rate growth, while the US base should also surpass 65 million at that time.

Broadly, MPA believes that Netflix’s launch will be a catalyst for progressive evolution in business models, content production, industry alliances, and regulation. Key factors include:

A Boost to Local Competition While Netflix has experienced significant success with its launch in Australia, its progress in Japan has been more of a slow burn. That said, its entry has encouraged more domestic competition and content production in Japan, benefiting the video industry as whole.

The likes of Amazon, Avex, Nippon TV-owned Hulu Japan, Gyao and Rakuten Showtime have scaled up the SVOD market as a result, while also becoming aggressive on content acquisition and first-window deals.

Such competition is especially welcome for pay-TV operators and branded pay channels across Asia-Pacific.

Few have stepped up consumer marketing to address key demographics that are served by Hollywood content, and many have remained complacent for too long, failing to invest significantly in scalable local and Asian content.

Less Is More To Maximise Marketing Netflix’s current standardised consumer offer is hindered by its premium pricing, together with the absence of some key titles.

Its consumer proposition is strengthened, however, by impactful marketing, PR and an established brand. These advantages will be amplified and exploited by mobile and broadband partners.

While regional and local OTT platforms often dwell on the number of hours they offer, Netflix’s consistent first-year marketing philosophy (in markets where it freshly launches) is that less is more.

Its full library typically takes two to three years to come online. Even then, it will still be limited by rights and licensing hurdles.

Nonetheless, Netflix’s consumer offer is underpinned by an immersive content experience, led by strong design and UX, together with great customer service. Both are natural magnets for customers.

Although Netflix’s pricing inevitably confines it to a niche A or AB demographic, these segments well developed in more mature markets and are growing in emerging economies.

This means that, over eight quarters, Netflix could secure a reasonable penetration in markets such as Singapore while securing a decent toehold in larger markets such as India and Korea.

A Lift for The Ecosystem Netflix’s pricing will also encourage content creators and distributors.

Indian SVoD platforms, for instance, are eager to avoid the Arpu stagnation that’s plagued pay-TV in India. Netflix’s pricing and tiers set a good, strong base for negotiations.

Similarly, large-scale pay-TV operators that are investing aggressively in SVoD content and technology, will welcome the pricing and competition.

Players such as Malaysia’s Astro have a deeper array of day-and-date content from Hollywood studios, and key Chinese and Korean content groups, as well as a large pool of vernacular content.

Some Hollywood studios, dismayed by a flight-to-bottom in SVoD retail pricing across pan-regional OTT platforms in Southeast Asia, may also welcome the move.

At the same time however, it could also allow telcos in growth markets such as Indonesia, without comparable data plans that can accommodate Netflix’s standardized prices, to create alternative, cheaper offers of their own.

Netflix going legal across the world ex-China is also a tacit effort to tackle content theft and sneaky usage, confirmed by a pledge to crack down on subscribers using VPNs to access the US library announced earlier this month.

Launch across some of Asia’s tightly controlled content regimes (i.e. Indonesia, Malaysia and Singapore) may also create an opportunity to deregulate strict content norms across the on-demand window, helping level the playing field for players such as HBO and local rivals.

That, however, depends on decisions taken by local regulators.

Netflix’s recent moves may also accelerate potential plans by 21st Century Fox and Disney, both shareholders in Hulu, to expand the scope of their existing OTT offerings in a number of Asian markets through partnership with telco and pay-TV partners.

Netflix’s flight to global supremacy is certainly making a mockery of Hulu’s alarming lack of progress in expanding beyond the US, despite the deep relationships and knowledge its shareholders have in international markets.

Time Warner may also accelerate its own initiatives through Warner Brothers, which has experienced success in China, and HBO.