Netflix has big appetite for growth

The entertainment giant is disrupting the industry but its rivals are not giving up without a fight

Netflix was born in 1997 when its co-founder and chief executive Reed Hastings was late in returning a video he had rented from a store. He was fined, which sparked the idea of starting a movie rental business at a flat rate, with DVDs delivered and returned by post.

Twenty years on and Netflix has evolved into an internet TV platform and a producer of TV series, films, documentaries and stand-up comedy. It releases between one and three of these made-for-television productions a day and is disrupting conventional distribution channels and flustering the cinematic establishment worldwide. In Hollywood, actress Helen Mirren has described Netflix as “devastating”. Filmmaker Steven Spielberg has suggested films debuting on Netflix’s platform should not be eligible for the Academy Awards. This year, the Cannes Film Festival banned Netflix offerings from competing.

The disruptive nature of Netflix extends to South Africa. For $7.99 a month, which can be cancelled at any time, South Africans can watch as many programmes as they like. Pay-TV monopoly MultiChoice was given a run for its money when Netflix was launched locally in January 2016. Pre-empting Netflix’s entrance, MultiChoice launched its low-cost internet television offering, Showmax, in mid-2015, thereby securing a large chunk of the market.

Netflix in South Africa does not look the same as Netflix in the United States, or anywhere else in the world. This is a result of the unending complexity of global content rights, which remains the company’s largest challenge.

On the breezy rooftop of the swanky Boscolo Exedra Roma in the heart of Rome, where Netflix held the press day for its annual See What’s Next international event, Hastings explains Netflix must bid against competitors in every region for the rights to various content. Often, it loses out.

He says the dream is for all content on the Netflix platform to be available to everyone everywhere, but he anticipates global content rights will complicate this for years to come.

This quandary in part prompted Netflix to begin producing its own content, which it can offer on its platform worldwide. Although Netflix began commissioning original content only five years ago, it has had marked success with series such as House of Cards, Orange is the New Black, Narcos and Stranger Things, among others.

In South Africa, as in any market it enters, Netflix says it aims to have 30% penetration within seven years. Already, marathon viewing of TV shows has proved to be “immensely popular” with South African Netflix subscribers. Globally, it takes 12 days for the majority of Netflix members to have their first binge but, in South Africa, users generally take only five days — “one of the quickest countries globally”, Netflix says.

As far as country-specific challenges go, the volatile rand is a headache for Netflix, which bills in dollars. Apart from that, the key issue for Netflix is one it faces in other developing countries — internet connectivity.

“We really follow the fixed-line internet,” Hastings says. “With mobile, usually data costs are high. Generally, where the internet becomes more developed and lower in cost, then we tend to follow those trends.”

Hastings’ first-hand knowledge of Southern Africa goes way back. “I was a teacher in Swaziland — 1983 to 1986 — right out of college, you know, US Peace Corps. I got to travel around all the rest of South and Southern Africa. All pre-internet.”

Todd Yellin, Netflix’s vice-president of product, says there is a reasonable number of viewers in South Africa, although “it’s still a minority and a small percent of South Africans who have enough access to broadband to watch and enjoy Netflix”.

But it’s a challenge Netflix also has to deal with in South America and in much of Southeast Asia. “So we’re really pushing with our technology and our limits to find how do you take the fewest amount of bits you possibly can put through the internet to get a decent enough picture with quality enough sound,” Yellin says.

“So we have got better at compression technology and getting to the point where it doesn’t take a lot but it still takes some kind of floor of internet. Slowly internet [in these regions] is getting better. It’s getting better, it’s just going to take more time.”

Even with the struggle of connectivity, competition emerges wherever Netflix goes.

“What’s great about competition is the consumer gets many choices,” says Hastings. “What’s difficult about it is it’s hard on us because everyone’s competing.”

Hastings compares internet TV services to apps. “On your phone, there will be five or 10 apps you use a lot, and there will be some you hardly use. It will vary per person how many services they want and what they want to pay.”

Showmax shares this view. “This isn’t a winner-takes-all business,” says Showmax spokesperson Richard Boorman. “In our experience, people are happy to subscribe to more than one service as long as they value the content each service is delivering.”

