Netflix Is About to Discover That Britain Bites Back
It’s been a tough few months for Reed Hastings.
Since announcing an unpopular price hike in October, the Netflix (NFLX) chief executive officer has presided over a grim cascade of events that has seen the company’s prospects plummet. His drastic answer to the price problem—a surprise plan to separate the streaming and DVD businesses—got a cold reception, forcing him to rapidly back-pedal on the scheme. In the end, all he has to show for the company’s mad season is a confusing, sprawling mess largely composed of hordes of pissed-off customers and a crumbling share price.
Given all of this, Hastings—and the business he runs—are desperate for some good news. And so we see the launch of Netflix in the U.K. and Ireland, which is certainly one way to try to get the company’s 2012 off to a strong start.
The basics, which we’ve already covered, are pretty familiar. British users pay £5.99 a month, while in Ireland it costs €6.99 (both around $9 USD). In return, they get access to a library of on-demand movies and television programs streamed to a device of their choosing. The service has forged deals with many local broadcasters, including the BBC and Channel 4, to provide a mixture of old and new programming on-demand. It has carried over rights for some top American TV series, and acquired a backlist of movies from most of the major studios.
It’s fair to say that the launch is off to a solid, though not spectacular, start.
Still, you can forgive Netflix for thinking it knows how to build up a business like this and make it work—after all, if it can crack the world’s most valuable TV and movie market, what’s to stop it doing the same elsewhere?
The truth is, however, it’s just not that simple: Establishing itself on the other side of the Atlantic will not be easy, and major success could be almost impossible. Here’s why.
First, Netflix’s rivals in the U.K. and Ireland are a lot more established. The biggest obvious competitor is Lovefilm, a DVD rental and on-demand streaming service that was bought out by Amazon (AMZN)a year ago.
Streaming service Blinkbox, meanwhile, has been going great guns since launching in 2006, and it has the marketing support of majority shareholder Tesco (TSCO:LN), the world’s second-most profitable retailer after Wal-Mart (WMT). Google (GOOG), at the same time, appears to have been concentrating its efforts to push YouTube rentals in Britain, with a publicity blitz in recent months.
These all make entry into the market complicated for Netflix, but not insurmountable.
Instead, the biggest stumbling block could be the existing TV players.
Two Markets Divided by a Common Language
Netflix may think its existing relationships and successes will be transferable—particularly ones that speak the same language and share similar tastes for Hollywood movies and American television. But what’s tough for outsiders to understand is that the shape of British broadcasting is very, very different from the other side of the Atlantic.
Take Rupert Murdoch. In America, for example, he’s a major media operator and his Fox (NWSA) network is a big deal. But in the U.K., he’s even bigger. His British TV business, Sky (BSY:LN), is much more advanced and influential, and has found great success by being very aggressive and forward-looking. Sky is prepared to pay over the odds to score rights to popular shows and jealously guards exclusive movie content as a way to safeguard its core subscription TV service: all things that could prove significant obstacles to Netflix’s ambitions.
In addition, Sky has invested heavily in mobile streaming apps with SkyGo, and has just announced a stake in Zeebox, an innovative TV guide app that I wrote about a few months ago. It’s not scared to move with the times, and it’s certainly going to continue to innovate, competing in that area with Netflix’s multi-device strategy.
The biggest difference that Netflix will find between America and Britain, however, is one that only takes three letters to explain: the BBC.
The role publicly funded TV plays in the U.K. and Ireland is hard to overstate. The biggest streaming service here, by a long way, is the BBC’s iPlayer: a high-quality product designed specifically to stream the latest episodes of some of the most popular TV in the market.
Going up against that is a very tall order. Sure, Netflix, Lovefilm, and others have made deals to get a hold of some BBC content, but they are largely getting non-exclusive access to a back catalog of older shows—old Doctor Who episodes, for example. But the iPlayer is free, and because it isn’t looking to extract maximum commercial value from it, the BBC isn’t handing out rights to new content. That makes it nearly impossible to compete with.
The Battle of Hastings
None of this makes it impossible for Netflix to succeed, but it does mean the company’s definition of success has to be significantly altered.
From the outside, the British and Irish market looks like a vast patchwork of services and providers: perfect territory for a big, swaggering giant to come in and clean up. In fact, the truth is just the opposite: For Netflix to get anything like the success it has had in America, it will need to find a way to get around Murdoch and the BBC, two of the world’s most powerful media forces.
They have no reason to work with Netflix and every reason to actively work against it, meaning that where Reed Hastings may have thought crossing the Atlantic was one way to get over his troublesome few months, in reality, he may have just laid the foundation for another year of headaches.
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