Netflix puts every telecom on guard
Rogers, Shaw unveil Shomi service to counter online firm’s influence
Time was, Canada’s broadcast regulator had a commanding say in what Canadians could and couldn’t watch on TV.
With jurisdiction over everything from how much domestic content broadcasters and cable companies must show, to the number and type of channels included in a cable package, the Canadian Radio-television and Telecommunications Commission still determines the kind of programs that cable and broadcast companies can offer and, by extension, how profitable they are.
Enter Netflix Inc. With a market capitalization of $28.7 billion US, analysts say the streaming-video company has changed the way people around the world watch TV with its promise of inexpensive movies and TV shows delivered over the Internet, whenever subscribers want to watch. Already Netflix is causing serious concern among Canadian cable companies and broadcasters, disrupting their business models and forcing players to up their game.
Last week, Rogers Communications Inc. and Shaw Communications Inc. unveiled a new streaming video service called Shomi, a joint venture that analysts are calling a shot across the bow of Netflix.
One reason for Netflix’s success at upending the conventional business model is that it isn’t regulated by the CRTC. Because it operates over the Internet rather than cable or the airwaves, the company, based in Los Gatos, Calif., doesn’t come under CRTC jurisdiction. So unlike incumbents such as Rogers, Shaw and BCE Inc., Netflix doesn’t need to worry about Canadian content rules and it can show virtually whatever its subscribers want.
Another competitive advantage is price. While its Canadian competitors charge monthly rates starting at over $30, Netflix survives on a flat monthly fee of $8.99.
Since its launch in 1997, Netflix has gone from curiosity to global phenomenon, with operations across a swath of countries including the U.S, Britain, much of Europe and Australia. Since coming to Canada in 2010, it has attracted four million subscribers out of a total of 14 million TV households, according to Adam Shine, an analyst at National Bank Financial.
In one week’s time the CRTC will launch public hearings into the future of TV in Canada and on the table are a number of proposals that are causing major worry in the industry. Among them is a plan to cap the price of basic cable packages. Another proposal calls for allowing subscribers to “pick and pay” for individual channels instead of having to buy pre-set bundles.
Critics warn that adoption of the proposals would result in reduced profits and major job losses down the line as some unbundled stations fail to attract subscribers.
Already struggling with slumping ad revenues, traditional carriers say the new rules will only add to their troubles, draining their resources as they face off against what could be their biggest com- petitive threat in decades.
Part of Netflix’s strength is its business model. Compared with the Canadian incumbents and their lofty profit margins, Netflix is a discounter that survives on thin margins thanks to massive subscriber volume. In the second quarter, it had a profit of just $71 million US on revenue of $1.3 billionUS.
Meanwhile, BCE Inc., the country’s largest communications company, reported second-quarter net income of $606 million on revenue of $5.2 billion. Its profit was more than eight times the size of Netflix’s earnings.
Such metrics mean the Canadian incumbents have plenty of room to manoeuvre as they look for ways to outflank their adversary. However, Netflix may be small but it’s rapidly increasing in scale as it Hoovers up subscribers around the word.