So what are they competing for? For time, Hastings says. “It’s up to us to produce great shows and, if we do, you’ll subscribe to us.”

Like Netflix, Showmax doesn’t disclose subscriber numbers for the South African market but, Boorman says, on the basis of third-party data, “it appears that we are very much delivering what people like, with a customer base on par with Netflix in South Africa and significantly ahead of any other service”.

Showmax’s approach has been one of localisation, in fact hyperlocalisation, while also providing top-drawer shows from Hollywood and Britain, he says. Showmax also launched its own original show, Tlali’s Wedding Diary, in December last year and it had more than double the number of views on its first day than any other show had, including “global smash-hit shows with mega-million budgets”.

For international content, Showmax benefits from the growing reluctance of major studios to license content to major global subscription video-on-demand services (such as Netflix). “That means we can secure for our customers huge hits like The Handmaid’s Tale, Big Little Lies, Mr Robot and, of course, Game of Thrones,” Boorman says.

If content is an arts story, distribution is a business one, and it’s ruffling more than a few feathers.

“I found it particularly frustrating to have a debate about distribution mechanics with the Cannes Film Festival,” says Netflix’s chief content officer, Ted Sarandos, explaining why Netflix productions were banned. Laws in France dictate that a film screened in a French theatre cannot be viewed in homes for three years. Some on the board of the film festival — “who operate movie theatres”, Sarandos says — decided Netflix films could not compete if they were not screened in a local theatre. “It’s a trade-off I’m not willing to make for our French customers.”

Commenting on Spielberg’s view that Netflix films should not be eligible for the Oscars because they are typically not screened in theatres, Sarandos argues: “What is a TV movie? Is it because you see it on TV? Because most people see most movies on TV. We want to be where the audience is and the audience, for most movies, is at home.”

The nine movies in the running for best picture this year played to 635-million empty seats in theatres, Sarandos says. “You want to talk about what room is a movie seen in? Let’s begin with: Was it seen?

“The Academy awards will have a challenge over time, just like the Cannes festival of how do you stay relevant when the movies you are talking about are irrelevant to the audience.”

Netflix is seeking opportunities to produce original South African content to show on its global platform.

Many Netflix productions have already been filmed, in part, in South Africa, including the science fiction series Black Mirror and the historical drama The Crown.

“We do a lot of production [in South Africa],” says Sarandos. “When we go there with one of our shows, we meet a lot of creatives and story producers and we take pitches.”

The South African film Inxeba (The Wound) is available on Netflix in the US. But will its viewership there dictate whether Netflix will make content in South Africa? “No,” says Sarandos. “It’s very case-specific; we will make original content in South Africa, regardless.”

In measuring the success of a production, Netflix has different goals for every project. “Every project has its own viewership target relative to what it cost. So something relatively inexpensive is geared to a smaller audience and, if it reaches that audience, it is successful,” he says.

In other cases, the reach exceeds expectations. For example, La Casa de Papel (known to English-speaking viewers as Money Heist) was a series created with Spanish audiences in mind but became a worldwide success.

But completion rates are an important measure. “If someone clicks a show, watches one episode and bails out, we don’t count that as a view, we just count that as a sample,” Sarandos says.

Whether South Africans have an appetite for local content on Netflix is one question, but does the world?

“When you tell a story well, it definitely resonates,” says Hastings. Asked whether global audiences can identify with South African characters, he says: “It depends on the quality of the storytelling. Think of Asian content, that’s even more different and sometimes it crosses over.”

Asked about the sustainability of Netflix, Hastings says it only requires that more and more people subscribe.

With 125-million subscribers (55% of which are outside of the US) and six million more forecast to join this quarter, Hastings sees plenty of room to grow. In the world, outside China, there are 700-million who pay for television, 800-million who pay for fixed-line internet and two billion YouTube and Facebook users.

“It’s a big potential. How many will choose to pay us, it’s hard to say. But we have got a lot of room to grow.”

“We want to be where the audience is and the audience, for most movies, is at home”