Content Globalization – A Script for Success?
Isolationist actions by a foreign government have adverse effects on Netflix's global ambitions.
Take 1 – Cut!
Foreign governments have taken increasingly defensive tactics to impede the growth of globalization by US domestic firms localizing in their markets. This counter movement is particularly salient for digital media companies, where content can be antagonistic to cultural values and disruptive to existing delivery platforms.
This tension hit a breaking point in Indonesia in January 2016 when PT Telekomunikasi Indonesia (Telkom), a state-owned telecommunications provider, blocked Netflix content shortly after the streaming service launched in the country due to alleged permitting and censorship issues. Telkom, which serves 85 million customers1 and is Indonesia’s largest internet provider, claimed to take “…this step to protect the Indonesian people.” 2 However, other internet providers in the country continued to deliver content to Netflix subscribers.
Protectionist trends like this should be alarming to Netflix as well as other content providers looking for growth opportunities in foreign markets. Telecommunication companies are key to the content supply chain pipeline, providing “last mile” internet access directly to Netflix subscribers. Without delivery through these networks, content firms cannot compete in foreign markets.
International governments have adopted widely varying stances on what type of content is banned for “cultural, religious, or political issues” 3 and are often influenced by religion. Indonesia, whose population is nearly 90% Muslim4, has adopted some of the world’s strictest censoring requirements. Navigating varying restrictions across international borders has become increasingly complex and burdensome for global content providers. However, adhering to these requirements on a country specific basis is critical for continuing operations.
Take 2 – Action!
Netflix quickly rebutted the allegations behind the Telkom ban. The company claimed that it was following local censoring requirements and that its business model was not akin to traditional Indonesian broadcasters and therefore should not be subjected to local permitting requirements. This strategy was important to avoid being shut down by the other Indonesian internet service providers. Given the importance of the Indonesia media market within the region and its “first mover” advantage ahead of other domestic streaming rivals Amazon, Hulu, and HBO, it was critical for Netflix to continue operations. Indonesia is Southeast Asia’s largest online country5 with an emerging economy and population that has shown a propensity for watching video content online according to a Financial Times Consumer Research report6.
To regain access to Telkom’s large customer base, Netflix next began to negotiate directly with Telkom to resolve the ban. The confidential negotiations dragged on for over a year until April 2017 when the two companies agreed to a partnership agreement. Netflix content would be offered as part of a bundled internet/media package on the service provider’s platform. Additionally, Netflix would remove or block any content that violated Indonesia’s film censorship laws.
It is unclear what Netflix’s long-term defensive plan is in the country given Indonesia’s shifting regulatory environment. In 2016, the government allegedly asked content companies to establish local offices in the country to conduct operations. The purpose of establishing local entities would be to curb foreign companies from taxation evasion as well as to gain more control over content, payment systems, and consumer data8. Regulatory restrictions like these represent opportunities for local governments to protect existing content ecosystems and inhibit rapid diffusion of market share by foreign firms.
Take 3 – Re-shoot!
There are several alternative steps that Netflix can take to smooth relations with Telkom and as well the Indonesian government.
- Stricter self-censorship: According to 2009 Indonesia law, all content must be screened and approved by the Indonesian Film Censorship Board. However, an increased presence of foreign content companies operating within the country will elongate the bottleneck of the Board’s approval process. To streamline approval and save valuable resources, Netflix can partner with the Board to ensure that all censored requirements are met for new content. This could be automated AI systems to replace manual reviews – an upfront administrative burden on the company, but one which has long-term benefits such as decreased throughput time and censorship costs. Given the amount of future content flow, these costs can be scalable when the approval “model” is adapted to censorship restrictions in other countries.
- Another option to avoid this type of supply chain blockage in other countries would be to proactively partner with telecom providers to bundle the Netflix offering within the providers’ existing service packages. An exclusive partnership would allow Netflix to build a strategic relationship with service providers while blocking access for other competitors and allowing for quicker penetration into content-watching households.
Take 4 – That’s a wrap!
