The Netflix Challenge: The Two Major Hurdles In The Australian Market For The Service Transforming The TV Industry

The estimated 200,000 Australians who cheat so they can be recognised as local US subscribers of Netflix and access a deep well of entertainment content may be better off continuing the arrangement even if the on-demand internet streaming giant opens shop in Australia.

The market is getting crowded with choices of platforms growing quickly. Already, there's pressure on price with reports Foxtel is about to drop it's mainstream subscription levels.

All the big media companies want a piece of the prize: Ten, Nine and Seven television networks plus Fairfax Media and smaller players making pure online streaming plays. New Corp, of course, has a large stake through Foxtel, the dominant cable TV company.

Industry analysts IBISWorld put the annual value of just movie and video distribution in Australia at $1.8 billion. And subscription tv is worth $2.8 billion, according to PwC.

Megan Brownlow, executive director at PwC, says subscription TV will go from a 20% penetration to 48% of households by 2018 which puts some sort of pay tv service in half of Australian homes.

However, the majority of that growth will be internet streaming services.

Foxtel, which with Telstra as a 50% shareholder and good channel to market, will be a leading player.

Still Australians continue to access and love Netflix despite local offerings.

Most Australians stay with Netflix longer, according to analysis by Pocketbook Australia, a personal finance app. "Netflix customers also stay longer, with over 82% staying on after 60 days, compared to 74% for Foxtel and 39% for Quickflix," the analysis said.

And to access Netflix, this is how Australians do it: sign up to a service which assigns an IP address that makes Netflix think you're coming from a US internet connection, subscribe, and then access as much film and TV content as you want. It all costs about $13 a month including the Netflix subscription fee.

Many may want to continue doing this when, as is considered inevitable by some, Netflix moves into Australia. Because the local fees are expected to be higher, and the content available will likely be smaller than in the US.

The pile of accessible content will have shrunk is because of a rights system, considered archaic by some, that involves content owners sell the rights to movies and TV series by geography rather than by platform.

This made sense in a world without the internet when DVDs had to be shipped across the world, placed in stores and then sold over a counter. But not so much when content can be instantly streamed anywhere in the world.

As a result of it, Netflix may have the rights to a particular movie in America, but no-where else in the world. So it can't show that entertainment in, for example, Australia.

Those rights may have been assigned to another vendor or, in some cases, the original copyright holder may not even have the rights to a particular region, such as Australia, because those rights are held by a co-producer of a movie.

And from the perspective of sitting in Australia, we can't determine what will be missing when Netflix operates in Australia because we don't know what licensing deals are in place.

A legacy licensing system

If it sounds overly complicated, that's because it's essentially grown out what happens with books which were traditionally printed and distributed by geographic area.

The indie book movements, of course, doesn't work like this. Generally, a book will be sold by platform with no geographic restrictions except those imposed by the vendor.

Traditional publishers would buy, either with cash but more commonly with a bit of cash up front and a a percentage of sales called a royalty rate, the right to print exclusively for a set period of time in certain regions such as Canada, Australia or the UK.

In Netflix's case, it is entering a market where multiple deals have already been done by various Hollywood production houses with different platforms and vendors in Australia.

The rights to some content may not be available until those rights lapse, which could be several years away.

So Netflix's big problem is how not to lose those 200,000 already using the service, albeit by cheating the copyright deals, and at the same time convincing more Australians to sign up but this time directly and legitimately.

It's a difficult balancing act.

The entertainment houses and purveyors of streaming media in Australia are watching closely for Netflix's move.

Everyone believes Netflix, which has about 509 million subscribers, will make a move - it's just a matter of when.

Last month Graham Burke, the co-CEO of Village Roadshow, told ZDNet: "[On] Netflix, they're talking to our people about supply of products, so they are opening and coming to Australia."

Business Insider asked Netflix about its plans, and they replied: "We don't comment on rumours and have no comment with regard to Australia, but if we do we'll let you know."

Many local players believe the move will be soon.

Craig White, the CEO of easyflix.tv and a former sales director at at 20th Century Fox Australia, sees Netflix in Australia in the next few months.

"I think they’re coming, I think it's inevitable they're coming," he says.

He notes the slip which became public that Netflix was in commercial negotiations with local content providers and/or studio representatives.

There have also been reports that Netflix has been eyeing off local platforms, including ASX-listed Quickflix, as a possible way to hit the local market with content deals already in place.

With more has 120,000 paying subscribers, a credible streaming on-demand platform and a deep DVD library, Quickflix is much like a small version of Netflix.

