Why Netflix Competitors Target Countries, Not Genres

Streaming video service iflix, the Netflix of Southeast Asia, has raised at least $90m, bringing their total amount raised to $165m. The investor roster is not who you’d expect for investors buying into an early-stage growth company — they raised most of their funds from cable companies. Cable companies care about Netflix because they provide the externality that Netflix relies on: cheap, highly-reliable bandwidth. If there’s only one major incremental user, that user has a strong negotiating position; if there are more, the bandwidth sellers have the upper hand.

It’s expensive to compete with Netflix for general-interest television. Companies like Hulu can do it because they’re joint ventures with broadcasters. Amazon can do it because they bundle streaming with Prime; their video offering grows their ecommerce business. But most competitors try to restrict themselves by either genre or geography: AMC-owned Shudder is the Netflix of horror, and iflix is the Netflix of Southeast Asia.

Why does the Netflix of Southeast Asia have more potential than the Netflix of Horror?

Bundling: a subscription service is cheaper if it can charge every viewer a fixed price even though different people value different subsets of the same offering different amounts. Suppose Alice is willing to pay $8/month to watch horror and $2/month to watch comedies, and Bob is willing to pay $2/month for horror and $8/month for comedies. A service selling both horror and comedy can sign both of them up at $10, for a total of $20 in revenue; a service selling just one bundle can either sign one of them up for $8 or both of them up for $2 each. Enumerate more people and genres and the bundling argument only gets stronger; by the time you get to Yvette’s love of Polish documentaries and Zebulon’s fanatical devotion to pawn shop reality TV, the bundle outperforms every other strategy.
There are two cases where bundling fails. First, some genres can have negative appeal to broad audiences. The Netflix of pornography or blood sports won’t be Netflix. The other, more transient case is when a genre focus lowers customer acquisition cost. If every horror fan knows about Shudder (my sample size here is small but compelling), capturing that small audience of fanatics will be cheap. This works best for polarizing genres: everyone you advertise to is either 100% in your target market or 100% not. (Incidentally, the Netflix of Anime has raised $27m.)
Bundling offers an information advantage: Some people like science fiction movies because they serve up interesting ideas. The same plot with a wizard instead of an alien would be equally cool. Some people like special effects — they’ll watch explosions even if they don’t happen in space. And some people love particular actors or directors. Netflix’s broad library lets them measure all of these effects and run a principal component analysis on your taste. With fewer data points, that’s harder to do, and false positives are more likely.
Rights are a regional problem: Studios like to parcel out show rights by geography. There are all sorts of historical reasons for this, which Netflix and Amazon are vigorously fighting, but it remains a fact of the business down to the hardware level. This means that getting rights to many movies in one country is a comparatively easier biz dev problem than getting the rights to many movies in many countries. And since the slow speed of big companies is a leading cause of unnecessary startup death — money flows out the door whether the person you’re negotiating with is on vacation or not — optimizing for a quick BD process is a win.
Infrastructure is a local problem: Telcos and governments are tied with movie studios near the bottom of the easy-to-do-business-with rankings. And ultimately, anyone selling streaming video is at the mercy of the companies that own the wires, and the governments that regulate them. BusinessWeek had a great piece a few months back on Netflix’s extremely successful Brazil strategy. In addition to good content:

[T]he team in Brazil got to work installing web servers around the country. Along the way, they teamed up with telecommunications giants such as Telefónica, which were in the process of introducing high-speed broadband nationwide. Netflix supplied the companies with additional servers at no charge.

Smartphone-first markets are fundamentally different from desktop-first markets: Netflix is famous for making the transition from DVDs-by-mail to video-by-web, but the transition from video-on-PC to video-on-any-device is, at least in dollar terms, an even bigger one. The companies that start with the expectation that people will watch on phones have a totally different user experience in mind: they need to cache content, they can expect users to pick what to watch on a slower connection than they end up using to watch (you browse shows on 3G before connecting to Wifi to view one), and they’re less concerned about piracy (nobody has a terabyte of pirated movies on their Galaxy S7). Netflix is still making the transition to smaller screens; their developing world competition has a head start.
Netflix is involved in everything, but not everywhere: Netflix is, technically, available in every country that’s not facing economic sanctions from the US (except China). But in many of those countries, Netflix doesn’t actually have local language or local translation. They’ve localized in a few places, and cited a resulting uptick in use, but in many markets they’re just not there yet.

Building a sustainable streaming business is hard. Depending on whether you’re Netflix bull or a Netflix bear, it’s been done either one time in history or zero. But there’s demand for Netflix clones — not just from consumers, but from wealthy telcos who dread negotiating against a streaming video monopoly. A genre-focused competitor is easier to imagine, and theoretically much less work, but a regional competitor is the best bet.