According to a new report in London’s Financial Times, Netflix is planning to launch next in Latin America, specifically Argentina, Brazil, Chile and Mexico, rather than to make its next port of call Europe.
We have some trouble understanding this, given the low rate of penetration in Latin America for broadband lines. That’s not to say we don’t actually believe the story, which is simply that negotiations have gone ahead with Grupo Televisa and TV Azteca of Mexico, and Globo of Brazil, but there are a number of ways to interpret this.
Spanish content is very valuable in the US itself. We understand that while Brazilian content is Portuguese much of it also exists in translated form for distribution around Latin America, so all of this deal may be a side step around US studios, buying access to content for US citizens.
There are around 35 million Spanish speakers in the US who use it as a primary language, and a further 10 million who use it as a second language. In fact there are more Spanish speakers in the US than in Spain. We have frequently covered stories about this network or that pay TV operator adding Spanish language content to its channel line-up, because this is a significant portion of the US population. However if we were Netflix and we were talking to Latin American content producers, we would a) want that content for a special Spanish service in the US b) want that content for online delivery in Latin America and c) want that content for delivery even in Spain ‘ why do a negotiation about a single territory when there are several you can hit in one negotiation.
If we take the 4 proposed territories they are very different. Mexico and Brazil are the pay TV powerhouses of Latin America ‘ Brazil has 8.9 million pay TV homes now and will have around 20 million by the end of 2014 (See Rethink Latin American Pay TV report). Mexico has 9.7 million pay TV homes today and this will grow to 18.7 million pay TV homes by 2014. These are strong markets growing very rapidly, with 26% and 40% growth respectively during 2010.
Argentina by contrast has 6.8 million pay TV homes and is growing more slowly, at just 6.8% last year, while Chile is tiny at just 1.9 million pay TV homes although it is growing a little faster at 17.8%. Netflix has consistently said that it will launch into a single international market during 2011, and if it works out, it will then proceed to roll out internationally as fast as it can. These two markets (Argentina and Chile) really don’t qualify as good international test beds worth all the extra hassle of separate launches.
By comparison Germany and France have high pay TV penetration, closer to the USA, and high broadband penetration, both with around 25 million pay TV homes. The UK is almost 14 million pay TV homes. Tracking pay TV tells you that people are used to paying for video services. And broadband lines in these countries are closer to 8 Mbps to 10 Mbps on average ‘ so Netflix would have the capacity to push video to the majority of the population. The same is true of parts of Asia such as Korea or Japan, but there are bigger cultural and content barriers for those markets.
We would also say, that although we believe that the economic miracle that is Brazil is set to continue, and Mexico is not far behind it, these countries have a history and a reputation of boom and bust and to put all of Netflix’ eggs into such an unstable basket, and ignore Europe, with premium broadband penetrations, might be frowned upon by investors.
Just look at the broadband issues for a minute ‘ in Europe recent research reports on broadband shows that China and the US continue to add more lines than any other single market while Russia and Brazil, are the most rapidly growing in percentage terms with 22% and 14% respectively. Asia is also growing fast.
But Pyramid Research shows Brazil on a mere 16 million domestic broadband lines, while other sources claim there are 75 million internet users there, suggesting that almost half of the 193 million population of Brazil can lay their hands on the Internet one way or another. This is partly explained by the immense usage of mobile broadband in Brazil and those cellular lines are not going to be used to deliver Netflix HD video.
There is one benefit about going to Latin America first for Netflix ‘ any revenues that it obtains there from US content will be very popular with Hollywood, which numbers Europe as a huge existing source of revenue and Latin America less so. Possibly Latin America is easier to license Hollywood movies, but then again this story is not about getting Latin American licenses for Hollywood movies, but about licensing Spanish and Portuguese content.
Netflix boss Reed Hastings has been saying consistently that if we want an indication of where Netflix will launch next, look at high levels of internet ‘ by which we assume he means both high speed and high penetration. Point Topic, which counts broadband lines for the Broadband Forum, shows that the UK, Germany and France all have between 20 and 27 million broadband homes each, which means that around 75% to 80% penetration of domestic homes with broadband in each of those countries (Germany has 35 million homes, France and the UK about 25 million).
It’s fairly clear that broadband penetration, geographical concentration and pay TV acceptance are all higher in Europe than they are in Latin America, it’s just that it would be madness to ignore Latin America because that market has suddenly accelerated, and isn’t so far behind. There is another reason to launch in Europe, Netflix would not want Amazon’s recently acquired LoveFiLM to get too much of a head start, or it could find itself shut out.
So our assessment is that these two moves are likely to be happening in parallel. Netflix is preparing, we believe, for a European launch. Latin America is being trawled for mostly Spanish content rights, again mostly for the US now and later for launches into Brazil and Mexico. The Spanish content might come in handy for Spain and Europe later too.