Yesterday the South African internet was buzzing with new rumours that Netflix might be looking to launch in South Africa soon, thanks to an interview with Vodacom CEO Shameel Joosub on TechCentral.
Joosub told TechCentral that Vodacom is in talks with Netflix and other international VOD companies looking to launch in South Africa, to offer the network’s billing platform as an additional payment option for South African audiences. He didn’t say that anything was confirmed between the two companies, of course.
The thing is, even though Netflix has said that it plans to be in 200 countries by the end of next year, and reportedly confirmed to News24 almost a year ago that South Africa would be on that list, there are some challenges ahead for the service.
Not least is the fact that video on demand (VOD) in the form of Altec’s Node, Times Media’s Vidi and MTN’s Frontrow has failed to make much of an impact here yet. Two new services, ShowMax and ONTAPtv, had stronger launches but there are no user numbers yet. One immediate problem for any VOD service is that only 1.4m households in South Africa have any kind of internet access at home (the number of internet users is higher, but access at home is vital for TV streaming in our opinion). So the addressable market is small – and margins in VOD are even lower.
According to Netflix’ latest quarterly results, up to and including September this year, Netflix has 42 million paying subscribers in its US homeland, off of whom it makes a healthy $344m (R5bn) per quarter. But Netflix also says that it is currently in 87 countries globally already – nearly half its 2016 goal. In those other 86 countries, it has just 24m paying subscribers, and makes a $68m (R1bn) loss per quarter.
The infrastructure cost is broadly the same; it costs Netflix about $15 a quarter per user in “cost of revenues” in the US. That’s stuff like servers and video licensing. Internationally, that cost rises to about $17 per quarter.
The big difference, though, is in the cost of marketing – or “customer acquisition”. In the US, that’s currently less than $1.75 per paying customer per quarter. In the rest of the world it’s a massive $5 or more. To make it worse, market saturation in the US means that cost is falling, but the international cost of marketing per customer has risen this year overall as new audiences are harder to reach in the countries left to conquer.
Here are the full stats:
|Domestic Streaming||March 15
|Cost of revenues*||$582,529||$612,691||$644,914|
|Cost of revenues*||$375,278||$422,966||$451,251|
|Contribution profit (loss)||-65,007||-91,916||-67,648|
The size of the actual addressable market in South Africa will likely mean it would take years for Netflix to turn a profit here based on past performance.
There is one more thing, though, that you might think works in Netflix’s favour. While it’s currently available in 87 countries, the vast majority of those don’t have any real infrastructure beyond CDN arrangements (Netflix itself is mostly hosted on Amazon Web Services).
According to Unotelly, a service that lets you log on to Netflix from outside its borders by hiding where you’re really accessing it from, there are only 27 login servers internationally. Most countries don’t really have their own Netflix, they just have access to one hosted somewhere else. So you might argue that a launch in South Africa – and the firm is hiring accountants to look at that – would mean access to customers in neighbouring countries too.
That makes sense, until you look at ITU figures that suggest only 4m households in the whole of Africa have access to fixed line broadband right now. That compares to 365m households in Asia Pacific.
Looking at the map below, the 27 countries with a Netflix login server are coloured orange. The 60 where Netflix is available includes places like Guernsey and Vatican City. They’re coloured green and most don’t even show up on the map.
Think like a Netflix exec. There are 365m households with fixed line internet access in the untapped space on the right, and 4m in Africa. Where are you going to prioritise opening a loss making business that you hope to grow into profit? The counter argument is, of course, that mobile broadband penetration is much higher (approaching 50% in SA). But is that really Netflix’s core market?
Ultimately, of course, that probably won’t deter the firm from launching here next year as it’s reportedly said it will. After all, every good US tech company wants to dominate the world with its platform and has to squeeze out rivals to keep its investors happy (Netflix currently has almost a billion dollars of debt). But the chances of it making money here, and the economics of VOD in general, are dubious.
But does Netflix care? It told investors at the end of 2014 that it plans to finish its global rollout by the end of 2016, and that in doing so foresaw the firm as a whole breaking even over the two years. The strength of its US business means it’s still doing better than breaking even: profits in 2014 were $278m, and this year Netflix is on course to still take home over $100m in profit despite its rapid expansion.
Even if it hits its target and gets to 200 countries including South Africa by the end of 2016, so long as its US userbase continues to grow or remains stable, it has the resources and focus not to worry about loss making nations for a long, long time. Which other VOD companies can say that?
[Image – CC by Alan Levine, Additional words by Lungelo Shezi]