Why Netflix is Just Warming Up

I’m in the process of moving house again. And part of that process involves deciding what services to connect.

Of course there’s the obligatory gas & electricity, water & sewage. But there’s also the biggest decision of them all — internet and TV.

It’s a difficult decision to make over here in the UK. The reason being there’s actually quite a bit of competition.

In terms of TV I get to choose from there’s Sky, Virgin, BT and Freeview.

With the internet it’s even more, Sky, Virgin, BT, TalkTalk, EE, Plusnet, John Lewis Broadband, Fuel Broadband and Post Office.

I’ve made my decision, which I’ll tell you about shortly. But in the process I went through a bit of a dilemma. My deciding factor boiled down to a question about TV viewing.

How will I consume the majority of TV?

What that means is, will I pay silly prices to a cable provider (Sky, Virgin, BT) to have access to their TV channels? Or will I access the Freeview channels (for free) and stream anything else through my internet into my smart TV?

The thing is, there’s a few shows exclusive to Sky. And I really like them.

Game of Thrones, True Detective and Hannibal. And then of course there’s the sport. That’s the killer…at least for me.

My problem is the same for many Australians. Except instead of Sky, it’s Foxtel. If you’re unaware of Sky, it’s almost exactly the same as Foxtel.

Sky more or less has a monopoly on good sport. That’s why they and BT forked out £5.136 billion (AU$10.43 billion) for just the Premier League rights.

But there’s more. The Ashes is on in a week and a half. The only way to watch any of the games is on Sky. They’ve created a dedicated Ashes channel just for the series. They do the same thing with the SkyF1 channel and European Football.

So if I really want any of the good sport then I guess I’d have to get Sky right? Wrong. It just costs too much, and I can watch other stuff streamed off the internet.

A bit of something is better than nothing right?

The way in which we consume TV has changed dramatically. You know it, I know it and TV companies know it.

Gone are the days of scheduled programming. I watch more things on catch up, on-demand or through some kind of iPlayer app than I do ‘scheduled programming’.

You see right now I don’t have Sky. I’ve been in a sports drought. The only sports I can legally watch sports are on Freeview and through my WatchAFL subscription.

However things have changed a bit. You see, Sky realised they were losing customers. Thanks to Netflix, Amazon Prime and the success of Freeview streaming apps, they knew they had to change.

In mid 2012 Sky launched NowTV. This is a no-contracts service where you can subscribe to a pack of channels for a daily fee (for sport) or a monthly fee (entertainment or movies packages). It’s only now just starting to get popular.

Foxtel launched a similar service in late 2013, Foxtel Play. You can rest assured when Sky does something here in the UK Foxtel follows suit pretty quickly in Australia. Foxtel Play is battling with pitiful user numbers. It will slowly grow, but while it does Foxtel will lose subscribers.

Why is that? Simple, internet streaming.

All I want is a fast internet connection. So I’m connecting Virgin’s 152Mbps fibre broadband.

That leaves me with all the Freeview Channels (including streaming catch up channels), Amazon Prime, NowTV on my smartphone or computer (which I can stream to the TV) and most importantly, Netflix [NASDAQ:NFLX].

When the Ashes rolls around I can get a weekly pass from NowTV. I can play it through my phone or laptop straight to the TV. And in between tests I don’t need a full subscription to a bunch of channels I’ll never use.

Now for Sky, this isn’t really a great outcome. Because the end result is I spend less money with them. But if they didn’t have NowTV, I would spend nothing with them.

Better some than none, as far as they’re concerned. Foxtel in Australia is exactly the same. They will start to lose subscribers because most people will figure out they can stream what they want when they want it from other services like Netflix.

And this week a Roy Morgan survey showed just how in trouble Foxtel is. The Roy Morgan survey said that Netflix in Australia now has over one million subscribers (pick jaw up off the ground).

That’s right. Just three months after launching down under, Netflix has smashed every other streaming service in Australia.

This chart from Roy Morgan is hilarious. And a damning indictment on how bad TV services are in Australia.

Source: Roy Morgan / Via newsmaker.com.au

Click to enlarge

Here’s the thing. Foxtel still has around five million households subscribed to their services. But they have had a monopoly on cable TV in Australia for 20 years.

If Netflix was to get sports it would leave the likes of Foxtel and Sky dead in the water.

Imagine if Netflix was able to pick up the rights to the AFL, the Cricket or a global sport like Tennis or Golf? Imagine pretty hard, because it’s only a matter of time.

The numbers tell the story

In the UK it took five months to hit one million Netflix subscribers in 2012. Australia just smashed that to bits. The three biggest markets for Netflix are the US, Canada and the UK. And the UK is still a growing market, which has only had Netflix for three years.

The point to all this is simple. Cable TV is finished. They’ll live on, in the form of a pick & mix option where you can buy a day or week pass to get things like sports or one off TV series (Game of Thrones).

But the future is in Netflix.

If you don’t believe me, think about this. In the US (Netflix’s first market) about 30% of the households subscribe to Netflix. If they can achieve that in every ‘developed market’ they’ll tear traditional TV companies to shreds.

In the UK it would mean around 7.8 million subscriptions (over double what it’s at now).

In Australia there are currently around 9.1 million households. 30% would be 2.7 million subscribers. That too is more than double what Netflix has now.

The target should be 30% in every market. And if it is, then the international expansion of Netflix is just warming up. To me the rapid growth in Australia shows just how good this company is.

What I’m saying is that the stock might be hundreds of percent higher than it was a few years ago. But with Europe still to come, Japan on the cards and more growth in the UK and Australia, I don’t think it’s slowing down any time soon.

Sam Volkering
Editor, Money Morning

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Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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