Netflix is used to local spoilers blocking its international expansion as it enters new markets, such as Crave TV in Canada, ViaPlay and HBO Go in the Nordics and Sky’s Now TV in the UK, but in Asia it faces perhaps its most formidable obstacle yet in HOOQ.
HOOQ was first announced on January 30th 2015 by Singapore based regional Telco SingTel in partnership with Sony and Warner Bros as a pre-emptive strike against Netflix, before it arrives, and has just launched its inaugural service in the Philippines. India, Indonesia and Thailand are set to follow this month, ahead of SingTel’s domestic Singapore market, where it is the dominant Telco.
But it will be in Australia where Netflix and HOOQ first lock horns directly. Netflix itself has earmarked March 24th as its launch date in Australia and New Zealand, while HOOQ plans to enter soon after. HOOQ aims to optimize QoS by delivering just over networks owned by SingTel or its partners. This leaves Netflix with the advantage of being untethered to any Telco and so free in principle to run over any access network, but may initially concede something to HOOQ in quality of experience, at least until it builds out its own CDN or makes suitable arrangements with third party CDNs as well as local Telcos, to ensure end to end QoS.
This is not so much an issue in North America and Europe and probably not in Singapore either, but could prove to be in other Asian markets, including India, where broadband coverage is still patchy and often unreliable. This factor contributed to disappointing take up for Netflix in Latin America and especially Brazil, where only 20% of Internet subscribers enjoy access speeds over 500 Kbps at the time of the launch.
In Australia we are looking at a fairly straight match up, although the outcome may not entirely be replicated in the Asian markets where content tastes are different. Ironically Netflix could benefit from the piracy that is rife in the region, since this has enabled it to gain substantial brand recognition for its iconic series “House of Cards” and “Orange is the New Black”, which arguably have proved the most influential series in the history of pay TV, at least matching the impact of “The Sopranos” and “Sex and the City” for HBO. In fact Netflix CEO Reed Hastings regularly describes his company as the HBO of the Internet.
This highlights how content has become a kingmaker for Netflix and it was the great success of these series that rekindled its global expansion after a year lying fallow in 2013, following its launch in the UK and Ireland at the start of that year.
This content factor will ensure that Netflix succeeds in becoming a major player in the Far East, even if it concedes early mover advantage to HOOQ. But the latter is also coming in with a strong content play through having Sony and Warner Bros on board. At launch, HOOQ is offering 10,000 movies and TV shows from those two partners, including films like Spider-Man and Harry Potter, as well as popular TV shows like Friends and Gossip Girl. It is complementing this with a fairly extensive library of Indian, Chinese, Thai, Filipino, Indonesian, Korean, and Japanese content, which will be crucial for competiveness in these respective markets.
Success will come down as much to making the right calls on local content as being able to offer high enough QoS. When it comes to infrastructure SingTel is strongly placed not just in Singapore, but most of the other target markets. In Australia it owns Optus, the country’s second biggest Telco after Telstra, with about 30% share of mobile subs and 16% fixed broadband. This at least gives it a sizeable captive market to attack with bundled deals, although Netflix will also be able to ride over Telstra’s network, which accounts for 50% of broadband subs.
Telstra also has substantial investments in five key regional Telcos or mobile operators, including Telkomsel (Indonesia), Advanced Info Service (Thailand), PBTL (Bangladesh) and Globe Telecom (Philippines). Globe Telecom was therefore the infrastructure partner for the recent Philippines HOOQ launch and similarly these other Telcos will be in their markets.
SingTel also has investments in Bharti Airtel covering India, which has a significant presence in Bangladesh, Sri Lanka and Africa. What is interesting in the Asian markets is that HOOQ could be more of a mobile than fixed broadband play, especially across the vast rural but still quite densely populated areas of India. Here 4G/LTE roll out is key since it enables sufficiently high bit rates for premium video reception on tablets and smartphones. In India this is happening quite fast, with 15 million LTE connections expected by the end of 2015. That may still be a small percentage of the country’s 937 million base of mobile subscribers, but is still plenty for HOOQ to chew on given that 4G/LTE deployment will accelerate anyway during 2016.
The overall size of its Internet base, whether mobile or fixed, will make Asia the world’s biggest battleground for OTT over the next few years. Netflix was driven to international expansion partly because it saw a future for global OTT, but also because its domestic US market was becoming saturated. This has already been reflected in Netflix revenues, which soared internationally by 76% year over year to $388 million for the last quarter of 2014, accounting for 30% of the total, while US revenue growth was confined to 24% reaching $917 million.
Netflix is predicting both international and US growth to slow this quarter to 59% and 22% respectively, highlighting the importance of the Asian market. The number of Internet users there is still climbing steeply, as is the penetration of sufficiently fast broadband for premium TV, although from a low percentage base. In Q2 2014, 46% of the world’s Internet users were in Asia, yet this was still only 35% penetration, so there is plenty of room for rapid growth to continue. Penetration rates across North America, Europe and South America stand respectively at 88%, 71%, and 57%.
Asia will soon become the world’s biggest market for streaming services, with SingTel well poised to take a major share, having established its tentacles in all the key markets and a subscriber base of 500 million. But this is hardly an homogeneous market, with far more substantial cultural, linguistic and market differences between countries than exists say in Latin America.
India has its great Bollywood empire, whose films Netflix distributes around the world and not just to diaspora. It is also characterized by chronically low ARPUs below $5 a month that would mean Netflix would probably have to cut its usual subscription prices to gain traction there. By contrast Singapore enjoys relatively high ARPUs, such that Netflix itself could prove disruptive to SingTel’s MIO VoD service, which costs considerably more than Netflix’s prevailing $9 a month subscription. So we are likely to see a range of outcomes across the Far East in the battle shaping up between Netflix and HOOQ in particular.