'Free Riding on Network' Netflix, South Korea Supported Q3

[Asia Economy Reporter Seulgina Jo] Netflix, which has been embroiled in controversy over 'free riding' by avoiding network usage fees despite massive traffic in South Korea, is continuing rapid growth globally by leading with Korean popular culture such as the so-called 'K-zombie' craze drama series and K-pop. In particular, the Asia-Pacific region, including South Korea, accounted for about half of Netflix's global new paid subscriber revenue for the first time in a quarter, playing a significant role as a performance driver.

On the 20th (local time), Netflix stated in an investor letter released along with its earnings that the Asia-Pacific region centered on South Korea and Japan made the largest contribution to paid subscriber growth in the third quarter. It was reported that 46% of the global net increase in paid subscribers in the third quarter came from the Asia-Pacific region, representing a 66% increase compared to the previous year.

Netflix expressed satisfaction with the progress in the Asia-Pacific region, noting, "Especially in both South Korea and Japan, we achieved double-digit penetration in broadband homes." The number of Netflix paid subscribers in South Korea was estimated to be 3.3 million as of the end of September.

This is analyzed to be largely due to Korean popular culture, such as K-pop and K-dramas, which have recently gained worldwide popularity. A source mentioned to major foreign media the Korean dramas aired under Netflix original titles such as Kingdom 2 and The School Nurse Files, evaluating that "(these dramas) made South Korea the biggest growth source for Netflix in the global market." This highlights the significant role of Korean popular culture in Netflix's recent global growth.

These figures attract even more attention as they come amid ongoing controversy over Netflix's free riding ahead of the comprehensive audit of the Ministry of Science and ICT and the Korea Communications Commission by the National Assembly's Science, Technology, Information and Broadcasting Committee scheduled for the 22nd and 23rd. Initially, the committee requested Reginald Sean Thompson, CEO of Netflix Services Korea, as a witness for the audit, but he submitted a letter of absence citing overseas stay. On the 23rd, team leader Yeon Juhwan was appointed as a proxy, but doubts remain about how responsible answers can be provided.

Netflix is expected to emphasize at the audit that it has invested heavily in producing Korean popular culture content and plays a key role as a platform for global expansion. A source explained, "Since 2015, nearly $700 million has been invested," adding, "Investment has increased since the end of last year, and content partnerships have been established with CJ ENM and others." About 70 works produced in Korea have been released as Netflix originals in the global market, offered with subtitles in 31 languages and dubbing in more than 20 languages.

However, criticism is inevitable that Netflix, which earns huge amounts of money domestically and internationally using K-content as a major weapon, is free riding domestically by ignoring network quality obligations. Currently, overseas content providers (CPs) such as Netflix and Google YouTube account for more than 70% of domestic traffic.

An industry insider pointed out, "While Netflix lowered streaming quality in Europe in March due to concerns over service disruptions caused by traffic overload, it kept the quality unchanged domestically," adding, "Despite causing a burden on domestic network maintenance due to massive traffic, it ignores its obligations." This has intensified controversy over unfair treatment compared to domestic companies. Last month, the government announced legislation, the so-called 'Netflix Free Riding Prevention Act (Amendment to the Telecommunications Business Act),' which requires content providers (CPs) to maintain network quality. It is scheduled to take effect on the 12th.

Meanwhile, Netflix announced that its third-quarter earnings per share (EPS) were $1.74, below the market expectation of $2.14. Revenue was $6.44 billion, exceeding the forecast of $6.38 billion. The global net increase in paid subscribers was 2.2 million, significantly below the forecast of 3.57 million.