Netflix reminds that content is king, localised content even more so

SUMMARY:

Netflix is still turning in losses, but Wall Street recognises (for now) that original content costs, but the payback is subscriber growth.

Okja

The BBC is about to do something rather interesting this week. When the second series of police procedural drama Top of the Lake’s first episide airs, the broadcaster will also drop all the remaining episodes onto its online iPlayer service at the same time. While the other episodes will also air on TV week-by-week, fans will be able to do a ‘box set binge’ if they so choose.

It’s an experiment that the BBC needs to undertake as the Netflix-factor eats into viewing patterns. If successful, it’s not beyond the realms of possibility that other BBC shows will follow the lead here, although Top of the Lake qualifies as a controlled experiment at best, broadcast on BBC2 to a relatively small audience. Whether ‘bankers’ like Poldark, Line of Duty or Doctor Who are set for the ‘box set binge’ treatment anytime soon is a moot point.

But you only have to look at Netflix’s latest quarter to see why it’s necessary for one of the oldest and most respected broadcasters in the world to dip its toe in the bingeing waters. Netflix now has nearly 104 million subscribers, split almost evenly between the US and the rest of the world, adding 5.2 million new sign-ups in the past three months alone. It’s still making a loss, but revenues are up 36% year-on-year to $2.7 billion.

Ongoing losses aren’t troubling Wall Street right now with investors seemingly understanding that the kind of big budget original content that’s winning new subscribers comes at a price, as CEO Reed Hastings notes:

When we produce an amazing show like Stranger Things that’s a lot of capital upfront and then you get a payout over many years. And seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest and integrate to basically self develop many more properties as [we] can find the appropriate ones. And then there’s comfort with being able to finance it and of course our debt to market cap is incredibly low and conservative. So we got lots of room there.

It’s a philosophy that’s paying off. Netflix Chief Content Officer Ted Sarandos points to new and existing content success stories, including 91 nominations at the forthcoming Emmy award ceremonies:

13 Reasons Why started right at the end of the quarter, rolled into some of our biggest content brands; new seasons of House of Cards, Orange Is the New Black; ending the quarter with Okja. So I think it was the combination of a lot of different things, kind of a reinforcement that is almost for programming to a wide variety of taste and keep the quality level high that we can turn some success off of that.

What is notable about Netflix in recent months is how much drive has been put into non-US domestic market expansion with some considerable success, although there are still sticky spots, such as Germany, where people are not typically used to paying for TV content, unlike in the UK, where Sky had pioneered a subscription model years before.

There’s also the Amazon-factor to be taken into account, as a globally-recognised brand. Hastings acknowledges this, but doesn’t want to overplay its impact:

Amazon is super successful around the world if you look at U.S. with Prime, incredibly successful. It just doesn’t seem to take away from us, so I wouldn’t characterize it as us versus Amazon in Germany. I would really characterize it as, can we have a service that’s so great that Germans find it worthwhile paying for?

Clearly we’re succeeding at that making our service better and better. In particular, there’s no advertisements on Netflix and so it’s great for kids, it’s great for teens. And then the great content is so significant in helping the growth. But we’re really seeing that around the world whether it’s Brazil or Argentina or Japan, Singapore or Germany, Internet TV is really catching on for us, for YouTube, for others.

We just got to continue what we’re doing, more local productions. We’ve got some amazing new shows we’re producing in Europe and in Latin America. With Asia, we’ve got a lot more to learn. We’re really expanding a lot in India, Japan. We’re figuring it out market by market. But Asia is very unique and very large.

Local thinking

For Sarandos and his team, getting that localised content delivery in place is a task that’s only going to get bigger over the coming years. So expect to see more productions like the recent film Okja which has attracted enormous international acclaim. Sarandos explains:

Okja is directed by Bong Joon Ho, who is the most celebrated director in Korea and is a huge star and attraction in and of himself, but also the movie itself is one of the most ambitious productions in the history of Korea. His films tend to travel around the world pretty well. It made a ton of noise at the Cannes Film Festival. It was the most talked about film at the festival.

So it helped in attract new subscribers also but it also brings a brand here to Netflix that it’s a place for great content worth paying for. And I think we saw some of that benefit throughout Europe and in pockets of Asia, where we saw big sign-ups in Korea. But remember for most people, they’ve loaded Netflix for the first time when Okja was coming out in Korea. So relative to the rest of the world, we’ve got a lot of work to do, but it was a great introduction to Netflix for a lot of the world.

Matching the program into local taste is really the key and we’ve seen it in our expansion through Latin America, our expansion to Europe. As we look to Asia, we have to get better and better matching those tastes and those tastes are not as easily aligned with Western tastes. So we’ll invest more time and energy in Asia putting some people on the ground in Asia that we haven’t historically, but well within how we’ve looked at the size of the teams generally, but locating them more likely outside of the US as we get to grow for local audiences in Asia and throughout the rest of Europe.

Hastings adds that while Netflix has made enormous advances, there is still a long way to go to compete with established broadcasters:

We’re continuing to see increased median viewing compared to a year ago, two years ago, three years ago as we’re winning a few more of the moments of truth of what you do to relax. But still we’re such a small player in our viewing compared to linear TV, compared to YouTube. So we’ve got a long way to go to have more and more content to please more and more members that continue to grow.

My take

Netflix remains a remarkable digital disruption success story. It’s indicative of the success of the firm’s cultural imprint that people talk of their evening plans as being ‘dinner and Netflix’. No-one talks about ‘dinner and BBC’ or ‘dinner and CBS’. It’s sensible of the the BBC to dabble in new broadcast models, but equally important though that it doesn’t feel it has to react simply for the sake of it. There’s already been one massive screw-up as a result of ‘digital desperation’ when Doctor Who spin-off Class aired first solely on iPlayer to nationwide indifference. As Hastings alludes to, Netflix may look like the rampant disruptor, but in reality it’s an aspirational broadcaster compared to the traditional linear rivals.

Image credit - Netflix