Resolving the ban was a time and resource consuming burden for Netflix. The outstanding concern is how the company plans to manage this type of issue on a global scale. Given the variety of local regulatory and censorship requirements around the world, how can Netflix mitigate protectionist situations like this in the 190+ other international territories in which it operates?
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Cover photo: Sarfraz Ali, “Indonesia blocks Netflix over local laws on ‘porn’, ‘radicalism’ ”, Daily Pakistan Global, January 28, 2016, [https://en.dailypakistan.com.pk/technology/indonesia-blocks-netflix-over-local-laws-on-porn-radicalism], accessed November 2017
1Resty Woro Yuniar, “Netflix Blocked by Indonesia’s Top Telecom Provider,” Wall Street Journal, January 27, 2016, [https://www.wsj.com/articles/netflix-blocked-by-indonesias-top-telecom-provider-1453896220], accessed November 2017
2Resty Woro Yuniar, “Netflix Blocked by Indonesia’s Top Telecom Provider,” Wall Street Journal, January 27, 2016, [https://www.wsj.com/articles/netflix-blocked-by-indonesias-top-telecom-provider-1453896220], accessed November 2017
3Samantha Bookman, “Indonesia blocks Netflix as local pay-TV operators, regulators, complain about its content,” FierceCable, January 27, 2016, [http://www.fiercecable.com/online-video/indonesia-blocks-netflix-as-local-pay-tv-operators-regulators-complain-about-its], accessed November 2017
4“10 Countries with the Largest Muslim Population in the World,” May 26, 2015, [http://www.malaysiandigest.com/features/555150-10-countries-with-the-largest-muslim-population-in-the-world.html], accessed November 2017
5Source: “Southeast Asia on cusp of video streaming boom,” FT.com, June 14, 2017, ABI/INFORM via ProQuest, accessed November 2017.
6Source: “Southeast Asia on cusp of video streaming boom,” FT.com, June 14, 2017, ABI/INFORM via ProQuest, accessed November 2017.
7EM Squared FT Confidential Research, “Southeast Asia on cusp of video streaming boom,” Financial Times, June 14, 2017, [https://www.ft.com/content/1b6cc61c-5115-11e7-a1f2-db19572361bb], accessed November 2017
8Source: Resty Woro Yuniar, “Indonesia Puts Squeeze on Foreign Tech Companies; Proposed law would require companies providing Internet-based services to incorporate and pay taxes there,” WSJ.com, April 2016, ABI/INFORM via ProQuest, accessed November 2017.
I agree that exclusive partnerships with telecom providers would be a beneficial way to safely enter a protectionist market as well as lock out competition. However, I wonder what advantage Netflix would have in those negotiations. In Indonesia’s example, Telkom had the ability to open the gate between Netflix and the majority of Indonesian viewers. Unless Netflix offered a convincing financial incentive, Telkom may be happy to offer the same deal to Netflix competitors.
I’m by no means an expert in the content industry, so perhaps I’m missing a strategic insight. Does Netflix have something unique to offer telecom companies?
Very interesting article.
It seems to me, however, that it is a prime example of how protectionist policies erode trade and therefore unless such a market presents a truly outstanding potential financial reward, it might be better to shy away from it until the regulatory environment becomes more predictable.
The government is happy to erect barriers in the form of censorship, but it is not happy to bear the burden of maintaining it. Moreover, by giving itself the ability to all but block the company’s operation in the country, it is giving itself unprecedented leverage in any negotiations, potentially wiping out the economic profit of the company. In addition by investing in opening channels of communication with the regulators and educating them about control systems, Netflix may be decreasing barriers to entry for other players in the space further jeopardizing their competitive advantage in the value chain.
I am not an expert on Indonesia, but given the current environment the best strategy might be the simplest one – wait and see.
Thanks for the article outlining an interesting example of protectionism. The biggest way this plays out for most global companies is in China – they have the unique distinction of being one of the world’s biggest markets but the one that is mostly likely to disguise protectionism as ‘necessary censorship’ – and has victims from Netflix to Facebook to small-scale chat apps.
