The impact of Netflix on MultiChoice and the South African TV market

Netflix’s entry into the South African market has created much noise. What might this mean for competition in the South African pay-television industry?

This is an important question for South African consumers and incumbent rivals, but is also an interesting one for economists.

From a competition economics point of view, the answer to this question depends on the closeness of competition between Netflix and other pay TV providers.

Netflix offers a purely on-demand media entertainment service while satellite TV provides a mixture of scheduled media with limited on-demand features and movie rental services.

Competition theory argues that entry by new competitors is typically followed by benefits to consumers in the form of better prices, improved quality and greater innovation.

It is questionable whether there is currently much competition in the pay-tv market, given the market structure. Local video-on-demand (VOD) rivals are clearly in the immediate line of competitive fire as they provide internet-based on-demand services similar to that of Netflix, albeit each with their own library of content.

The battleground here is not just over the price of the service, far from it.

What is important, among other things, is the quantity, quality and variety of content (which depends on content licencing), the fluidity and usefulness of the interface for browsing content, platform accessibility and of course, the algorithm or encoder by which content is delivered to your screen.

The battle over content licencing is especially important as this dictates the winners and losers in terms of catalogue depth.

Netflix does not have rights to a significant portion of content in this territory for the time being (including local content).

With respect to the streaming algorithm, a superior service can deliver a better balance of video quality with minimal or no buffering given a set connection speed relative to an inferior service.

We think we know who wins here, but probably best to leave this call to technical specialists and user reviews.

Looking beyond the VOD market, it is important to consider whether Netflix poses a threat in the satellite TV space as well. From an economic point of view, substitutability between products determines if consumers are able to switch or not.

In this instance, it depends on a number of factors including consumer appetite for on-demand media in relation to scheduled programming, and importantly in sports-mad South Africa on the sports offering of any potential rival.

Satellite TV catch-up services, while on-demand, are designed for a different purpose and have very limited content, so are unlikely to be a substitute to Netflix.

Movie rentals have a pay per view model, which is also unlikely to be directly substitutable for the all-you-can-eat buffet model offered by Netflix. Finally, Netflix does not offer sports, which DSTV has exclusivity over.

Exclusivity over sports may have a dampening effect on the willingness of consumers to switch to alternative content providers.

Our working assumption here is that those consumers who highly value watching live sports in their homes (available only on DSTV premium and to a limited extent on DSTV Extra and Compact), are likely to remain the incontestable portion of the market for the time being.

DSTV’s total number of subscribers, as of the end of 2015, were around 5.4 million, and based on historical data (2012), the proportion of premium subscribers was approximately 40%.

Assuming this percentage remains valid, that leaves the remaining 60% (or 3.2 million subscribers) as mostly contestable (although this may be somewhat less, given that Compact and Extra do offer limited sport channels).

ADSL and FTTH are key

Within this group, internet penetration rates are a key prerequisite for competing on-demand services.

Telkom’s 2015 annual report indicates that there are more than one million ADSL subscribers (just under 20% of DSTV’s subscriber base), and we can assume most ADSL subscribers could potentially meet Netflix’s minimum requirements for streaming.

These subscribers are more likely to have access to sufficient cost-effective bandwidth and probably represent the primary pool of consumers from which Netflix can currently draw.

It is therefore reasonable to infer that the main battleground between Netflix and DSTV can be drawn where there is an overlap of contestable DSTV subscribers (the 3.2 million) and those households that already have ADSL or are able to sign up for ADSL.

However, the basic international trend shows that while VOD traffic is generally increasing, one would expect relatively quicker uptake in countries with better access to faster cheaper broadband.

What might make matters worse for satellite TV operators is that consumer demand may be asymmetric, in that there is a general trend away from scheduled programming towards on-demand services.

If correct, the traditional model of scheduled programming could be on its way out, and in DSTV’s case, supported only by live sports.

On the other hand, countries such as the UK have battled to overcome the anti-competitive effects of content exclusivity (entrenched in the likes of Sky TV) in a market that has more competition than South Africa.

This will continue to make it difficult for Netflix in penetrating the captured South African market.

So will Netflix bring much-needed competition in the South African market?

Overall, we think this is likely to happen over the contestable portion of customers across the VOD and satellite TV space, which includes a sizable share of DSTV’s current subscriber base.

However, until broadband access expands and Netflix is able to recapture its more extensive global content in this territory, this will limit the speed of its advance into South Africa.

Moreover, for as long as DSTV retains exclusive rights over sports broadcasting, it is likely to retain a hold over its most lucrative viewership.

Written by Alex Constantinou and Linton Reddy, competition economists at DNA Economics – a private consulting firm that advises on competition, regulation, trade, and climate-change matters.

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The impact of Netflix on MultiChoice and the South African TV market