Should DStv just embrace Netflix?

Make no mistake, DStv sees Netflix as a threat. Or, more specifically, its parent company Naspers does. It wouldn’t have launched ShowMax, its own video-streaming service, if it didn’t. But is there an argument to be made that the pay-TV operator should actually embrace Netflix?

As it turns out, there might be. According to a new report from IHS Technology, a number of international operators have baked Netflix into their offerings. Many of these, including Virgin Media and BT TV, say that doing so has had a largely positive impact on their offerings.

According to IHS, Netflix currently has partnerships in place with 25 pay TV providers, with many more likely to follow after the over-the-top (OTT) video giant expanded to 130 new territories last month.

“Many of the operators working with Netflix have seen customer satisfaction ratings improve under the partnerships, which have helped foster positive operational performances,” said Ted Hall, Research Director at IHS Technology.

Read more: Netflix arrives in SA: should you make the switch from the US version?

There are however reasons to be cautious.

Revenue-wise, operators typically receive a share of the ongoing subscription fees only for customers that sign up via that operator’s set-top box, the IHS report says. This is insignificant, as most Netflix users either already have an account or sign up via a more user-friendly device, such as a PC/laptop or tablet.

That means baking Netflix into a pay-TV package is unlikely to sway anyone annoyed by the cost of their current package.

“Netflix is a both less lucrative and more dangerous content partner to work with than the other premium networks pay TV providers traditionally partner with, such as HBO”, Hall said. “But collaborating with the ever-popular streaming service is necessary for many operators positioning their platforms as one-stop-shop ecosystems for TV and video content.”

Read more: Netflix releases fourth quarter earnings, lays out ambitious plans for 2016

That said, IHS believes the results from its survey generally support the view that third-party video-steaming services positively impact operators’ performance and complement traditional channels and VoD offerings. However, caution remains over how this dynamic could change as Netflix becomes more popular, with some operators wary that it has the potential to negatively impact core pay TV services and, in turn, average revenue per user and revenues overall.

“Netflix plays at least some – likely small – role as an upsell driver for some operators, whose customers can only access the app via their most advanced set-top boxes,” Hall said. “This is the case for 10 of Netflix’s 25 operator partners, primarily those using TiVo as their technology partner, in addition to Orange, Bouygues and Elisa.”

Read more: Netflix officially live in SA at $7.99 a month

However, concerns were also expressed that some of operators’ core channel packages and VoD services could be at risk in the longer term, as growing numbers of pay TV subscribers access Netflix.

Diminishing appeal of premium movie channels

Growing Netflix usage could also prompt pay TV customers either subscribing to or considering premium movie services to reconsider their need for these higher-cost packages. “Europe, where HBO has achieved consistent subscriber growth in recent years, will be more resilient to this than the US,” Hall said.

According to IHS estimates, Showtime, The Movie Channel, Flix and Encore all experienced US subscriber declines in 2014. HBO was among those to achieve positive net additions – along with sister channel Cinemax and rival Starz – largely thanks to the launch of its direct-to-consumer streaming offering, HBO Now. In spite of the tough conditions, IHS still forecasts subscriber and revenue growth for most of the major players in the years to come.