Netflix expansion amidst increasing competition

August 11, 2021

Greg Sigel

SVP – Partnerships

Netflix’ expansion into the mobile games market highlights Netflix’s focus on boosting its global revenues while simultaneously funding the production of unique content customised for audiences in different countries of the world.

Boosting its appeal in geographies outside of its native North America matters a lot to Netflix. The US subscription video on demand (SVOD) market – Netflix’ traditional growth engine – looks to be at saturation point, and rivals are expanding their subscriber base at a faster rate.

The decline in the number of new Netflix subscriptions during the second quarter of this year (down 85% on Q2’20)[i] was expected given the unprecedented surge in sign-ups at the height of the pandemic. But equally, there is little doubt that Netflix share of the US SVOD market has also been eroded with the increasing competition. The pressure is coming not only from a resurgent Amazon Prime after it enticed more subscribers onto its ecosystem of entertainment and eCommerce during the lockdown but also a succession of new entrants launched in the past couple of years.

The scale of the competition has led some to suggest that the US SVOD market is now at saturation point, with the proportion of households having a subscription remaining at a consistent 74.6% in the second quarter of 2021.[ii] Kantar estimates that new sign-ups to US subscription video on demand (SVOD) services in the second quarter of 2021 (excluding advertising-supported services and including activated bundle deals) dropped almost 13% year on year.

Amazon Prime Video’s share of new SVOD subscribers in the three months ending June 2021 was an impressive 24.2%, up from 18.7% a year earlier. HBO Max pulled in 12.5% and Disney+ 11.6%. Newly launched Discovery+ (formed earlier this year by the US$43bn merger of AT&T owned WarnerMedia, and cable channel Discovery (see our blog WarnerMedia and Discovery combine to form a streaming giant) accounted for 9%.

Netflix came in fifth place with 8.4% of new US SVOD subscribers in Q221, though significantly ahead of Hulu, Apple TV+ and Paramount+ which accounted for just 3.2% (a steep drop from the 11.8% in Q121, its first quarter of operations). While the Netflix subscriber base remains much more significant than those of its competitors (210m vs 104m for Disney+, 54m for NBCUniversal’s Peacock and 36m for Paramount+ for example), its share of new subscribers has trailed most of its rivals over the last four quarters.

Overseas growth and original content will drive expansion

However, the signs are that Netflix is successfully growing its overseas business, with its platform now available in over 190 countries (the only exceptions being China, North Korea, and Syria). Statista research records that Netflix added 36.5m paid subscribers globally in FY20, 30.3m of which were located outside the US and Canada. And while its North American subscriber base shrank around 400k in the second quarter of 2021, other world regions saw continued expansion.

Netflix is rapidly approaching the point at which Europe, the Middle East, and Africa (EMEA) region will become its single most significant pool of customers – growth here expanded 29% from 51.8m subscribers in FY19 to 66.7m in FY20. Yet at the same time, while revenue derived from those subscribers in North America in Q420 was US$2.98bn, paying customers in the EMEA region generated just US$2.14bn.

Both Netflix and its SVOD competitors know that original and exclusive content is crucial to pulling in and keeping new subscribers, particularly in countries where English is not the first language. Consequently, they are ramping up the amount of money they pay to produce that original content – writer-director Alex Kurtzman (Transformers and The Mummy) recently signed a US$160m, five and a half year deal to make films and shows for Paramount+ for example.[iii] Similar agreements with Shonda Rhimes and Ryan Murphy (Netflix) and Jordan Peele (Amazon Studios, also in the process of acquiring MGM for US$8.45bn) are intended to give other streaming platforms an edge in accommodating what seems like an insatiable consumer appetite for new shows.

Netflix spent around US$11.8bn on content in 2020, significantly less than the US$13.9bn it spent in 2019, primarily due to production delays caused by coronavirus lockdown restrictions. Statista estimates its investment levels will jump again to around US$17bn in 2021, however. Reports suggest that Amazon too spent US$11bn on video and media in 2020, though up 41% year on year from US$7.8bn in 2019.[iv] The figure is likely to rise again once it’s US$8.45bn purchase and subsequent integration of film studio MGM is complete.

Delicate balance between content costs and revenue

There is an apparent dilemma for Netflix, Amazon and other US SVOD companies trying to grow their overseas revenue further. Generating enough turnover from lower-cost subscriptions in less affluent parts of the world while simultaneously investing in the production of unique and localised content to keep those viewers happy.

Netflix introduced a mobile-only subscription plan for consumers in Nigeria, Kenya, South Africa and other sub-Saharan African countries in July this year [2021], with prices starting at US$3.99 a month in a bid to attract more customers in the region. Other countries, including India and Malaysia, have had similarly low-cost plans since early 2020. After price increases implemented in Europe during late 2020/early 2021, Netflix’ average revenue per subscriber in the EMEA region climbed to US$11.66 in Q221, second only to North America (US$14.54) according to Statista. The figure is slightly less for the Asia Pacific at US$9.74, while turnover from subscribers in Latin America was US$7.50.

Those numbers have been rising steadily for the last few years, but so have content production costs – the challenge for Netflix is to maintain a balance that delivers both subscriber growth and profitability, something that the addition of a games portfolio to its subscription just might help it achieve.

[i] Netflix beats on paid subscriber growth, but misses earnings expectations, CNBC, 20th July 2021

[ii] Has the US video streaming market reached saturation?, Kantar, 14th July 2021

[iii] Can Paramount+ Succeed? One Producer Hopes to Make It So, The New York Times, 1st August 2021

[iv] Amazon Spent $11 Billion on Prime Video and Music Content in 2020, up 41% From Year Prior, Variety, 15th April 2021

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