4 Reasons 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 (keeping in mind that the telcos have their own pay TV subscription services) 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  click here

Threat No. 3: Internet TV click here

Threat No. 4: Netflix Originals

“The goal is to become HBO faster than HBO can become us”

– Ted Sandaros, Chief Content Officer for Netflix

Here’s the other part of Netflix that is growing: Netflix Originals. These are original programs that are produced by Netflix.

There are two main benefits here. Firstly, this helps differentiate Netflix’s streaming product (exclusive for an initial period). Secondly, the original content is licensed globally. This way, Netflix is able to leverage its global subscriber footprint and finance future original programming. These are advantages that SingTel and StarHub may not have in their respective pay TV services.

So far, Netflix’s content creation can be considered a success.

Nearly 90% of Netflix’s subscribers have engaged with its original content. But there’s more. Netflix is also approaching content creation from a new and unique angle, which ties in with its big data advantage. As this article from the Atlantic explains:

“The data can’t tell them how to make a TV show, but it can tell them what they should be making. When they create a show like House of Cards, they aren’t guessing at what people want.”

In the recent Emmy awards, Netflix’s original programmes had garnered 34 nominations, an impressive achievement for a company which started releasing original content only three years ago. This original content advantage may be hard to overcome for both StarHub and Singtel.

The Foolish bottom-line

ViewQuest, a local virtual private network (VPN) provider, revealed recently that more than half of its internet traffic in Singapore was from users of Netflix. The high level of 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. In an Internet TV world, StarHub and Singtel may have their work cut out for them. The local telcos may also be hard pressed to replicate Netflix’s original programming advantage.

For more investing analyses and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.