Netflix Expansion Worries Some, Welcomed By Others

BMI View: The potential for Netflix's European expansion initiative to disrupt the region's traditional pay-TV business models is well-recognised. Broadcasters and pay-TV providers are responding with their own streaming services - the latest reportedly emerging in Austria. However, success is not guaranteed and players should collaborate with the US giant, as Deutsche Telekom seems set to do.

Kurier reports that ?sterreichischer Rundfunk (ORF), Austria's national public service broadcaster, will acquire video-on-demand (VoD) operator Flimmit in order to develop a commercial video streaming service. Like many of its peers, ORF has been losing audiences to cable- and satellite-only channels as well as IPTV services and, now that it is facing additional competition from Netflix, it is understandably keen to develop a rival service of its own.

Flimmit currently offers rental-only and download-to-own access to more than 2000 Austrian movies, series and documentaries. We expect ORF to move Flimmit to a more sustainable subscription-based model, focused on flat monthly fees, and to make a significant quantity of archive and future content available via the platform.

Broadband TV Services Take Off
Austrian Broadband Bundle Subscriptions By Type, 2012-2013

BMI View: The potential for Netflix's European expansion initiative to disrupt the region's traditional pay-TV business models is well-recognised. Broadcasters and pay-TV providers are responding with their own streaming services - the latest reportedly emerging in Austria. However, success is not guaranteed and players should collaborate with the US giant, as Deutsche Telekom seems set to do.

Kurier reports that ?sterreichischer Rundfunk (ORF), Austria's national public service broadcaster, will acquire video-on-demand (VoD) operator Flimmit in order to develop a commercial video streaming service. Like many of its peers, ORF has been losing audiences to cable- and satellite-only channels as well as IPTV services and, now that it is facing additional competition from Netflix, it is understandably keen to develop a rival service of its own.

Broadband TV Services Take Off
Austrian Broadband Bundle Subscriptions By Type, 2012-2013

Flimmit currently offers rental-only and download-to-own access to more than 2000 Austrian movies, series and documentaries. We expect ORF to move Flimmit to a more sustainable subscription-based model, focused on flat monthly fees, and to make a significant quantity of archive and future content available via the platform.

The revitalised platform would, most likely, be accessible via browsers installed on computers, smartphones and smart TVs, but a dedicated app should also be considered, expanding the service's reach to games consoles and cable/satellite set top boxes. ORF should also consider establishing internet peering agreements with Austria's broadband network operators to ensure high quality and uninterrupted streaming. This is Netflix's preferred modus operandi in most markets and has proved very successful for the US-based giant.

Although branching out into streaming will help many public broadcasters continue engaging with an increasingly fragmented audience, competing directly with Netflix is no panacea. Streaming can complement existing offerings and investment should therefore be focused on developing complementary, rather than competitive, content. We believe that platform operators - be they cable/satellite, telecoms or broadcasting - should work with Netflix where possible.

This view seems to be playing out, as reports suggest that Deutsche Telekom (DT) is finalising a partnership deal with Netflix that would, presumably, allow Netflix access to DT's extensive European broadband networks. DT already has cable, satellite and TV operations across its European footprint, and these have proved useful in attracting and retaining customers to its converged services platforms. DT clearly recognises the value in protecting its investment in this business and user base by working with Netflix.

Austria is already well served with converged services. Regulator RTR notes that, at the end of 2013, 1.743mn broadband consumers took bundled services, up from 1.657mn a year earlier. Broadband and TV bundles grew by 170.9% in 2013 to 111,444, while triple-play (TV, telephony, broadband) bundles increase by 21.1% to 517,104. As Austrian consumers seem happy to take multiple products, we believe that deep, complementary products will find favour. As such, we expect Netflix to do well in Austria but - unless ORF is prepared to invest heavily in overhauling its new business - competitive offerings such as Flimmit will flounder.

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Geography: Austria, United States
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