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The Elephant In The Room, Possibly Speaking French

In this convergence of media and technology predicting success is tricky. Some might call it a fool’s game. Brilliant research and analysis aside, consumers can’t describe the next big thing. They’ll know it when they see it. Then, watch out.

fancy screenSubscription video-on-demand service Netflix reported mid-year financial results this week; delighting stock traders with its profits then disappointing with lower profit next quarter guidance when the company rolls out the service in six European countries. Broadcasters, pay-TV and otherwise, are nervous at new pressure on consumer entertainment spending. Show producers – and their agents – are lining up to pitch their best concept.

Second quarter revenue hit US$1.34 billion, up 25% year on year. Net income figures were even better, US$71 million, more than double like period last year. Netflix originated as a mail-order DVD service in the US, similar to Amazon with books. Both disrupted brick-and-mortar bookstores and DVD rental shops. And then they moved on.

In addition to quarterly financial results, Netflix claimed 50 million subscribers worldwide, more than a quarter outside the US. The service has operated in the UK and Ireland for two years, then Scandinavia and then the Netherlands abour a year ago. As hinted for several months, Netflix arrives in France, Belgium, Germany, Austria, Switzerland and Liechtenstein in September, largely countries with French or German-speaking populations. Despite the “at projection” financial results, stock traders punished Netflix for suggesting the European launch will lower Q3 results.

The prospects in Germany and other German-speaking countries for subscription TV services have long been debated. With public television channels remaining free-to-air and compulsory household license fees to pay for them, pay-TV operators have a built-in revenue threshold. Viewers naturally compare cable and pay-TV offerings – and charges – with programming on public TV versus the €18 to €30 per month license fee. 

Germans already have a choice of subscription video-on-demand (SVoD) services: Vivendi’s Watchever, Amazon’s Prime Instant Video, ProSiebenSat’s Maxdome, Deutsche Telecom’s Videoload and, of course, Apple’s iTunes. To cut through the competition Netflix will need to find the price point, not discussed in this week’s announcement, and attractive content. Among hardcore TV fans Netflix has something of an edge with well-received original serials like Game of Thrones, Orange Is The New Black and House of Cards. Netflix has licensed to Sky Deutschland the second season of House of Cards, but in the post-modern age of binge viewing multi-season runs have become passé. Several sources suggest Orange Is The New Black will be included in the new European offering.

The French market is, of course, different. SVoD services have popped up but current law delays online release of films for 36 months after theater release. Serials proprietary to Netflix could be a “tsunami” (Europe 1 July 22) of TV viewing. “We want to invest in French society and French content and we want to give an avenue for French content to get out around the world,” said Netflix CEO Reed Hastings in the Q2 investor conference call. “We’re looking to make some investments with original content. So instead of House of Cards, it might be called House of Versailles.” That was a joke.

Joking aside, Netflix is constructing a server facility in Paris with “the capacity to provide five million subscribers,” noted Les Echos (July 21).

Film and TV production houses have been rapaciously gobbled up by bigger film and TV production houses, generally those owned by very big broadcasters and distributors. Netflix is a competitor for them all, which became very apparent with the US$80 billion offer – so far, rejected – by 21st Century Fox, principally owned by the Murdoch family, for Time Warner. Both 21st Century Fox and Time Warner have huge production and distribution capacities. Time Warner owns the HBO network of cable and satellite channels that was a game-changer in the US TV market a generation ago as much as the original Fox TV channel. Rumors abound of Time Warner bidding for Netflix to thwart, in part, a take-over by 21st Century Fox.

As with every disruption there are opportunities. “I just signed a two year contract with Netflix. We go in September,” said German show host and comedian Harald Schmidt, quoted by der Standard (July 22). “I have no idea what Netflix is but according to (my producer) it is hipper than Twitter.”


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