Why Netflix won't conquer Canada

When Netflix in September 2010 entered the Canadian market as its first international expansion, there was plenty of fanfare. Two years later, it’s safe to say its energy and momentum have been sustained, having acquired over a million customers. The February 1 launch of its much anticipated US$100 million series House of Cards is the company’s latest blockbuster salvo. And that, among other moves, is forcing Canada’s telecommunications companies and broadcasters to take nervous notice. Bell, for example, reported in July 2011 in written comments to the CRTC that what are called “over-the-top” (OTT) service providers like Netflix have had “an acute impact on premium television providers like The Movie Network, Super Ecran and Movie Central.”

But the rumours—abetted by cable company subscriber losses in the U.S. and addressed by investment bank reports from RBC and Scotiabank—that the beginning of the end is at hand for the country’s traditional broadcast industry may be overstated. Traditional broadcasters are under increasing stress because of Netflix, but the reality is more complex. The surprise could be that if the Canadian industry gets its act together, it’s high-flying Netflix that could be in trouble.

Nevertheless, with few stumbles Netflix has enjoyed tremendous success since it launched in the U.S. in 1997 originally as a DVD-by-mail service. Since then it has expanded into online streaming and is among the biggest content providers in the U.S. Its stateside subscribers number about 27 million, rivaling giants like Comcast and DirecTV, and 2011 revenues reached US$3.2 billion.

Now that Netflix has brought its considerable bulk north of the border,  there’s been increased talk about the phenomenon of cord cutting. This is where consumers abandon their cable TV subscriptions in order to make do with cheaper, or free, OTT services like Netflix which stream film and TV content online direct to TVs, computers and mobile devices. Theoretically, if the trend were to gain steam it would negatively impact the profitability of Canadian broadcasters and telcos (or BDUs, broadcast distribution undertakings).

Between the first quarter of 2010, when Netflix entered the market, and the second quarter of 2012, of the six major Canadian BDUs  (Bell, Cogeco, Rogers, Shaw, Telus and Videotron) only Rogers recorded a cable subscriber decline. But even then it’s 2.2% slip in overall subs was effectively reversed by a 2.5% increase in higher value digital subs. Some telcos have actually seen massive growth. Telus, with its relatively new IPTV offering, is up 89.5%; even the more moderate gainers, like Shaw, managed 12.4% growth.

Research from Toronto-based Convergence Consulting suggests cable’s losses are so far entirely the fault of competition from IPTV offerings to Bell, Bell Aliant, Telus, MTS and Sasktel. Principal Brahm Eiley wrote via e-mail, “In 2004-2010 Canadian cable gained TV subs; in 2011 they did not and we expect this trend to continue in 2012 and go forward.”

Neither government nor private studies, including efforts by the incumbent BDUs themselves, have been able to detect definitive evidence of cord cutting. The CRTC’s 2011 report, “Results of the fact-finding exercise on over-the-top programming services,” which included submissions by the most of the incumbents, concluded as much. Mario Mota, co-founder of Boon Dog Professional Services, which publishes the industry report Canadian Digital TV Market Monitor, says his firm’s research indicates cord cutting not only isn’t happening, but that subscribership continues to grow. “Even though the over the top players like Netflix are gaining traction in Canada, we haven’t yet seen that translate into customer losses in the traditional TV system.”

At the same time Netflix’s subscribership continues to increase at a jet-powered pace. Just two years after entering Canada, it commands a little over 1 million customers.

Nevertheless, Shaw’s submission to the report put the danger in sharp perspective. Wrote Jean Brazeau, SVP, regulatory affairs: “Netflix’s anticipated one million subscriber threshold would surpass that of of Canadian pay television service Movie Central (962,705 subscribers) and would approach that of The Movie Network pay television service (1,220,869), both of which have been in operation for close to 30 years.”

In fact, data suggest that what might instead be happening is what’s called ‘cord shaving.’ This is where consumers pare back the packages to which they subscribe rather than eliminate cable altogether. And for all the BDUs that should definitely be worrying. After all, lost revenue there can ultimately lead to the same place: decline and fall.

Who’s taking the big hit?

CRTC data indicate some interesting trends in pay and specialty TV subscriptions since the 2008 financial crash and Netflix’s arrival (see sidebar: “Shifting fortunes of pay and specialty TV”). Looking at a representative cross-section of popular channels, there has been a 53.5% decline in the subscription average growth rate, from 4.3% in 2009 to 2% in 2011. That’s what’s called ‘falling off a cliff.’

“On the TV side there’s been some modest signs of cord shaving—i.e. some people are maybe taking a smaller package,” concedes David Purdy, SVP, video product management for Rogers. “We don’t know if that’s because of the economy being relatively flat or whether it’s because people are looking for other over the top services or getting their content through different means.”

In its comments for the CRTC report, Bell cited quarterly data showing The Movie Network, Super Ecran and Movie Central services taking a big hit at the onset of the financial crash, mounting a decent recovery through 2009 before falling back in Q2 2010—almost exactly coincident with Netflix’s arrival. The CRTC’s own data indicate both The Movie Network and Movie Central were up in 2011 but well off their growth rates of prior years.

So on one hand, TV subscribership for the incumbents is growing, but on the other package subscription may be falling. Who’s in trouble here? Netflix or the Canadian broadcast industry?

The answer is, “it depends.” There is both opportunity and danger for all the players. While it appears the incumbents may be at least beginning to lose their monopoly on the consumer market as a result of more choices opening up, their position as a gateway to content leaves them in a strong position to fight for the consumer’s dollar. But make no mistake, it’s going to be a fight.

In part two of this series, we take a look at the tension between Netflix’s presence in the industry as competitor and complement. The question Canadian broadcasters are asking themselves is, does Netflix expand their audience for content, and therefore their business, or does it take their audience away?