2 Reasons Why Netflix Inc is a Threat to Singapore Telcos

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.

Threat No. 1: Scale click here

Threat No. 2: Big Data

Notably, Netflix’s scale does not come from its number of subscribers alone.

In my previous article, I mentioned that the video streaming company was estimated to have made up almost 37% of peak internet traffic in North America in the first-half of 2015. The high level of usage provides Netflix with an immense amount of proprietary data on its users’ preferences. As an article in the Atlantic mused:

“Netflix has meticulously analyzed and tagged every movie and TV show imaginable. They possess a stockpile of data about Hollywood entertainment that is absolutely unprecedented.”

The benefit of this data stockpile is two-fold. Firstly, Netflix is able to recommend shows to the users based on their preferences. Secondly, Netflix is able to analyze how well a certain movie or series helps it retain customers. In essence, Netflix is able to decide how much each piece of content is worth based on its ability to retain customers.

Starhub’s Chief Executive Officer, Tan Tong Hai, believes that the customers’ viewing habits is the secret to the future of television:

“I think the most part of understanding the future of TV is to understand the consumption patterns. This is not just consumption pattern, it’s also the behaviour. Or more important, the viewing habits.

If you truly understand the behaviour, and the viewing habits, I think you got it. That, in my view, is the secret behind the future of TV.”

If Netflix is able to gain a foothold in Singapore, like it has in Australia, the video streaming company may be able to accumulate consumer preferences at a larger scale than its competitors (which include the pay TV subscription services offered by Singapore’s telcos). The data could help Netflix pick and price content for the most compelling offering to customers.

If Netflix is able to do that, it could well prove to be a threat to the current incumbents.

The Foolish bottom-line

ViewQuest, a local virtual private network (VPN) provider, revealed that more than half of its internet traffic in Singapore was from users of Netflix. The high usage may suggest that there is great consumer demand for Netflix in Singapore.

As such, Foolish investors may want to keep in mind how Netflix’s scale and huge database may be a threat to the local incumbents.

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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.