[Inside Chodong] Nurturing Native OTTs Requires Government Support Over Integration

[Asia Economy Reporter Lim Hye-seon] ‘17 billion KRW vs -126 billion KRW’

This was the domestic performance report of online video service (OTT) providers last year. The US representative Netflix posted an operating profit of 17 billion KRW, while the native leading players Wavve and TVING recorded operating losses of 50 billion KRW and 76 billion KRW, respectively. As of February this year, Netflix's monthly active users (MAU) stood at about 12.45 million, exceeding the combined total of Wavve (4.88 million) and TVING (4.07 million). To cover losses, they must either raise subscription fees or attract more subscribers. Since raising fees will inevitably cause users to leave, they need to expand differentiated content to meet expectations. Ultimately, large-scale investment is necessary. Wavve plans to invest 1 trillion KRW by 2025, and TVING plans to invest 400 billion KRW by 2023.

Netflix also struggled initially with losses during its early investment phase. In 2012, when Netflix began producing original content in earnest with titles like ‘House of Cards,’ it recorded operating losses. However, Netflix continued to invest relentlessly. This year, Netflix plans to invest 800 billion KRW domestically and release 25 Korean original contents. Not only Netflix, but Disney Plus and Apple TV Plus are also mounting strong offensives.

The recent rise of the native OTT integration theory is due to this situation. The Korea Communications Commission recently proposed ‘OTT integration’ as a national agenda to the Presidential Transition Committee. The judgment is that native OTTs must unite to create ‘economies of scale’ to compete against overseas OTTs. However, native OTTs have different views from the government. While they agree on the premise that competitiveness must be enhanced, they are cautious about proposing ‘integration’ as a solution. OTTs argue that if content businesses cooperate, intellectual property (IP) ownership becomes unclear, which may deter investors. Each operator also targets different overseas markets. Wavve is preparing to enter the US and Europe starting with Southeast Asia, while TVING is preparing to enter the US next year targeting Japan and Taiwan.

Rather than ‘integration,’ OTTs are demanding institutional support from the government similar to overseas cases. This includes the introduction of a self-rating review system and tax incentives. TV broadcast programs and overseas OTTs operate under a self-rating system, but OTTs undergo prior classification review by the Korea Media Rating Board. This causes delays in timely content supply and even prevents some content from being produced.

Tax benefits are also necessary. According to Article 25-6 of the current Restriction of Special Taxation Act, the tax credit rate for costs incurred domestically for video content production is 3% for large corporations, 7% for medium-sized enterprises, and 10% for small businesses. This rate is significantly lower than major overseas countries such as the US (25-35%), the UK (25%), France (30%), and Australia (40%). Moreover, this tax credit is set to expire at the end of this year. Although an amendment to the Telecommunications Business Act to support OTT businesses has been proposed, it is currently stalled due to disagreements between ministries.

The trend in the media market is OTT. In the US, where the ‘cord-cutting’ phenomenon occurred first, one in four paid TV subscribers canceled their service over the past five years. To flexibly respond to the turbulent business environment and produce world-class content, a stable institutional framework that enables consistent production investment must be established.