Quickflix also has a fairly open share registry with more than 60% held by small investors which means a raider could get control. Note: Nine Entertainment recently bought an 8% stake in Quickflix which indicates there's value there.

And Fairfax Media is reported to be seeking a stake in Nine which would give it an indirect route to Quickflix.

However, Netflix says it isn't looking in that direction. "We are not interested in QuickFlix," it told Business Insider.

And Craig White from EzyFlix.tv says the speculation about whether Netflix is acquiring in Australia can be ruled out.

"The fact is that they have never acquired a business as part of their international growth," White says.

"It's fair to say, and I think they've even said it themselves, they are not looking to acquire anyone else.

"They don't need a brand and they don't need a platform and they don’t need to inherit any content rights.

"Their most immediate challenge is the Australians who are getting parallel access.

"How will those Australians feel when asked to pay quite likely a premium for less content to access the service more legitimately here?

"I suspect they will have a lesser service in Australia probably at a slightly higher price.

"Even when Netflix launched in Canada it did not launch with the same title count it had in the US.

"Will they lose customers that they've already got here or will there be a net gain of entirely new ones?"

And Netflix is up against a range of local players including Foxtel with Presto, Quickflix, EzyFlix.tv and then there's Google Play and iTunes. And the television networks are all getting in streaming, including Nine which bought that stake in Quickflix.

Telstra will have a much easier time of it than any new player trying to start from scratch says Megan Brownlow of Pwc .

"The thing with Netflix is that they don't have the content rights for this territory. Everyone’s expecting them to enter but I believe it will not be easy for them to grow in a crowded market with strong incumbents," she says.

PwC, according to its annual media outlook report, says Netflix completed a capital raising in early 2014 to fund international expansion and original content, making Australian Netflix a possibility.

Should such a player enter the market, it may be integrated into existing platforms such as Apple TV or Fetch TV for an additional monthly fee.

The prospect of a Netflix style proposition in Australia is seen as a positive development for some of the smaller players.

"We would be receptive to providing integrated access to such a service as simply another subscription content pack. Fetch TV views these services as complementary, not competitive with the Fetch TV proposition," according to Fetch CEO Scott Lorson quoted in PwC's analysis.

Apple TV and Xbox Live already provide this interface in countries where services such as Netflix are available.

However, Netflix faces barriers in slower internet download speeds in Australia and the fact that Foxtel and the free-to-air television networks hold the rights to much premium content.

Communications minister Malcolm Turnbull believes country-based copyright restrictions will "shortly be a thing of the past and as we move to a global digital economy" following a bipartisan inquiry which recommended geoblocking be discouraged or banned.

Others disagree, saying geographic restriction is integral to the content creators, the studio business models and platforms such as Foxtel.

Stephen Langsford, CEO of Quickflix, sees Netflix currently getting a free ride because it's picking up Australian subscribers without the high price of licensing content for the local market.

Even if Netflix doesn't have an interest in working with a local partner, Nine has already bought a stake in Quickflix and the Ten Network says it's actively seeking a partner.

Quickflix shares have been traded a lot more actively in recent months with the price going from 0.7 cents a share in June to 1.2 cents now.

"There's certainly lots of interest, that's for sure," Langsford told Business Insider.

"Given our lead position in rolling out our service, and the last few years of investment to get to streaming, we are seeing lots of growth in streaming at a time when larger players, particularly the broadcast media players, are saying they need to diversify and get into this sector.

"There's lots of discussion about Netflix and I guess that puts focus on the broadcast media players.

"Notwithstanding what they would like to do, do they have a runway sufficient enough to build their platform and a proposition?

"I guess that is fuelling the speculation around what the free-to-airs may or may not do."

Langsford says he's been investing considerably in brand and the platform.

"Our brand is now recognised for digital and online streaming of movie and TV entertainment," he says.

"You don’t develop a brand overnight. We have a run rate revenue of over $22 million and over 120,000 paying customers. You don’t recruit that customer base overnight.

"When Nine comes out and says it’s going to be a $60 million to $80 million investment, they are probably about right.

"We are already seeing new entrants in the markets such as Foxtel Presto.

"It just goes to show that if you want to get going, get into the market tomorrow, no amount of money is going to light everything up in a sort amount of time."

Langsford won't comment about who he's speaking on strategic partnerships.

"I can say we are having strategic partnering/investment discussions with international and local industry players," he says.

"We think the time is right given our momentum and where we are with our platform, our device roll-out and our content arrangements that potentially partnering with a larger player makes a lot of sense to get going at full tilt."

Here's how PwC sees the market growing over the next few years:

Originally published on Business Insider