Netflix in Africa – Sounds Great, but Who’s Really Paying?

Netflix has launched its service in 130 countries, including 54 in Africa. We marvel at the audacity of rolling out this complex a service with this kind of scale. We are most intrigued by the underlying infrastructure subtext and we say African ISPs may well be the ones to bear the cost for this manna.

 

Netflix has gone global, launching its service in 130 countries, including 54 in Africa. We make a number of observations:

One would be remiss not to marvel at the sheer audacity of rolling out this complex a service with this kind of global scale. Service rollout in multiple geographies is supposed to take time, to adapt business models and service delivery to local constraints – regulatory, infrastructure, income levels or consumer content consumption habits. Netflix did not appear to bother with such precautions; they are taking the service rollout conventional playbook and throwing it by the window.

Netflix is well aware of the constraints it will face in African markets. Scarce local content, ill-adapted payment model (credit cards, paypal, itunes, etc.) and a primarily mobile, metered broadband customer base that would make watching Netflix in Kenya or Nigeria more expensive than in the USA. But the company doesn’t really care at this stage. This is a scaled-up, globalized play, and they are ostensibly aiming at the top-end of the market- people with international credit cards, or as the company puts it, “elites”, or “iPhone owners”.

In effect, Netflix needs to show investors that it’s adding customers; if the company picks up even 10% of video customers in two-thirds of its new markets, they will have an international customer base larger than their US base, which will sustain their investment proposition and their capacity to pick up global rights for content. This is the Netflix “virtuous cycle” (see Chart). Localization, we anticipate, will come later in the markets that show the most promise.

• We’ll limit our commentary on the VoD market impact – if only to note that 1) we expect it to be moderate due to the above targeting and 2)Netflix will face a horde of African competitors – who do care about localization a lot more than Netflix does.

For our part, we are most intrigued by the underlying infrastructure subtext – because it offers a glimpse of how some webscale companies look at Africa. In effect, Netflix is launching in 54 African markets with what is relatively scant infrastructure on the continent. The company has a CDN in Johannesburg, using the NAPAfrica exchange for peering at the Teraco JB1 data center. In other countries, Netflix will feed from its Amazon Web Services data centers and over time, encourage ISPs to integrate the Netflix Open Connect CDN cache into their networks so as to cut down on latency. ISPs will have to connect to Johannesburg or Dublin unless Netflix builds a CDN closer to them – which it still might.

African ISPs may well be the ones to bear the cost for this Netflix manna. The impact on mobile operators is bound to be limited – customers pay on a per usage basis. For other ISPs, Netflix is a problem. As traffic increases, so will the need to pick up multi-gigabit connections to connect to the Netflix CDN, increasing bandwidth costs. ISPs may then be forced to either develop Netflix-specific pricing (difficult), get Netflix to pay up (unlikely), increase their overall prices (possible) or simply absorb the Netflix-related costs (unattractive). Inasmuch as Netflix is great for the customer, it also runs the risk of squeezing out substantial economic value out of the African non-mobile broadband market.

 

The Netflix Virtuous Cycle

Netflix Cycle

 

Source: Netflix

 

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