For Netflix, it had to sign a deal with iQiyi to gain any distribution foothold in China (see source below). The government-imposed delay and this insufficiencies of the iQiyi solution has given competitors and free alternatives to Netflix in China their chance to develop so that Netflix/iQiyi will not have the same potential as if they were able to enter earlier and uninhibited. The second-order consequence is a growing divergence between the compatability of technology ecosystems coming out of China and America – such as the Ali and Amazon ecosystems – and as globalisation will eventually lead to their collision, this divergence will be an interesting trend to watch.
Source: Jing, M. Netflix, South China Morning Post, Netflix extends its global reach to China – but not on its own terms, 26 April, 2017 accessed at http://www.scmp.com/tech/china-tech/article/2090853/netflix-extends-its-global-reach-china-not-its-own-terms on 12/01/2017
Thank you for the article, very interesting ! Reading this a major risk that might effect Netflix came to my mind – can this “bans” only be a way to “push” the company against the wall to create revenue sharing and not real censorships considerations ?. The large number of stakeholders you show in the first diagram makes this an extremely risky threat. handling this situation will require Netflix high legal costs and understanding. In some cases, I assume those litigations might even jeopardize it’s “first mover” stand.
Thanks for posting such an interesting article. One of my big takeaways from the article is the importance of relationships and proactively engaging with relevant parties prior to entering a market. I wonder if the results would have been different if Netflix chose to collaborate with the Indonesian Film Censorship Board prior to launch. I assume that every country has such regulatory body. Additionally, would it be possible to establish an international standard? Although it may not be in Netflix’s best interest to establish such board, given the current and future importance of technology, the Internet and the exchange of media, it may be a worthwhile investment for society.
Great article, David! I agree with the risks highlighted in Michal’s comment related to engaging in negotiations for partnerships with the government as well as local service providers. I similarly am concerned with the leverage that Neflix’s counterparties will have in these negotiations and how this may require Neflix to make unprecedented compromises (potentially affecting future negotiations and profit). I am equally concerned about the time-intensive nature of these negotiations, particularly given that the first-mover advantage appears to be significant for this business. However, despite these challenges, I believe that Neflix should move forward in these markets, especially as Neflix’s international growth surpasses its domestic growth (https://www.recode.net/2017/10/11/16458032/netflix-monique-meche-amazon-europe-asia-politics-policy). I think how Netflix approaches content globalization will depend on its value proposition and priorities as a company. For example, if Netflix values speed-to-market and competitive advantage most, I am of the belief that they should move forward on a proactive partnership strategy, as you mention, to shorten the negotiation process. If Netflix perceives its content as its advantage, I would advise them to collaborate with competitors on a strategy for negotiating in international markets, so as to split associated costs, gain back leverage, and potentially avoid establishing partnerships.
Netflix’s dilemma here is quite reminiscent of our marketing case on ZALORA in which the company chose to establish the infrastructure necessary to deliver it’s goods, allowing other firms (Amazon) to potentially benefit from its investment in the future at a fraction of the cost. After reading this piece, I was left wondering whether this should be Netflix’s battle to fight… it seems quite expensive and most likely non-replicable across multiple countries with strict and varying censorship laws. The obvious risk in sitting it out is a competitor establishing partnerships with telecom firms as the one you described.
Fascinating read. Thanks!
Great article, David! Stricter self-censorship and partnering with a local telecom provider to ensure that consumers have a means to access Netflix are sensible strategies, but as Netflix expands into more markets, I also think it needs to have dedicated teams and processes in place to have conversations with government organizations ahead of market entry to minimize the risk of service disruption and build partnerships with the local community of influencers. While this certainly adds to the cost to doing business, I view it as a potentially more cost-effective way of sustaining Netflix’s reputation and the level of service for consumers than being reactive to negative consequences as they happen over time. These new local relationships may also help Netflix with creating more local content down the road, further enhancing Netflix’s competitive differentiation versus Amazon, Hulu, and others.