1 Reason Why Netflix Inc is a Threat to Singapore Telcos

Credit: Fool Editorial

Netflix Inc, a popular U.S.-based video streaming service, has started to make its way into conversations regarding Singapore’s telecommunication companies. Firstly, Starhub Ltd (SGX: CC3) said in its recent earnings presentation that it is in commercial discussions with Netflix. In another earnings call, Singapore Telecommunications Limited (SGX: Z74) was asked about its strategy in partnering Netflix.

From these exchanges, it would seem like Netflix is seen as both a threat as much as an opportunity for the local telcos. But, which is it really?

Reasons to worry

Before I continue, I should mention that I have owned shares of Netflix since early 2007. I have followed its business developments for the past eight years, and have watched it evolve from its days as a DVD-by-mail provider to its current status as an important player in the video streaming scene in the U.S and other parts of the world.

To understand whether Netflix is a threat or opportunity, we should first understand what Netflix brings to the table.

The first point to note is Netflix’s scale.

At the end of September this year, Netflix had 69 million subscribers worldwide. In contrast, Starhub had reported 542,000 Pay TV subscribers while Singtel recorded 683,000 for its Singtel TV / Optus TV services.

Both Singtel and Starhub do collect more sales per subscriber, though. In the past twelve months, Singtel had recorded revenue of $228 million from its 423,000 Singapore subscribers while Starhub clocked in $391 million in Pay TV revenue. Netflix, in comparison, generated US$6.4 billion in revenue.

On one hand, some might say that it’s not a fair comparison to pit Netflix’s global revenue with the local telcos’ TV revenue. But seen another way, Netflix is increasingly using its massive scale to secure global licensing for content to be streamed across its 69 million subscribers. If Netflix is able to spread its content cost across its large user base, it could create a product with better content variety at a lower price to the customer.

This could be a threat that Singtel and Starhub needs to deal with.

The Foolish bottom-line

Netflix has built up a significant lead in U.S. consumer usage over the past few years. The video streaming company was estimated to make up almost 37% of peak internet traffic in North America in the first-half of 2015.

There are signs that this pattern of usage could occur in Singapore as well.

ViewQuest, a local virtual private network (VPN) provider, revealed that more than half of its internet traffic was from users of Netflix. On one hand, a single data point does not make it a trend. But it is worth noting the similar pattern of usage between what ViewQuest is seeing and what North America is experiencing. The high level of usage may suggest that there is a high consumer demand in Singapore for Netflix as well.

As such, Foolish Investors may want to keep in mind how Netflix’s scale may be a threat to the local pay TV incumbents. As consumers spend more time on the internet for their TV shows, Singtel and Starhub may well find itself drawn into competing at a global level, whether they choose to or not.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Netflix.