by Cory Barker
Mexico is home of a powerful media and telecommunications industry, which historically has extended its business to other Latin American countries and to the Hispanic population of the United States.3 The country is the domestic market of Grupo Televisa, the largest media company in Latin America as well as of the telecommunications behemoth América Móvil (number 155 in the Fortune 500 in 2015).4 The entry into and success of Netflix in Mexico has established a new market that now seems very attractive to many significant local firms. The availability of titles offered by Netflix has already affected access cycles to many American television series and movies, threatening cable and satellite television providers. More recently, with the launch of exclusive series (Camelia La Texana [2014]), exclusive local films (La Dictadura Perfecta [2014]), and its original production for Mexico and Latin America (Club de Cuervos [2015], Narcos [2015–], 3% [2016–]) Netflix is directly reshaping the hegemony of the established local producers. These producers, in turn, are deploying all of their respective structural advantages to gain a foothold into the video-on-demand sector, not only in the country but also in the Latin American region at large.
The arrival and evolution of Netflix in Mexico offers a privileged case to analyze a set of interconnected issues related more generally to the growing spread of technologies for digital distribution of film and television around the world, namely:
• The technological, regulatory, and logistical challenges that the developing local markets impose to global players;
• How local culture acts as a restraining factor that requires global players to adapt in order to thrive in the new market; and
• How the entry of a global player might change the local media industry, including the reaction of local incumbents to the arrival of a new distribution model.
In On-Demand Culture, Chuck Tryon states clearly, “Given the global scope of the entertainment industry, it is crucial to recognize the intersections of the local and the global when it comes to digital delivery. This analysis requires careful attention to a variety of political, logistical, and cultural factors that influence how audiences access movies [and television] across a range of countries.”5 This essay answers this call while also acknowledging that these analyses must place themselves within an industrial framework that inevitably has to take into account cultural aspects in order to offer a complete vision of the impact of the new model of distribution that Netflix has heralded in Mexico.
Methodologically, I rely on the coverage of Netflix’s activity by the local and international press, reports to investors, and statistics by media consulting firms, as well as on direct analysis of the platforms and advertising strategies of the local competitors. On the theoretical level, I make use of recent literature on digital distribution and studies related to the international spread of television, which help explaining the dynamics—cultural and otherwise—that emerge when global distributors reach local markets and get in contact with their incumbents and audiences.
The Latin American Opportunity
Repeatedly, during the writing of this analysis, it will prove essential to look at the larger framework of Latin America in order to understand Netflix’s role in Mexico. The reasons behind this are the evident structural similarities in terms of the Internet access and economic development that Mexico shares with all the countries in the region, the status of the Spanish-speaking Latin America as a geolinguistic region for the consumption of media, and Mexico’s leading role as a media producer, adaptor, and distributor for this territory.
After entering into Canada in 2010, Netflix decided to expand to Latin America and the Caribbean during 2011, rolling into 43 countries in the region.6 Surprisingly, the company chose a territory comprised of developing countries as the second move in its plans for international expansion. According to Netflix leadership, the reasoning behind this choice was the great opportunity that the region represented in long-term growth. “[G]iven that Latin America has about 4x more broadband households than Canada, there is lots of room for growth,” stated the letter to the shareholders from the third quarter of 2011.7 For the launch, The Wall Street Journal consulted Credit Suisse Senior Analyst John Blackledge on the matter. He pointed out that “the new region has a sizable chuck of potential customers. Brazil, Mexico, and Argentina alone have nearly 35 million broadband subscribers … compared with 10 million in Canada, where Netflix began its international expansion.”8 Unlike Apple, whose foray into Latin America had been quite slow relative to its expansion in other global regions—the iTunes store did not open in Mexico and Brazil until 2009 and 2011 respectively—Netflix clearly wanted to score the first-mover advantage and establish itself in a market where legal video streaming services were uncommon, or even nonexistent.
Of course, Netflix’s decision to enter into the Latin American market was aided by the sizeable economic prospects in the region. However, while the region appeared like virgin territory, it was not an Eden; there were unusual challenges that the company faced very quickly. An article in The Huffington Post noted:
The move brings challenges not seen in Netflix’s core markets, the U.S. and Canada. Broadband Internet reaches a far smaller percentage of homes in Latin America than in the United States, and speeds are slower. Piracy of movies is among the most widespread on the planet, meaning many consumers can pick up a DVD or CD of the latest films for less than a dollar. Also, Netflix has little brand recognition in the region, and in the case of Brazil it already faces a homegrown competitor [i.e., Net Movies].9
The Mexican market also presented most of these discouraging traits, but on the bright side the country offered a enormous growth potential in Internet use, an audience hungry for Hollywood film and television, and an untapped non-regulated video streaming sector with practically no local competition. All of these factors created a challenging, yet very attractive new territory for a global media player.
