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14 November 2019

Netflix factor provokes Korean U-turn over broadband consolidation

Nations rarely react consistently to invasion as has been shown clearly by responses to the great US streamers and especially Netflix as they enter foreign territories. The streamers meet a mixture of stiff resistance and opportunistic collaboration from parties seeking to gain by forming tactical or occasionally longer-term strategic partnerships.

This dichotomy shows up well in South Korea, a country with proud local traditions but also a hot bed of capitalist enterprise, so that it is not surprising the rapid rise of Netflix has provoked mixed responses. This has come to the boil recently as Netflix has been particularly aggressive both in terms of content strategy forging local partnerships and cutting prices for mobile-only offerings as it has done in a few other countries in SE Asia, such as India and Malaysia. But South Korea is much wealthier per head with GDP per capita running at around $30,000, comparable with many developed nations such as Italy and Spain, where no such price cut has been considered. Netflix in April 2019 started trialing a 30% price cut per sub for mobile-only subs from about 9,500 won to 6,500 won ($5.70), admittedly not as low as in India but well under the level in nations of comparable unit wealth.

At the same time, Netflix has been spending heavily on original content production in South Korea with a budget of around $140 million for 2019, a lot for a country this size and dwarfing local competitors. By contrast local SVoD provider Oksusu, the country’s largest indigenous video streaming service owned by SK Telecom with 9.5 million subscribers, will spend only about $9 million this year. This is less than Netflix is spending on just one six-episode series, called Kingdom, at about $11 million.

Commitment to local content and also to promoting it abroad not just to South Korean diaspora but also people from other nations has also gained some recognition and diffused local opposition. So not all South Korean entertainment firms have refused to license content to Netflix, with JTBC taking shows such as Man x Man, which runs on Netflix an hour after it airs on its own channel, while others air the next day. Then local mobile operator LG U Plus is partnering with Netflix in the hope of increasing subscribers as South Koreans consume ever more series and movies on mobile devices.

This is all bearing fruit, with Netflix subscriber numbers more than tripling over a year to reach about 2.2 million by the end of September 2019. Although this is still far below the local total the rapid advance has put the wind up those operators that have not collaborated as well as some that have. It was clear the Netflix factor lay behind the decision by the  Korea Fair Trade Commission (FTC), the country’s antitrust regulator, to grant conditional approvals for LG U Plus itself and SK Broadband to purchase cable TV operators CJ Hello and t-broad, respectively. These are in turn the number and two MSOs in the country. The FTC has approved SK Broadband, subsidiary of the country’s largest mobile carrier SK Telecom, to merge with t-broad, while LG U Plus, the country’s third-largest MNO, has been cleared to acquire a 50% stake in CJ Hello for 800 billion won ($700 million).

FTC Chairwoman Joh Sung-wook indicated that concerns over conceding too much power to a few large telcos had been outweighed by the need “to boost competition for innovation in a rapidly changing technology and market environment in broadcasting and telecommunications industry,” as she was quoted in The Korea Times. That is a euphemism for the threat to the country’s entertainment industry posed by the SVoD boom and in this case largely Netflix, given that in contrast to India Amazon Prime has made little impact in South Korea. This largely reflects Amazon’s struggles to make inroads into the country’s ecommerce market which is usually a springboard for Amazon Prime video. Online retail is dominated by local companies already offering next day delivery at low prices, led by 8-year old start-up Coupang whose 2018 revenues were $4.1 billion, 65% up on the $2.5 billion of 2017.

There are still some conditions attached to those two takeovers, with both LG and SK banned until 2022 from increasing subscription fees for cable TV services beyond the prevailing inflation rate. They must also avoid forcing consumers to switch to expensive subscription packages and are prohibited from reducing the number of cable TV channels.

It is not hard to see why South Korea has become such a fought after market. Besides its flagship status it is more profitable than most of its neighbors and exhibiting strong SVoD growth, which will generate revenues of almost $290 million in 2019 and on course to pass $500 million for 2022. It is true that ARPUs are falling in response to the competition as we have observed, but at about $6 per month are still higher than almost all other countries in the region, save for Japan.

In China it is about $2.50, while in India full blown pay TV packages are not much more. Certainly the Netflix effect is provokeing consolidation across the video services spectrum beyond those two cable TV takeovers, with SK Telekom again playing a pivotal role. The country’s three main broadcasters KBS, MBC and SBS are collaborating with SK Telecom over a new video streaming platform that is clearly a defensive move against the SVoD invasion, echoing similar activities in other countries in Europe and elsewhere. These broadcasters already own Pooq between them, with MBC and SBS both holding 40% each, and KBS 20%. With Pooq holding about 3.8 million subscribers and SK Broadband’s Oksusu 9.5 million, the new platform could kick off with over 13 million.

But unless this partnership starts matching Netflix on content not just in terms of spending but also global exploitation, their lunch will continue to be eaten. Netflix itself will want to dig its tentacles deeper into the body of South Korean entertainment to build a fortress in turn against the new forces shaping up in global streaming, such as Apple and Disney.