Why 2017 Will Be Crunch Year for the Global Ambitions of Netflix and Amazon

Reed Hastings_Jeff Besos_Split - Getty - H 2016
Getty Images

The streaming giants, which launched nearly everywhere this year, are facing off in a worldwide battle for subscribers and SVOD revenue.

The future — 2017, at least — looks bright for both Netflix and Amazon as they look to expand their international subscriber basis following global launches this year.

In January, Netflix took its online streaming service everywhere, except for China (and a few conflict zones, including Syria, the Crimea and North Korea). Amazon followed suit in December.

The new year will see the two SVOD giants battle for subscribers and revenue using very different tactics. But, according to Richard Cooper, a research director at London-based group IHS Markit, both Amazon and Netflix should expect strong double-digit growth in the coming years.

IHS expects Amazon Prime to hit 64 million subscribers worldwide by 2020, more than double the 30.5 million it has today. Netflix, which reported 86 million subscribers as of the third quarter of this year, should see that figure top 130 million globally by 2020, predicts IHS.

“Amazon has some catching up to do, Netflix has a substantial lead, but we see fairly consistent growth in terms of subscriber numbers,” says Cooper. “Of course, growth in percent terms will slow as the subscriber base gets bigger, but both are very well positioned.”

The added competition in international markets could affect Netflix’s subscriber growth trajectory, pricing and content strategy. “Amazon’s spending on originals will continue to push content costs higher, negatively impacting Netflix,” says Wedbush Securities analyst Michael Pachter. “While we do not expect existing international Netflix customers to defect in favor of Amazon’s Prime Video offering, we do think that future subscribers are up for grabs and we think as many as 20 percent to 40 percent of future SVOD consumers will choose Prime Video over Netflix given the more compelling price point.”

Amazon's Prime Video service is rolling out at $5.99 (or €5.99) internationally vs. $/€7.99 for Netflix’s basic tier subscription.

Pachter expects Netflix “will likely draw the majority of new subscribers for now, given that it has thousands of programs, including many originals and exclusives, as well as non-exclusives, compared to Amazon’s hundreds of programs,” but predicts that “Netflix’s international growth will slow.” His model assumes 2017 international subscriber additions of 12 million compared to nearly 13 million in 2016, but he sees a downside risk of roughly 1 million, or $50 million to $80 million in revenue.

Others on Wall Street have also been discussing the impact of the new global showdown between the two streaming giants. “While competition between Amazon and Netflix is likely to resemble a marathon rather than a sprint, Amazon's latest move could drive demand for both global and local rights higher, increase cost of customer acquisition and prompt Netflix to offer [more aggressive] tiered pricing in select markets sooner rather than later,” said Cantor Fitzgerald analyst Youssef Squali in a recent report.

The challenges facing Amazon Prime as it rolls out globally are similar to those Netflix has struggled with this year in its international push, namely a library of mostly English-language productions with limited international appeal and a blanket pricing structure that could make the service too expensive in many markets. Amazon is also well behind where Netflix was in January this year, when it made the jump from 50 territories to 200. Before Amazon Prime Video went worldwide this December, it's full online video service was available in just five countries (the U.S., Japan, the U.K., Germany and Austria).

Netflix is ahead in the push to localize its international services and supports 21 languages worldwide. Amazon currently is available only in English, with French, Italian, Portuguese and Spanish subtitled and dubbed versions available for some titles. 

Industry watchers expect Amazon to follow Netflix's lead in investing more in local language content, both through acquisitions of international films and series, and via the commissioning of foreign originals.

For The Grand Tour, a British motoring reality TV show that launched this year, Amazon plunked down at least $160 million (Netflix's Ted Sarandos puts the figure at $250 million). The company has also dipped its toe in foreign-language series production, investing in the German original You Are Wanted, featuring local star Matthias Schweighofer, and picked up numerous Japanese anime series from local giant Fuji TV, including Battery and The Great Passage. And in India, Amazon has partnered with various homegrown content production firms.