Factors Surrounding the Entry and Evolution of Netflix in Mexico
Netflix launched its streaming service in Mexico in September 2011. The event was closely followed by the main national newspapers. El Universal explained the service in painstaking detail; El Economista called it a “digital revolution in content” and published an info-graphic illustrating the service’s functions; and Reforma decided to focus on Netflix’s CEO Reed Hastings statement that the service would not compete with television.10 Netflix was presented as a curiosity that could attract the attention mostly of tech enthusiasts. Netflix was not the absolute first video-on-demand product in Mexico—the iTunes store added video rentals soon after its Mexican launch in 2009—but it was the first platform to offer unlimited streaming access for a single monthly fee.
The following pages present a detailed analysis of the multiple factors—both facilitating and deterring—that have surrounded the entry and evolution of Netflix in Mexico, including the major obstacles the service has encountered and a brief account on how it has faced them so far. For clarity’s sake, I have decided to organize these factors in three broad areas, each of them linked to one of the issues that this essay addresses: (1) technological, regulatory, and logistical challenges; (2) local culture as a restraining factor; and (3) reaction of the local incumbents. It should be noted, though, that this is an artificial separation, for all of these factors are, in reality, interconnected and affect each other deeply. Drawing from press sources, state statistics and regulations, and research on the role of local culture in international distribution, I examine Netflix’s entry into Mexico.
Technological, Regulatory and Logistical Challenges
This first section details the features of the Mexican market at the time of Netflix’s arrival, including the technological infrastructure and legal framework that would eventually regulate the company’s practices. It also addresses billing and pricing, key considerations Netflix had to adjust in order to remain viable in Mexico.
Technology
The first of the challenges that Netflix faced in Me
xico was the low penetration of broadband Internet, which is directly correlated to the market’s lack of competition in telecommunications. Indeed, Telmex (a subsidiary of América Móvil) holds a de facto monopoly in many regions of the country on landline telephone and broadband Internet. Telmex’s market dominance and its reluctance to provide higher speeds at affordable prices prevented expansive Internet penetration in Mexico—to such an extent that it placed near the bottom in broadband use among the 35 member countries of the Organization of Economic Co-operation and Development.11 Statistics from ITU and the World Bank claim that only 12 percent of the total population has access to fixed broadband Internet. Meanwhile, mobile broadband penetration had only reached 37.5 percent of the population by 2015.12 Basic access to the Internet is a bit more encouraging, as 44.4 percent of Mexicans were regular users in 2014.13 Although there is still little broadband penetration, there is notable growth year to year. For instance, the World Bank reports that in 2013 broadband access was 10.93 percent, while a year later it was 11.56 percent; similarly, the number of Internet users grew slightly from 43.5 percent in 2013 to 44.4 percent in 2014. This is a clear expansion in both cases. In summary, the country is still far behind in comparison to developed nations, but growing at a steady rate, a factor that surely encouraged Netflix’s decision to pursue this new market.
Legal Framework
In Mexico, the Congress of the Union regulates the action of the telecommunications and broadcasting companies. In 2011, there were separate rules for each sector in place, as they were at the time considered as two different industries. While Televisa dominated broadcasting, América Móvil was the leader in telecommunications. With such regulation in place, América Móvil was prohibited to offer pay television and Televisa could not offer telephone or Internet service. Of course, new developments in digital technology inspired the creation of a new regulatory environment. After long debate, the new Ley Federal de Telecomunicaciones y Radiodifusión was passed in July 2014, with the primary goal of enhancing competition in what is to be a new, growing sector. As a result of these changes, more steady growth in Internet penetration has already begun throughout the country, which in turn is likely to create an OTT-friendly environment that could benefit Netflix—but which also brings with it a pair of formidable local competitors.
Nevertheless, Netflix benefitted significantly from an absence in the pre-existing legislation when it launched in Mexico. Though the country places limitations on foreign investment in broadcasting, Netflix was exempt from these limitations as a video-on-demand/Internet company. As a result, despite its status as a foreign firm, Netflix faces no taxes and few legal limits in its new territory.14 These circumstances have certainly allowed the company to act more freely in a moment of increasing deregulation in Mexico.
Billing
Originally, Netflix’s billing was dependent on the use of credit cards, which are not as widespread in Mexico as they are in the United States and Canada.15 Debit cards are more popular, but the local banks do not authorize use over the Internet in all cases due to lingering distrust of online transactions and a perceived lack of punishment for cybercrime. This became a real problem for Netflix in Latin America, as demonstrated in investor letters from 2011 and 2012. For instance, the report for the fourth quarter of 2011, soon after Netflix’s entry to the region, mentioned the issue of billing quite superficially:
As expected upon launch, we’ve found that processing ecommerce consumer payments is quite challenging as compared with North America and Europe. To overcome this challenge, we are working with our local payment partners to optimize our systems, exploring adding new payment methods and testing various trial campaigns to improve conversion.16
Comparatively, the report from the third quarter of 2012 was much more explicit on the issue:
The biggest issue holding back much stronger growth is payments. For a variety of reasons, many Latin American broadband households are leery of, or unable to, provide debit/credit cards that can be accepted over the Internet. For those who do provide us debit/credit cards, we see higher rates of payment declines than in our other markets.17
Netflix first addressed the billing problem in Mexico by promoting debit cards as an accepted form of payment. The letter to shareholders from the fourth quarter of 2012, explains, “In Mexico, we’ve made progress in enabling debit cards for Netflix which has to be done in some cases bank-by-bank.”18 Secondly, Netflix followed the strategy of many other companies like Apple, Microsoft, and Nintendo in launching prepaid cards to access online services. On November 2014, Netflix made available gift cards for 99 and 299 pesos, which could be acquired in supermarkets and department and convenience stores.19 For Netflix, this was an answer to the specific conditions of the market. Mexican consumers are used to prepaid cards as a way to control their expenses and protect their credit/debit cards from online fraud.
