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Dongle vs. Goliath

21 Jul, 2014 By: Erik Gruenwedel

Netflix’s pending European “invasion” into France, Germany, Belgium, Austria, Switzerland and Luxembourg comes 70 years after the Allied D-Day invasion of Normandy, France, during World War II.

While the subscription streaming pioneer might consider its expansion a form of liberation from European pay-TV, it will encounter “resistance” from more than 3,000 third-party video-on-demand services — including French telecom Orange, whose new HDMI dongle “Orangecast” promises subscribers myriad content options instead of Netflix, including movies and TV.

“We will soon commercialize this product and offer a device that is different from Google,” Orange CEO Stéphane Richard told L’Express.

Richard, of course, is referring to Google Chromecast, which has launched in more than 11 countries. The dongle, in addition to offering a direct line to Google Play, features an app for Netflix’s disruptive TV business model that is giving European media companies — and packaged-media strongholds such as Germany — fits.

In a July 15 report, German research firm Goldmedia said video-on-demand and SVOD are about to enter the country’s mass market due to the influx of connected devices and available bandwidths. Spearheaded by SVOD (notably Netflix and Amazon Prime Instant Video), the German VOD market is projected to reach €750 million ($1 billion) by 2019 from €163 million ($220 million) in 2013.

Indeed, 51% of the German VOD market in five years will be controlled by subscription streaming. It’s a trend that’s already underway in the United Kingdom — the third-largest home entertainment market.

With more than 46 million subscribers globally (11.6 million internationally), Netflix’s brand is well documented and revered. European media companies aren’t taking any chances. Deutsche Telekom, which recently launched its own SVOD service, reportedly is in talks with Netflix about a possible marketing alliance.

The German telecom isn’t alone. The European Union, in a July 10 report, found that more than 3,000 digital media devices have emerged in recent years — most with a mandate to extend the existing pay-TV ecosystem — and combat SVOD. Leading the charge is TV Everywhere (1,104 services cited), branded channels of broadcasters on open platforms (711 services) and transactional VOD and electronic sellthrough movie services (409) — spearheaded by iTunes and Amazon Instant Video. The countries with the most established digital platforms are the U.K. (682 services), France (434) and Germany (330) — all three planned strongholds for Netflix and Amazon Prime Instant Video.

Also included in the report are 223 OTT video platforms established in the United States and targeting Europe. This includes Netflix, Amazon Prime and HBO Go, among others. The EU contends Netflix and Amazon have formed a duopoly of sorts in the U.K., with a combined market penetration of 97.8%, leaving just 1.1% to BT Vision and 1.1% to the rest of the field (Sky Now, Wuaki.tv, Club SFR, FilmoTV, etc.).

Indeed, the report says the U.K. SVOD market revenue grew to $274 million in 2013 largely on the backs of Netflix and Amazon Prime. In 2012, the worldwide SVOD market accounted for $4.7 billion in revenue with 66 million subscribers (more than 50 million in the U.S.).

European SVOD Market Growing Fast

The nascent European SVOD market is estimated at $575 million, representing 11% of worldwide subscription streaming subs (7 million). In Eastern Europe, the SVOD market is estimated at $255 million, with 7% of worldwide subs (4 million).

The global SVOD market is projected to generate $8 billion in revenue by 2017, with more than 120 million subscribers, according to IHS. SVOD viewing represented one in every seven minutes of online long-form video viewing in Europe in 2012.

Germany currently has four SVOD services: Amazon Prime, Watchever (Vivendi), Maxdome (Pro7) and Videoload (Deutsche Telekom).

France has two SVOD providers: Canal Play and FilmoTV, each with 200,000 subscribers. It also has the longest release window for SVOD (by law, 36 months after theatrical bow), which is why the country lags behind the rest of Europe in SVOD adoption. Netflix, shrewdly, is basing its Euro headquarters in Luxembourg in an effort to circumvent the French law.

France and Germany are two of the six largest broadband markets in the world and there is greater potential for online streaming to grow in Western Europe than in the rest of the world, according to Goldman Sachs.

Meanwhile, Belgium primarily has transactional VOD and electronic sellthrough platforms via pay-TV operators.

Belgium saw a 30.5% revenue increase to 71.5 million Euros from 2011 to 2012 from transactional VOD. The country reported a 700% increase in revenue to 9.8 million Euros from electronic sellthrough of movies and TV series.

“As with other Internet businesses, size matters and the first-mover advantage plays a key role in the SVOD market,” the EU report states. “Content acquisition is crucial in order to have a rich and diversified video library that appeals to customers. Pay-TV operators are still the financial powerhouses for content acquisition and rights, but new entrants of the ilk of Netflix are slowly catching up.”

Netflix or Bust

As media companies in Europe navigate a transitioning home entertainment landscape, whether OTT video is delivered via dongle, a Roku streaming media device or a proprietary set-top box, having access to Netflix or other SVOD service is indispensable, according to Barbara Kraus, director of research at Parks Associates.

Worldwide digital set-top box shipment revenue last year totaled $20.3 billion, up 3% from $19.6 billion in 2012, according to IHS. Revenue will set new highs over the next two years, peaking at $22.8 billion in 2015.

“Google wants to differentiate [Chromecast] by increasing the number of apps that can run on it. That may result in content differentiation over time but any impact would not yet be influencing,” Kraus said. “Streaming VOD such as Netflix, Hulu Plus, etc., every device has those.”

Indeed, Orange’s attempt to circumvent Netflix in France could be wishful thinking, according to Dan Rayburn, tech analyst with Frost & Sullivan.

“If it does not have Netflix, folks will not want it,” he said. “They want Netflix.”

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