Investment Costs Surge but Market Size Limits Growth
Must Expand Scale Through Overseas Expansion
[Asia Economy Reporter Oh Su-yeon] Seven out of ten Koreans subscribe to online video streaming services (OTT). While the number of users is steadily increasing, OTT companies are also facing growing deficits. Investment costs continue to rise, but it is difficult to recover these costs due to the small size of the Korean market. To overcome this, they are turning their attention overseas.
According to the Korea Communications Commission's "2022 Broadcasting Market Competition Status Evaluation" released on the 5th, the OTT usage rate last year was 72%, up 2.5 percentage points from the previous year. Users subscribe to an average of five OTT services, of which 2.7 are paid subscriptions.
It is no exaggeration to say that OTT has emerged as an essential platform, but the market situation is challenging. In 2021, Netflix was the only company to turn a profit domestically. Domestic companies expanded their sales and grew in size, but their deficits widened. In 2021, operating losses were 76.2 billion KRW for TVING, 55.8 billion KRW for Wavve, and 24.8 billion KRW for Watcha.
Although OTT users are increasing, the industry expects the market situation to become even more difficult in 2023. At a forum held at the National Assembly last month, a representative from the domestic OTT industry stated, "In 2021, the deficit was 70 billion KRW, and this year looks even more bleak."
The problem lies in content acquisition costs. As competition among OTT platforms intensifies, producing quality content requires pouring in hundreds of billions of KRW. The success of Korean content has attracted overseas operators who come with large sums of money, driving up overall production costs. Domestic users' expectations have also risen. Whereas content was previously produced only to Korean standards, now it is difficult to receive a good response without global-level quality.
Looking at each company's 2021 performance, Wavve's content provider settlement fees accounted for 14.52 billion KRW, more than half of its 28.6 billion KRW in operating expenses. TVING's operating expenses were 29.78 billion KRW, with content usage costs of 7.07 billion KRW and commission fees of 4.05 billion KRW. Some companies spend up to half of their operating expenses on securing content.
The growth momentum of OTT has slowed. Meanwhile, content investment costs continue to rise daily. However, the market is small. Focusing only on Korea makes it impossible to turn a profit.
Professor Kim Yong-hee of Dongguk University Graduate School of Film and Video said, "Even if it is not a blockbuster, capital must be invested in a short period to produce competitive content. However, competition is so fierce that any killer content loses its value before recovering costs, resulting in losses." He explained, "To offset operating losses, the subscriber base needs to exceed about 10 million."
The Korea Communications Commission announced in June that Netflix, the top domestic company, had 11.18 million monthly users. Following were Wavve with 4.24 million and TVING (before merging with Season) with 4.02 million. It is difficult to surpass 10 million users in the domestic market.
OTT companies are turning their eyes overseas to survive. Their strategy is to grow by securing paid subscribers abroad. Wavve began its global expansion by acquiring the Korean content platform Cocoawa in the Americas in December last year. TVING announced plans to enter Japan and Taiwan in 2022 and the United States in 2023. Although the entries into Japan and Taiwan have been postponed, it is showcasing original content such as "Yonder" globally in cooperation with Paramount+. Watcha has been operating in Japan since 2020.
As latecomers entering overseas markets, a strategic approach is necessary. The situation is different from when early players like Netflix first expanded globally. They need to find niches left by major players.
Professor Kim said, "If Netflix entered overseas markets with a weak link strategy (targeting smaller operators), domestic companies should consider a strong link strategy. The collaboration between Naver and TVING in Korea is an example." He added, "It is difficult to succeed alone, so securing subscribers through bundling with influential overseas platforms is important."
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