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Netflix’s ‘Lukewarm’ Latin America Holiday

26 Apr, 2012 By: Erik Gruenwedel

In addition to foreign expansion challenges, Netflix traffic growth in the United States appears to be peaking

Netflix continues to top streaming video traffic during peak viewing times in the United States across wired broadband connections but is experiencing growing pains outside North America, according to a new report, Global Internet Phenomena Report: 1H 2012, from bandwidth management firm Sandvine.

When factoring upstream and downstream traffic during a 24-hour period, Netflix represents 24.4% of peak video traffic, compared with 14.2% for file-sharing service BitTorrent. Netflix comprises 32.9% of peak hour traffic, up 0.2% from the last report in September. That peak streaming traffic is projected to decline to 32.5% in the second half of the year.

Notably, Netflix drives 33% of capacity infrastructure (data) costs — a reality not lost upon cable operators such as Comcast, which recently bowed a proprietary SVOD service that doesn’t impact a subscriber’s monthly data usage cap.

Netflix CEO Reed Hastings, in a recent Facebook post, decried Comcast’s apparent competitive move in violation of federal net neutrality guidelines.

Meanwhile, Netflix’s prowess in the United States and successful launch in Canada hasn’t been replicated thus far in Latin America, Mexico and the Caribbean — a reality company officials acknowledged in April 24 financials. The Los Gatos, Calif.-based streaming service launched operations in the United Kingdom and Ireland in January.

Sandvine said that when measuring bandwidth usage, Netflix’s reception in Latin America has been “lukewarm” at best. The SVOD service accounts for just 0.75% of the region’s streaming traffic on fixed access networks (such as cable and satellite), and 0.73% on mobile.

Notably, the usage levels still rank Netflix the 13th largest source of peak hour traffic on both fixed and mobile access networks.

Unlike in the United States, where there is substantial broadband penetration, relatively large disposable income with credit card usage, myriad Netflix-enabled consumer electronics devices and limited competition, in Latin America the environment could scarcely be more different, according to the report.

“Since few Latin American subscribers have access to the high speeds, consistent quality and large usage allowances available on cable or DSL connections, Netflix faces an uphill battle for the time being,” the report reads.

In Latin America, many countries have limited deployment of fixed access networks, so subscribers often rely on mobile connections as the primary Internet access. Since few subscribers have access to the high speeds, consistent quality and large usage allowances available on cable or DSL connections, Netflix faces a challenge.

In addition, content offerings in Latin America (and other foreign territories) are significantly smaller than in the United States, often lacking marquee titles. Regional content is paramount in Latin America with subtitles (in Spanish and Portuguese) key to consumer adoption. Still, Sandvine said Latin America offers “tantalizing” growth possibilities with a substantial consumer base.

In the United Kingdom and Ireland, network and credit card issues pale in comparison to the reality that Netflix faces competition from Amazon-owned LoveFilm Instant, satellite TV BSkyB’s SkyGo platform and BBC’s iPlayer, among others. Indeed, the iPlayer accounts for 6.4% of peak period streaming traffic. Since launching, Netflix represents 2% of the streaming traffic.

Regardless, Netflix also faces increased domestic competition from YouTube (the second-largest source of peak downstream traffic, at 13.8%), Hulu, HBO Go, Amazon Prime, Comcast Xfinity Streampix, Dish Network's Blockbuster@Home and traditional TV networks streaming their content to game consoles and other devices, according to the report.

Additional business challenges from increased content licensing costs have the potential to impact the content catalogue. Those companies that already own vast content libraries (i.e. Comcast’s NBC Universal) and can control or influence licensing will play a particularly interesting role in the developing market of SVOD, the report said.

“All of these services face a tremendous uphill battle to knock Netflix off its perch, and many will have to overcome the same licensing issues as Netflix, so don’t expect Netflix to fall from the top spot anytime soon,” the report reads.

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