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5 December 2019

Netflix hits century of pay TV distribution deals – where next?

Netflix has for several years been reaching out both to local distributors and content producers to sustain global growth and buttress itself against intensifying competition from all quarters, including indigenous sources and the US-owned majors. There is some evidence of that working from recent results, although the bigger test is yet to come as Disney+, AT&T’s HBO Now, Comcast’s Peacock and Apple TV+ all ramp up during 2020.

We may recall how Netflix endured a rare slump in subscriber growth over Q2 2019 as a result of losing 130,000 subscribers in its already-saturated home US base. These US losses were stemmed in Q3 while international subs surged to leave Netflix on 60.6 million home subs and 97.7 million overseas, or 158.3 million in total. This rise was attributed to the impact of sci-fi series Stranger Things, but also reflects the recruiting power of its global distribution partners, many of which are legacy pay TV operators, which now number just over 100.

Indeed, if we discount China where Netflix’s activities are largely confined to acquisition of rights to Mandarin-language content, these operator deals span almost half of all global pay TV subscribers. It includes more than three quarters of pay TV subscribers in Western Europe and approaching 90% in North America. This itself marks the culmination of a strategy shift both by Netflix itself and those operators, given they were previously competitors. So, Netflix is moving in the opposite direction from the big streamers such as Disney which have pulled their content from its platform, by onboarding with pay TV operators, which suits the latter’s emerging strategy as aggregators.

This shift is most notable in France where Netflix’s original arrival in September 2014 was met by hostility both from content producers and operators, but that did not prevent it amassing 5.3 million subs by mid-2019, about 58% of the country’s SVoD total. Netflix is now on board all major pay TV operators there, which assists subs growth since it addresses a target of over 25 million homes.

Canal+ was the last to succumb, having previously resisted other OTT platforms such as BeIN Sports and Altice France/SFR’s RMC Sport before caving in. But Canal+ efforts to compete had been floundering, with its CEO Maxime Saada decrying what he claimed was an uneven playing field before shutting its SVoD offering CanalPlay. The operator came back with Canal Series focusing more on popular TV series with some success, amassing over 1 million subscribers, but then realized its future lay more as an aggregator and finally got into bed with Netflix.

Two other factors at play in France are a reluctance by consumers to subscribe to more than one SVoD service and a preference for watching the content on big screen TVs. Smart TVs and pay TV are therefore seen as major drivers of SVoD growth in France.

There are still three major regions where Netflix has yet to make much impact via pay TV distribution, Asia Pacific, Latin America and Central and Eastern Europe (CEE), which between them host 400 million pay TV subscriptions, again not counting China. Netflix has been stepping up its activities recruiting operators in those regions.

Generally, Netflix does not fold its content directly into these pay TV packages but instead makes it available as an add-on at similar rates to the standalone SVoD range. Integration is therefore at the billing rather than service level with Netflix gaining through additional marketing and convenience of access. However, some operators have wrapped Netflix closer into their fold, such as Comcast’s Sky in Europe with an offer limited in duration for now combining its Entertainment package with Netflix Standard (HD) for around $35 a month. The offering is priced the same as Entertainment on its own, so Sky is effectively bundling Netflix as a free extra. Netflix is presumably fully reimbursed itself with Sky dangling it as a loss leader.