Can Netflix Conquer Japan? Why Netflix Expansion Into Japan Matters

  • Netflix is launching its streaming service into Japan.
  • The adoption rate will be better than expected due to scale, pricing, strategic partnerships, and integration into both mobile and gaming devices.
  • Furthermore, Netflix has much more scale when compared to domestic film producers, and has a content collection that will still appeal to 40% of moviegoers.
  • Therefore, the barrier to competition while high still seems surmountable in the case of Netflix.
  • The total addressable market for Japan is $4.26 billion.
Can Netflix Conquer Japan, Why Netflix Expansion Into Japan Matters

Netflix (NASDAQ:NFLX) is one of the few companies that I have been eyeing very closely. Not so much because of the recent correction in the stock, or because it's gotten easier to own following the recent stock split, but because of the growth potential in international markets. Recently, Netflix announced its expansion into Japan, with the service to be released on September 2, 2015. The company is in a pretty solid position to gain market share, as a result of its partnership with Softbank, and the adoption potential due to the high penetration of broadband households. The company's introductory pricing is low even when compared to the United States with pricing starting at $5.40 per month, which is almost half the price of subscriptions in the United States. This is a part of a long-term strategy to gain trust and awareness from Japanese consumers, but over time the company will eventually raise pricing to improve both profitability, and the quality of its content collection.

Analyst forecasts vary, but relatively quick adoption seems like a pretty high probability due to the aggressive marketing tactics that Netflix uses to broaden awareness of its products, and the ability to market and sell the service via Softbank. Netflix is also very well integrated into game consoles, so broadening the over-the-top service into game consoles reduces friction around adoption. Softbank will also pre-install Netflix into any smartphone or tablets they sell, which further lowers the barrier of entry.

Beyond aggressive pricing, Netflix also has a very competitive content budget, and its content licensing of US-based titles will make the service relevant to Japanese consumers. Furthermore, the company anticipates that it will adjust its content spend to create more original content for the Japanese market specifically. The amount spent isn't exactly quite clear, but approximately 50% of all content on Netflix Japan will be domestic offerings. Given the global profile of Netflix, there's a lot of export potential for various Japanese titles, especially because the company is planning on expanding its service into both China and India. Therefore content creators, get the immediate benefit of investments into Netflix- branded originals, and international distribution via its global subscriber base. Therefore, Japanese film producers will eventually come around to the idea of working with Netflix, as Netflix compensates for production up front and provides immediate exposure to a global audience. Furthermore, the Japanese film industry has been stagnant due to a lack of investment, which opens the opportunity for larger competitors to destabilize pre-existing companies.

The language barrier between perhaps Japan and China can be overcome through subtitles or dubbing. Titles created for Japa have much more potential for success if exported into a Chinese market, versus a Latin American market. After all, while there are some demographic differences preferences on storytelling, historical events, and style are likely to be the same. Hence, U.S. titles have performed relatively poorly in the Japanese box office for a number of years, as a lot of high budget films aren't very compatible with Japanese viewers. That could change going forward, as Netflix’s incentives are more aligned to create a film-viewing experience catered to Japanese viewers.

Why Netflix Expansion Into Japan Means So Much

According to the Motion Picture Producers Association of Japan, the film industry generated ¥207 billion in terms of revenue. Based on current exchange rates, the Japanese film industry generates $3.25 billion in terms of box office gross receipts. However, Japanese films make up 58% of gross receipts. In other words, Netflix’s content mix will already appeal to 41% of moviegoers. Therefore, Netflix's strategy to integrate approximately 50% of Japanese titles into its subscription package while using its pre-existing content licensing agreements to provide the other 50% in imported films and shows gives the company unprecedented leverage when compared to competing offerings. Furthermore, the Japanese film market is relatively small when compared to the global film industry, which is projected to gross $88.3 billion in revenue in 2015, according to Statista database.

Japan has approximately 35.5 million broadband households, so if we were to assume market saturation the revenue potential is $4.26 billion (assuming $10/month subscription rate). In other words, Netflix alone has enough scale to compete with the entire movie industry of Japan, as the projected revenue contribution makes it worthwhile to invest into the market, as if they were already an established channel provider. Success in Japan will also determine the success in China, so the company will be investing aggressively into its Japanese debut.

Netflix has a content budget of around $1 to $2 billion not including the licensing of TV shows, so the company is going to be extremely competitive even when compared to well-established broadcast television stations within Japan. This is because Netflix has a better content delivery method, and a global pool of subscribers to fund in-house content development. While much of the investment is currently directed towards Western titles, the company is planning to shift more of its content development toward Eastern markets, which is why they had invested so significantly into the development of Marco Polo. To produce 10 episodes of Marco Polo cost Netflix $90 million, which is an amount that Japanese-based channel providers or movie producers won't be able to match. Furthermore, Netflix is releasing a second season of Marco Polo in January of 2016, and it will be a global release. The title will appeal very specifically to the Asian demographic.

The scale of in-house content in Asian-centric narratives is expected to increase considerably going into the 2016 Chinese launch. Furthermore, momentum will begin to pick-up in 2017 as Disney titles will be made available on Netflix. This will broaden global appeal due to the high levels of international box office success both Disney Studio and Pixar animations tend to generate.

To conclude, Japan is an ideal market for Netflix to enter into. It has the cash to strong-arm local content producers, and it has a proven business model that works across demographics and geographics. With investment and expansion concentrated in Asian markets between 2015 and 2020, the company will be able to sustain its expansion efforts. This implies that many of these isolated markets will eventually be rolled over by the well capitalized, web-based TV streaming model of Netflix.

You can also check out amigobulls' Netflix stock analysis for a quick look at the company's key fundamentals.

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