“International expansion” cannot be taken for granted

By Matt Walters – @matthew_waltersmatt.walters@decipher.co.ukHead and shoulders

Magine, once described (not entirely accurately) by one industry commentator as “Spotify for TV”, has since its original launch in Sweden in November 2012 been held up as the poster boy for a total cloud television future.  With good reason we in the industry took notice as it first claimed to sign up 500,000 paying subscribers in its first twelve months on the back of formidable carriage deals it had agreed with SVT (the Swedish public service broadcaster), TV4, CNN International, the BBC, Eurosport, National Geographic, Nickelodeon and Cartoon Network.  A further successful launch in Germany, spurred by agreements with RTL (giving users access to channels including, among others, RTL, VOX, Eurosport, Nickeolodeon and Comedy Central), shortly followed, and Magine now claims to have subscribers that run to seven figures in Germany.

Seven-day network PVR and backwards EPG?  Check.  The ability to access the service on multiple devices around the home?  Check.  A potentially low-cost, scalable model requiring the consumer to have simply a compatible device and home broadband connection to enable live streaming from the cloud, with no need for a set-top box?  Check.  Half of those surveyed in Sweden for research for Magine even declared that the service had increased the amount of television they were watching.

But Spain has proved third time unlucky for Magine.  Perhaps fittingly for these convergent times, the demise of Magine’s Spanish service was announced on Twitter, shortly followed by a terse statement from the company explaining that it had “decided to focus its attention on other markets where a commercial product can be launched in a shorter time frame”.  Though Magine claimed consumer and broadcaster response to the service had been “positive”, rumour had it in the industry that it was struggling to get major Spanish private and public broadcasters on board.  It will close from 1st February and Magine will direct its efforts elsewhere.

It’s difficult to read the industry press at the moment without encountering talk of the “international expansion” plans of the online video companies in all their flavours – VOD, SVOD, DTO, DTR, OTT, IPTV and “total cloud”.  Some of the laziest journalism has talked of quests for “global domination”, “European invasions” and “building empires”.  The recent example of Magine demonstrates that such “international expansion” simply shouldn’t be taken as a given.

How can a service that has achieved considerable initial success in not one but two European countries struggle in the way it has in a third?  In order to get close to answering this question, we need to first retrace Magine’s Spanish steps and then confront the realities of the market it was entering into.

Magine launched in Spain in July 2013 on the back of funding to the tune of $19m from Swedish and international investors.  It had secured content deals with Chello Multicanal, Viacom Spain, Cosmopolitan, National Geographic Channel Spain, among others.  At the time of the Spanish BETA launch, Magine’s CEO and co-founder Mattias Hielmstedt described the Spanish marketplace as an “ideal” one for Magine, due to “high broadband penetration with a relatively low pay TV penetration”.

Data from Ofcom’s recent International Communications Market Report provides an interesting perspective on why Magine might have struggled.  The Spanish television market into which Magine entered is small by revenue, sized at around £3bn, compared to the UK (£13.4bn), Germany (£18.9m) and France (£8.8bn).  While UK television industry revenues grew year-on-year last year by 3.4% (the strongest in Europe, ahead of Germany at 2.5%), Spanish television industry revenues by comparison shrank by 6.2%.

Not only did contemporaneous economic factors weigh against Magine, so too did the pay v free divide in the landscape of the Spanish television market.  Pay TV penetration is extremely low in Spain, relative to its European counterparts: standing at 57.1% in Germany and 52.8% in the UK, it stands at just 22% in Spain.  It is a market instead in which free-to-air retains a strong appeal – DTT is the most popular platform in Spain, finding itself in 76% of home and achieving near 99% coverage.  In terms of daily consumption, Spain is eclipsed only by Italy (261 minutes) for the average daily number of minutes spent watching television content – 244 minutes – one of the highest figures not only for Europe but for the world.

What about the internet?  The online population (or “online universe”, as Ofcom describes it) for Spain, relative to other European counterparts, is also small.  For the UK, this stands at 39.2m – or approximately 61.1% of the population, Germany 52m (64.5%) and France 37m (56%).  Spain’s online universe is 23.5m, or just 49.7% of the total population.  Broadband connections per 100 households is also low – whereas the UK and France stand in the high eighties, for Spain the figure is 70.  Of those online in Spain, 27% – less than a third – of those surveyed as part of Ofcom’s research had accessed television content over the internet in the last week (32% had in the UK).  Just 57% of those surveyed had used a free-to-air broadcaster’s catch-up service within the last year – 19% in the last week – compared to 92% in the UK (47% in the last week), 81% in France, and 78% in Italy.  Even in a market with as strong a free-to-air dimension as Spain’s, watching free-to-air catch-up online remains a less popular and less regular activity than in other European markets with greater pay TV penetration.

What emerges is a picture of a national television industry which is small by European standards, whose revenues are shrinking, whose pay TV penetration is low, and whose consumers – watching among the highest average number of minutes of television each day – have a strong enthusiasm for free-to-air over pay.  Add to this Ofcom’s findings that Spain has a smaller online population, relatively speaking, than its European neighbours, fewer broadband connections per 100 households, and that accessing television content over the internet is a small (but admittedly growing) activity, and you get the sense that these are far from ideal conditions from which to attempt to a launch a potentially transformative total cloud television service. It could go some way to explaining why Netflix – fresh from a round of European entries in 2014 – continues to delay its launch in Spain.

What I’ve argued above would suggest that online video players of all those different stripes – VOD, DTR, DTO et al – can’t and won’t be successful, which to muddy the picture isn’t the case.  Wuaki.tv, owned by the Japanase Rakuten conglomerate, has 600,000 registered users, and Canal+’s Yomvi is also well embedded within the market – both in this case VOD providers.  Other green shoots are emerging in the form of services such as Filmin and Nubeox, both VOD players and both growing.  One extremely interesting stat to emerge from Ofcom’s report is in the context of the use of download-to-rent (DTR) and download-to-own (DTO) services.  Of those that had used online video services in the last year, the highest proportion of those that had used a DTR or DTO service in the last year (69%) and in the last week (26%) were to be found in Spain.  In the UK, 48% had used such a service within the last twelve months, and 15% in the last week.  In Germany, the respective figures stood at 47% and 15%.  European television markets have their quirks, and this appears to be one of them.

What Magine’s failed experiment does demonstrate, and this is something we at Decipher have argued often in recent years, is that – though the capability to deliver a cloud-only television service may exist, and indeed some viewers may already live in and consume in a cloud-only universe – technological developments almost always outpace consumer trends and habits.  Put another way, content consumption trends often lag the technological developments that offer consumers new ways to watch and enjoy content – and Magine very much resides in such a category.  Spain simply wasn’t ready for a total cloud television service that relied among other things upon subscribers’ willingness to pay and the broadcasters’ enthusiasm to agree to carriage.  Magine tried to move the market and the market wouldn’t move.

International expansion, two small words on a corporate strategy document, can seem entirely logical at the time of writing.  With hindsight, and with complex market dynamics at play of the kind I’ve described above, it simply cannot be taken for granted in the world of online video.

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