“Amazon’s strategy is less Hollywood-focused and more local-driven than Netflix’s, implying that the company needs to form local talent and production relationships and ramp up initial cash spend significantly — end-to-end production requires more up-front cash investment than licensing content — to fund a 200 country rollout,” said Canaccord Genuity analyst Michael Graham.

IHS estimates Amazon will spend $337 million on original content this year, up from $176 million in 2015. But that pales in comparison to Netflix's estimated $1.2 billion budget for originals in 2016.

“Local content, local language content is one of those things that really does drive subscriber acquisition and retention,” says Cooper, predicting both Amazon and Netflix will continue to ramp up spending on non-English films and series. But, he cautions: “Other than English- and Spanish-language series, the rate of return on shows in other international languages is less and less. It puts Netflix and Amazon in a Catch 22 situation: you can't get more subscribers unless you invest in local content and you can't invest in local content until you get more subscribers.”

Graham recently estimated that Amazon is self-producing a larger portion of its originals, about 83 percent of its roughly 50 completed or announced titles, compared with about 14 percent of Netflix’s roughly 260 completed or announced titles. “Though the total amount of originals by Amazon is only about one-fifth of Netflix’s, the number of self-produced titles is nearly equal,” he said.

Wall Street will pay close attention to how the two companies do in terms of international subscribers. Squali expects Netflix to end 2016 with 42.98 million and 2017 with 56.52 million before reaching 91.14 million at the end of 2020. (He has no forecasts for the number of international Amazon Prime or video subscribers.)

Cooper does not see the global expansion of the American SVOD giants as a major threat to local players, such as British pay TV group Sky or John Malone's Europe- and Latin America-focused cable giant Liberty Global.

“There is a lot of talk in the U.S. about cord cutting, which is a real thing, but it is not being stimulated by Netflix or Amazon Prime,” he argues. “We see very little cannibalization. These services tend to be more complementary. Most customers see them as an add on, not as an alternative, to pay TV.”

In fact, recent deals like Netflix's cooperation with Liberty Global, which will see the latter integrate Netflix into set-top-boxes, shows how the company is taking a more cooperative than disruptive path on the international stage.

This is one area where Amazon Prime and Netflix differ in their strategic approach. Netflix appears to be shifting from competing with traditional cable and over-the-air services to becoming a premium channel brand in its own right. Since cable companies in many parts of the world are consumers' main access point to the Internet, Netflix clearly sees it as better business to work with the Liberty Globals of this world than compete against them.

Amazon, according to Cooper, “has more arrows in its bow” strategically, since its links to Amazon.com's retail service means the Amazon Prime offering can also drive transactional video rentals and downloads. Rights holders worldwide will be watching closely to see if Amazon Prime's global rollout will mean a boost in digital home entertainment revenue.

Amazon has also begun exploring two other business models that, so far, Netflix has ignored: sports rights and partnerships with third-party content providers. In recent months, Amazon has reportedly begun talks with the likes of the National Basketball Association, the National Football League and national sports leagues in numerous countries, exploring the idea of buying up rights to offer to fans worldwide.

Sports, says Cooper, is “a huge, huge driver of subscriber uptake.” And he argues that it makes “logical sense for both Amazon and Netflix” to move into sports rights as they expand worldwide. However, he thinks Amazon will be most competitive in “smaller, niche sports” where there is less competition from established, deep-pocketed TV companies. He notes that a big pay TV player like Sky in the U.K. spends an average of $80 a month per user, much of it for big sports rights, compared to Amazon Prime's $80 a year per user.

Amazon's other promising business model is its streaming partnership program, which the company introduced to Europe this year following an initial U.S. launch last December. The setup allows Amazon Prime members to create their own a la carte pay TV service by adding subscriptions to video services such as Showtime, Starz or AMC, essentially making Amazon Prime an online cable TV network.

“While Netflix is moving towards being a global channel brand, Amazon is moving towards becoming a multi-channel network,” says Cooper.