The next stage of Netflix's(NASDAQ:NFLX) ambitious global expansion begins in just one week, when the streaming video leader will launch its service in Japan. Historically, Japan has been a tough nut to crack for U.S. media firms.
Netflix rival Hulu launched in Japan in 2011, but it wasn't very successful. Last year, Hulu's U.S. owners gave up and sold the Japanese business to a local operator. As a result, some pundits expect Netflix to crash and burn in Japan.
But perhaps Netflix CEO Reed Hastings and his team understand exactly how hard it will be to penetrate the Japanese market. That may be why Netflix announced this week that it will have a partner for its launch in Japan: SoftBank, one of the top Japanese telecom firms.
Netflix's Japan plan
SoftBank is the third-largest cellular company in Japan, with nearly 40 million subscribers -- good for 26% market share -- according to Japan's Telecommunications Carriers Association. It also has millions of broadband home Internet subscribers.
This makes it a good partner for Netflix in terms of getting the word out, and coaxing people to try the service. SoftBank customers will be able to sign up for Netflix at SoftBank stores, third-party retailers, or through SoftBank's website and call centers. Most importantly, SoftBank will handle the billing, so Netflix won't have to collect payment information from these customers.
SoftBank will also begin pre-installing the Netflix app on its smartphones later this year. That will further boost Netflix brand awareness in Japan. Finally, the two companies plan to collaborate on original content in the future.
Netflix has gone this route before
Netflix has clearly found that having a partner is important for driving member sign-ups in many international markets. Two years ago, it partnered with Virgin Media in the U.K. to put its app on Virgin customers' set-top boxes, creating a seamless experience. Virgin Media also offered a free six-month Netflix subscription to customers who upgraded to its higher-tier services.
When it entered France last fall, Netflix didn't waste any time striking partnership agreements. It quickly signed up both Orange -- the country's largest telecom provider -- and its smaller rival Bouygues Telecom to distribute Netflix and integrate the Netflix app on their set-top boxes. Netflix has implemented similar deals in other European markets, as well as Australia.
Benefits outweigh the costs
Partnering with telecom firms comes with a cost for Netflix. The company has to share some portion of its revenue -- the exact terms have not been disclosed -- in order to get the marketing and billing support that these local partners can provide.
In Japan, Netflix will be starting with a lower average revenue per user, too. The basic SD plan, which costs $7.99/month in the U.S., will go for about $5.40/month in Japan. The standard plan, including HD service and up to two simultaneous streams, will cost less than $8/month in Japan, compared to $8.99/month here.
Even so, sharing some of that revenue with SoftBank seems like a no-brainer from Netflix's perspective. The alternative would require spending a lot more on marketing (adding costs) and having slower subscriber growth (crimping revenue).
Given the long-term potential of the streaming business and the tremendous first-mover advantages available -- as demonstrated by Netflix's dominance in the U.S. and Canada -- the best strategy is probably the one that leads to the fastest subscriber growth. As a result, we should expect to see many more deals like the SoftBank partnership as Netflix continues its global expansion this year and in 2016.