Pricing
Netflix thrives on the idea that users want to pay an affordable monthly fee to get a high volume of valuable content. In Mexico, the service decided to enter with a fixed price of 99 pesos a month, which would seem decidedly cheap for the middle class users, who were paying already up to three times that amount for expensive broadband access and up to five times that for premium direct-to-home television subscriptions.20 In October 2014, Netflix introduced a three-tiered pricing scheme in Mexico: $89 for one streaming device with standard definition, $109 for the basic service of two streaming devices on high definition, and $149 for up to four streaming devices in HD. In a gracious move, Netflix decided to keep the basic service at $99 for the existing clients until October 2016 when the prices would be set at $99 for one screen, $129 for two screens, and $159 for four screens.
Price is closely linked to perceived value. In Mexico, Netflix offered value to consumers based on perceived flexibility and improved content. From the initial point of entry until a price adjustment in 2014, there was no limit on the number of devices that could be used at the same time on the same account. This flexibility fostered sharing between extended families and friends, in turn providing Netflix with huge amounts of data for tracking viewing habits. Furthermore, this practice created a positive image of the company, ensuring loyalty and the perception of value sorely needed to gain a foothold against piracy. Likewise, as in the United States, Netflix dangled a one-month free trial to users. This was, unsurprisingly, a very popular method of luring in new users, especially as the company added more and more original content to lure users into paying clients.
Local Culture as a Restraining Factor
Experienced media companies know that local culture is a force to reckon with. Despite the claims of global homogenization, local audiences still prefer watching content that feels closer to their own ways of life. Netflix faced this reality when it entered the Latin American region. This second area of analysis comprises three linked topics: (1) the localization of content; (2) characteristics of the audiences for Netflix in Mexico; and (3) the strategies the service has put in place to raise its brand awareness.
Localization of Content
Content has become a crucial factor to explain both the early difficulties and the recent successes of Netflix in Mexico. Being clearly connected to culture, content could work both as a deterrent to entry for global firms and as a powerful enabler, once the question of cultural tastes has been adequately addressed. During the first wave of diffusion of satellite television networks in Europe, Jean Chalaby proposed a model to explain the strategies that established global media companies use to succeed in markets characterized by strong cultural identity.21 The model identified four steps that the Pan-European channels were putting in practice. These steps move from lower to higher levels of “localization”: (1) introduction of local advertising, (2) translation of content, (3) local programming, and (4) local opt-out. The first step cannot be applied to Netflix because it works on a subscription basis, but the other three steps accurately describe how the company operates in Latin Amer
ica, albeit in different order: (1) translation, (2) local opt-out (separate feed for each country, easily doable in the case of streaming technology), and (3) local programming. In this section, I reflect on the form that each of these steps is taking within Mexico.
TRANSLATION
The first step of Netflix’s adaptation process in Mexico was obviously translation: subtitling and dubbing. In the country, the preference for one method of language transfer over another depends on age (kids programming must be dubbed) and genre (animation and documentaries are preferably dubbed; drama could be either dubbed or subtitled). In addition, it depends on the characteristics of the perceived audience, as viewers that are purportedly more sophisticated prefer subtitling or to even watch programming in the original language. This preference for subtitles, which is clear in the middle and higher classes that constitute Netflix’s target audience in Mexico, apparently has come as a surprise for the company. As a result, it had to rush to offer both methods of language transfer. In the first quarter of 2012, the company reported to have “increased … subtitle coverage [in Latin America] to nearly 100 percent of non-kids English language content (in addition to previously available dubbing) to accommodate varying viewing preferences.”22
Regarding dubbing, Latin America has historically developed a unique linguistic dialect called Español Latino that has become widely present throughout the region. This variety of the language, which differs substantially in vocabulary and pronunciation from Castilian Spanish, is built upon the idea of a “neutral” pronunciation and vocabulary understandable in the Americas.23 It is not actually spoken anywhere, but people accept it as a normative language for watching films and television. It has developed slowly through time, to the point that it has become a convention used in the major dubbing studios in Mexico, Argentina, Chile, Colombia, and Venezuela. Creating a dubbed feed that works for several countries surely helped limit Netflix’s expansion costs. For its original English productions, Netflix became a commissioner to dubbing studios in the region—House of Cards (2013–) is dubbed in Mexico, Orange Is the New Black (2013–) in Chile, and Bloodline (2015–2017) in Argentina.24 For the rest of the American content, the dubbing and subtitling is unchanged from the initial distribution window (be it a theatrically released film or pay cable television series). Despite early struggles, the establishment of these two language options heralded few complaints from the audience (with the exception of some anime fans demanding that the default track be Japanese, not an English dubbing.)25
